India–Nepal Economic Integration: Existing Constraints and Way Forward

Abstract

India and Nepal share long-standing cultural, historical and economic ties, formalised under the 1950 Treaty of Peace and Friendship. Despite close relations, a persistent irritant in their economic engagement is Nepal’s widening trade deficit with India. While often attributed to treaty provisions, this article, drawing on extensive data analysis and key informant interviews, argues that the deficit is primarily a reflection of Nepal’s structural supply-side constraints rather than India-specific factors. Nepal’s exports have steadily weakened as industrial growth has stagnated since the mid-1990s, while imports have expanded rapidly, fuelled by rising remittance-driven incomes that now account for nearly a quarter of its GDP. The contraction of manufacturing has reduced export competitiveness, even as import demand has accelerated, leading to a sustained external imbalance. Addressing this challenge requires a forward-looking strategy that prioritises investment in Nepal’s productive sectors, upgrading trade infrastructure, fostering cross-border value chains and enhancing bilateral investment cooperation.