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Empowering India-Nepal Ties Through Hydropower


  • The National Hydro Electric Power Corporation of India (NHPC) recently signed a Memorandum of Understanding (MOU) with the Investment Board Nepal (IBN) to develop 750 MW West Seti and 450 MW Seti River (SR6) hydroelectric projects in western Nepal (a total of 1,200 MW).
  • The projects were awarded to India nearly four years after China backed out.
  • The article discusses India’s offerings in terms of India-Nepal cooperation, shared concerns, common interests, and options and alternatives for collaboration.


GS Paper2: India and its neighbourhood- relations.

Mains Question

With its immense strategic importance as an Indian security concern, India cannot afford to overlook a stable, secure, and friendly Nepal.” Discuss. (150 words)


  • Announcement: The announcement comes after Nepal and India issued a Joint Vision Statement on Energy in early 2022, which calls for expanding mutually beneficial bilateral cooperation in the power sector, including joint development of power generation projects in Nepal.
    • It also entails the construction of cross-border transmission infrastructure.
    • Bidirectional power trade with access to both countries’ electricity market
    • Coordination of national grid operations
    • Institutional collaboration in the exchange of cutting-edge operational information, technology, and know-how.
  • The total cost of these projects is expected to be around $2.4 billion, according to the most recent MoU. The NHPC has begun preliminary engagement of the site with an investment of over 18,000 crore and has also signed an MoU with the Power Trading Corporation Limited, India for power sale.
  • Importance: The signing of the MoU will allow the NHPC to conduct a project study, hydrological study in two rivers, geo-technical survey, and drilling work before beginning construction work.
  • Previous projects: In western and eastern Nepal, India is already involved in the Mahakali Treaty (6,480 MW), the Upper Karnali Project (900 MW), and the Arun Three projects (900 MW).
  • Concerns: When the government awarded the West Seti and SR-2 projects to NHPC Limited, some Nepalese leaders expressed concern that the government did not use a competitive bidding process.
    • However, the government stated that because West Seti is a national priority project, it must be expedited and that the contract can be awarded through negotiations.

There are numerous obstacles.

  • Conception: Historically, the 750MW West Seti Hydroelectric Project was conceived as a 37 MW run-of-the-river project in the early 1980s.
  • Early License: Nepal granted a developing licence to a French company in 1987, which prepared a pre-feasibility study proposing the scheme without the construction of a dam.
  • Project transfer: With the project failing to see the light of day, an Australian Corporation acquired a majority stake in the early 1990s, but progress was hampered by investment and environmental concerns.
  • In Chinese hands: As a result, China intervened in 2009, with Australian Corporation holding the majority stake. However, Chinese Corporation backed out, citing a poor investment climate.
    • In 2011, Nepal revoked the licence of the West Seti Hydropower Company Limited, in which Australian Corporation owned a majority stake, and handed it over to China, but the Chinese corporation withdrew again in 2018, citing resettlement and rehabilitation issues.
  • Nepal was thus left in a bind after two Chinese companies withdrew from the projects after signing memorandums of understanding with the government.
  • Gathering domestic supplies: Following that, Nepal attempted to develop the project by mobilising internal resources. However, increased costs caused additional delays.
    • In the meantime, the project was renamed the West Seti and Seti River (SR6) joint storage project (1,200 MW).

Irritants in India-Nepal Ties

  • Issues with the Peace and Friendship Treaty: The Nepali authorities sought the 1950 Treaty of Peace and Friendship in 1949 in order to maintain the special links they had with British India and to provide them with an open border and the right to work in India.
    • However, it is now regarded as a sign of an unequal relationship and an Indian imposition.
  • Irritated by Demonetisation: In November 2016, India withdrawn $15.44 trillion in high-value currency notes (1,000 and 500). Over $15.3 trillion has now been returned in the form of new currency.
    • Nonetheless, many Nepali nationals who were legally entitled to hold 25,000 in Indian currency (due to the Nepali rupee’s peg to the Indian rupee) were let down.
  • Territorial Disputes: In 2019, Nepal released a new political map claiming the Uttarakhand districts of Kalapani, Limpiyadhura, and Lipulekh, as well as the Susta area (West Champaran district, Bihar) as part of Nepal’s territory.

Rejuvenating bonds

  • Rekindled optimism: The decision to involve India demonstrates Nepal’s confidence in India’s ability to complete the project. If completed, it will give India much-needed leverage in future hydropower cooperation.
  • Critical relevance: Given that the West Seti Hydroelectric Project was a major Chinese venture under the Belt and Road Initiative, these hydropower projects will help India reduce China’s geopolitical influence and strengthen its presence in Nepal.
    • The project has the potential to improve the two countries’ cross-border power exchanges.
  • Address Nepal crises: Despite its enormous hydropower potential, Nepal experiences power shortages during peak hours, increasing its reliance on India to make up the difference.
    • With an estimated capacity of 83,000 MW, Nepal’s electricity exports to India are expected to boost foreign exchange while alleviating power shortages.
    • It is estimated that if Nepal’s hydropower potential is fully realised, it will generate 310 billion in 2030 and 1,069 billion per year in 2045 by exporting electricity to India.
  • Meet India’s increasing energy demand: Similarly, India’s severe deficit in coal-based thermal power plants in recent years, which meet 70% of India’s electricity demand, has compelled the government to arrange supplies through coal imports, hastened the search for better alternatives.
    • With rising energy demand, the West Seti Hydroelectric Project could provide an additional viable alternative to addressing power deficits.

The way forward

  • In order for the project to be completed successfully, the following options and alternatives must be investigated:
  • Accelerate the project: Because investment-related constraints have already delayed the project, a preliminary study of investment scenarios, particularly a favourable investment environment, distribution and transmission network, and cost of resettlement and rehabilitation, is required
  • Revamped distribution share: To address Nepal’s concerns that India’s electricity rates and supply may be insufficient to meet rising demand, the new MoU has already revised the percentage share of energy that Nepal will receive free of charge from the generation projects from 10% to 21.9%.
    • Address domestic demand: The MoU allows Nepal to request that the NHPC sell the power generated by the projects to the domestic market before selling it to the export market in whole or in part.
  • Strengthening ties: Under the Bangladesh-Bhutan-India-Nepal (BBIN) framework for cross-border energy cooperation, the project could be expanded to include other regional partners.
  • For example, a cross-border energy market can be created and optimally operationalized if the combined estimated hydropower potential of Nepal and Bhutan, as well as the potential of Northeast India, is effectively harnessed. It will be a win-win situation on both the bilateral and regional levels.

December 2023