No conversation about Nepal's foreign trade gets very far without arriving at India. In FY 2025/26, India absorbed 82% of Nepal's total merchandise exports and supplied Nepal with goods worth over Rs 1.2 trillion — more than half of everything Nepal imports. That relationship is governed by a specific set of treaties, tariff arrangements, and border infrastructure that most people never see, but that shape almost everything about what Nepal can sell, buy, and transport. Here's how it actually works in 2026.
Why India Is Nepal's #1 Trading Partner
Geography explains most of it — Nepal is landlocked, and India physically surrounds it on three sides, making Indian ports and highways the default route for almost anything entering or leaving Nepal, even goods ultimately headed elsewhere. But the relationship goes deeper than proximity. India supplies nearly all of Nepal's petroleum products, is the source of roughly a third of Nepal's foreign direct investment, and accounts for about a third of Nepal's overall trade in services. Add to that a shared open border, a currency peg between the Nepali and Indian rupee, and decades of treaty-based preferential access, and India's dominance becomes less a matter of choice and more a matter of structural inevitability.
The Nepal-India Trade Treaty — Key Provisions Explained
The bilateral trade relationship is anchored by the India-Nepal Treaty of Trade, alongside the Agreement of Cooperation to Control Unauthorized Trade first signed in 2009; both were automatically renewed in October 2023. The Treaty of Trade grants Nepal unilateral duty-free access to the Indian market for most goods of Nepali origin, a significant preferential advantage compared to most of India's other trading partners. Separately, the Treaty of Transit gives Nepal the right to move third-country trade through Indian territory via mutually agreed routes — essential for a landlocked country that needs access to seaports it doesn't have. The transit treaty's most recent revised version was signed in June 2023 for a seven-year term, with automatic renewal for further seven-year periods baked into the agreement itself. In late 2025, the two countries signed a Letter of Exchange amending the transit protocol to allow direct rail-based cargo movement along the Jogbani-Biratnagar link, with access to major corridors including Kolkata-Jogbani, Kolkata-Nautanwa (Sunauli), and Visakhapatnam-Nautanwa — a meaningful upgrade for exporters who previously depended more heavily on road transport.
What Nepal Exports to India (Soybean Oil, Agro-Products, Electricity)
Refined soybean oil dominates this list by a wide margin — Nepal imports crude edible oil (mostly from South American producers), refines it domestically, and exports the finished product to India under favourable tariff treatment. Beyond edible oil, cardamom and other spices, carpets, jute goods, cement clinker, and a growing volume of electricity round out the export basket. Electricity deserves special mention: it has gone from a negligible export category to a genuine growth story in just a few years, discussed in more detail below. What's notable — and a point several trade economists have flagged — is how concentrated this export profile has become. With edible oil and a narrow set of agro-products making up the bulk of shipments to a single market, any shift in Indian import policy carries outsized risk for Nepal's export earnings.
What Nepal Imports from India (Fuel, Vehicles, Machinery)
India supplies essentially all of Nepal's petroleum products — diesel, petrol, LPG, and aviation turbine fuel — making it the single most important line item in Nepal's import bill from any source. Beyond fuel, Indian imports span vehicles, industrial machinery, steel and iron products, cereals, pharmaceuticals, and a wide range of manufactured consumer goods. This breadth, combined with the sheer proximity and lower transport cost compared to overseas suppliers, is why India's share of Nepal's total imports has consistently sat well above 50% for years.
Nepal-India Electricity Trade — A Growing Export Category
This is arguably the most encouraging trend in the entire Nepal-India trade relationship. Nepal earned a record Rs 29.32 billion from electricity exports to India and Bangladesh in FY 2025/26, a 68% jump from the Rs 17.46 billion earned the previous year, as surplus hydropower generated during the monsoon season found buyers through the Indian Energy Exchange's day-ahead and real-time markets, plus a medium-term power sale agreement with India's NTPC Vidyut Vyapar Nigam. At the same time, Nepal's electricity imports (needed during the dry season when river flows drop) fell to Rs 10.56 billion from Rs 12.92 billion the year before. The result: a net electricity trade surplus of Rs 18.76 billion — a rare instance where Nepal is a net exporter rather than a chronic net importer.
Border Trade Points & Transit Facilities
Trade with India flows through a network of designated customs points along the open border, with Birgunj historically the single largest gateway by import value, complemented by other major crossings that connect to Indian rail and highway corridors. The 2025 transit protocol amendment specifically expanded rail-based freight options via the Jogbani-Biratnagar link, giving exporters and importers an alternative to congested road routes for bulk cargo. Nepal has also been in discussions with India to gain access to additional Indian seaports — including Dhamra in Odisha and Mundra in Gujarat — which would diversify Nepal's third-country trade routes beyond its traditional reliance on Kolkata port.
Challenges: Non-Tariff Barriers, Quality Standards, Documentation Delays
Duty-free access on paper doesn't always translate to friction-free trade in practice. Nepali exporters have periodically run into new Indian quality-certification requirements — steel utensil exports, for instance, were halted for a period after India began requiring quality certification for the raw materials used in such products. Nepal also continues to press India on removing quantitative export quotas that cap how much of certain Nepali products (vegetable ghee, acrylic yarn, copper products, zinc oxide) can enter the Indian market each year, arguing these caps sit awkwardly alongside a treaty built around free trade. On the Indian side, domestic industry groups have periodically lobbied their government to act against the rapid growth of Nepali edible-oil exports, a reminder that Nepal's biggest export category is also its most politically exposed.
Outlook for Nepal-India Trade
The relationship is deepening rather than diversifying, at least for now — the rail transit amendment, growing electricity trade, and periodic intergovernmental committee meetings on trade and transit all point toward closer integration rather than a pivot away from India. The open question is whether Nepal can convert that deepening relationship into more balanced trade, particularly by scaling electricity exports and reducing its almost total dependence on refined edible oil as its flagship export category. For now, the fundamentals suggest India will remain Nepal's dominant trading partner for the foreseeable future, for better and for worse.
FAQs
What percentage of Nepal's exports go to India?
Approximately 82% of Nepal's total merchandise exports went to India in FY 2025/26.
Does Nepal have duty-free access to India?
Yes, for most goods of Nepali origin, under the India-Nepal Treaty of Trade — though quantitative quotas apply to a small number of specific products.
Is Nepal's trade deficit with India improving?
Rising electricity exports have helped narrow the gap somewhat, but the overall bilateral deficit with India remains the largest component of Nepal's total trade deficit.
How does Nepal access ports for third-country trade?
Through the India-Nepal Treaty of Transit, which grants Nepal transit rights through Indian territory to reach seaports, primarily Kolkata, with discussions ongoing to add Dhamra and Mundra ports.
Discussion