On June 1, Nepal renewed and revised its seven-year transit trade agreement with India. The updated treaty, signed in New Delhi by the prime ministers of both countries, enhances Nepal’s access to designated Indian sea ports by road, rail, and water.Furthermore, the planned expansion of Nepal’s petroleum import pipelines enhances supply chain security. Moreover, a long-term cross-border electricity trade agreement and a memorandum of understanding (MoU) on cross-border digital payments are seen to be breakthrough initiatives.Improved access via land and waterThe transit agreement with India is crucial for Nepal’s sea-borne trade, since ports in the Bay of Bengal are much closer to Kathmandu (roughly 900 kilometres away) than to the nearest Chinese port of Tianjin (4000 km away). Even for markets such as South Korea, accessible from the East China Sea, shipping by sea from the Bay of Bengal would be more cost-effective than the combined land and sea route via China. In fact, using Bangladeshi ports makes more economic sense for Nepal for transit trade (a trade and transit agreement was signed in 1976) than routing through China.For the first time, India has granted inland waterways access to Nepal, offering potential cost savings and congestion relief in the journey to Haldia/Kolkata ports. There are also hopeful indications on access to two other ports, Dhamra and Mundra.Integrated Check Posts (ICPs) streamline movement of goods and people across the borders. The two currently operational ICPs at Jogbani and Raxaul, handling the bulk of bilateral trade, have limited parking space and narrow access roads, constraining the daily crossing of as many as 730 trucks a day. To facilitate the growing volume of trade, a third ICP was inaugurated at the border of Nepalgunj (Nepal) and Rupaidiha (India), and MOUs for two more ICPs, near the Nepalese towns of Bhairahawa and Dodhara Chandani, were signed.The cross-border cargo rail link at the second-busiest Biratnagar-Jogbani border became operational with the first cargo train’s inaugural eight-kilometre run from Bathnaha in India to the Nepal customs yard. However, it stopped after the inaugural run, due to lack of coordination between the relevant agencies.The existing passenger rail link between Jaynagar (India) and Kurtha (Nepal) was extended by 17 km into Nepal. So now Nepal can deploy private rail operators as well.Nepal has long requested India to facilitate better international air connectivity. Its two new international airports in Pokhara and Lumbini, both located west of the existing Kathmandu airport, remain underutilised.Currently, India only allows one air entry point for international flights into Nepal, flying over the Indian airspace via Simara (Nepal), which is directly south of Kathmandu, on the Indian border. This puts international flights approaching Nepal from the west at a disadvantage, as they must make a detour through Simara. It also causes congestion at the Kathmandu airport.Nepal has been requesting for another entry point over the northwestern corner of Nepal, near Mahendranagar. However, India has expressed air safety concerns arising from potential multiple entry points on the Nepal-India border.Currently, high altitude traffic is only allowed via Simara. This situation hinders the growth of international air traffic to Nepal, and a solution must be found by examining international experience in managing air corridors, while keeping in view India’s security concerns.Petroleum pipelines promote resilient and cost-effective supplyNepal heavily relies on India for vital petroleum imports, which, until 2019, were transported via road. Occasional road disruptions in the past have caused extreme hardship for Nepalis. To address this issue and ensure the avoidance of earlier hardships, India and Nepal have built a 69-km pipeline from Motihari (India) to Amlekhgunj (Nepal). Since 2019, Nepal has been importing diesel through this pipeline.Transporting oil via pipelines is cost-effective, safer, minimises losses, and is not susceptible to road disruptions. In a bid to further reduce dependence on trucks, an MoU was signed during the prime ministers’ meeting to extend the pipeline by 62 km to Chitwan in Nepal. Another MoU covers the construction of a new 50-km pipeline from Siliguri (India) to Jhapa (Nepal)Breakthrough long-term power trade agreement and a new tripartiteCurrently, Nepal’s power trade with India involves both exports and imports. In the future, its power exports are likely to increase significantly, which requires supporting infrastructure as well as trading arrangements. Significant gains were made on both fronts during the Nepal prime minister’s visit to India.Nepal first achieved surplus power in 2021, but this is only the tip of the iceberg. Its hydroelectric power potential is enormous. However, finding a market for surplus power in from June to September is hard, even with an existing capacity of about 1200 megawatts. That is only a fraction of its economically viable potential of 42,000 MW. With new capacity being added, and no storage possibility, the surplus generation problem in the wet months will only worsen.Cross-border transmission lines are, therefore, critical for Nepal’s electricity trade. Most of the 12 existing transmission lines are low voltage and cannot carry much energy. In this context, the 400 kV Gorakhpur-Butwal line, expected to be completed in the next two years, is significant.Apart from transmission, India also signed a project development agreement for the Lower Arun hydroelectric project (669 MW), expected to take seven to eight years for its construction and an MoU for Phukot-Karnali hydroelectric project (480 MW), expected to take five years for its construction.Apart from that, investors in Nepal’s power sector need to be assured of demand, since Nepal’s internal demand is only a fraction of its power generation potential. In this context, India’s agreement to purchase 10,000 MW of power from Nepal over the next decade, doubling current annual purchases and transitioning away from yearly agreements, is a breakthrough. The agreement follows up on last year’s joint vision statement on power sector cooperation. It will further enhance power exports, which already represent Nepal’s third most important source of export revenue, totalling $60 million in 2022.Currently, Nepal trades part of its surplus power in bilateral mode on India’s Energy Exchange, specifically within the “Day Ahead Market,” where the market clearing price tends to rise during the monsoon months. Yet, in the dry season, the tables turn, and Nepal becomes an importer of power from India. For example, in fiscal year 2020-21, Nepal imported three times the amount of power it exported to India.One caveat is that under the Indian regulations, plants with Chinese involvement will not qualify to export power to India, since India and China do not have a power trading agreement. Since signing the long-term agreement, India has initiated new financial scrutiny of plants selling power to India.Another major development is the entry of Bangladesh into the power trading equation. For the first time, transit trade in power will become a reality for Nepal, with India allowing its grid for export of 40 MW power from Nepal to Bangladesh. Though symbolic, this sets the stage for larger long-term power export from Nepal to Bangladesh.Overall, the developments in cross-border power trade are a win-win for all countries involved. For Nepal, the gains are clear, as mentioned above. For India, the developments provide an equally important marker in its support for a bilateral and sub-regional energy market. By enabling cross-border energy export from Nepal, it is facilitating the long-desired development of Nepal’s hydropower sector.By enabling such trade to become trilateral, it is helping plant seeds for sub-regional energy cooperation. Finally, by promoting hydropower development, both from Nepal and Bhutan, India is supporting the transition to green energy.From Bangladesh’s standpoint, the import of hydro-based electricity could serve as a crucial catalyst for reducing its heavy dependence on fossil fuels. The export of 40 MW of power from Nepal to Bangladesh could be just the beginning.For example, Bangladesh and Nepal intend to jointly develop the 683 MW Sunkoshi-3 hydroelectric project in central Nepal, and export power to Bangladesh through India.Potentially transformative digital payments agreementNepal and India already allow Bank ATM debit cards and credit cards to be used across the border for withdrawing local currency and making point-of-sale transactions in local currency. Moreover, Nepali migrant workers in India use the Indo-Nepal Remittance Facility Scheme to remit money swiftly and cheaply, using Indian banks.The MoU signed between Nepal and India on cross-border digital payments can be transformative. It is part of India’s ongoing international expansion of its immensely successful Universal Payments Interface (UPI). Introduced in 2016, UPI-based real-time digital transactions accounted for three-fourths of all retail digital transactions in India in FY23. In Nepal, QR code-based point-of-sale transactions have climbed to a monthly volume of nearly 8 million, and mobile/online payments across banks are also rising.Once implemented, the MoU will ensure interoperability between the two countries’ digital payment systems, promoting digital inclusion, minimal transaction costs, and convenience, enhancing person-to-person and person-to-merchant payments, and benefitting trade in goods and services, especially for a large number of cross-border travellers.ConclusionWhile the details of the new transit treaty are not yet public, a reading of the official press releases by the two governments, rooted in deeper economic engagement, have renewed optimism on bilateral trade and Nepal’s transit trade. Along with breakthroughs in cross-border power trade and digital payments, these also augur well for the renewal of the vital Nepal-India trade agreement in November this year.Successful implementation of ongoing agreements can help pave the way for further deepening and broadening of economic ties.Sanjay Kathuria is Visiting Senior Fellow at the Centre for Social and Economic Progress, and Adjunct Professor at Georgetown and Ashoka Universities, and Global Fellow at the Wilson Center. He tweets @Sanjay_1818. T.G. Srinivasan is Visiting Senior Fellow at the Centre for Social and Economic Progress. The authors would like to thank Paras Kharel and his colleagues at SAWTEE, Nepal, as well as Uttam Malla (former DG of National Statistics Office, Nepal) for comments on an earlier version. Views are the authors’ own.
