The Geopolitical Triad: Navigating Asymmetric Interdependence in Nepal’s Development Infrastructure

Bishnu Raj Upreti, PhD[1]

1.      Introduction

The contemporary political economy of Nepal is fundamentally shaped by its asymmetric interdependence with its two contiguous neighbors, India and China. Positioned as a landlocked—or as modern diplomacy envisions, a "land-linked"—state between two civilizational powers, Nepal’s pursuit of national interest requires a sophisticated balancing act. This structural dynamic is most visible in the development of large-scale infrastructure, where the divergent strategic philosophies, financial modalities, and operational frameworks of New Delhi and Beijing intersect. The choices Kathmandu makes in navigating this triangular relationship carry profound implications not only for its domestic economic modernization but also for its sovereign diplomatic space.

2. Practical impact of Chinese and Indian approaches on Nepal’s economic development support

The distinct models of development cooperation deployed by China such as the Belt and Road framework and India, through bilateral cooperation on the projects modality such as cross-border railways, power grid connectivity, and trade and transit arrangements, in Nepal have created fundamentally different practical outcomes for the country's economic development and its diplomatic room for maneuver.

Evaluating these impacts reveals how the Chinese macro-infrastructure model and the Indian integrated-interdependence model shape Nepal’s economic realities and sovereign choices.

2.1. The Chinese Model of development cooperation: BRI

China's recent approach to Nepal is characterized by state-backed, macro-infrastructure intensive projects under the Trans-Himalayan Multi-dimensional Connectivity Network. In terms of practical economic impact, the primary value of the Chinese model is structural modernization. By attempting to construct tunnels, highways, and cross-border rail links through the Himalayas, China’s investments challenge the geographical reality that has long isolated Nepal.

There are already  positive results of the Chinese Model of development cooperation. For example, infrastructure development like the Syaphrubesi-Rasuwagadhi Highway upgrade and the dry ports at Tatopani and Rasuwagadhi. Once fully functional, they create viable alternative commercial corridors. Furthermore, China's pivot toward "small and smart" community-centric projects under the Silk Roadster framework directly affects local agricultural supply chains, assisting smallholder farmers with storage technology, mini-tillers, and market connectivity.

However, progress has been slow. Nine years after Nepal signed the 2017 BRI Memorandum of Understanding, the flagship projects—such as the complex trans-Himalayan railway to Kathmandu—remain stuck in protracted feasibility stages. The funding mechanism is a primary point of friction. Nepal remains highly cautious about accepting large commercial or concessional debt packages from China's EXIM Bank, strictly pushing for grant-based aid or comparable interest financing with ADB or WB to preserve its fiscal health.

The existence of the BRI expands Nepal’s long-term sovereign options. The signature of the comprehensive Framework for Belt and Road Cooperation gives Kathmandu an alternate geographical pivot.

Historically, any disruption at the southern border could affect Nepal's economy. However, if the northern connectivity projects break India's de facto monopoly over Nepal's transit routes, granting Kathmandu greater psychological and structural advantage. It transforms Nepal from a landlocked state trapped in a single orbit into a potential "land-linked" bridge connecting two of the world's largest consumer markets.

2.2 The Indian Model: Deepened Bilateralism and Grid Integration

India's model focuses on deep functional, market-driven integration, leaning heavily on cross-border transport, trade agreements, and energy grids. While the Chinese model offers future structural transformation, the Indian model provides immediate high-liquidity financial returns.

The 25-year Bilateral Agreement on Electric Power Trade, alongside cross-border lines like the 400 kV Dhalkebar-Muzaffarpur corridor, has turned Nepal's immense hydropower potential into a highly profitable export asset. Nepal routinely exports close to 1,000 megawatts of electricity daily to India during the monsoon season, reasonably reducing its trade deficit. This integration reached a historic milestone through a trilateral arrangement allowing Nepal to export 40 MW of power directly to Bangladesh utilizing Indian transmission lines.

However, this model reinforces a massive trade imbalance in merchandise. India accounts for roughly two-thirds of Nepal’s total trade and remains its primary supplier of petroleum and consumer goods, generating a persistent structural trade deficit that hydropower earnings alone cannot entirely close.

India's Cross-Border Electricity Trade (CBET) framework contains eligibility provisions that restrict imports of electricity from projects involving ownership, investment, or beneficial control by entities from countries sharing a land border with India unless those countries have a bilateral power-sector cooperation agreement with New Delhi. In practice, this provision has limited the ability of some Nepalese hydropower projects with Chinese investment to access the Indian electricity market. While India presents the measure as part of its regulatory and grid-security framework, several analysts interpret it as a mechanism that indirectly constrains Chinese economic influence in the regional power sector.

India's Ministry of Power issued the “Procedure for Approval and Facilitating Import/Export (Cross Border) of Electricity” on 26 February 2021 under the Cross-Border Electricity Trade (CBET) framework. The procedure established eligibility conditions for electricity imports and exports involving neighboring countries. The procedure indeed contains a provision (commonly cited as Clause 6.3(i) in the 2021 procedure) that restricts import of electricity into India from projects that are owned, controlled, or invested in by entities from a country sharing a land border with India unless that country has a bilateral agreement on power-sector cooperation with India. This provision has been widely discussed in Nepal because it affects hydropower projects involving Chinese investment. Consequently, hydropower projects in Nepal with significant Chinese ownership or control have faced difficulties obtaining approval for electricity export to India under the CBET regime. This interpretation has been widely noted by analysts and commentators. However, many scholars, policymakers, and media commentators have argued that the clause has a geopolitical effect of constraining Chinese participation in Nepal's hydropower sector and therefore reflects India's strategic concerns regarding Chinese influence in South Asia. That interpretation is plausible and commonly advanced, but it is not an officially acknowledged purpose of the regulation.

India has extended this policy to restrict imports from projects that utilize Chinese Engineering, Procurement, and Construction (EPC) contractors, even when the project is entirely owned by Nepalese entities. For example, India delayed import clearances for power from the 456 MW Upper Tamakoshi Hydroelectric Project, Nepal's largest domestic undertaking, citing the presence of a Chinese civil contractor, despite the project being fully funded by domestic institutions.

2.3 Nepal's balancing approach and response strategy

Nepal government has adopted a balancing strategy in dealing with strategic interests of her neighbors especially to deal with the selling hydropower energy to India. Nepal manages its hydropower portfolio by separating projects into two distinct tracks based on their intended destination market and funding mechanisms.

The first is Southern Export Track, which focuses on allocation to India/Domestic Firms. For mega-projects intended exclusively for export to the Indian market or for regional transit to Bangladesh via the Indian grid, Kathmandu allocates development rights to Indian state-owned enterprises or domestic developers. This approach was demonstrated by transferring the 750 MW West Seti reservoir project and the 450 MW Seti River-6 project to India’s National Hydroelectric Power Corporation (NHPC) Limited, alongside ongoing progress on the 900 MW Arun-III project by Satluj Jal Vidyut Nigam (SJVN). This alignment complies with India's CBET guidelines, ensuring guaranteed market access and immediate financial returns to stabilize Nepal's balance of payments.

The second is Domestic and Northern Track, which allocates  China’s global bidding. For projects aimed at domestic consumption or future northern grid connectivity, Nepal continues to accept Chinese competitive bids and investment. Projects like the 135 MW Manang Marsyangdi plant and various run-of-the-river projects feature active Chinese participation. By using Chinese investments to satisfy domestic demand, Nepal preserves its financial capital for export-oriented projects.

Kathmandu uses institutional mechanisms—such as the Joint Working Group (JWG) on Power Cooperation and high-level diplomatic channels—to advocate for a relaxation of India’s strict contractor rules.

Some of the critical analysists argue that because public projects are awarded through transparent global tendering processes, penalizing a project for selecting a cost-effective Chinese contractor limits market competition and raises construction costs. This diplomatic effort gains additional relevance during periods of improving bilateral relations between New Delhi and Beijing, allowing Nepal to push for a separation of regional trade arrangements from specific geopolitical events.

To reduce its vulnerability to a single external buyer, energy experts and state planners increasingly focus on boosting domestic electricity consumption. The government encourages industrial electrification, the adoption of electric vehicles, and incentives for high-load digital infrastructure like data centers. By building domestic demand, Nepal seeks to create an internal market buffer, ensuring that electricity produced by any developer—regardless of the contractor's nationality—can be fully consumed within the country at competitive tariff rates.

Likewise, exploring Trans-Himalayan Energy Grids is another pragmatic approach of Nepal. While India remains the most accessible commercial market, Nepal continues to explore long-term diversification with China. Both nations have advanced feasibility studies for the Jilong/Keyrung-Rasuwagadhi-Chilime 220 KV Cross-Border Power Transmission Line. This Nepal-China cross-border infrastructure serves as a long-term strategic alternative. While the immediate financial returns favor the southern grid, developing a northern transmission corridor ensures that Nepal retains a degree of structural autonomy, preventing a single neighbor from exercising a permanent veto over its natural resource economy.

Bilateral strategy of Nepal is to export 10,000 MW of electricity to India within a ten-year window. To achieve this goal, the government recognizes that it must maintain an active partnership with Indian energy markets.

So far, Nepal is following a pragmatic realism approach. The government is attempting to address India’s concerns while simultaneously maintaining open economic relations with China on internal infrastructure projects. This dual-track strategy allows Kathmandu to protect its sovereign development goals while navigating the competing interests of its powerful neighbors.

 

3. Pokhara International Airport and Nepal’s strategy

Pokhara International Airport (PIA), built by a Chinese contractor and funded through a major concessional loan of China, stands as a critical intersection of Nepal's domestic tourism ambitions and the challenging realities of regional geopolitics.

Regarding the current operational situation of the PIA, it presents a stark duality. The PIA is highly successful as a domestic hub, but it remains largely grounded as an international gateway. Domestically, the airport operates at a high capacity. Following its inauguration, trunk routes connecting Pokhara to Kathmandu, Bharatpur, and Bhairahawa were successfully shifted to the new facility. Unlike the old Pokhara airport, which lacked the technology for late-afternoon and night operations, PIA’s modern infrastructure allows for scheduled evening and night flights. This capability has improved reliability and travel convenience for domestic commuters and tourists alike.

However, the international orbit is dormant and underutilized. Despite being designed as Nepal’s third international airport, sustained, scheduled international commercial operations have failed to materialize.

Despite having modern infrastructure, Pokhara International Airport Pokhara International Airport has not achieved regular international operations primarily due to insufficient airline demand and concerns about commercial profitability. The airport faces challenges related to limited international passenger traffic, seasonal tourism patterns, and competition from Tribhuvan International Airport as Nepal's main international gateway. In addition, constraints in obtaining efficient international air routes, particularly through neighboring airspace, increase operating costs for airlines. Regulatory and operational issues, including route approvals and navigation requirements, have further slowed expansion. Some airlines also face aircraft performance and payload limitations on certain routes. Geopolitical considerations associated with regional strategic competition and the airport's Chinese financing have added complexity to route development, while concerns regarding project financing, debt obligations, and governance controversies have affected investor and airline confidence. Together, these commercial, operational, regulatory, and geopolitical factors have limited the airport's international utilization despite its modern facilities.

Consequently, an airport built with an investment of nearly Rs 22 billion ($216 million) through a loan from the Export-Import Bank of China is operating at an international loss, raising serious concerns regarding long-term debt servicing and financial sustainability. Nepal government has outlined specific strategic plans in its policy programs and federal budgets to revive the airport's economic viability. The state’s interventions focus on infrastructure upgrades, diplomatic maneuvers, and market-driven incentives.

Recognizing that private infrastructure investments in Pokhara’s tourism sector exceed Rs 600 billion, the government is using fiscal policy to stimulate demand by a) Airline concessions (The federal budget includes provisions to offer substantial subsidies, including waived landing, parking, fuel-handling, and navigation fees, to any international low-cost carrier willing to operate regular flights out of Pokhara or Bhairahawa), b) Hospitality industry support (to lower operational costs for local businesses awaiting international traffic, the government treats hotels and resorts on par with productive manufacturing industries, granting them discounted electricity tariffs and tailored tax incentives), c) Modernization of supporting and technical facilities (The Civil Aviation Authority of Nepal continues to work on the airport's technical integration into global aviation networks, i.e., instrument upgrades (enhancing the reliability of the Instrument Landing System (ILS) and automated weather monitoring to ensure safer arrivals through the valley’s unique micro-climate and mountain terrain), Global Aeronautical Mapping (working to ensure PIA is consistently updated across international aeronautical maps and flight-planning databases, which helps lower insurance premiums for international airlines evaluating the route).

The most critical consideration for long-term development is diplomatic negotiation with Nepal's neighbors are a) the Indian air route push (the government is leading diplomatic talks with New Delhi to secure low-altitude cross-border entry and exit points (specifically via Mahendranagar and Nepalgunj). Without these permissions, flights must take longer, less fuel-efficient paths that deter commercial airlines; b) the loan-to-grant restructuring (Nepali officials are actively discussing options with Beijing to convert a portion of the EXIM Bank loan into a non-repayable grant. This restructuring would ease financial burden of Civil Aviation Authority of Nepal and reduce the domestic political tension surrounding the project's funding source, c) Designating Pokhara as the tourism capital (By officially branding Pokhara as the "Tourism Capital of Nepal," the government aims to link the airport’s survival to specialized international travel packages, focusing on adventure, wellness, and cultural tourism for visitors from neighboring regions).

3.1 Geopolitical effects

India acts as the primary external operational bottleneck for Pokhara International Airport. New Delhi's pressure is direct, tangible, and structural, manifesting through its control over the region's shared airspace and energy markets. Geographically, international flights arriving from the west or south need efficient low-altitude entry points into Nepal. India has consistently refused to grant new air entry routes via Mahendranagar or Nepalgunj. Currently, international flights are forced to enter through the southern Simara corridor, causing fuel-heavy, costly detours that destroy the profit margins of low-cost carriers.

Right before the airport opened, Chinese diplomats publicly categorized PIA as a flagship project of the Belt and Road Initiative (BRI), a designation the Nepali government disputes, arguing the loans were signed prior to the BRI framework. India has a strict policy of non-cooperation with any infrastructure bearing a Chinese or BRI stamp. Indian commercial airlines (like IndiGo or Air India) refrain from scheduling flights at PIA, and India remains reluctant to allow scheduled flights from Indian hubs like Delhi or Mumbai into Pokhara.

4. Public opinion and media comments on the PIA

The discourse surrounding Nepal’s newly constructed international gateways—specifically Pokhara International Airport (PIA) and Gautam Buddha International Airport (GBIA) in Bhairahawa—reveals a profound divide between lofty national ambitions and harsh geopolitical realities. In mainstream political and media circles, these multi-billion-rupee "National Pride" projects were originally championed as vital engines for economic development, aiming to transform the regional landscapes into vibrant tourism and trade hubs while relieving the severe congestion plaguing Kathmandu's Tribhuvan International Airport (TIA). Supporters within successive ruling coalitions continually emphasize their immense long-term strategic value, arguing that direct connectivity to the Buddhist circuit via Bhairahawa and the Annapurna tourism gateway via Pokhara will eventually catalyze foreign investment, enhance labor migration logistics, and unlock unprecedented regional growth. To salvage these underutilized assets, governmental bodies have floated aggressive relief measures, such as offering tax and electricity tariff incentives, exploring "fifth freedom" traffic rights to attract multi-sector foreign airlines, and planning to mandate the national flag carrier to anchor regular operations out of these stations.

However, the prevailing narrative in the local media and among opposition groups has grown increasingly cynical, framing the current state of these airports as a cautionary tale of economic mismanagement and a "white elephant" paradox. Critics point to damning fiscal data showing near-zero export trade and negligible commercial flight traffic, which leaves the state heavily burdened by massive foreign loans—most notably the Chinese EXIM bank loan for Pokhara—without the revenue generation required for repayment. This fiscal anxiety is compounded by intense scrutiny over technical anomalies, such as improper runway elevations and cost-inflation controversies during the bidding phases, which opposition circles use to attack governance integrity. The dominant media consensus suggests that until the state transitions from symbolic, grand inaugurations to the messy work of fixing flawed technical designs, lowering prohibitive aviation fuel costs, and building robust air-cargo logistics, these facilities will remain stagnant monuments to over-ambition.

The most critical point of divergence between political factions lies in how they interpret the persistent diplomatic and geopolitical gridlock stalling the airports' viability. The opposition and independent media heavily criticize the government for failing to secure vital, new reciprocal air entry routes from India, an obstacle that severely restricts international commercial airlines from operating cost-effective, direct flights into both Bhairahawa and Pokhara. While government loyalists treat these constraints as ongoing bilateral negotiations requiring diplomatic patience, critics interpret them as a failure of neighborhood foreign policy and express growing anxiety that Nepal has entangled itself in regional geopolitical friction, particularly regarding projects built by China. Ultimately, while the government pushes a vision of eventual integration into regional aviation networks through persistent diplomacy and aggressive airline incentives, the opposition and local media remain fixed on immediate domestic accountability, arguing that without a drastic structural overhaul, future generations will be left paying for a dream that remains physically and diplomatically grounded.

 

5. Conclusions:

While local political and business circles in Pokhara view the airport as an economic necessity that the state must rescue through aggressive diplomacy, the national media and federal political circles increasingly see it as a cautionary tale of mismanaged geopolitics, technical flaws, and systemic institutional corruption.

Nepal's current economic development and foreign policy rely on balancing these two competing frameworks. The government utilizes both models to serve distinct national interests. By leveraging China's BRI, Nepal gains the alternative routes necessary to strengthen its sovereign position and ensure its long-term trade security. Simultaneously, by engaging with India's cross-border grid networks, Nepal secures the immediate commercial market needed to finance its domestic growth. For Kathmandu, navigating these parallel models requires maintaining a strict policy of non-alignment, ensuring that domestic infrastructure serves as a bridge for national development rather than an arena for regional geopolitical rivalry.

The intersection of infrastructure development, natural resource management, and regional security creates a complex arena for Nepal's foreign policy. This is most visible in the hydropower sector, where Nepal possesses an economically viable potential of over $42,000MW, yet remains constrained by political commitment, capital deficiencies and regional geopolitical rivalries. Even if strategic framework of India explicitly seeks to limit Chinese engagement in South Asian energy infrastructure. However, Nepal government has moved toward a policy of strategic unbundling and market-driven pragmatism. In this way government aims to maximize development capital and protect national interests without alienating either of its powerful neighbors.

 

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[1] Dr. Upreti is Kathmandu based geo-political analyst, public policy and conflict and security researcher.