Nepal: Negotiating Hydro-Power with India and China

8 December 2016 Dr Auriol Weigold, FDI Senior Visiting Fellow Download PDF

Key Points

  • Nepal has a complicated political geometry and an ongoing shortage of energy, the implications of which are reflected in the relationships with its giant neighbours.
  • Its hydro-power resources, and Sino-Indian negotiations for access to those resources, will continue to be Nepal’s primary saleable asset.
  • Indian Prime Minister Narendra Modi’s post-election visit to Nepal in 2014 was the catalyst for a brief reinvigoration of the bilateral relationship after a lengthy period of inactivity and disengagement, but the relationship waned again due to political instability in Nepal.
  • The visit to New Delhi by Nepalese Prime Minister Prachanda in September 2016 in the wake of President Xi Jinping’s cancelled visit to Kathmandu reset the bilateral relationship with India, with hydro-power and other agreements reinstated.
  • Facilitating the meeting between Xi and Prachanda on the sidelines of the October 2016 BRICS summit was a feather in Modi’s cap.


After a lengthy period of poor bilateral relations between India and Nepal, repaired by Prime Minister Modi’s 2014 visit to Kathmandu, another period of disengagement followed as Nepal introduced a new constitution during rapid changes of Prime Ministers. China had made overtures to Nepal that led to agreements on a key hydro-power project and Nepalese acquiescence to other important Chinese projects, such as the One Belt, One Road (OBOR) initiative. Later, China judged Nepal not to have fully complied and cancelled or postponed President Xi’s scheduled visit to Kathmandu. Instead, the Nepali Prime Minister, Pushpa Kamal Dahal, known as Prachanda, visited New Delhi in September 2016 and a number of agreements were reached, articulated in a Joint Statement that revitalised the relationship and energised several flagging hydro-power agreements. Prime Minister Modi, host of the BRICS Summit held in Goa in October, devised a plan to bring Prachanda and Xi together on the sidelines the meeting. Nepal then reverted to its earlier intention of balancing its India and China relationships.



In a flurry of political change, Nepal installed three new Prime Ministers in as many years, and may see a fourth next year. Prachanda, a name he went by in his guerrilla war days and as Chairman of the Communist Party of Nepal, became Prime Minister for the second time in August 2016, displacing Khadga Prasad Oli, who had been elected the previous year. Oli was also a Communist Party leader and faced challenges over the implementation of a new constitution. Oli had replaced Sushil Koirala, Nepali Congress Party chief, as Prime Minister in late 2015. The new constitution, shepherded in by Oli, included a deadline for three-level elections in 2017 that is likely to see the return of the present leader of the Nepali Congress, Sher Bahadur Deuba, as Prime Minister. Each of the three Prime Ministers to date were contacted by Indian Prime Minister Narendra Modi in late 2014, and again after a period of disengagement, in 2016, seeking to restore relations and to cement India’s trade advantages with Nepal, including hydro-power.[1]

Alongside the shifting political geometry, Nepal is acutely short of electricity. Compared with its vast capacity in untapped water resources, the country has a generating capacity below its own needs. Enticed by those abundant resources, its two giant neighbours are competing to sign agreements for the development of hydro-electric projects that should also serve the interests of Nepal.

India and China (through Chinese-administered Tibet), both border Nepal. India’s border runs along five states, Uttarakhand, Uttar Pradesh, Bihar, West Bengal and Sikkim, a distance of some 1,850 kilometres. The Indo-Nepalese border is open, and the Nepalese and their businesses have unhindered rights to transit and trade across it, as well as access to Indian seaports. This has been the case since the signing of the 1950 Treaty of Peace and Friendship between the two countries, and is a core element of their fluctuating bilateral relationship.

India, to some extent, still sees Nepal as a buffer between itself and China, viewing China through the prism of the 1962 War, and the route to India across the mountain passes on Nepal’s northern border, as Lindsay Hughes has said. Since the first Constituent Assembly was elected in 2008 after the monarchy collapsed, Nepal has had eight prime ministers. In the midst of that unstable political setting, China has energised its push to gain a presence there.

Today, however, Chinese access to Nepal, and other regional states such as Burma/Myanmar, Bangladesh and, further west, Pakistan, via its new overland Silk Road (the One Belt One Road), has heightened Indian perceptions of being more vulnerable to Chinese encroachment by investment in its neighbours, as has China’s expanding maritime sphere of influence, based on Indian Ocean ports.

India’s Posture

Sher Bahadur Deuba, the likely next Prime Minister of Nepal, has said that Nepal must have good relations with both its large neighbours, in a balanced approach that is echoed by Prachanda. That intention, together with former Prime Minister Oli’s visit to Beijing in March 2016 and subsequent apparent engagement with China, followed by the invitation from Prachanda to President Xi to visit Nepal in October this year, have rather eclipsed Modi’s early visit to Nepal. His visit in September 2014 was his third overseas trip since his election and signalled the renewed importance of Nepal to India. It was heralded as ushering in a new chapter in relations between the two countries but the relationship stalled in again in 2015 over violence and border disputes during Oli’s Prime Ministership.

Modi’s visit was important, as India’s relations with Nepal had been less than active at the leadership level; Manmohan Singh made no visit to Nepal during the period of his government, ostensibly due to the political instability there. Modi’s immediate engagement in 2014 was intended to halt any further drift from Kathmandu.

As context, despite his acceptance of an invitation (not kept) to visit in 2012, and a wish to make Nepal his final bilateral visit in 2014 before the general election, Prime Minister Singh did not make it to Kathmandu, nor, indeed, had any Indian leader since 1997. The then Prime Minister of Nepal, Dr Baburam Bhattarai, however, visited India in late October 2011, during which time the leaders reviewed the state of the bilateral relationship and, to consolidate the relationship, cited in their Joint Statement on 23 October 2011, an interesting proposal: the establishment of an Eminent Persons Group to look into the totality of India-Nepal relations and suggest measures to expand and consolidate relations between the two countries. This did not eventuate until 2016, and Singh met the Nepalese Prime Minister only once on the sidelines of an overseas meeting, despite his proximity during visits to neighbouring countries between 2008 and 2012.

Although senior Indian officials visited Nepal and Indian investments there were (and remain) high, the tensions around the framing of a constitution amid shifting leadership is also cited among the reasons for Singh’s failure to visit. Singh’s absence, though, left opportunities for the bilateral relationship-hungry Modi.

Modi’s objectives also fell prey to the outcomes of Oli’s constitution and the provisions that particularly affected the Madhesi community that lives close to the border with India,[2] and the promising interactions after Modi’s election gave way to some twelve months of hostility between the two neighbours. This lasted until Prime Minister Prachanda’s visit to India in mid-September 2016, in which discussions were held with Modi to review the state of the relationship and to assess, among other projects, hydro-power infrastructure.

India’s Opportunity

The unexpected cancellation by President Xi of his visit to Nepal that had been scheduled for September-October 2016 left India with a renewed opportunity. Although China’s Foreign Ministry promoted the President’s decision as a postponement and denied that it was a cancellation, Xi’s action appears to be a result of China’s disappointment at Oli’s failure to implement the ‘agreements and understandings’ made during his visit to China earlier that year, including Nepal’s lack of interest in joining the OBOR project. It was suggested nonetheless by the Chinese Foreign Ministry that the President was expected to visit Nepal either before or after the BRICS Summit that would be held in mid-October, in India. However defined, the deferral of Xi’s visit was seen in India as a welcome setback to what had been viewed there as potentially concerning progress in the Nepali-Chinese relationship.

Prachanda, just one month into his new term as Prime Minister prior to his 15-18 September visit to India, made it clear from the start that his mission was to ‘rebalance’ Nepal’s foreign policy between its two neighbours. During his visit to New Delhi, Prachanda sought to lay a ‘strong foundation’ for renewed trust between India and Nepal after the ‘bitter experiences’ around the implementation of the new constitution, rather than to advance new bilateral initiatives.

The Joint Statement issued by the Prime Ministers on 16 September rehearsed the collaborations already in place, noting that the first meeting of the Eminent Persons Group, first flagged back in 2011, had been held in Kathmandu in July 2016, and expressed the hope that it would look into the ‘totality’ of Nepal-India relations. Both leaders stressed the importance of regional co-operation within the framework of the South Asian Association for Regional Co-operation (SAARC) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation (BIMSTEC).

Also noted was their progress particularly in trade, transit modes, connectivity and power. The Prime Ministers agreed to expedite progress on two cross border rail-link projects: Jayanagar-Bijalpur-Bardibas and Jogbani-Biratnagar. Three other cross-border rail projects would also be facilitated, grid connectivity and power supply would be ramped up, and the two countries would engage in a master plan for cross-border interconnection out to 2035. Reviewing major joint hydro-power projects and viewing India’s largest hydro-power project, in Himachal Pradesh, occupied much of Prachanda’s visit. Despite China’s OBOR-facilitated access to Nepal, the open border with India offers great incentives for collaboration on transit and power supply under updated agreements that are highly beneficial to Nepal.

Water Diplomacy

Water is arguably Nepal’s greatest asset, a view shared by India and China alike. It has been a source of tension, though, with existing Indo-Nepalese water treaties seemingly tilted in India’s favour. The Prime Ministers’ Joint Statement, however, recorded that various issues particularly linked to hydro-power projects in Nepal – Pancheshwar, Upper Karnali and Arun-III – are to be ‘addressed expeditiously’, so that their outputs rapidly benefit the Nepali people. The two Prime Ministers also agreed to discuss all water resources-related matters, including flood management, irrigation and other major projects, either planned or underway.

India and Nepal have a long history of water resource negotiation, the first having taken place between 1910 and 1920 on British projects. After Indian independence, the Kosi and Gandak water treaties of 1954 and 1959, respectively, involved the construction of dams that primarily irrigated Indian lands, leading to Nepali resistance in the form of blocking or stalling hydro projects that would benefit India. A climate of distrust saw little progress over some decades on a number of projects, leaving their relationship on water resources in limbo. Despite the collapse of bilateral relations during the Oli prime ministership of 2015-16, substantial advances had been made in the three months following Modi’s visit to Nepal.

An overview of India-Nepal relations, a ‘Bilateral Brief’, appeared on the Indian Ministry of External Affairs website in October 2015, recording that a Development Authority was set up in September 2014 to carry out the Pancheshwar Multipurpose Project, referred to in Modi’s and Prachanda’s Joint Statement. India and Nepal signed an agreement on ‘Electric Power Trade, Cross-Border Transmission Interconnection and Grid Connectivity’, more generally known as the Power Trade Agreement (PTA) in October 2014. A Power Development Agreement (PDA) for the 900 megawatt Arun-III hydro-electric project between India’s Satluj Jal Vidyut Nigam Limited (SJVNL) and the Investment Board of Nepal (IBN) was concluded in November 2014. Also, a PDA for the 900 MW Upper Karnali hydro-electric project was concluded between the IBN and the GMR Group, which implements infrastructure projects in India, in September 2014. The latter two projects are also referred to in the Joint Statement, and cluster around Modi’s productive visit in September that year.

Endorsing the hydro-power agenda, Prachanda spent a day of his time in India, 17 September, at Rampur in the Kinnaur district of Himachal Pradesh, with Piyush Goyal, Indian Minister of State in the Rajya Sabha (Upper House). Goyal has Independent Charge for Power, Coal, New and Renewable Energy and Mines. There, they toured India’s largest hydro-power project, the Nathpa Jhakri Hydroelectric Project. The project is being run by SJVNL, which signed a Memorandum of Understanding in May 2014, the month that Modi was elected, for the commissioning of the Nepalese Arun-III Hydro-Power Project. Prachanda noted that SJVNL is working on other Nepal water projects too, and commented that its experience and expertise would assist Nepal in commissioning more projects.

Prachanda was accompanied by his ministers for Foreign Affairs and Physical Infrastructure and Transport, five members of his Parliament, two Indian Joint Secretaries from External Affairs and Goyal’s Ministry, and other officials including senior officers from the Himachal Pradesh State Government and SJVNL. The gathering signalled a revival in India-Nepal relations and rests on Nepali politicians focussing on their country’s economic development – in which the hydro-power sector plays a major role – and India’s dealing with Nepal as an equal not to be exploited. From the Indian perspective, Prachanda’s desire for balance in Nepal’s relationships with its two giant neighbours would benefit from a southerly shift.

Modi’s BRICS-BIMSTEC Initiative

As noted above, following Prachanda’s visit to India, the Chinese Ministry of Foreign Affairs suggested that President Xi’s postponed visit to Nepal might take place in October, either before or after the Goa BRICS Summit. The new timeframe remained in doubt and, acting in India’s interest, Modi took steps to facilitate a meeting of the Chinese and Nepalese leaders.

In what may seem a counterintuitive move, but a cleverly strategic one, Modi invited the leaders of the BIMSTEC countries to hold a joint summit with Brazil, Russia, India, China and South Africa (the BRICS states), on 16 October, for ‘regional outreach’ at the BRICS Summit underway in Goa at that time. The BIMSTEC leaders who attended were from Bangladesh, Bhutan, Myanmar, Nepal, Sri Lanka and Thailand, putting China and Nepal in the same room. Xi and Prachanda met on the sidelines of the BRICS dinner on 15 October, and the meeting turned into an ‘impromptu trilateral’ when Modi ‘dropped by’ and spent some twenty minutes with the two leaders. Exactly what was discussed between Xi and Prachanda is still not known, nor the topic of conversation after Modi joined them, but the meeting appeared a triumph for Modi.

Inviting the BIMSTEC leaders to join their BRICS counterparts not only brought China and Nepal together in India’s presence, but provided Modi with the opportunity to project India as a stable, secure and expanding economy, while garnering the appreciation of the economically-emerging BIMSTEC states and enabling them to meet the economically strong BRICS leaders at one time.

SAARC, the subject of recent FDI Strategic Analysis Papers, was not invited and was unlikely to have been considered. Its membership largely overlaps with that of BIMSTEC and, by not inviting it, Pakistan was effectively excluded from what became greater global exposure for BIMSTEC states brought by the BRICS members’ presence.

Nepal and China met under the aegis of India, a meeting opportunity that Beijing appeared increasingly unlikely to afford Kathmandu in the immediate future. It was most definitely in India’s best interests and was an adroit extension of the friendship and development offered and agreed to in the Joint Statement of one month earlier.

India and China in Nepal: Negotiations and Competition

The collapse of the Indo-Nepalese relationship in 2015-16 may have briefly resonated in China. Within that period, Prime Minister Oli visited President Xi, and everything for the latter’s visit to Kathmandu appeared to be in place. It did not occur, as seen, apparently because China was not satisfied with Nepal’s responses to its initiatives.

China had assured Nepal that it would support it and invest there, but in return Nepal would need to meet China’s long-term partnership requirements. The crisis with India has been resolved, at least pro-tem, and China can restore its interest in Nepal on a number of fronts when it chooses to do so. It acted, in fact, within days of the BRICS-BIMSTEC Summit.

Prachanda met with the Chinese Minister of State Administration for Industry and Commerce, Zhang Mao, on 21 October, within a week of the end of the Summit, in Kathmandu. He reiterated his country’s earlier readiness to participate in China’s OBOR project, recognising the benefits that would accrue to Nepal as a land-locked country. Road links between Nepal and the Tibetan Plateau are in place, a rail link is planned, and China might see advantage in opening its borders to Nepal, as India has done. Whether it does or not, Nepal has endorsed its stated aim to balance its relations with India and China.

India, however, will see that Nepalese balance as adding a further strand to China’s perceived encirclement of it – this time terrestrially – as, at best, potentially sharing a bilateral partner and, at worst, alienating it. India has seen a similar erosion of other regional relations as China has embraced other countries – Myanmar, Bangladesh and Pakistan, among others – in what India sees as its regional sphere of influence.

Its hydro-power resources, and Sino-Indian negotiations for access to those resources, will continue to be Nepal’s primary saleable asset.

China, with 2015 approval from Nepal’s Investment Board, will proceed with dam construction on the West Seti River in north-western Nepal; at some $1.6 billion, it is the single largest foreign investment in Nepal to date. Also cleared to start last year were two Indian hydro-power projects, together worth $2.4 billion. Nepal is enjoying the rush from both India and China to gain access to its rivers, to supply their energy-needy countries.

The most successful bids will be those that give the most to Nepal. India, if it is maximise its own influence in Nepal while countering that of China, must, as said, be more cognisant of Nepal’s interests and regard them as more important than it might have done in the past.



[1] In the FDI Strategic Analysis Paper, ‘India-Nepal Relations: From Dominance to Equality’, Lindsay Hughes tracks the frequently troubled relationship between the two states and its political shifts, determining that as Nepal ‘serves India by virtue of its geographic location…’ and that if India ‘could demonstrate that it is willing to treat Nepal as an equal’, it would gain it goodwill, but notes that China’s influence in Nepal is troubling for India.

[2] Ibid.

About the Author

Dr Auriol Weigold is an Adjunct Associate Professor in International Studies at the University of Canberra. She has been a Fellow and Honorary Fellow at the Australian Prime Ministers Centre at old Parliament House, Canberra, between 2010 and 2015, publishing on Australian and Indian prime ministerial relationships. Previously, she was Convenor of the BA International Studies and an Editor of the South Asia Masala weblog, hosted by the College of Asia and the Pacific at the Australian National University.

In 2008, she published her first book: Churchill, Roosevelt and India: Propaganda during World War II. Since then, she has co-edited and contributed to two further books. Her research interests include the Australia-India bilateral relationship, India’s energy and security needs, and Indo-British Relations in the 1940s.
Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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