Trade lifeline under strain as Nepal’s crisis threatens ties with India

A sweeping political crisis in Nepal has upended daily life and threatens to disrupt the country’s most vital economic artery: its trade with India. The bilateral flow stood at more than $8 billion last year and represents a lifeline for everything from petroleum to food supplies.

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The unrest, led by Gen-Z protesters angered by corruption and a government social media ban, has already shut down Kathmandu’s transport system, vandalised Parliament and the homes of senior political leaders, and forced Prime Minister KP Sharma Oli to resign. For India, the instability across its Himalayan border carries immediate commercial consequences and longer-term strategic risks.

The numbers behind bilateral trade

India is by far Nepal’s largest trading partner. According to the Indian Embassy in Kathmandu, India accounted for about 63 per cent of Nepal’s total trade volume in 2024–25. Nearly 79 per cent of Nepal’s exports went to India.

Bilateral trade between India and Nepal reached $8.54 billion in 2024–25, with India exporting goods worth around $7.33 billion and Nepal exporting approximately $1.2 billion to India. That left Kathmandu with a yawning trade deficit of over NPR 563 billion, despite a surge in Nepalese exports last year.

The imbalance is stark. Indian goods alone represent nearly 16 per cent of Nepal’s GDP, underscoring how deeply dependent the smaller economy is on its southern neighbour.

Nepal’s imports from India are dominated by petroleum products, vehicles, machinery, medicines, fertilizers, and food grains. By contrast, Nepal’s exports to India consist mainly of refined palm and soybean oils, cardamom, carpets, polyester yarn, and electricity.

Trade disrupted amid political unrest

That trade engine is now sputtering. Since September 8, Kathmandu has been brought to a standstill. Demonstrators stormed restricted zones near Parliament, and protesters set fire to the homes of senior leaders. At least 19 people have been killed in clashes with security forces, according to Reuters and The Guardian. The government initially banned social media apps, including Facebook, WhatsApp, YouTube, and X, triggering even more unrest.

By September 9, Prime Minister Oli stepped down under mounting pressure, but transport remained paralysed. Freight entrepreneurs declared an indefinite strike, airports were shut, and cross-border cargo movement slowed. Kolkata Port, which serves as Nepal’s key gateway to the world, promised uninterrupted service, but with Nepal’s roads and distribution channels blocked, the assurance provided little relief to traders.

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For Indian exporters of petroleum, machinery, and grain, the disruption poses immediate risks. Delays could cascade into shortages inside Nepal, higher costs for consumers, and missed payments for suppliers in India.

Debate over Nepal’s trade imbalance

While some voices in Kathmandu point to India as the source of Nepal’s vulnerability, others argue the problem lies within. A leading trade policy commentator in The Himalayan Times wrote: “Nepal’s trade deficit with India is not an inevitability—it is a challenge that can be addressed through strategic policymaking, stronger institutions, and smarter economic diplomacy. Blaming India for Nepal’s trade woes oversimplifies the problem; the real issue lies in Nepal’s ability to negotiate better terms, strengthen its domestic industries, and proactively seek market opportunities.”

The commentary emphasised that internal reforms, not border blockades or trade bans, would provide lasting solutions. Rajendra Sangraula, president of the Nepal Freight Forwarders Association, told Rising Nepal daily: “The government will work to resolve the trade problems with the two neighbouring countries—India and China, as they are the first market of Nepal. The ministry has been taking initiatives to upgrade trade and business between the two countries.”

The current crisis is not the first time Nepal’s economic dependence on India has come under strain. In 2015–16, following Nepal’s adoption of a new constitution, a blockade at the India–Nepal border led to severe shortages of fuel, medicines, and essential goods. The episode caused deep resentment in Nepal and gave China an opening to project itself as an alternative partner.

Although the blockade ended, the memory lingers. Many Nepali policymakers continue to view over-reliance on India as a strategic vulnerability. The push to diversify trade, whether through electricity exports or alternative transit routes, is rooted in those experiences.

Yet diversification has limits. Most of Nepal’s trade passes through Kolkata Port, which provides access to global markets. It is yet to be seen if new Chinese ports in Tibet or Yunnan, opened for Nepalese goods, could prove better in terms of costs and logistical hurdles to the established India route.

Nepal’s growing power exports to India

A bright spot in the trade relationship has been power. In recent years, Nepal has begun exporting surplus hydroelectricity to India, especially during the monsoon months. Indian companies have signed long-term power purchase agreements, giving Nepal a source of relatively clean export revenue.

However, the volumes are still modest compared to petroleum imports from India. Electricity sales are estimated at a few hundred million dollars annually, a fraction of the billions Nepal spends on Indian oil and machinery. The government in Kathmandu hopes to scale up power exports dramatically, but that requires political stability, cross-border investment, and a functioning financial system.

China’s influence and strategic stakes

For India, the concern is not just about disrupted trade but about geopolitics. An unstable Nepal provides fertile ground for Chinese influence. Beijing has already invested heavily in Nepalese infrastructure under the Belt and Road Initiative. It is also Nepal’s second-largest trading partner after India.

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Still, India’s position is entrenched. Geography and logistics mean that even as Chinese imports grow, Nepal cannot easily replace Indian petroleum, food staples, or transit facilities. The relationship may be unbalanced, but it remains unavoidable.

Media reports indicate security officials also worry that instability could spill over into Indian border states, encouraging migration pressures and creating openings for anti-India or Chinese networks. Last year, India briefly suspended imports of some Nepalese goods over concerns about Chinese components, underscoring the delicate intersection of trade, politics, and security.