'If the State Functions Properly, Crony Capitalism Does Not Exist'

Nepali private sector is in one of its most difficult situations in recent times. Even though liquidity is abundant and interest rates have fallen, credit growth has stalled, market demand remains weak, and the investment sentiment is subdued. Adding to these pressures are concerns over policy unpredictability, fallout from the US-Iran war, and the recent arrests of business figures, all of which have shaken confidence within the business community. It is at this challenging moment that Anjan Shrestha, President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), has assumed leadership of the country's apex private sector body. In this conversation with Mukul Humagain and Ashim Neupane of New Business Age, he argues that main obstacles to investment are not the cost or availability of credit, but weak demand, policy inconsistency, and deepening structural challenges. He also speaks candidly about how declining consumption, migration-driven demographic shifts, and governance constraints are undermining long-term investor confidence and discouraging capital from flowing into productive sectors. As Shrestha takes the helm at FNCCI, he outlines his priorities: restoring business confidence, strengthening policy dialogue with the government, and steering Nepal toward sustainable, investment-led growth. Excerpts:

Q: You have taken charge of FNCCI at a particularly difficult moment for the private sector. What is your honest assessment of where the private sector stands today, and what does that mean for your priorities as president?

A: The situation is quite serious. The biggest challenge right now is confidence, and confidence is at a low ebb. The private sector's morale has been badly shaken, particularly after the recent Gen Z-led movement. There is a palpable sense of insecurity about peace, stability, and the broader business environment. That said, there is also cautious optimism. A stable government has been formed relatively quickly, and with a near two-thirds majority in Parliament, there is hope that decisions can be taken more decisively. But conditions on the ground remain difficult. Demand has weakened sharply and many businesses are operating at just 30-40% of capacity, and the manufacturing sector, in particular, is under significant strain. Global developments have only added to the pressure. Tensions in West Asia, especially the Iran-US conflict, have disrupted supply chains, raised logistics costs, and pushed fuel prices higher. This has increased production costs, squeezed industries, and added to inflationary pressures.

Against this backdrop, the new government has come in with a fresh mandate and announced 100 commitments on its very first day. If these are implemented effectively, there is genuine potential for improvement. At this stage, the government deserves the opportunity to deliver on its promises. At the same time, recent actions against business leaders cannot be ignored. Our position is clear. Investigations must be conducted confidentially and in accordance with due process. What we are seeing instead is that details are being made public even before investigations are concluded, leading to damaging media trials. Around the world, financial crimes are generally addressed first through financial penalties and regulatory action. Detention should be reserved for exceptional cases, such as when there is a genuine risk of evidence being destroyed. In today's digital economy, where business operations and financial records are easily traceable, early detention can inflict disproportionate reputational damage.

We also need reforms such as anticipatory bail. Equally important is the clear distinction between an individual and the business they own. If allegations are made against any person, the entire enterprise should not be paralyzed. Freezing all corporate bank accounts can halt production, disrupt supply chains, threaten jobs and damage an entire ecosystem of suppliers, employees, and creditors. The economic cost of this will be significant. We can learn from international precedents.

In the case of Kingfisher, Vijay Mallya is no longer operating in India, but the airline was taken over and operations continued. Similarly, troubled assets of the Jaypee Group were taken over rather than simply dismantled. Nepal has its own lessons. Shree Distillery managed to recover after government action, but Triveni Distillery collapsed entirely, with its entire ecosystem destroyed and causing immense losses for workers and associated stakeholders. The government must act carefully and responsibly. Investigations should be swift and thorough, but they should not destroy businesses, undermine investor confidence, or inflict economic damage far greater than the alleged offence itself.

Q: Private sector credit growth is currently at 3-4%. The NRB has cut interest rates, liquidity is abundant, and yet businesses are not borrowing. What is actually stopping investment? Why does the private sector still lack confidence, and what would it take to restore it?

A: To understand the present situation properly, we need to go back and examine where the problem began and how it evolved. After COVID-19, the Nepali economy became over-leveraged. During that period, the banking sector, not directly directed by the government, but operating within a broadly supportive policy environment, made credit relatively accessible to protect businesses. Credit expanded, investment picked up, and liquidity helped sustain overall economic activity.

However, concerns soon emerged that an over-leveraged economy risked becoming unstable. Policymakers responded by taking a contractionary stance. The problem was not the intention to tighten, that was reasonable, but the way it was executed. The correction should have been gradual and phased. Instead, it was abrupt. Multiple restrictive measures were introduced simultaneously: liquidity tightened, new working capital guidelines were introduced, imports were restricted, and interest rates were raised. Businesses struggled to absorb such a sudden shift.

At the same time, the cooperative sector ran into a crisis. Cooperatives had been circulating close to Rs 600 billion in the market, providing a critical lifeline particularly for small and medium enterprises. When that system broke down, a major source of liquidity disappeared almost overnight. Cooperatives had played an important role at the grassroots level. They provided small, short-term loans that turned over continuously and kept money moving through local economies. Commercial banks, development banks, and finance companies were not structured to fill that gap. The result was a genuine shortage of money in circulation. These two shocks hit simultaneously. On one hand, contractionary policy deliberately suppressed demand to cool consumption and protect foreign exchange reserves. On the other, the collapse of the cooperative sector drained liquidity independently from the system. Together, they delivered a sharp blow to aggregate demand. That is why there is so little appetite for borrowing today.

Outward migration, particularly among young people, is compounding the problem over the longer term by steadily shrinking the domestic consumer base. So even though banks are now sitting on excess liquidity, investment is not materializing. In effect, Nepal is caught in something resembling stagflation: low growth combined with persistently weak demand.

Looking back, the tightening was a policy misstep, not in its intent, but in its execution. That is one of the central reasons we find ourselves where we are today. A further structural problem is weak government spending. Capital expenditure has been declining for years, both in terms of allocation and actual execution. Even deep into the fiscal year, capital expenditure has hovered around just 27-28%. That is an extremely low figure, and it reflects not only reduced ambition but weak institutional capacity to deliver. When the government cannot spend effectively on development, it further suppresses economic activity - and all of these factors together have brought us to the current impasse.

Q: What are FNCCI's core demands from the upcoming federal budget, and which of them are truly nonnegotiable for the private sector?

A: The starting point has to be regulatory reform. The government's plan to repeal around 15 laws and regulations is a positive step. However, a much larger body of legislation needs to be revisited, amended, or modernized. That work is long overdue and critical. Taxation is the other major concern. Nepal's overall tax burden is high compared to its neighbors, particularly when considered cumulatively. The tax-to-GDP ratio stands at roughly 18-22%, compared to roughly 10-11% in India and 7-8% in Bangladesh. This gap directly affects what the private sector has consistently been saying: the cost of doing business and the ease of doing business. These are the two fundamentals. Reducing the cost of doing business requires serious government commitment to infrastructure.

Take logistics for example. Transporting goods from Kolkata Port to Nepal can cost more than moving the same goods from that port to other destinations within India. That should not be the case. That imbalance is partly structural, as containers frequently return empty because Nepal does not export enough to utilize them fully, and that imbalance drives up costs. Although rail connectivity exists, access is limited, with businesses sometimes waiting months. These inefficiencies need to be addressed directly, including through better management of Inland Container Depots (ICDs) and Integrated Check Posts (ICPs).

Domestic infrastructure is equally urgent. Roads and national highways are not in good condition, and improving internal connectivity must be a priority. This is one area where government action can have the most immediate and lasting impact. At the same time, roles need to be clearly defined. Economic development cannot be driven by the government alone - it requires meaningful coordination with the private sector, and institutions like FNCCI must be part of that process. There is also a broader efficiency argument: private enterprises are generally more efficient than state-run ones. Where the government operates businesses, it should consider bringing in private sector management, or at very least, evaluate performance against private benchmarks.

What is not sustainable is a model where the government both runs industries and protects them from competition. That distorts markets and holds back growth. The government needs to shift from being an operator to becoming a facilitator and regulator: one that sets clear rules, ensures policy stability, and creates the conditions for private enterprise to lead. Its role should be to make the system work, not to run it.

Q: Nepal's tax system is often criticized for being complex, unpredictable, and prone to disputes. Which two or three reforms would have the most immediate impact on private sector investment?

A: The most fundamental issue is the overall tax burden. Nepal's tax-to-GDP ratio, which stands at around 18%, is high for an economy at this stage of development. That burden does not remain with businesses-it is passed on to consumers. Rationalizing the overall tax level must be the starting point. The second major issue is VAT. The current rate of 13% is already considered high in Nepal's context, and we have consistently argued for its review. We have also long advocated for a multi-rate VAT structure, though this has yet to receive serious attention from policymakers.

The international precedent is instructive: India's GST system launched with rates as high as 28% on certain categories, but over time these were brought down, with many goods now falling into slabs of 18% or below. That rationalization supported consumption and made the system more equitable. The same principle should apply here: tax policy should stimulate economic activity, not suppress it. If the goal is to strengthen domestic consumption and make the economy more dynamic, raising taxes is counterproductive. The third area is income tax. Effective rates in some cases reach as high as 39%-a level that discourages formalization, deters investment, and penalizes growth. This requires serious and urgent review.

Beyond these three, there is a growing concern around excise duties. Traditionally limited to products like cigarettes, alcohol, and goods considered harmful or environmentally sensitive, excise taxes are now applied across a much wider range of goods. This reflects a broader pattern: when fiscal pressure rises, the default response is to introduce new taxes rather than reform the system. That approach is not a solution. Excessive and ever-expanding taxation raises the business costs, weakens competitiveness, and ultimately drives investment away. Our economic challenges cannot be solved by taxing more.

Q: Nepal's export base has barely grown in 25 years while imports continue to dominate even for basic consumption. FNCCI represents industries that have benefited from import protection and tariff structures that discourage exports. Is the private sector genuinely committed to building an export economy, or does it prefer the current consumption-driven model?

A: The reality is that Nepal has increasingly become a consumption-driven market for foreign goods. Around 60-70% of what we consume is imported. That is the structure of the economy, and it is a serious problem. But it can also be viewed differently: the same 70%% import is also a 70% opportunity to replace foreign goods with domestic production. We can either see Nepal as having only 30% productive capacity, or as a country with enormous room to grow. The choice is clear. Of course, we cannot produce everything domestically.

Petroleum, for example, is not immediately substitutable. But in other areas, progress is possible and already underway. Gas gas exploration in Dailekh is one example. The focus should be on how to accelerate such efforts, not whether they are worth pursuing. Nepal also has an underused geographic advantage. Positioned between two of the world's largest economies, it has real potential for assembly-based and contract manufacturing-producing or assembling goods for export to India or China, or integrating into cross-border supply chains. This is a genuine opportunity that has remained largely untapped.

More broadly, the country needs a shift in mindset. Rather than chasing sectors where Nepal has little comparative advantage, we should build on areas where potential already exists-such as high-value agriculture, medicinal herbs, hydropower, and minerals. The debate around agriculture often misses this distinction: traditional subsistence farming may not be the answer, but high-value, export-oriented agriculture offers strong prospects. At the same time, structural constraints cannot be ignored.

Institutional capacity is weak, and policy has too often served narrow interests rather than the broader economy. This is essentially a problem of crony capitalism, and its needs to be acknowledged. In a functioning market economy, early entrants may gain an advantage, but the system must remain open so others can compete. When opportunities are concentrated among a small, connected group, the economy stagnates instead of expanding. The way forward is broad-based development, with a strong focus on SMEs. Nepal has around 1.7 million SMES. They are not a peripheral part of the economy - they are central to the issue. Large manufacturers may produce goods, but SMEs handle distribution, connect markets, and sustain economic activity across the country. Without strengthening SMES, neither domestic production nor export growth can scale meaningfully.

Q: Crony capitalism has become more visible in Nepal over the past decade. How do you assess this problem within the private sector, and how should it be addressed? What roles should the FNCCI and state play?

A: I beg to differ on the framing of this as a problem "within the private sector." If the state functions properly, such distortions do not take root in the first place. When all three are sound, outcomes change dramatically. This suggests that the primary responsibility lies with the state - its political leadership, policymakers, and administrators. That said, the problem is real and visible, and it should not be ignored. I believe this personally and institutionally. In a market economy, a first-mover advantage is natural and legitimate - a business can pull ahead through capability, efficiency, and initiative.

But beyond that point, the door must remain open. No business should succeed simply because it enjoys state protection or political favor. In principle, any sector of the economy should be open to all participants. Where restrictions exist-and there may be exceptional cases where they are justified, they must be transparent and justified. Cronyism ultimately distorts the entire system. We a few players receive excessive protection, inefficiencies accumulate, competition weakens, and the market integrity erodes. A healthy economy depends on open and fair competition-that is the foundation of a free market and there is no sustainable alternative to it.

There is also a related issue in how some policymakers view the role of the state. The idea that the government should be directly running businesses needs to be reconsidered. State-owned enterprises are often justified on the grounds that they provide cheaper goods or services. In practice, however, the opposite tends to be true. Take Nepal Drugs Limited as an example. It sells paracetamol at one rupee per unit, but the production cost is around Rs 2. If the same product were sourced competitively from the private sector, it could likely be procured at around Rs 1.50, and with targeted subsidies, the consumer price could still be brought down without the system hemorrhaging money.

State production at higher cost, subsidized to appear cheap, is simply inefficiency dressed up as policy. This creates an uneven playing field. When state-owned enterprises receive annual support running into hundreds of millions of rupees, private firms cannot compete on equal terms. Nor should they be expected to. Competing against entities with unlimited public backing is not a market; it is a managed outcome. That is precisely the kind of distortion a genuine commitment to open competition must correct.

Q: You have spoken at length about the need to restore private sector confidence and drive investment-led growth. But as the head of one of Nepal's larger business groups, what is Laxmi Group itself doing?

A: We have identified a number of potential projects and sectors for expansion. But we are currently in a wait-and-see mode rather than committing to large-scale investment.

The primary reason is weak market demand. Demand is simply too low to justify moving forward aggressively with new capital deployment. There are also structural concerns. Nepal's population growth rate is declining, and outward migration is gradually eroding the domestic consumer base. This has raised serious questions about both the future availability of labor and the long-term size of the domestic market. These are not short-term fluctuations; they are trends that require careful evaluation before any major long-term commitments are made.

Global developments are adding another layer of uncertainty. The ongoing instability in West Asia is something we are watching closely, given its potential to affect costs, supply chains, and overall economic conditions in ways that are difficult to predict with confidence. While we remain optimistic about the opportunities available to us, the current posture is one of disciplined caution. We are continuing the internal preparations, identifying sectors, assessing feasibility and building readiness, but we have not yet moved into active execution.

Q: Your Hyundai assembly plant has been operational for roughly a year and a half. How would you assess progress at this stage? How is the group thinking about the transition from ICE to EV assembly?

A: We are not introducing any new models in the immediate term. At present, we are assembling the Hyundai Venue and the Hyundai Creta, and production has been progressing steadily. In roughly a year and a half of operation, we have assembled around 2,600 units. Additional models are expected to be introduced gradually, likely from next year. Our focus so far has been on internal combustion engine (ICE) vehicles. However, we are actively working toward assembling EVs. We are in touch with Hyundai in this regard, and EV production is a clear direction for us. In terms of overall performance, the plant is still in its early stages and we are continuing to build scale. The experience so far has reinforced how much timing, market demand, and the broader policy environment matter when it comes to the viability of this kind of industrial investment. Looking ahead, we are exploring expansion possibilities, liking adding new models, and potentially EVs, but those decisions will depend on how the market develops and how conducive the industrial ecosystem becomes.

Q: As you assumed the FNCCI presidency while continuing to lead a major business group, how will you manage potential conflicts of interest? What safeguards will you put in place to ensure you represent the broader private sector rather than your own business interests?

A: My position on this is clear: everything must be fair, transparent, and governed by clear principles. This is why I do not regard conflicts of interest as unmanageable. FNCCI is an umbrella organization that represents the entire private sector - not any single business or individual. When policies are made, it is entirely possible that I, or any other business, might benefit as a first mover. That is natural in any market system. What is not acceptable is a policy that allows only a select few to benefit while closing the door to everyone else. That is where the line must be drawn. If a policy creates opportunity, that opportunity must be open to all. That is the essence of a fair market. As long as that principle holds, concerns about conflict of interest are largely answered. I am a businessperson and will remain one. Serving as FNCCI president does not mean stepping away from business or avoiding new ventures - that is not the issue. What matters is ensuring that policies are not designed to unfairly favor specific individuals or groups. That must not happen.

I will operate within established institutional processes and frameworks, with a consistent approach that is fair, transparent, and aligned with policy. A first-mover advantage is legitimate, but beyond that, the system must remain open and competitive for all. That commitment, I believe, is the strongest safeguard against conflicts of interest.

This interview was originally published in the May 2026 issue of New Business Age magazine.