Hydro-power Diplomacy in India-Nepal Ties: A New Era of Regional Energy Connectivity

From Water Disputes to Hydropower Opportunity

For decades, the bilateral relationship between India and Nepal regarding water resources and their utilisation was viewed primarily through the lens of dispute as a result of the older water-sharing treaties, which were often perceived as unfair by Nepal, with the prevailing sentiment that the agreements were asymmetrical and heavily favoured towards India. In recent times, this has evolved towards a relationship that views hydroelectricity as a regional commodity. Nepal has significant hydropower potential, with experts estimating a theoretical potential of 83,000 MW, out of which 42,000 MW is economically feasible. 

The country's topography, with its steep gradients, provides the opportunity to build some of the world's largest hydroelectric projects. Four crucial tributaries of the Ganges, the Mahakali, Karnali, Sapta Gandaki, and Sapta Kosi, originate in the Himalayas and flow through Nepal's valleys into the Indian plains before flowing into the Bay of Bengal. This natural flow creates an opportunity for joint infrastructure development and energy trade, and with India's large energy market and Nepal's surplus power, stronger cooperation is crucial to unlocking the full potential.

The Riparian Paradox and historical grievances

Historically, this potential has been limited by a paradox, as Nepal is the "upper riparian" country, and India is the "lower riparian" country. In theory, Nepal, being upstream as water flows to downstream in India, should give Nepal the bargaining advantage in treaty negotiations. However, the reality has been the opposite, due to the massive power and size asymmetry between the two countries as India has been accused of reaping the better end of benefits from water-sharing agreements with Nepal. 

Some of the primary legacy water treaties, like the Kosi agreement of 1954, the Gandak agreement of 1959, and the Mahakali agreement of 1996, shared a common theme that Nepal was perceived as unequal, as specific clauses often felt one-sided, creating a deep trust deficit and fueling a sense of "water nationalism" in Nepal. The claim was that India, while in the process of pursuing its own national interests, often overlooked Nepal's interests, ending in one-sided benefits instead of mutual ones. This sentiment significantly contributed to the slow progress on cooperation on water issues.

Commercialising the Flow: The 2024 Long-Term Power Trade Agreement

However, current realities indicate that the focus has shifted from past disputes to a more commercialised model where Hydropower is a traded commodity. This shift moves away from a focus on administrative water rights and toward hydroelectric trade as a more equitable diplomatic tool. The landmark moment in this dynamic came through the signing of a long-term power trade agreement for 25 years in 2024, under which Nepal would export 10,000 megawatts of electricity to India, guaranteeing a long-term market for Nepal's electricity production.

Alongside the agreement, new 132kV cross-border transmission lines were inaugurated to increase the energy connectivity between the two countries. While political concerns within Nepal are still present, this deal emphasises that cross-border energy trade does benefit both countries as Nepal reduces its trade deficit with India while becoming more self-sufficient in energy, while India benefits from the significant hydroelectricity import, as it would contribute to its climate change goals through an increase in the share of clean and renewable energy sources in its total energy requirements.

Emergence of Trilateral Energy Cooperation in South Asia

This bilateral dynamic has successfully led to the emergence of a trilateral energy architecture. In 2024, Nepal, India and Bangladesh signed a historic tripartite agreement for electricity imports from Nepal to Bangladesh via India. 

This was an historic achievement and milestone for sub-regional energy trade cooperation in South Asia, as Bangladesh will purchase 40 megawatts of hydroelectricity from Nepal via India. In a further sign of progress in late 2025, an agreement was reached for Bangladesh to import an additional 20 megawatts of electricity from Nepal, bringing the import total to 60 megawatts annually. In accordance with the agreement, the electricity is being exported from Nepal to India via the Dhalkebar (Nepal)-Muzaffarpur (India) 400 kilovolts (kV) transmission line and from India to Bangladesh via the Baharampur (India)-Bheramara (Bangladesh) 400kV transmission line. 

This energy architecture is crucial in fostering energy cooperation in the South Asian region, which has been chronically economically disconnected with intra-regional trade at just 5%. This trilateral energy architecture could further propel energy cooperation with other countries in the region, such as extending the Bangladesh-Bhutan-India-Nepal (BBIN) initiative to expand energy trade, as Bangladesh also seeks to import hydroelectricity from Bhutan via India. 

There is an energy cooperation vacuum in South Asia, given the paralysis of SAARC and its energy centre. Unfortunately, the BIMSTEC and its energy centre have not yet yielded any significant results and have met only once in 2023. However, the potential for energy cooperation within the BIMSTEC member states remains immense, as India could facilitate a regional energy market, where it can import hydroelectricity to other South Asian countries, such as Sri Lanka, apart from Bangladesh, and apart from just bilateral or trilateral attempts, institutions like the BIMSTEC energy centre need to play an active part in facilitating energy trade within its member countries.

Persistent Bottlenecks and Nepal’s New Political Momentum

Despite this momentum, significant bottlenecks remain. As seen in stalled projects like the Pancheshwar Multipurpose Project, which was signed in 1996 as part of the Mahakali project, negotiations have remained inconclusive after almost three decades of talks due to disagreements between the two sides. Furthermore, most of Nepal's 42,000 megawatt hydropower potential has remained largely underutilised, as Nepal has throughout the years faced political instability and is short of technology and finances to build dams. Simultaneously, India has also failed to provide meaningful support.

However, a new political era in Nepal, with the government of Balen Shah, could provide an opportunity and the much-needed spark for joint infrastructure development and energy cooperation that stalled under the old guard. The Balen Shah government has pledged to raise Nepal's installed hydropower capacity to 30,000 megawatts over the next decade, with plans for long-term energy trade agreements with India and Bangladesh. Prime Minister Balen Shah has recently accepted an invitation from Prime Minister Narendra Modi to visit India, which would be his first official visit as prime minister.

Himalayan Waters as a Catalyst for Regional Integration

The trajectory of India-Nepal ties is going through a significant transformation as it is evolving from a history of friction on water sharing to a future of regional energy cooperation. While the effects of legacy treaties like the Kosi and Gandaki agreements still linger as a result of the trust deficit. The 2024 Long-Term Power Trade Agreement represents an important shift toward Nepal's economic sovereignty and India's green energy security. The emergence of trilateral trade with Bangladesh further shows how hydropower diplomacy can be used to overcome bilateral tensions to enable a connected South Asian grid. Ultimately, the flow of Himalayan water is much more than a matter of just borders; it could also serve as a crucial driver of regional integration and shared economic resilience.

Written By: Arunanshu Sarkar Edited By: Bhaskar Jha