The Economics of Land: Why Reform Still Eludes Nepal

Nepal formally introduced its Land Use Policy in 2015, followed by the Land Use Act in 2019. However, the country’s land reform journey began much earlier, immediately after the democratic movement of the 1950s. The first national budget, presented by Subarna Shumsher Rana in 1951, abolished the Birta Pratha - the feudal land grant system - marking the beginning of Nepal’s modern land reform agenda. The move expanded land rights, challenged feudal ownership structures, and established land as a productive economic asset. In the decades that followed, successive governments introduced various land reform measures.

Earlier reforms primarily focused on redistributing land through ownership ceilings for households, industries and commercial entities. The modern Land Use Policy, however, shifts the emphasis from ownership to utilisation, seeking to regulate how land is used rather than who owns it.

The policy proposes dividing the country’s territory into designated Land Use Zones (LUZs), including agricultural, residential, commercial, industrial, mining and minerals, cultural and archaeological, river and reservoir, forest, public use and open space, construction material extraction, and other specialised zones as required.

Nepal’s land profile underscores the importance of effective land management. Forests and shrubland account for 46.08% of the country’s total land area, while only 28% is arable. Of the 3.5 million hectares of agricultural land, just 1.5 million hectares have irrigation facilities, highlighting the scarcity of productive farmland. (See Figure 1)

Figure 1: Nepal’s land profile

Land Ownership and Property Rights

Land ownership in Nepal falls into three broad categories: public (government), private and guthi (trust) land. Private ownership dominates agricultural and residential landholdings, allowing owners to freely buy, sell, lease or mortgage their property. Certain tenancy and leasing rights also exist within guthi land.

The Constitution of Nepal provides strong protection for private property rights. Even when land is required for public infrastructure, the government must acquire it through due process and provide compensation. This legal protection has made real estate one of Nepal’s most trusted investment assets. Land in strategic or urban locations offers both capital appreciation and liquidity, reinforcing public confidence in property as a store of wealth.

Fragmentation, Speculation and Distorted Land Use

Nepal’s land economy is increasingly constrained by fragmentation and speculative investment.

Generational inheritance has progressively divided agricultural holdings into smaller parcels, while rapid urban expansion has largely been driven by private real estate developers rather than planned urban development. The resulting fragmentation has undermined commercial agriculture, complicated land pooling initiatives, and encouraged inefficient land use.

Land speculation has further intensified these challenges. Rising urban land prices have encouraged repeated buying and selling, with inflated valuations often used to secure larger loans from banks and financial institutions. Asset-backed lending practices have inadvertently fuelled speculation, while the conversion of fertile agricultural land into housing plots has accelerated urban sprawl.

The Land Use Policy itself emerged largely in response to growing food security concerns as productive farmland continued to disappear under residential and commercial development. Unplanned settlements have also expanded around industrial corridors, creating conflicts between residential communities and existing industries. According to former Joint Secretary Rishi Raj Koirala, growing residential encroachment has led local communities to demand the relocation of industries that were originally established outside settlement areas.

Implications for Industry and Agriculture

Industrialists argue that speculative land prices have significantly increased the cost of acquiring land for productive investment. Deepak Shrestha, Chairperson of the Nepatop Organisation, notes that industries also face regulatory constraints, as land acquired for industrial purposes cannot easily be sold if businesses relocate or cease operations.

Despite the enactment of land use legislation, implementation remains weak. Discussions around inheritance taxation continue, but meaningful reforms remain politically sensitive given the broad base of land-owning households. Instead, property transfers continue to attract substantial transaction taxes without addressing the underlying structural issues.

Agriculture faces similar constraints. Fragmented holdings remain one of the principal obstacles to commercial farming and mechanisation. Birendra Bahadur Basnet, Executive Chairperson of Arju Rice Mill, has attempted to develop commercial rice farming but continues to face inadequate production relative to the mill’s processing capacity. To bridge this gap, the company supports surrounding farmers with improved seeds and production inputs while encouraging them to supply paddy directly to the mill.

Ultimately, fragmented landholdings continue to lock Nepal into subsistence agriculture, limiting economies of scale, mechanisation and overall productivity.

An Unfinished Reform Agenda

Although land reform has remained on Nepal’s policy agenda for over seven decades, the process remains incomplete. Structural issues—including fragmented ownership, speculative investment, weak implementation and outdated land management practices—continue to undermine reform efforts.

Population growth is placing increasing pressure on finite land resources. At the same time, urban development remains dominated by individual home ownership, with apartment living yet to gain widespread social acceptance. Securing land for tourism, industry, infrastructure and commercial agriculture has therefore become an increasingly complex policy challenge.

To discourage speculation, the government is considering moderate taxation on land used for commercial production while maintaining lower taxes on a single residential property. The objective is to discourage land hoarding while encouraging productive investment.

Former Finance Minister, Surendra Pandey, argues that speculation lies at the heart of Nepal’s land problem. “Price speculation of land, rather than its productive use, is at the centre of every problem associated with land,” he says. He advocates policies that facilitate land leasing and productive ownership while discouraging investment driven solely by capital gains.

Legacy of Feudal Ownership

Historical land distribution continues to shape Nepal’s land economy today.

During the Rana and Panchayat eras, large tracts of land in the Terai were allocated to political elites, bureaucrats and their associates. When land ceilings were later introduced, many landowners simply redistributed holdings among relatives and associates to avoid government acquisition.

Legal loopholes continue to enable similar practices. The Giribandhu Tea Estate controversy exposed how exemptions originally intended to support agriculture and industry could be exploited for speculative real estate gains. A land swap provision introduced by the previous government allowed the estate’s owners to relocate operations while unlocking highly valuable urban land in Birtamod for commercial sale.

The Supreme Court later struck down the provision, and the Giribandhu case has since become a defining example of how legislative loopholes can perpetuate feudal patterns of land ownership under the guise of legal reform.

Migration and the Urban Backwash Effect

Migration in Nepal has followed neither a linear nor a gradual path.

During the decade-long insurgency, large numbers of people bypassed intermediate towns and migrated directly from rural villages to major urban centres, particularly

Kathmandu Valley. This abrupt migration dramatically increased urban land demand while placing enormous pressure on infrastructure and public services.
Urban planner Kishore Thapa notes that population concentration in major metropolitan regions is a global phenomenon, citing examples from the United States. However, in most countries this transition occurs gradually through intermediate urban centres. Nepal’s experience has been considerably more abrupt.

Development economists describe this phenomenon as the “backwash effect”, whereby capital, talent and economic opportunities become increasingly concentrated in major cities, drawing resources away from peripheral regions.

The Arun III Hydroelectric Project provides a clear illustration. Following compensation payments, many displaced households from Sankhuwasabha chose to relocate to Damak, Biratnagar and Kathmandu Valley despite improved infrastructure in their home district. Similar migration patterns are evident across rural Nepal, where families sell agricultural land to purchase small urban plots in search of better economic opportunities.

Nobel laureate Gunnar Myrdal described this process as cumulative circular causation, a self-reinforcing cycle in which investment, employment and income become increasingly concentrated in core urban centres, further accelerating migration and widening regional disparities.