What Happened
- With Balendra Shah's Rastriya Swatantra Party (RSP) sweeping Nepal's 2026 elections and forming a stable majority government, analysts recommend a recalibration of India's Nepal policy.
- The incoming RSP government represents a generational and ideological break from Nepal's traditional parties — both the communist factions (CPN-UML, CPN-Maoist Centre) that tilted toward China, and the Nepali Congress which was India's traditional interlocutor.
- Key policy recommendations for India: engage with RSP early, avoid the "big brother" perception, fast-track stalled connectivity projects, revisit the 1950 Treaty through the Eminent Persons Group, and engage the "new Nepal" on equal terms.
- Nepal's persistent complaints against India include the 2015 blockade, alleged interference in domestic politics, and the Kalapani-Lipulekh border dispute.
- China has made significant inroads in Nepal through BRI investments, infrastructure financing, and diplomatic wooing — India must not cede this space by default.
Static Topic Bridges
India's Neighbourhood First Policy
The "Neighbourhood First" policy is India's strategic doctrine for South Asian diplomacy, foregrounded in Prime Minister Modi's first term (2014–). It prioritises giving primacy to neighbours in India's foreign policy, including connectivity projects, development assistance, disaster relief, and people-to-people exchanges. The policy was reflected symbolically in inviting SAARC leaders to Modi's 2014 inauguration.
- SAARC (South Asian Association for Regional Cooperation): Founded 1985 (Dhaka Charter); 8 members; India is the largest economy. SAARC is effectively paralysed by India-Pakistan tensions since the 2016 Islamabad Summit was cancelled after the Uri attack.
- BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation): India pivoted to BIMSTEC as the effective South Asian multilateral platform; Nepal is a BIMSTEC member.
- India's development assistance to Nepal: Includes the Janakpur-Jaynagar railway, Arun-3 hydropower (900 MW on the Arun River), Raxaul-Kathmandu railway feasibility, and petroleum pipelines.
- Line of Credit: India has extended multiple lines of credit to Nepal for infrastructure projects totaling over $1.6 billion.
Connection to this news: The Neighbourhood First policy's success depends on the quality of bilateral engagement, not just its volume. Shah's election is an opportunity to demonstrate that India's "neighbourhood first" approach translates into genuine partnership — not patron-client dynamics that Nepal's electorate resents.
India-Nepal Bilateral Irritants: Border Disputes and Treaty
Three interlinked issues have persistently strained India-Nepal relations: the 1950 Treaty of Peace and Friendship, border disputes (particularly Kalapani-Lipulekh), and Nepal's perception of Indian political interference.
- Kalapani-Lipulekh dispute: India's political map shows Kalapani (at the India-Nepal-China tri-junction in Uttarakhand) as Indian territory. Nepal's revised 2020 political map claims Kalapani, Lipulekh, and Limpiyadhura as Nepalese, incorporating them into the new Sudurpaschim Province.
- The dispute arose from conflicting interpretations of the 1816 Sugauli Treaty with British India.
- Eminent Persons Group (EPG): A bilateral high-level body established in 2016 to review the 1950 Treaty; submitted report to Nepal PM in 2018 but Nepal has never formally shared it with India — a deliberate act of diplomatic positioning.
- 2015 Blockade: An economic blockade, coinciding with the Madhesi protests against Nepal's 2015 Constitution, was widely perceived in Nepal as Indian-orchestrated. India denied involvement, but severe fuel and medicine shortages generated lasting anti-India sentiment.
Connection to this news: Shah's government offers a window to resolve or manage these irritants, given his mandate for clean governance and his lack of ideological debt to either India or China. India should approach the EPG report, border dialogue, and treaty revision proactively rather than reactively.
China's Influence in Nepal: BRI and Strategic Competition
China's engagement with Nepal has deepened significantly since Nepal joined the Belt and Road Initiative (BRI) in 2017. China is Nepal's second-largest trading partner and a growing source of investment and tourism. The China-Nepal relationship is also shaped by Tibet — Nepal is home to approximately 20,000 Tibetan refugees.
- Nepal's BRI projects: Trans-Himalayan Multi-Dimensional Connectivity Network, including a proposed China-Nepal railway through the Himalayas to Kathmandu; Kerung-Kathmandu railway.
- Trade: China-Nepal trade remains much smaller than India-Nepal trade (Nepal does ~65% of trade with India), but China is the second-largest source of FDI in Nepal.
- Nepal's buffer state role: Nepal's policy has historically been to balance India and China — a "yam between two boulders" (bimba-kanda) as Nepali leaders have described it.
- Tibetan refugee issue: China regularly pressures Nepal to restrict Tibetan refugee activities; Nepal has complied with several extraditions, creating a human rights concern for democratic observers.
Connection to this news: China will seek to maintain its influence with the new RSP government through economic incentives. India's advantage — open borders, Gurkha tradition, remittances, cultural affinity — is structural but can be squandered through arrogance or inaction. A proactive Indian engagement strategy is essential.
Hydropower as a Cornerstone of India-Nepal Economic Partnership
Nepal has an estimated hydropower potential of 83,000 MW (economically feasible: ~42,000 MW), of which only about 2,700 MW is developed. India is Nepal's primary market for electricity export and a key investor in hydropower projects.
- Power Trade Agreement (2014): Framework for cross-border power trade between India and Nepal.
- Arun-3 (900 MW): Being developed by SJVN (India's state-owned hydropower company); construction ongoing.
- Upper Karnali (900 MW): Being developed by GMR Group (India); facing delays.
- India-Nepal Power Exchange: Nepal exported approximately 500 MW to India in 2024; target is to scale to 10,000 MW within a decade.
- India-Nepal electricity interconnection: 4 transmission lines currently operational; expansion planned.
Connection to this news: Hydropower cooperation offers a win-win template for the new bilateral relationship — Nepal gains revenue and development, India gains clean energy for its green transition targets. Shah's clean governance mandate makes him a credible partner for transparent project implementation.
Key Facts & Data
- Indo-Nepal Treaty of Peace and Friendship: Signed July 31, 1950; open border provision under Articles 6 and 7.
- Nepal's estimated hydropower potential: 83,000 MW; only ~2,700 MW developed as of 2024.
- Nepal joined BRI: 2017.
- Eminent Persons Group (EPG): Established 2016; report submitted to Nepal PM in 2018; not yet officially shared with India.
- 2015 Blockade: September–February 2015–16; precipitated by Madhesi protests against Nepal's Constitution (promulgated September 20, 2015).
- Kalapani area: ~372 sq km claimed by both India and Nepal; located at tri-junction with China.
- Nepal's total trade with India: Over 65% of total trade.
- Indian Line of Credit to Nepal: Over $1.6 billion across multiple tranches.
- BIMSTEC: 7 members (Bangladesh, India, Myanmar, Sri Lanka, Thailand, Nepal, Bhutan); founded 1997.
- SAARC: 8 members; founded 1985 (Dhaka Declaration).