China’s Nepal Push: Implications for India’s Economy and Regional Trade

Ira Singh
Khabar Khabaron Ki,14 Mar’25

China’s expanding influence in Nepal is reshaping regional dynamics, with significant implications for the Indian economy. Nepal, traditionally aligned with India, is increasingly engaging with China through infrastructure projects and trade agreements, challenging India’s longstanding economic ties with its Himalayan neighbor.

Nepal’s Shift Towards China
In December 2024, Nepal’s Prime Minister K.P. Sharma Oli visited China to seek investments and revitalize stalled infrastructure projects under the Belt and Road Initiative (BRI). This visit marked a departure from Nepal’s customary diplomatic engagements with India, signaling a strategic pivot towards Beijing. During the visit, Nepal and China signed a framework agreement to advance cooperation on infrastructure and trade projects, aiming to transform Nepal from a landlocked to a “land-linked” country.

China has granted Nepal access to four seaports and three land ports, reducing Nepal’s dependency on Indian ports for third-country trade. This development provides Nepal with alternative trade routes, diminishing India’s traditional monopoly over Nepal’s international commerce.

Impact on Indian Economy
India accounts for approximately two-thirds of Nepal’s international trade, while China’s share stands at about 14%. However, China’s growing investments in Nepal’s infrastructure, particularly in energy and transportation, are altering this balance. Chinese companies have shown interest in developing large-scale energy projects in Nepal, such as the proposed $190 million solar electricity plant by Risen Energy. These projects could potentially reduce Nepal’s energy dependence on India.

India has responded to China’s increasing presence by exerting pressure on Nepal to limit Chinese investments, particularly in strategic sectors like hydropower. This has led to delays and cancellations of Chinese-funded projects, affecting Nepal’s energy development plans and, consequently, its economic growth.

Geopolitical Tensions and Economic Ramifications
The growing competition between India and China in Nepal is part of a broader struggle for influence in South Asia. India’s traditional dominance in the region is being challenged by China’s strategic investments, prompting concerns over economic and security implications. For instance, India’s refusal to allow flights to the Chinese-built Pokhara airport through its airspace has hindered the airport’s operational viability, reflecting the complexities in India-Nepal-China relations.

Furthermore, India’s restrictions on Chinese investments, imposed after the 2020 border conflict, have impacted billions of dollars in potential business. These measures, while aimed at safeguarding national interests, have also affected Indian firms with Chinese stakeholders, highlighting the intertwined nature of regional economies. China’s ambitions in Nepal are reshaping the economic landscape of South Asia, challenging India’s traditional influence. As Nepal diversifies its economic partnerships, India faces the challenge of recalibrating its strategies to maintain its economic and strategic interests in the region. The evolving dynamics underscore the need for India to adapt to the changing geopolitical environment to safeguard its economic interests.