IMAGE: REUTERS
THE SOYBEAN and palm oil that Nepal buys from Argentina and Brazil, refines and ships back across the border to India made up much of the surge in exports last year. Strip out that arbitrage—Indian tariff policy temporarily making Nepal a processing zone—and the underlying trade picture looks bleaker. Real exports to India are a narrow basket: tea, textiles, yarn, some steel. And electricity.
That last category changes the calculus. In the year to mid-2025, Nepal exported 2.35bn units of hydropower worth Rs17.5bn ($121m), mostly to India. For the first time, export earnings from electricity exceeded import costs. Nepal now has something India really needs: clean power for its northern grid, at prices competitive with domestic alternatives. The government talks of reaching 10,000MW of exports within a decade. At current prices that would mean $400m-500m a year—more than double total merchandise exports in dollar terms.
But the wires run through India. New transmission lines require Indian approvals. Power purchase agreements are negotiated with Indian buyers who hold better information. And India has made clear it will avoid buying electricity from projects with significant Chinese investment. The hydropower pathway, in other words, runs through New Delhi on New Delhi’s terms.
The same is true of everything else. Nepal’s currency has been pegged to the Indian rupee since 1993, which means monetary policy is effectively outsourced to the Reserve Bank of India. When the rupee depreciates, the Nepali rupee follows. When India raises rates, Nepal’s money supply tightens. Importers and consumers benefit from stability. Exporters to third countries—carpet weavers in Kathmandu, pashmina traders in Pokhara—must compete globally with a currency they cannot devalue.
The open border, 1,751km of unfenced passage, makes India an extension of Nepal’s domestic market. Perhaps 5-8m Nepalis work there informally, their remittances largely uncounted in official statistics but forming a social safety net the government has yet to build. When Gulf migration collapsed during covid, Indian labour markets absorbed the shock.
All this should make the bilateral relationship the central organising fact of Nepali economic policy. Instead Kathmandu treats it as a problem to be managed, a source of grievance, a constraint on sovereignty. Politicians invoke strategic autonomy and the China option. They sign infrastructure deals with Beijing that trigger Indian conditionality on hydropower purchases. They talk of diversification while the data show dependence deepening.
The 2015 blockade—when goods movement through Indian territory was effectively halted for months—hangs over every calculation. Fuel and medicine ran short. The economy contracted. Trust has yet to recover. Yet the lesson is that Nepal should maintain trade with India, which is inevitable, and also secure a legally binding transit treaty with enforceable dispute resolution. That treaty remains absent. Instead transit access is renegotiated periodically, subject to diplomatic winds.
As for hydropower, Nepal’s best hope for export-led growth requires Indian transmission, Indian buyers and Indian forbearance on Chinese investment. The 2024 long-term power agreement is a framework; it needs enforceable contracts and grid access schedules. Nepal has the most influence now before India builds other sources in the Himalayas.
Can Nepal convert passive dependence into active leverage? Its future will be negotiated in New Delhi, and the only question is if it shows up prepared. ■
