How India's Economic Interests Are Affected By Current Nepal Situation

Recent violent anti-government protests in Nepal, culminating in Prime Minister KP Sharma Oli's resignation on September 9, 2025, have raised significant concerns for India's economic interests. India has vital economic ties with Nepal, relying on the landlocked nation for cross-border trade, energy and stability against increasing Chinese influence.

The current unrest threatens to disrupt the crucial trade corridor that connects Nepal with India and the rest of the world, and there are fears of the disruption of supply chains. India is Nepal's largest trade partner and accounts for a significant portion of its imports, including petroleum products, vehicles, machinery, and food. Political instability can lead to delays at border crossings, including major transit points like Raxaul-Birgunj and Sunauli-Bhairahawa, causing supply-chain disruptions that harm both Indian exporters and Nepali consumers.

There could also be an impact on Indian investment. With over 150 Indian ventures operating in Nepal, accounting for more than 35% of its total foreign direct investment, ongoing instability creates an unfavourable investment climate. Indian companies in sectors like manufacturing, telecommunications, and power could suffer financial losses and face project delays.

There are serious threats to energy cooperation. Recent developments have seen significant progress in India-Nepal energy relations, which are now at risk. Numerous cross-border hydropower projects are in development or being planned, with large-scale investment from Indian firms.

The new political uncertainty could jeopardise these projects, stalling construction and undermining India's goal of securing up to 10,000 MW of power from Nepal over the next decade. Joint ventures between Indian and Nepali entities to develop cross-border transmission lines, such as the Dododhara-Bareilly and Inaruwa-Purnea lines agreed to in April 2025, may face delays. 

Nepal's internal political strife has broader geopolitical implications for India. The ongoing instability could create an opening for China to increase its economic and political influence in Nepal. India has been actively engaged in Nepal to counter Beijing's growing presence, particularly in the infrastructure and energy sectors. A prolonged state of unrest in Nepal could destabilise the long and open border shared with India, facilitating cross-border criminal activities, including smuggling and other security threats. In response to the recent protests, India has already heightened security measures along the border. 

There will also be a negative impact on specific Indian economic sectors which are more directly vulnerable to Nepal's political turmoil. Religious and general tourism between the two countries could be hampered, impacting India's tourism sector. The significant Nepalese population working in India, and the related remittances, could be affected by changes in Nepal's economic or political situation. Key bilateral connectivity projects, including railways and integrated check posts, could be slowed down or derailed by the political uncertainty. 

In conclusion, while the extent of the impact remains to be seen, Nepal's political instability could negatively affect India's economic interests by disrupting trade, impacting investment and remittances, and potentially delaying progress in crucial sectors like energy and connectivity. Both India and China will be closely monitoring the situation as they vie for influence and seek to protect their economic stakes in Nepal.

Despite the immediate risks, there is a potential to restore stability if diplomatic engagement is successful. High-level talks in August 2025 had aimed to deepen cooperation, and Indian officials continue to emphasise a "Neighbourhood First" approach. Maintaining diplomatic engagement and focusing on shared economic goals, particularly in energy and infrastructure, will be crucial for both countries to mitigate the fallout of the current situation

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