Harnessing the Potential of India-Nepal Partnerships in Hydropower


SOHINI NAYAK for Observer Research Foundation  (10 January 2022) –  The bilateral relationship between neighbours India and Nepal encompasses not only common notions of culture and common geographical boundaries, but also shared freshwater resources. There are a number of well-endowed rivers originating in the Himalayas such as the four crucial tributaries of the Ganges: Mahakali, Karnali, Sapta Gandaki, and Sapta Kosi. These flow through the valleys and plains of Nepal, meandering into the flat sub-tropical plains of India, before finally joining the Bay of Bengal. These rivers help irrigate the low-lying parts of Nepal, as well as the fertile Indo-Gangetic plains of India. They contribute approximately 45 percent of the annual flow of the Ganges and 70 percent of the dry-season flow, thereby making them the “lifeblood of the Indian fertile low land.

Consequently, these rivers create opportunities for collaboration through various bilateral institutional setups between the two nations. Appropriately, both countries are working to optimise the potential benefits and address prevailing problems through a joint bilateral apparatus.  This includes the creation of a three-tier mechanism called the Joint Ministerial Commission for Water Resources (JMCWR), Joint Committee on Water Resources (JCWR), and Joint Standing Technical Committee (JSTC), for the implementation of agreements and treaties related to shared water resources, along with addressing water-induced problems of flooding and inundation. There is also an additional mechanism of the Joint Committee on Inundation and Flood Management (JCIFM) that looks into embankments and flood forecasting. One of the primary concerns of this bilateral arrangement, and an area of mutual interest between the two countries, is the hydroelectric power sector. It is tasked with promoting the maximum utilisation of shared water resources through the development of common hydropower projects.

The challenge lies in the maximum use of natural resources, which has not been possible for Nepal due to certain contraints, as will be explained later in this brief. In this scenario, provisions such as bilateral partnerships, especially with economically more viable neighbours such as India, can act as catalysts for Nepal to improve its hydropower setup. However, the India-Nepal partnership in this regard has met with little success, and this brief attempts to explain why. The brief offers a historical account of India and Nepal’s engagements in the hydropower sector, and makes a case for the two countries to shift from contention to cooperation.

Hydropower in Nepal and India’s Role: An Overview

The landlocked Himalayan nation of Nepal is home to the opulent perennial waters of the steep Himalayan topography, making up approximately two percent of the world’s water resources. The country has about 6,000 rivers, with a total length of 45,000 km whose average runoff is 220 billion cubic meters annually.[7] Nepal boasts, on paper, of a hydropower generation capacity of 90,000 Mega Watts (MW), of which 43,000 MW is economically feasible. This owes to the presence of four large river systems in the country—Koshi, Gandaki, Karnali, and Mahakali—and the other river system comprising of the southern rivers (See Map 1 and Table 1). However, despite such natural endowments, Nepal’s hydroelectric power generation is estimated at only 650 MW per annum, which is less than one percent of the proven potential.

Table 1: Major river systems of Nepal

Source: “The Way Forward for Nepal’s Hydropower Development”, Hydro Review, 2019

Map 1: Major River Systems in Nepal

Source: ‘A Review of Hydropower Projects in Nepal’, 1St International Conference on Energy and Power, RMIT University, Melbourne, Australia. 

Though Nepal ranks second in the availability of freshwater on earth, it is severely lacking in capabilities in utilising these rivers for generating electricity. More than 30 percent of Nepal’s population do not have access to electricity, and the 70 percent who may be on-grid—whether in urban or rural areas—experience regular power-cuts. The peak electricity demand in 2018-19 was at 1,320 MW, while the total installed generation capacity was only 1,182 MW. One of the primary reasons why Nepal lags in this sector is the absence of any dependable, grid-supplied power. Further, due to population growth, overall energy demand is increasing at a remarkable rate of 10 percent every year.

In Nepal’s current energy mix, biomass is proving to be a more reliable source in the absence of many alternatives. (See Table 2) 

Table 2: Total Energy Supply (TES) of Nepal (Energy Mix), by Source, 1990-2018 (in ktoe)

Source: World Energy Balances, 2020

At present, hydropower fulfils only one percent of Nepal’s energy needs.[20] The country is undertaking a strategy called ‘Vision 2020 Hydropower’, to identify economically feasible projects that will provide scope for investors searching for a conducive environment. These projects will be done via the public-private partnership (PPP) mode, involving the Nepal Electricity Authority or NEA and IPPs, or independent power producers. [21],[e]

However, progress has yet to be made for various reasons:  regulatory challenges,[f] marginalisation of local communities,[g] unstable politics,[h] absence of a substantial framework and appropriate location,[i] and increasing dependence on foreign aid.[j]

Map 2: Major hydropower projects in Nepal

Source: Hydro Review: The Way Forward for Nepal’s Hydropower Development, 2019

India has been trying to leverage its presence in Nepal’s hydroelectric power sector for better investment opportunities, thereby boosting its own economy and building energy security. The two countries have undertaken various collaborative projects, with the latest being the Lower Arun Hydropower Project, a USD 1.3-billion deal between the partners. The Indian Satluj Jal Vidyut Nigam (SJVN) aided a 679-MW project between Sankhuwasabha and Bhojpur in eastern Nepal. This is the second mega project undertaken by India after the USD 1.04 billion 900 MW Arun III project. (See Tables 3 and 4)

Table 3: India-Nepal projects in the pipeline

Source: Compiled by the author from various open sources.

 4: Projects implemented in Nepal with Indian assistance

Source: Central Electricity Authority, Ministry of Power, Government of India

Despite progress, however, there is great scope for improvement. A crucial obstacle is the absence of mutual trust. The next sections describe the power asymmetries between the two riparians, which result in disharmony in perspectives and strategies.

Enduring Asymmetries

India and Nepal are two crucial riparian states of South Asia, sharing the mighty and complex Ganges basin. They have a century-old history of water dynamics and have held bilateral dialogues dating back to 1874.

Nepal’s enormous water wealth and huge hydropower potential may be the answer to India’s ever-increasing requirement for energy. As argued by A. Ochilov, the Nepalese terrain can provide the best option for downstream flood control and dry-season augmentation. At present, there are 89 sites that can provide about 30 gigawatts (GW) of power and 145,000 gigawatt-hours (GWh) of energy. However, the problem lies in Nepal being the upstream or the upper riparian country, and India being downstream.

In theory, “riparians” are members of the international community of nations that should engage as equals; in practice, however, the power relations are asymmetric. There is often the presence of a hegemon, especially when two countries are not engaging as equally industrialised economies with stable political systems, such as in the case of India and Nepal.

There are various determining points that are critical in this regard. Frey and Naff (1985) have analysed the position of a state on a river comprehensively, stating the advantage of geography, where the flow of water cannot be contained. This gives one state, more often the upper riparian one, better bargaining power and allowing it to set the rules, agenda, and parameters of that agenda. Generally, the weaker party may have to “comply”. However, in some cases, if each is legitimate in the eyes of the other, then an actor with less material capacity may still retain influence over the stronger actor. Riparians can also impose “power over ideas”, known as ideational power, with the legitimisation of narratives that it believes is correct. This is particularly applicable for allocative configuration. In this case, hegemonic riparians can dominate and manipulate through a number of tools such as knowledge, data-sharing, ambiguity, and non-cooperation on any particular issue. The only way through such a situation is to bring about a counterbalance on the part of the weaker riparian, who can provide “offers” that the stronger one does not have.

Paradoxically, in the case of Nepal and India, the upper riparian is in need of a proper structure to utilise its resources. This is because of the lower riparian—i.e. India’s—sheer size, economy, and its relatively stable democratic institutions; it also produces 400 times more electricity than Nepal.

Despite being aware of the benefits of cooperation, both countries are lacking in effort and political will to translate potential to reality. While Nepal lacks the financial resources and technology to set up dams for hydroelectric projects, India has not provided adequate support. Additionally, the deep-seated mistrust and grievances that Nepal has had due to several failed treaties act as roadblocks to any effective institutional mechanism. India argues, for its part, that Nepalese authorities have been more concerned with “narrow political gains.”. For India, the fault does not lie with the treaties, but with Nepal’s lack of trust and will to implement those agreements.

A Succession of Treaties and Agreements

Among the first formal engagements between Nepal and India in the power sector took place in 1920, while the latter was still under British rule. The Sarada Treaty and construction of the Banbassa barrage on the Mahakali River (also known as Sarada in India) intended to set up a power station at Khatima in connection with the Sarada Canal Project in the state of Uttar Pradesh in India. Nepal provided about 4,000 acres of its territory for the construction, in exchange for an equal amount of forested land from the British government in India. The Nepalese government also obtained the right to use a minimum of 400 cubic feet per second (cusecs) and a maximum of 1,000 cusecs of water from the Sarada Canal for irrigation purposes.

However, after conclusion of the treaty, Nepal was dissatisfied with the quantum of water being obtained, concluding that the treaty was “unequal” as it did not specify how much India could withdraw of the approximately 650 cumecs average annual flow of the Mahakali. In effect, the only limitation was the scale of technology India was free to employ.

This treaty existed till the Mahakali Treaty of 1996, which also embodied a complex set of agreements, as it brought about the revision of some key treaties of the past that suffered from “poor design, inefficient implementation and bad maintenance. (The Mahakali Treaty will be discussed in more detail in a latter section of this brief.)

Earlier, on 25 April 1954, the Kosi Agreement was signed providing for the first developmental project in an international river that could be mutually beneficial for both countries. The primary goal was to introduce flood-control mechanisms with the construction of a barrage. However, right after the agreement was signed, the opposition political parties in Nepal severely criticised it, saying it would be non-beneficial for the country. They claimed that the treaty provided extra-territorial rights to India for an indefinite period of time, and Nepal would receive only a minuscule proportion of the total irrigated land and also lose fertile land, even as India would obtain energy. This led to a tumultuous 1960s, with calls for firm amendments. Revisions were made in 1966 and it was acknowledged that the agreement had not given importance to consensus in decision-making.  This is reflected through an Exchange of Letters between the two countries, signed on 19 December 1966, that made mention of compensation to be paid by India to Nepal for loss of land revenue. Consequently, India was compelled to pay an annual compensation at the rate of Nepalese Rupees five per Nepali bigha for all lands acquired for the Kosi Project. The agreement also changed ‘ownership’ to ‘lease’, thereby providing Nepal the privilege of acquiring the land for the construction of the project and then lease it to India after the payment of the compensation.

Another agreement that courted controversy was the Gandak Agreement: Nepal saw it as Indian encroachment of its sovereignty and territorial integrity. The Agreement was concluded on 4 December 1959, and it provided for the construction of a barrage, canal head regulators, and the development of hydropower for the two countries. There were also complaints from Nepal about the social costs of the projects: land behind the barrage got submerged, and people were displaced and not compensated. The two countries then created a coordination committee, to be funded by India, to address the issues.

In 1996, India and Nepal signed another treaty, the Mahakali Treaty, as mentioned briefly earlier. Then Indian Minister of External Affairs Pranab Mukherjee and his Nepalese counterpart, Prakash Chandra Lohani, after three days of deliberations in Kathmandu signed the treaty on 29 January 1996. The treaty is formally known as the Treaty between his Majesty’s Government of Nepal and the Government of India Concerning the Integrated Development of the Mahakali River Including Sarda Barrage, Tanakpur Barrage and Pancheshwar Project. It dealt with the Sarda Barrage, Tanakpur Barrage, and Pancheshwar Project in an integrated manner. However, even this treaty was not accepted by Nepal over mostly environmental concerns and issues about water-sharing. Despite ratification of the treaty by two-thirds of the joint upper and the lower houses of the Nepalese Parliament, it was highly criticised. In this case, Nepal believed India to be overstating its existing utilisation of water. Moreover, the use of the phrase “existing consumptive use” caused ambiguity: the treaty applied this clause only to Nepal, giving India greater scope to use the water unilaterally and without any liability.

The Oli Commission, formed to look into this issue, also found that the presence of Indian troops in Kalapani, near the headwaters of the Mahakali, worsened the misunderstanding. Indeed, this problem persists today, with claims and counter-claims about the delineation of the border between the two countries. This is a barrier for any future collaborations revolving around water or hydropower development.

The precursor to this problem caused by the Mahakali Treaty was another noteworthy project—the Tanakpur Barrage, unilaterally built by India in 1983—which eventually came under the Mahakali Treaty. Nepal found it unacceptable that the Tanakpur Treaty (1991), which was giving 2.9 hectares of its territory to India for a hydroelectricity project, was not submitted to its parliament for approval. It was in 1988, when India completed the construction of most of the Tanakpur barrage and the powerhouse, that it requested for 577 meters of Nepalese land for this purpose. It was not until 1996 that India became amenable to a negotiation.

While the Tanakpur barrage issue was ongoing, the then Indian Prime Minister Rajiv Gandhi imposed a peacetime economic blockade on Nepal, as the latter had allegedly been importing light arms from China—this only caused the bilateral relationship to further deteriorate. The blockade was soon lifted as PM Gandhi reverted to the Treaty of Peace and Friendship of 1950, resulting in the foreign ministers of the two countries meeting again in 1990.

During this time, the anti-Panchayat movements by the Nepali Congress and the Left Front were also threatening the position of the Nepalese Royal Regime.  India took this opportunity to draw up a draft proposal on 31 March 1990, with strict demands for Indian security to the Nepalese government. Furthermore, an interim Post Panchayati Raj government came into being, comprising the Nepali Congress and the Communist United Left Front, with Krishna Prasad Bhattarai as prime minister. He also visited India at this time to discuss the issue of “common rivers” that can bring about development.

In 1995, the then UML (Unified Marxist-Leninist) government of Nepal put forth a package for India that proposed increments in the quantum of electricity and water for Nepal by the development of a high dam at Pancheshwar, which is bordering the Mahakali river. After the fall of the UML, Prime Minister Sher Bahadur Deuba’s government initiated formal talks, leading to an agreement in the form of the Mahakali Treaty.

All these treaties are testimony to how both countries have continuously tried to forge an alliance to maximise the benefits of their shared water resources. However, the problem lies in unchanged perceptions towards past failures. Further, economic blockades, with the most recent one being in 2015, created undercurrents of apprehension among the Nepalese people towards their Indian counterparts. Often regarded as a humanitarian crisis, the 2015 blockade came a few months after the country suffered two devastating earthquakes that killed several thousands of people. Anti-Indian sentiments kept resurfacing as the Nepalese claimed hegemonic behaviour on the part of India—the country that was not at all pleased with the new Constitution of Nepal, along with the Madhesis in the south of the country, who were protesting against the new government and the Constitution. Fuel, medicines and other vital supplies from India, which form about 70 percent of the bilateral trade, were suspended through the towns of Raxaul and Birgunj, thereby worsening the situation. The trade embargo imposed by India also resulted in an energy crisis in Nepal, withholding several tariff hikes requested by the NEA with different rates for the dry and the wet seasons. This also reminded the Nepalese of the 1989 blockade with India—which had also taken place after an earthquake—over India’s growing anxiety towards China and Nepal’s proximity, as well as disputes over transit treaties. It finally culminated in India putting pressure on Nepal to overthrow the Panchayati System—this again, for Nepal, showed India’s controlling attitude, which still exists today.

Indeed, despite the potential for better hydroelectric power development between the two, the influence of politics in the bilateral mechanism has been enormous. Domestic politics in Nepal remain tumultuous. Though the country is displaying a more robust ‘state-transformation’ after the local and national elections held in mid-2017 and early 2018.It has been trying to restore its federal structure and democracy after emerging from the civil conflict that lasted till 2006. Throughout these phases, hydropower and its various aspects of development have remained integral in every government’s economic development strategy.

Towards Improved Cooperation

A study by the Asian Development Bank (ADB) underlines India’s incremental energy demand for the next decade, caused by sustained economic growth from rapidly growing industries, rise in income level, and increased availability of goods and services. In this regard, the government is counting on hydropower as a crucial source of electricity, along with other uses, such as irrigation, flood control, and navigation, through power developmental plans.However, till date, only 20 percent of the country’s entire potential is being harnessed. The estimated capacity is 145,000 MW and a target of bridging the lag by 70,000 MW by 2030 is under formulation.Despite claims of India producing surplus electricity, and the country moving forward with categorising cross-border power trade as a ‘strategic issue’, about 35 percent of the Indian population do not have access to electricity, especially in the rural areas. According to 2017 data, the country still needs 135 GW of power generation capacity.

Many factors hinder development: longer gestation period and capital-intensive nature of the projects, environmental problems and rehabilitation issues, inter-state aspects with common rivers between adjoining states with no investment sanctions, land acquisition problems, and lack of participation of private sector enterprises.[56]

To be sure, India offers a ready and dynamic market to Nepal’s hydropower generating resources. Further, not only will there be a conversion of the mono-sectorial use of water to a multi-sectorial one for both countries, but an integrated water management system for the trans-national rivers of India and Nepal could also be outlined in the long run. The geographical proximity of the two countries will help the southern neighbour make the best of the Himalayan waters that flow from Nepal.

Even though it has been difficult to bring about a constructive proposition suitable to both the parties, the key lies in embracing and creating newer narratives and building on the older ones. One such narrative is through the creation of a BBIN (Bangladesh, Bhutan, India, Nepal) subregional framework for energy, with the formation of multilateral engagement that can strengthen bilateral collaborations. This could lead to grid synchronisation replacing the SAARC Energy Center, which has been losing its pace in recent times. Not only will a BBIN energy framework allow Nepal and India to export electricity in the region, but also create economic opportunities without any barrier in connectivity.

Focusing on hydropower management, strategists argue in favour of institutional changes that must be brought about with intensive and extensive collection of hydrological data and exchange of ecological information across the border, open availability of project documents, and study of already successfully executed projects. Micro-management is also crucial between the local and non-local institutions, as it can aid in formulating a flexible framework at the international level.

Nepal and India must realise the sensitivity of each other’s positions in South Asia and not overemphasise the trade of electricity. There have been counter-arguments about the cost of producing power being much lower in India compared to Nepal. However, if there is an understanding between the two and collaborations through strong agreements, they can be mutually beneficial. The resolution may come in the form of better framed legal documents between the two countries that can help check the work in progress, along with the Joint Committee mechanisms already reviewing ongoing measures.  This will also help Nepal shed its image of a “buffer” between India and China and replace it with a more credible identity of a crucial supplier of hydroelectric power.