India Nepal Relations: History, Challenges and Area of Cooperation

Table of Contents

Context: Following the election of Nepal’s new Prime Minister Balendra “Balen” Shah (2026), both India and Nepal expressed willingness to strengthen bilateral ties (open border, deep cultural links, major trade dependence).

India Nepal Relations: Why India Should Invite Balen Shah

Diplomacy: Early invitation signals India’s commitment to the “Neighbourhood First policy” (India’s primary regional diplomacy doctrine).
Political Transition: Engaging new leadership helps India understand Nepal’s emerging Gen-Z political movement and evolving foreign policy orientation.
Economic Interdependence: India remains Nepal’s largest trade partner and transit route (Nepal is landlocked; the majority of trade via Indian ports).
Energy Cooperation: Nepal’s hydropower exports depend on India-led regional energy grid projects (India agreed to import 10,000 MW of power from Nepal over 10 years).
Strategic Balance: Early engagement prevents strategic drift towards China or other external powers.
Infrastructure Support: India can assist Nepal in overflight rights for new airports and energy market access (key Nepali demand).
Crisis Assistance: Nepal may need help dealing with fuel and fertiliser disruptions from the West Asia conflict.
People Links: Strong societal ties (open border; millions of Nepalis live/work in India).
Economic Stability: Nepal’s economy relies heavily on remittances and tourism (≈14% population working abroad; ~3.5 million workers).
Trust Building: An invitation would help address past tensions (2015 blockade perception, constitutional issues, border disputes).

Significance of India-Nepal Ties

Economic significance

Trade: Nepal shares a border with 5 Indian states. Hence, an important point of trade and economic exchange.
Energy security: India and Nepal share many transboundary Himalayan rivers with huge hydropower potential.
Foreign exchange: Remittances sent from India are one of the major sources of foreign exchange.

Strategic significance

Buffer state: Nepal acts as a buffer state between India and China. It prevents any future chances of aggression.
Internal security: Cooperation of Nepal is necessary for curbing cross-border smuggling of weapons, fake currency and narcotics.

Cultural significance

Pilgrimage sites: Many Hindu and Buddhist religious sites are in Nepal, making it an important pilgrimage site for Indian citizens.
Common religion: The majority of citizens in India and Nepal are Hindus, forming a major civilisational link between the two nations.

Diaspora: Nepali diaspora in India and the Indian workforce in Nepal act as a people-to-people link.

Areas of Cooperation between India and Nepal

Areas	Details
Trade and Economy	Bilateral trade: India is the largest trading partner of Nepal. In FY 2021-22, Nepal constituted 2.34% of India’s exports. And exports from India constitute almost 22% of Nepal’s GDP. FDI: India is the largest source of FDI in Nepal. Indian firms engaged in manufacturing, services (banking, insurance, dry port), the power sector and tourism industries, etc.
Connectivity	Transit: Nepal, being a landlocked country, needs freedom of transit. India provides transit for almost the entire third-country trade of Nepal. Recent developments: A 35-km cross-border railway line linking Jaynagar in Bihar to Kurtha in Nepal was flagged off. India has also handed over the Solu Corridor, a 90-km, 132 kV power transmission line, which will help bring electricity to several remote districts in northeastern Nepal. Nepal has signed an MoU with India for the Kathmandu-Raxaul railway link. Sagarmatha to Sagar: India is looking to develop the inland waterways to Nepal and provide sea access for Nepal.
Defence cooperation	Defence modernisation: India assists the Nepalese Army in its modernisation through the provision of equipment and training. The Gorkha Regiments of the Indian Army are raised partly by recruiting from the hill districts of Nepal. Joint military exercise: Surya Kiran
Cultural cooperation	There have been initiatives to promote people-to-people contacts in the areas of art & culture, academics and media with different local bodies of Nepal. Recent developments: Sister cities: India has signed three sister-city agreements for Kathmandu-Varanasi, Lumbini-Bodhgaya, and Janakpur-Ayodhya. Recently, PM Modi laid the foundation for the construction of the India International Centre for Buddhist Culture and Heritage in the Lumbini Monastic Zone, Lumbini, Nepal. The Ramayana Circuit train: It includes major pilgrimage sites from India and Nepal that are related to the Ramayana.
Energy cooperation	Hydroelectric projects: Arun 3 Project, Pancheshwar Multipurpose Project, Pokhara (1 MW), Trisuli (21 MW), Western Gandak (15 MW), and Devighat (14.1 MW). Motihari-Amlekhgunj Pipeline: The pipeline carries petroleum products from Motihari in India to Amlekhgunj in Nepal. India and Nepal have had a Power Exchange Agreement since 1971 for meeting the power requirements in the border areas. Nepal also invited Indian companies to invest in the West Seti hydropower project in Nepal.
Assistance	Developmental assistance: The Government of India provides developmental assistance to Nepal in the areas of infrastructure, health, water resources, education and rural & community development. Humanitarian assistance: Nepal remains the biggest recipient of India’s humanitarian assistance due to its ecological fragility. Vaccine diplomacy: India has extended vaccines and COVID-related aid to Nepal.
Multilateral Partnership	India and Nepal share multiple multilateral forums such as BBIN, BIMSTEC, Non-Aligned Movement, and SAARC etc.

Major Challenges in India–Nepal Relations

Relations between India and Nepal are historically close, based on cultural, economic, and geographical ties. However, several issues have created periodic tensions between the two neighbours.

Border Disputes

Disagreements over territories like Kalapani, Lipulekh, and Susta
Map controversies and differing interpretations of the boundary

Check here: India-Nepal Border Disputes in detail

Political Sensitivities and Trust Deficit

Perception in Nepal of Indian interference in internal affairs
Events like the 2015 blockade created resentment
Frequent changes in Nepal’s political leadership affect continuity

China Factor

Increasing influence of China in Nepal through infrastructure and investments
Strategic competition between India and China in the region

Water Sharing and Hydropower Issues

Disputes over river projects like the Kosi River and the Gandak River
Concerns over unequal benefits and flood management

Open Border Management

While the open border promotes trade and movement, it also raises issues like:
- Illegal trade
- Human trafficking
- Security concerns

Trade Imbalance

Nepal has a large trade deficit with India
Overdependence on Indian imports creates economic concerns

Treaty Concerns

Debate over revising the India-Nepal Treaty of Peace and Friendship (1950)
Nepal views it as outdated and unequal

Nationalism and Public Sentiment

Rise of anti-India sentiment in Nepal at times
Political leaders often use nationalism in domestic politics

Conclusion

India–Nepal relations are rooted in deep historical ties, but challenges like border disputes, political mistrust, and external influences need careful management. Strengthening mutual trust, respecting sovereignty, and enhancing economic cooperation are key to improving bilateral relations.