Straddling two of Asia’s most powerful nations, China and India, Nepal has historically pursued a policy of non-alignment, seeking to engage with both its neighbours without becoming a proxy in their broader regional rivalry. However, the strategic importance of its water resources has made it increasingly difficult to remain neutral.
As India and China expand their influence and the United States reconsiders its international engagement under President Donald Trump, Nepal faces mounting pressure to navigate these competing forces while securing its economic and energy future.
With over 6,000 rivers, including four major ones — the Koshi, Gandaki, Karnali, and Mahakali — Nepal has an estimated technical and economically feasible energy capacity of 83,000 Megawatts and 42,000 Megawatts, respectively, positioning it as a potential energy powerhouse in South Asia. Dwarika Nath Dhungel, former Water Resources Secretary in Nepal and water expert, tells Global Voices:
We in Nepal often only think of hydropower, and selling our electricity to become rich. But we must think of our water as a strategic commodity especially with China and India being close players.
India’s stronghold in Nepal’s hydropower sector
Most of Nepal’s rivers originate in Tibet, flow through Nepal, and then enter India, making the country an upstream player in South Asian water politics. However, with the Himalayan glacial melt accelerating due to the climate crisis, water flows are expected to become less predictable.
India, recognising this challenge, has pushed for large-scale reservoir projects in Nepal to regulate water flows, control monsoon flooding, and ensure year-round water availability in the Ganges basin. As such, India’s real interest lies in Nepal’s water resources, not electricity.
As of mid-July 2023, India accounts for about 35 percent of Nepal’s total foreign direct investment (FDI) and has significantly increased investments in hydropower plants. According to the Chinese state-funded Global Times, India won 10 contracts to operate hydropower plants, surpassing China’s five. This reflects India’s broader strategy to control Nepal’s water resources so that they align with its strategic interests.
In the meantime, Nepal’s electricity export to India has increased from 493 Gigawatt hours to 1,346 Gigawatt hours in a year. However, due to rising tensions between India and China, India has refused to buy power from any projects with Chinese involvement, a clear attempt to sideline China from Nepal’s hydropower industry that restricts Nepal’s export market in the process.
China’s expanding influence and stalled BRI projects
China, on the other hand, has viewed Nepal as a strategic gateway to South Asia and has invested heavily in its infrastructure, including hydropower. Chinese projects aim to extend economic corridors into Nepal, connecting it with China’s western provinces.
However, political instability and geopolitical tensions remain a challenge. The 1,200 Megawatt Budhi Gandaki reservoir project, for instance, has seen repeated shifts in who gets the construction contract, reflecting Nepal’s struggle to balance its relationships with both Beijing and New Delhi. Dhungel notes:
Major players in Nepal’s water sector in the early days were the United States, India, development banks, as well as Europe and Japan. Lately China has become the bigger investor. But with India refusing to buy power from projects involving Chinese involvement and Nepal’s inability to increase its domestic demand, China may no longer see Nepal as a viable market.
However, the reelection of K P Sharma Oli as Prime Minister of Nepal could portend a renewed push toward China. Oli ran on an anti-India platform after India blockaded Nepal in 2015, causing a humanitarian crisis, and his four-day visit to Beijing in December 2024 attracted significant attention, particularly from Indian media, as he broke the long-standing tradition of Nepali prime ministers making New Delhi their first foreign trip after taking office.
During his visit, Oli sought to revive stalled China-funded infrastructure projects under the Belt and Road Initiative (BRI), China’s flagship international development project. China’s projects in Nepal had remained in limbo since Nepal signed the agreement in 2017 after ideological divisions among Nepal’s major political factions, broader geopolitical tensions, and concerns over debt sustainability caused delays.
Following the visit, Nepal and China released a comprehensive joint statement outlining future cooperation. On energy cooperation, Nepal and China reaffirmed their commitment to advancing cross-border electricity trade. The joint statement emphasised that both countries “are ready to expedite the feasibility study of the China-aided Jilong/Keyrung-Rasuwagadhi-Chilime 220KV Cross-Border Power Transmission Line.”
China is Nepal’s second-largest trading partner, but for Beijing, its support is primarily a means of asserting its regional influence, both externally and domestically. The numerous infrastructure projects under the BRI serve as tools of diplomacy as well as symbols used by the Communist Party to reinforce its global development vision at home.
Chinese state media have equated these projects as altruistic efforts to help low-income regions grow their economies, promote shared global prosperity, and benefit humanity at large. Nepal is presented as merely one of many countries receiving China’s benevolent support and is often portrayed as a historically impoverished and vulnerable country long dominated by India; however, through Chinese aid and investment, as the narrative goes, Nepal is gaining greater agency and autonomy.
This aligns with Chinese Premier Li Qiang’s statement ahead of 70 years of China-Nepal relations to be marked later this year:
China is committed to expanding two-way trade and investment with Nepal and enhancing connectivity through border ports, highways, railways, aviation, and communications. Our goal is to help Nepal transform from a landlocked to a land-linked country.
The US Recalibrates its Role in Nepal
The United States, recognising Nepal’s strategic location in recent years, has also stepped up its engagement, primarily through financial assistance. The MCC, ratified by Nepal’s Parliament in 2022, was intended to support power transmission and road development. While initially suspended for 90 days along with USAID, select work under MCC Nepal Compact has been allowed to resume.
Nevertheless, the US under Trump’s second term has increasingly backed out of global humanitarian and development campaigns, leaving the field wide open for new global superpowers like China and India to assert their dominance. Dhungel added:
The United States backing away from several sectors, including energy infrastructure, could mean that China may or could use the opportunity to fill the vacuum created. But the inherent geopolitical tension between China and India, and the Sino-American relations via Tibet means Nepal will be tied up in a geopolitical proxy war.
Nepal’s Internal Energy Challenges and Path Forward
While Nepal now produces enough electricity to meet domestic demand, there is a bottleneck in transmission and distribution, preventing the generated power from being efficiently shared. So, while Nepal now has a surplus of energy during the monsoon season, much of the energy is wasted.
“Nepal’s biggest concern should not be the export of hydropower but increasing domestic demand,” says Dhungel. “As it is, geopolitical tensions mean we cannot export much electricity, but electrification of our industries, manufacturing, tourism, agriculture, and transport would revolutionise the country and even generate jobs for migrating youths.”
As Nepal seeks to make the most of its hydropower potential, it must carefully weigh its diplomatic and economic choices. India remains its primary electricity export market, yet Chinese investments offer much-needed development capital.
However, Nepal’s internal challenges — ranging from inconsistent policies to delays in infrastructure expansion — continue to hinder progress. The country’s ability to navigate this geopolitical minefield will determine not only the future of its hydropower but also its broader role in regional politics.
To maximise its energy potential, Nepal must expand its transmission infrastructure and negotiate fairer trade terms with India while managing its commitments to China and the US. The challenge remains in striking a balance — one that allows Nepal to harness its resources without becoming a pawn in the regional power struggle.
Source: Globalvoices
