India, Nepal Ink Pact to Step Up Trade Ties

Transit Amended: India-Nepal Connectivity Gets a Rail Upgrade

On November 14, 2025, India and Nepal signed an amendment to their Treaty of Transit, making way for seamless rail-based freight movement along major corridors including Kolkata-Jogbani and Kolkata-Nautanwa (Sunauli). This development signifies Nepal’s growing reliance on India's logistical infrastructure to access global markets. Yet, the implications extend beyond infrastructure — they touch upon geopolitics, trade asymmetry, and regional influence. Notably, India constitutes 64.1% of Nepal’s total trade, with bilateral trade valued at an impressive $8.85 billion in FY 2022-23.

Why This Agreement Is a Departure from the Norm

At first glance, the amendment to the Treaty of Transit appears as another chapter in the India-Nepal economic partnership. However, its real significance lies in the shift in modality: prioritizing multimodal connectivity. The addition of rail-based freight corridors is a conscious effort to move beyond road-centric logistics, long plagued by inefficiencies and delays.

Previously, Nepal’s trade routes relied almost exclusively on Indian road infrastructure, often leading to congestion at checkpoints like Birgunj and Sunauli. The current amendment specifically incorporates railways into Nepal's trade channels, a strategic improvement backed by infrastructure upgrades at Integrated Check Posts (ICPs). This marks a move towards alignment with international trade best practices, where multimodal networks dominate for their cost-effectiveness and reliability. What was once a cumbersome logistical bottleneck could now evolve into a streamlined process.

This policy also hints at India's increasing strategic intent to counter Nepal’s steady tilt towards Chinese investments, particularly in infrastructure through agreements under the Belt and Road Initiative (BRI).

The Institutional Machinery: Old Framework, New Goals

The Treaty of Transit was originally part of the 1950 Treaty of Peace and Friendship. Under Article VII of the Peace and Friendship Treaty, Nepal secured access to Indian ports for its third-country trade. Despite this provision, implementation has largely been restrictive due to bureaucratic inertia.

The amendment draws directly on the framework of this treaty but scales it with more expansive freedom. Under it, Nepal enjoys access to Indian rail-bound freight corridors originating from Kolkata and Visakhapatnam. Both these port cities will now more effectively cater to Nepal's imports and exports, addressing Nepal's historical grievances over limited port access. Importantly, improved access to these corridors will supplement existing road links to border points like Jogbani and Nautanwa.

Operational decisions will likely rely on India's Ministry of Commerce and Industry, in coordination with Indian Railways and the Nepal Intermodal Transport Development Board. Yet, as past experiences in Indo-Nepal agreements show, institutional coordination is no guarantee of smooth execution on the ground.

The Trade Numbers: Promises vs Reality

The Government of India projects that this amendment will enhance Nepal’s trade efficiency and reduce transaction costs. But the groundwork raises questions.

• Nepal’s exports to India remain minuscule at $839.62 million in FY 2022-23, a mere 9.5% of the total bilateral trade. In comparison, India exported goods worth $8.015 billion to Nepal, indicating a trade imbalance that this rail initiative alone cannot rectify.
• FDI paints a similar picture. Indian companies account for 33.5% of Nepal’s total FDI; however, Nepal’s manufacturing and service sectors still struggle to make meaningful inroads into Indian markets despite geographical proximity.
• While the multimodal integration aims to connect Nepal’s businesses with global markets through Indian ports, the overwhelming dependence on a single trade partner — India — creates vulnerability. India constitutes 64.1% of Nepal’s overall trade, exposing Nepal to supply chain shocks influenced by India's domestic conditions.

Moreover, the domestic capacities of these new rail corridors must match the volume increases envisaged. India’s own logistical challenges, including saturation at ports like Kolkata, could negate the anticipated benefits if capacity enhancements do not keep pace with demand.

The Real Test: Implementation Risks and Regional Politics

The questions nobody is asking are the most telling. Who ensures that infrastructural upgrades like containerized rail routes or regional ICP expansion remain consistent? Will bureaucratic coordination between Delhi, state governments bordering Nepal (like Bihar and West Bengal), and agencies like Nepal’s National Planning Commission operate as seamlessly as promised? History suggests skepticism is justified.

India’s attempts to bolster leverage with logistical offers haven’t always yielded smooth outcomes. Consider the 2015 "economic blockade" during Nepal’s constitutional crisis, which strained public sentiment in Kathmandu. Perceptions of Indian high-handedness or interference still loom large. Nepal has sought to diversify its trade dependencies, engaging China for direct trade agreements and attempting to utilize Beijing-funded infrastructure like the Rasuwagadhi-Kerung border.

The amended treaty is undoubtedly a counter-move. It reaffirms Nepal’s inescapable proximity to Indian infrastructure, aiming to make India the permanent first choice. But this assumes that geopolitics will not interfere in trade flows — a risky assumption given recent history.

An International Parallel: China and Mongolia

A useful comparator here is China’s transit policy towards Mongolia, another landlocked neighbor heavily reliant on external routes. As of 2014, Beijing upgraded its rail network for Mongolian goods to use Chinese ports for third-country trade. However, Mongolia’s excessive trade dependence on China — nearly 90% — reduced its economic sovereignty, creating a negotiation asymmetry Beijing has exploited.

India’s approach towards Nepal walks a similar tightrope. While the extended rail routes improve access on paper, Nepal’s overdependence on India may exacerbate existing economic vulnerabilities, as seen in Mongolia’s case. Balancing connectivity and autonomy remains a delicate exercise.

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