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Water in Nepal: Reserve of latent potential

Over six thousand rivers and rivulets pass through the land-locked country Nepal, making it the third richest country in water resources. The abundance of water can be utilized to generate hydropower. This will not only assist Nepal in mitigating energy scarcity within the country but also replenish Nepal’s treasury which can be further utilized for development and growth. Using Nepal as a case study, this paper attempts to demonstrate that if the development of a natural resource is strategically conducted, it proves to be a boon for economic growth.


The availability of natural resources alone, cannot be a determinant of economic benefit. There are social, economic, and political factors that are strongly correlated with the utilization of resources which play an important role in determining whether the recourse is a boon or a bane for the economy. Nepal’s decisions with regards to the past hydropower projects are an epitome of negligence and ignorance which have adversely affected the economy. If those decisions were more informed and strategic, Nepal’s economy would have improved significantly.


Nepal has the capacity to develop more than 83,000 MW of hydroelectricity. Only 350 MW is currently demanded by the country, suggesting that there is tremendous potential for trade and income generation. However, the current capacity of the Nepali hydropower stations is only 250 MW, 0.3% of its total capability. The deficit in energy supply is compensated by importing petroleum and over usage of fuelwood. Not only is the water underutilized, but there are other costs incurred to redress this underutilization. Petroleum imports alone exhaust a large chunk of Nepal’s export earnings (40% of export in 1999), draining the government finances and making it environmentally and financially unsustainable. Moreover, loss of forest area due to overutilization of fuelwood is strongly correlated with incidents of soil erosion and landslides causing crop productivity to rapidly decline. The negative spill-overs associated with not utilizing the available natural resources efficiently can be significantly large.

Nepal’s underutilization of water is largely due to the lack of investment. Nepal falls under the category of ‘low-income countries’ and is short of financial resources and technical expertise to develop mega hydropower projects. Most of the existing treaties are partnered with India, but they have not been conducive for Nepal’s economy.


As Nepal claims, India exercises soft power over Nepal, taking undue advantage of this power. Most of the agreements are skewed towards India’s benefit leaving Nepal with minimal bargaining power. The Mahakali Treaty (1996), The Koshi Agreement of (1954), or The Gandak Agreement of (1959) are a few amongst many of the treaties signed between both the countries regarding water resources. All these treaties are marked by inequality infringing upon Nepal’s sovereignty. For instance, under the Kosi and the Gandak treaty, India possesses the ‘right’ to control water in the Nepali territory, such that fishing rights and agricultural water usage can be acquired only after the Indian authorities give permission for it. Nepal was not only denied the benefits obtained from these projects but also deprived of its own resources, depleting the overall productivity in other industries. India, therefore, became the hydro-hegemon, achieving control of the water resources in Nepal, enabled by the exploitation of existing power asymmetries. Due to unpleasant past experiences, Nepal is hesitant to cooperate with India, obstructing prospective investments and growth. So, while India resolves the funding problem of these hydroelectric projects in Nepal, Nepal’s bargaining power in the international political arena proves to be an essential determinant of whether water could be utilized for Nepal’s benefit or not.    

Political Interventions: 

Domestic and international politics contributed towards the failure of developing a strong hydropower system for Nepal. Nepal is bounded on the north by China (the Tibetan region) and on the south, east, and west by India. Both India and China are fast-growing economies in  dire need of energy and Nepal is one of the most feasible and cheapest options for them. Nepal’s reliance upon India is beginning to falter, which is imposing security threats to India. Despite K.P. Oli’s effort to keep relations between India and Nepal independent of the relations between China and Nepal, India’s discomfort with Chinese involvement has led to obstructions in various treaties signed between Nepal and China. For instance, Nepal had to suspend a 1.5 billion dollar agreement with China regarding the West Seti hydropower project because of India’s insecurities. This political dynamic between India and China has a significant influence on Nepal’s decisions. Because of the lack of proper governance, insufficient funds, and sabotages by other more powerful countries, Nepal’s hydropower production remains underdeveloped. Thereby, politics plays a noteworthy role in maintaining natural resources and making decisions involving them.

Limited human capital:

Apart from limitations with regards to finance and politics, these treaties were initially agreed to because of the lack of awareness and information within the country. All these political interventions could have been tackled if the decision makers were well informed. With minimal knowledge about international water laws, there weren’t enough engineers or lawyers that could guide these projects or draft proposals to represent Nepal’s interest. The local population was  unaware to instigate scrutiny and the government was  economically weak to contest India’s proposal. India took advantage of Nepal’s vulnerability, and Nepal agreed to comply with its terms. Lack of education and expertise cost Nepal its political and economic freedom. Hence, it is not only the development of physical capital but also the advancement of human capital that establishes how natural resources are allocated and put to use for economic growth.  


It is evident that Nepal’s water resources have not been strategically utilized to initiate growth within the country. Instead, natural resources and disputes based on them have caused a lot of political instability, financial exhaustion, violence, and drudgery to Nepal. However, in an ideal situation, which is devoid of political intervention and power asymmetry, the results would have been quite revolutionary. A research paper by Gyan Pradhan, reckoned a computable general equilibrium (CGE) model to understand the impact of a medium-scale hydropower project over ten years, on the macroeconomy. A CGE analysis helps to analyze the effect of a particular policy/project on different sectoral levels such as production, employment, trade, etc.  A medium-scale hydropower project typically suggests that it has the capacity to produce 5MW-50 MW of hydro energy. As per the CGE results, when the entire project is financed by private foreign capital, which is mostly the case in the context of Nepal, the real GDP increases significantly. The assumption about foreign capital takes into consideration Nepal’s financial constraints, implicitly accounting for the soft power influence. Nevertheless, the demand for labor rises, the wage rates increase and the equilibrium cost of energy decreases within the next ten years, resulting in overall economic growth. The export channel is also estimated to prosper. 10,000 MW of electricity export is estimated to engender 0.5 billion dollars annually, assuming a royalty of one cent per KW.  The revenue can be further invested in projects yielding high returns (education, health, infrastructure, etc) and the credit markets can ‘turn foreign exchange reserves into credit for the private sector’ to mitigate inflation and perpetuate sustained growth. A lot of problems relating to low bargaining power, limited skilled labor, poverty, or underutilization can be attenuated if the hydroelectricity projects are rightly executed. ‘Prudent macroeconomic management is crucial’ . With proper utilization and management, hydropower solely can accelerate growth in the economy bringing forth revenue, increasing the living standards, and reducing unemployment.


Despite being a water resource-rich country, Nepal  has not been able to employ its resources efficiently. The availability of a natural resource is definitely an added bonus for Nepal but the method of utilization is what matters. Strategic decisions need to be made that maintain the balance between nature and economic benefits. The miracles of nature are beyond human understanding and they need to be conserved for long term growth. Development at the cost of the environment is a myopic approach to growth and in the long run, adversely affects development.  Furthermore, any sort of development or dialogues between the representatives of interested countries, regarding a particular natural resource, strongly affects the locals residing in proximity  to that resource. The costs of poverty, unemployment, and lost productivity outweigh the economic benefits if all micro aspects are not taken into consideration and minutely studied. There are many factors that contribute towards resource management and without strategic planning and effective execution, long term economic growth remains a far-fetched reality.

Vanshika Shah is a third year undergraduate student at Ashoka University pursuing a bachelor’s degree in Economics and a minor in International Relations.

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