Rethinking Nepal-India relations in the post-Gen Z uprising era

The relationship between Nepal and India has long been unique, shaped by shared cultural and religious ties, an open border regime, democratic governance and a history of cross-border kinship and cooperation. India remained a major destination for Nepali labor migration and higher education for a long time. Recruitment of Nepali youths into the Indian armed forces further reinforces bilateral relations while India’s contribution to Nepal’s democratic transition earned widespread respect. Cross-border marriages and family connections have historically strengthened this bond. These ‘roti- beti’, which signify deep cultural, social, and economic ties, factors collectively made India-Nepal relations not only strategically important but also a model of people-to-people connectivity. However, these traditional pillars of the bilateral relations are gradually weakening in recent years. While cultural and religious links are no longer as strong, younger Nepalis are increasingly heading to other countries for higher education and employment and the recruitment of Nepali youths into the Indian armed forces has effectively come to an end. In this changing reality, the two countries must now give bilateral relations a new boost by focusing on enhanced economic partnership, which can restore the missing links in the relationship.

Historically, Nepal–India relations have been underpinned by several enduring pillars, notably shared religious and cultural traditions, cross-border educational exchanges and the collective struggle of political leaders in both countries for democratic governance. Another significant pillar of this relationship has been the long-standing practice of recruiting Nepali youth into the Indian armed forces. But these traditional bonds have begun to break lately. Recruitment of Nepali youth into the Indian Army’s Gorkha regiments has effectively ceased since 2022 following India’s introduction of the four-year Agnipath scheme. This new framework departs fundamentally from the earlier model of long-term service with pension benefits, prompting Nepal to suspend participation in the recruitment process pending political clarity and consensus on the revised terms. Prior to this change, India recruited approximately 1,200 to 1,500 Nepali Gurkhas annually, and an estimated 32,000 to 34,000 Nepali soldiers currently serve across the Indian Army’s seven Gorkha regiments. Serving personnel and pensioners from diverse regions of Nepal have historically constituted a vital human link in bilateral relations. With the suspension of new recruitment, this important pillar of Nepal–India ties is gradually weakening. Given the depth of military-to-military relations, which have often played a constructive role in managing bilateral differences, the erosion of this linkage carries broader strategic implications.

Leaders from Nepal and India even fought for the establishment of democracy in each other’s country. However, such personal connections between the political leaders of the two countries now remain missing. The recent Gen Z-led protests that led to the fall of a government commanding nearly a two-thirds majority in parliament is a testimony to this fact. Unlike earlier movements, the emerging leaders of the Gen Z protests appear to have limited personal, educational or political connections with India.

Higher education traditionally served as an important connector between the two countries. India was among the preferred destinations for Nepali students pursuing higher studies for a long time. Recently, however, this trend has declined. Data on No Objection Certificates (NOCs) issued for foreign education by the Ministry of Education indicate that countries such as Japan, Canada, Australia, the United States, the United Kingdom, South Korea and several European nations have emerged as more attractive destinations. Occasional cases of harassment and subsequent suicide of Nepali students in various academic institutions in India have led to further decline in the number of those opting to pursue higher education in India. This shift in educational mobility is likely to further weaken long-term people-to-people ties that have historically reinforced bilateral relations.

Similarly, Nepal–India labor mobility is undergoing significant changes in recent years. India, once a primary destination for Nepali workers, is becoming less attractive to younger generations. Educated Nepali youth are increasingly seeking opportunities in Western countries through student and employment visas, while others prefer established labor destinations in the Gulf and Southeast Asia. For many in the younger generation, countries such as Japan, China, and South Korea are also gaining prominence. This declining labor migration to India further diminishes everyday social and economic interactions that have long sustained close bilateral engagement.

India has historically played a direct or indirect role in major political transitions in Nepal, often extending support or goodwill during periods of change. Leaders from Nepal and India even fought for the establishment of democracy in each other’s country. However, such personal connections between the political leaders of the two countries now remain missing. The recent Gen Z-led protests that led to the fall of a government commanding nearly a two-thirds majority in parliament is a testimony to this fact. Unlike earlier movements, the emerging leaders of the Gen Z protests appear to have limited personal, educational or political connections with India. In contrast, many leaders within Nepal’s mainstream political parties have maintained close ties with India, often shaped by educational experiences or sustained engagement with Indian political leadership. The rise of a new generation of political actors lacking such connections suggests a gradual reconfiguration of Nepal’s political landscape.

Serving personnel and pensioners from diverse regions of Nepal have historically constituted a vital human link in bilateral relations. With the suspension of new recruitment, this important pillar of Nepal–India ties is gradually weakening. Given the depth of military-to-military relations, which have often played a constructive role in managing bilateral differences, the erosion of this linkage carries broader strategic implications.

Economic Partnership as the New Driver

Given these fundamental shifts in the traditional pillars that bound the two countries together, it is imperative now to reset the bilateral relations, anchored in economic partnership. The historical and strategic dimensions of India-Nepal relations remain important, but economic partnership should now serve as the primary driver of cooperation. The priorities of Nepal’s Gen Z youth are increasingly centered on economic prosperity, good governance, accountability and transparency. India has the potential to serve as a constructive partner in supporting these aspirations. Aligning bilateral engagement with the evolving expectations of Nepal’s younger generation could help rebuild eroding linkages and contribute to the long-term strengthening of Nepal–India relations. Both countries can work towards capitalizing the shared resources, trade, investment and infrastructure opportunities. Strengthening economic ties can not only compensate for the waning traditional links but also provide a sustainable basis for mutual cooperation. But this needs more actions and political will than mere rhetoric.

The priorities of Nepal’s Gen Z youth are increasingly centered on economic prosperity, good governance, accountability and transparency. India has the potential to serve as a constructive partner in supporting these aspirations. Aligning bilateral engagement with the evolving expectations of Nepal’s younger generation could help rebuild eroding linkages and contribute to the long-term strengthening of Nepal–India relations.

Simplifying cross-border travel and financial transactions is a critical step toward deeper engagement. The Nepal Rastra Bank’s decision to lift the cap on high-denomination Indian currency notes (INR 200 and 500, up to INR 25,000) aligns with RBI regulations and eases transactions for migrant workers, traders, and tourists. Nearly a decade ago, Nepal banned high-denomination Indian currency, particularly following India’s 2016 demonetization of Rs 500 and Rs 1,000 notes. A significant portion of these notes was held both within Nepal’s banking system and by individuals, traders, and migrant workers, with estimates in 2016 suggesting around INR 10 billion outside the banks. The ban created difficulties for Nepali migrant workers, who were forced to carry low-denomination notes, increasing their vulnerability to theft, and in some cases, leading to arrests.

The Nepal Rastra Bank’s decision to lift the cap on high-denomination Indian currency notes (INR 200 and 500, up to INR 25,000) aligns with RBI regulations and eases transactions for migrant workers, traders, and tourists. The easing of these rules is expected to facilitate travel, trade, and tourism between the two countries.

The tourism sector, especially casinos and hospitality businesses catering to Indian tourists in Nepal, was also negatively impacted, as many Indian tourists were unaware of the restrictions, resulting in fines and reduced spending. The ban was partly motivated by concerns from India about counterfeit currency entering its territory through Nepal. Following India’s demonetization, Nepal’s inability to exchange the large stock of old high-value notes in its system led to their restriction. The recent easing of these rules is expected to facilitate travel, trade, and tourism between the two countries.

Tourism and Cultural Exchange

Tourism is a key sector where both nations can leverage shared cultural and natural resources, deepening economic partnership. India is Nepal’s largest source of tourists, while Nepal offers diverse landscapes, heritage sites and recreational opportunities, including emerging areas such as wellness and eco-tourism. The recent decision to lift the cap on high-denomination Indian currency notes, along with the wider adoption of UPI and QR-based digital payments, will further ease transactions for tourists and traders alike.

Indian tourist arrivals in Nepal by air have shown steady growth in recent years. According to the Nepal Tourism Board, 230,727 tourists arrived by air, marking a nearly 14 percent increase from the same period last year. While official data on Nepali tourists visiting India is limited, their numbers, including religious travelers, are significantly high. Facilitating smoother payment systems and transactions in both countries is likely to boost tourist flows further.

However, challenges remain. Reports highlight Nepali travelers facing difficulties at Delhi’s Indira Gandhi International Airport, particularly concerning transit and perceived discrimination. Many travelers have reported being denied onward travel, although the Indian Home Ministry clarified that these issues stem from airline policies, not government bias. Nonetheless, such experiences of harassment, humiliation, or systemic delays have led many Nepalis to avoid Delhi as a transit hub. Both countries need to work together to resolve these issues and ensure seamless transit and travel, which is essential for strengthening waning people-to-people connections.

Facilitating smoother payment systems and transactions in both countries is likely to boost tourist flows further. However, challenges remain. Reports highlight Nepali travelers facing difficulties at Delhi’s Indira Gandhi International Airport, particularly concerning transit and perceived discrimination.

Beyond immigration and currency procedures, cross-border initiatives can further enhance tourism and its economic benefits. Improving transport connectivity and developing non-traditional tourist regions can increase regional tourism revenue. Potential projects include better road and rail links from India to key Nepalese destinations, joint marketing campaigns and collaboration in skill development programs. These initiatives can provide employment and entrepreneurial opportunities in tourism and hospitality for people on both sides of the border.

Deepening Economic Interdependence with Hydropower Cooperation

Hydropower represents a critical pillar of India-Nepal economic interdependence. Nepal’s vast hydropower potential, estimated at 40,000 MW, provides India with a reliable source of electricity while generating revenue, employment, and infrastructure development in Nepal. Projects such as the Arun-3 Hydroelectric Project, developed by India’s SJVN Limited, exemplify this partnership. The 900 MW run-of-the-river project not only meets India’s growing energy demands but also provides Nepal with free electricity, rural electrification, and revenue-sharing benefits. Similarly, the Phukot Karnali and Lower Arun projects, in collaboration with India’s NHPC, have the potential to significantly contribute to Nepal’s industrial development and clean energy goals.

Hydropower represents a critical pillar of India-Nepal economic interdependence. Nepal’s vast hydropower potential, estimated at 40,000 MW, provides India with a reliable source of electricity while generating revenue, employment, and infrastructure development in Nepal.

The 2024 long-term power trade agreement paves the way to strengthen energy cooperation between the two countries. Under this pact, India will import 10,000 MW of hydropower from Nepal over the next decade, supported by joint ventures for cross-border transmission lines such as the Dhalkebar-Muzaffarpur and New Butwal-Gorakhpur lines. These initiatives enhance regional energy trade, improve grid stability, and promote sustainable development through green energy. By providing Nepal access to international energy markets, boosting investment in hydropower, and facilitating economic growth, these projects create a mutually beneficial framework in which India diversifies its energy sources and enhances regional connectivity.

Trade and Economic Integration

While energy cooperation is moving in a positive direction, trade relations continue to face structural challenges. Nepal’s imports from India far exceed its exports, creating a significant trade deficit. In the first four months of FY 2025/26, Nepal imported goods worth Rs 337.92 billion from India, while exports totaled only Rs 76.50 billion, resulting in a deficit of Rs 261.41 billion. Non-tariff barriers, including BIS certification and phytosanitary requirements, along with bureaucratic delays, smuggling and underdeveloped domestic industries, hinder Nepal’s export competitiveness. Periodic restrictions on staple imports by India exacerbate inflation and encourage informal trade, further complicating bilateral commerce.

While energy cooperation is moving in a positive direction, trade relations continue to face structural challenges. Nepal’s imports from India far exceed its exports, creating a significant trade deficit.

Addressing these challenges requires a combination of domestic reforms in Nepal and cooperation from India. Streamlining customs procedures, resolving non-tariff barriers, and enhancing industrial competitiveness are essential. Recent amendments to the Treaty of Transit, which facilitate rail-based freight movement between Jogbani in India and Biratnagar in Nepal, demonstrate progress in improving cross-border connectivity and trade efficiency. Similar infrastructure projects—including the Jayanagar–Kurtha and Motihari–Amlekhgunj railways, highways, and petroleum pipelines—reduce transportation costs, strengthen supply chains and expand Nepal’s access to third-country markets.

The recent policy decision of the Indian central bank is likely to facilitate Indian investment in Nepal. The RBI now allows Indian banks to lend in Indian rupees to Nepalese entities, and Special Rupee Vostro Accounts (SRVAs) can be used for investments in corporate bonds and commercial papers. These measures strengthen liquidity, reduce dependency on foreign currencies and foster regional trade in INR.These policy measures are also likely to strengthen financial and investment linkages, fostering deeper economic integration and cooperation between the two countries.

Beyond traditional sectors, collaboration in organic farming, fintech, startups and digital payments can create new avenues for mutual economic growth. Initiatives like UPI-FonePay interoperability, cross-border fintech partnerships and Nepalese organic produce supply chains in India exemplify opportunities for sustainable and inclusive economic cooperation. Economic engagement should not merely focus on trade and investment; it must also foster inclusive growth, people-to-people connections, and regional prosperity.

Path Ahead

India-Nepal relations are at a crossroads. Traditional cultural, religious and defense-oriented links are no longer sufficient to sustain the relationship, particularly as younger generations of Nepalis look beyond India for education and employment. Security concerns will continue to guide India’s Nepal policy, but economic partnership must now take the center stage. By deepening hydropower cooperation, easing trade and financial transactions, promoting tourism, improving infrastructure and fostering collaboration in emerging sectors, both nations can forge a resilient, forward-looking relationship. Recent positive developments—including the easing of high-denomination Indian currency restrictions, expanded digital payment systems, transit liberalization and the 2024 long-term power trade pact—reflect the potential for a mutually beneficial trajectory. At the same time, a sustained dialogue to address outstanding border disputes and sensitivities will be essential to rebuilding trust. A continued focus on economic partnership, complemented by political stability and people-to-people connectivity, will ensure that Nepal-India relations not only endure but thrive in the changing regional and global landscape.

(The author is the Editor of Republica Nepal. This OpEd was first published in Republica on 23.12.2025).

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