India’s Quiet Lead In Nepal’s Power Dreams – Analysis


By Amish Raj Mulmi*

Three months, two trust votes in Parliament, and a newly elected President later, Nepal’s post-2022 election government has finally taken shape. Maoist leader Pushpa Kamal Dahal ‘Prachanda’ began his third tenure as prime minister in December with the support of UML leader K.P. Oli and a host of other parties such as the monarchist Rashtriya Prajatantra Party despite a pre-poll alliance with the Nepali Congress (NC).

The UML-Maoist coalition ran into trouble almost immediately, first with the NC deciding to vote in favour of Dahal in the January trust vote, then over the choice of who becomes Nepal’s third President in February. With Dahal deciding to support the NC candidate Ram Chandra Paudel, Oli pulled out of the government, but the NC’s support meant the Maoist leader easily won the second trust vote in March.

The UML-Maoist post-election coalition was received encouragingly by Beijing, who have openly signalled a preference for a leftist government in Nepal. China announced the opening of the Kerung-Rasuwagadhi land border point with much fanfare; a Chinese team arrived in Nepal to start a detailed feasibility study on the much-vaunted train from Tibet; and China even declared the new Pokhara International Airport (PIA) as a ‘flagship project of China-Nepal BRI cooperation’. However, reports suggest Dahal was not too pleased with China’s effusive welcome of his new government. Government officials denied that the PIA was a BRI project, and Dahal sought to downplay Chinese enthusiasm by not participating in the Boao Forum despite being invited.

Governments have been notoriously fickle in Nepal, and the manoeuvrings of coalition politics meant Dahal held 16 different ministerial portfolios at one point in time excluding the prime ministership. But one of the constants in his third PM tenure has been Dahal’s insistence that his first foreign visit will be to India. Perhaps, this has come from a delicate external environment, with the US-China contest playing out in real-time in Nepal after the implementation of the MCC agreement. But a careful reading of India’s Nepal policy in the past few years suggests that Delhi has quietly taken the lead in Nepal with its push for connectivity, especially in hydropower development and trade. Nepal is now at the cusp of realising a long-awaited dream of development through its hydropower resources; and expanding the engagement on power trade and third-country export to Bangladesh will be one of the primary agendas of Dahal’s Delhi visit in mid-April.

India in Nepal’s hydropower 

Historically, India has shied away from the development of Nepal’s hydropower resources. Delhi has few legacy projects in the sector, instead choosing to prioritise other infrastructure sectors in Nepal. However, this has changed in the past few years. The 900 MW Arun III project, being developed by a subsidiary of Satluj Jal Vidyut Nigam (SJVN), is moving ahead at a quick pace, although land acquisition issues have plagued the construction of the 253-km-long transmission line from the project to Sitamarhi in Bihar.

Nepal has signed an agreement with NHPC Limited to develop both the 750 MW West Seti project, from which China’s Three Gorges Corporation had pulled out citing it was financially not viable, and the additional 450 MW Seti River 6 project on the same river. The Indian corporate GMR group has been given the licence to develop the 900 MW Upper Karnali project; however, the project has run into trouble with the company being unable to achieve financial closure within the stipulated deadline.

Additionally, there are reports that two of the hydro projects listed under possible BRI ventures inside Nepal—the 480 MW Phukot Karnali project and the 756 MW Tamor River storage-type project—have been awarded to NHPC and SJVN respectively. Several cross-border transmission lines are in the works, with the capacity of the Dhalkebar-Muzaffarpur transmission line agreed to be expanded to 800 MW from the current 600 MW at the Joint Steering Committee meeting in February 2023. In March, an agreement was signed towards the export of Nepali power using transmission lines in Bihar at a fixed rate of INR 7.21 per unit.

The most exciting development—one that could realise Nepal’s much-awaited hydropower potential—has been the export of NPR 11 billion (INR 6.8 billion) worth of power to India between June and December 2022. Nepal is currently allowed to sell 452.6 MW generated from 10 projects in the Indian day-ahead electricity market. One of the key agendas during Dahal’s Delhi visit will be a proposed 25-year bilateral agreement for power trade, replacing the current yearly renewal that has brought ‘uncertainty’ to the trade according to Nepali officials. There are worries that India’s decision to waive off Inter-State Transmission System (ISTS) charges to its domestic projects will make Nepali power exports less competitive, and Kathmandu will be seeking a similar waiver on its power exports as well. Similarly, Nepali private power companies may soon also be able to sell their power directly to Indian buyers.

A recipe for growth 

India’s regional connectivity push will get additional momentum if it expedites the export of Nepali power to Bangladesh using Indian transmission lines. Both Kathmandu and Dhaka are highly positive about the proposal which, after Delhi’s go-ahead, will be one of the few instances globally of trilateral power cooperation. This will provide a boost to larger BBIN connectivity and India’s G20 aspirations, as well as provide momentum to the joint vision statement on power sector cooperation between Nepal and India that was issued in April 2022.

But as with any close relationship, a few wrinkles will have to be ironed out. The reverberations of the India-China contest have been felt in Nepal, with India blocking access to its markets for infrastructure projects developed or funded by China. This has created a great degree of anxiety among Nepali private sector power developers who are looking towards India as the potential export market. Locking market access may create a disincentive for Nepal to not look towards China, but the policy has also allowed China to access Nepali markets that were previously restricted to it.

For instance, due to India seeking end-user certificates to control the supply of explosives to projects with Chinese involvement, Nepal has now imported explosives from China for commercial use for the first time in several years. India’s move has also been extended to projects where both Indian and Chinese contractors have been involved, such as the 456 MW Upper Tamakoshi project, as well as to projects funded by multilateral institutions such as the ADB like the Gautam Buddha International Airport in Bhairahawa, which was built by a Chinese contractor.

Both market access and trilateral cooperation in power will be high on the agenda during Dahal’s visit, with Indian markets vital both for the export of surplus Nepali power as well as the operationalisation of the new international airports at Bhairahawa and Pokhara. The long-pending question of additional air routes must see a resolution during the visit, almost nine years to the day Indian Prime Minister Narendra Modi and his then Nepali counterpart Sushil Koirala agreed to facilitate Nepal’s demands of three additional air entry points into Nepal within six months of their 2014 joint statement. Nepal’s new political map post the Kalapani dispute will remain a constant irritant in bilateral ties unless resolved, but in all likelihood, Dahal will try to steer clear of the issue during the visit.

Regional connectivity has long been a mirage in South Asia, but developments over the past few years have raised hopes that it can finally be achieved in the culturally similar but economically disconnected region. Issues such as a bilateral UPI payment interface, which are at an incipient stage at the moment, will boost this connectivity drive, but the key will be India’s assurance to its neighbours that Delhi is committed to realising its vision for the global South in the G20 presidency and taking the connectivity projects in South Asia one step further.

*About the author: Amish Raj Mulmi is the author of All Roads Lead North: Nepal’s Turn to China (Context/Hurst/Oxford University Press). He has written for Carnegie Endowment for International Peace, Centre for Social and Economic Progress, Al Jazeera, Hindustan Times, Roads and Kingdoms, India Today, The Kathmandu Post and The Record. He is contributing editor for Himal Southasian, and consulting editor at Writer’s Side Literary Agency.

Source: This article was published by the Observer Research Foundation

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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