The Evolving Nepal-India Partnership

Nepal and India share a deeply rooted and multifaceted relationship characterized by open borders, shared cultural traditions, and strong economic ties. This unique bond has developed over time and plays a central role in the progress of both nations. India is not only Nepal’s largest trade partner but also the primary source of tourists, the exclusive supplier of petroleum products, and the largest foreign investor. Furthermore, India plays a crucial role in facilitating Nepal’s foreign trade and is a significant source of remittances sent home by Nepali workers in India.

Over the last couple of years, both nations have made significant progress in strengthening their relationship, marked by high-level visits and the signing of agreements in various areas of cooperation. 

Throughout history, India has been a reliable partner for Nepal during times of disaster and crisis. A notable example of this was in 2015 when India quickly responded to Nepal’s devastating earthquake by providing immediate relief and a financial aid package to help with reconstruction efforts. Nepal received similar cooperation during COVID-19 and after the Western Nepal’s earthquake of 2023. These gestures reflect the depth of the bilateral relationship, which extends beyond economic cooperation to humanitarian support during difficult times.

Recent cooperation

Despite the strong partnership, Nepal faces certain challenges. One of the most pressing issues is the trade deficit with India, which constitutes nearly 18% of Nepal’s GDP. High business costs, driven by bureaucratic delays and expensive transportation, further hinder the country’s economic growth. As a landlocked nation, Nepal’s reliance on neighbouring India for trade and transit means it has to deal with high transaction costs, making it difficult for local businesses to compete.

To address these challenges, Nepal and India are working together to reduce the trade imbalance and improve digital financial connectivity. 

One of the key areas of potential for Nepal is hydropower development and trade. Nepal has vast untapped hydropower potential, and India has been an important partner in harnessing this resource.

In 2022, Nepal began exporting electricity to India. This partnership holds even greater promise for the future. Nepal plans to export up to 10,000 MW of electricity to India within the next decade.

This will not only help Nepal reduce its trade deficit but also contribute to India’s renewable energy goals by providing clean, hydropower-based energy. 

In addition, Nepal signed a tripartite agreement with India and Bangladesh in 2024 to allow Nepal to export electricity to Bangladesh using the Indian grid. This is a landmark agreement to boost regional trade and help address climate change by reducing reliance on coal and gas.

Another area where Nepal can benefit is digital infrastructure and artificial intelligence (AI). India has made significant strides in improving its digital economy, including advancements in AI, digital payments, and mobile banking. As India’s digital infrastructure continues to grow, Nepal stands to gain by tapping into these developments.

One example of this collaboration is the ongoing effort to facilitate cross-border digital payments and bank transfers. This would make transactions for tourists, traders, and workers smoother and more efficient, reducing barriers to trade and commerce. For instance, Nepali workers in India could more easily send remittances home than before, boosting the local economy. The broader impact of this digital connectivity could enhance Nepal’s trade, tourism, and remittance flows, benefiting both countries.

Infrastructure development is another critical area where Nepal stands to gain from its relationship with India. The two nations are collaborating on constructing new petroleum pipelines and improved border roads aimed at reducing business costs and improving connectivity. A key success story is the Motihari-Amlekhgunj petroleum pipeline, which has saved Nepal millions of rupees annually by cutting down transportation costs and eliminating losses from pilferage and theft. 

The construction of new integrated check posts (ICPs) in key border areas, such as Bhairahawa and Dodhara-Chandani, is expected to streamline cargo and passenger movement, further reducing transaction costs and delays. In addition, cross-border railways and new road networks are being developed to improve trade and the free movement of people and goods.

Looking Ahead

 Looking beyond, one of the most promising areas for future collaboration is the creation of a regional energy grid in South Asia. Through this initiative, Nepal could trade renewable energy with other countries in the region, further diversifying its energy export market. Not only would this help boost Nepal’s economy, but it would also contribute to the region’s collective efforts to achieve energy security and reduce carbon emissions.

Tourism is another area where Nepal has a strong comparative advantage. The country has world-renowned landmarks like Mount Everest, Lumbini (the birthplace of Buddha), and Janakpur (birthplace of Sita) while India has diverse attractions such as the many religious places including Varanasi, Ayodhya, Char Dham, Taj Mahal and so on. The proximity of these nations enables seamless travel, fostering cross-border tourism.

Joint marketing initiatives, shared tourism packages, and improved infrastructure can enhance the experience for travellers. With both nations aiming to boost economic growth through tourism, cooperation can help improve transport networks and hospitality services, benefiting local economies and creating a more accessible tourism route for international travellers. By working together, Nepal and India can attract more global visitors, increasing their tourism potential and improving people-to-people relations.

Nepal, in addition to hydropower, could also focus on bringing more investment in Nepal, especially in the areas of IT, manufacturing, tourism and other renewable energy. Expansion of Nepali production capacity in these areas can also benefit from India’s expanding consumer and industrial sectors. 

Furthermore, South Asian countries can become key parts of India’s supply chain. For instance, countries like Nepal, Bangladesh and Sri Lanka could specialize in some products including manufacturing or providing intermediate goods that are used in Indian production not only in manufacturing sectors but also in services.

Countries like Nepal in the region have opportunities to take advantage of India’s growing tech and innovation ecosystems. By fostering collaboration and taking advantage of the digital public infrastructure developed in India, countries can gain access to new technologies in sectors such as healthcare, education, agriculture, and basic service delivery. 

Conclusion

 By leveraging these opportunities, especially India’s rapid growth, Nepal can improve its infrastructure, boost trade, and enhance its technological base. Nepal’s economy can benefit from the development of clean energy exports, improved financial transactions, and more efficient cross-border trade mechanisms. These efforts will help reduce Nepal’s trade deficit, make the cost of doing business more manageable, and create a brighter economic future for both nations.