India–Nepal trade & transit treaties (and the 1989 blockade)

Alongside the 1950 Peace and Friendship Treaty, India and Nepal concluded a Treaty of Trade and Commerce governing bilateral trade and Nepal's trade through Indian territory and ports. Successor treaties followed in 1960 and 1971; in 1978 trade and transit were split into two separate treaties — a long-standing Nepali demand, since transit is a right of landlocked states while trade is reciprocal commerce. Nepal's consistent positions — transit as a permanent right rather than a periodically renegotiable favour, separation of transit from trade, and more port and route options — have been conceded incrementally: separate treaties since 1978, longer terms and automatic renewal since the 1990s, Visakhapatnam port access in 2016, and inland-waterway access in the 2023 treaty.

The 1989 blockade is the regime's defining trauma. When the 1978-era treaties expired in 1989 amid a dispute over whether to renew one combined or two separate treaties — and amid Indian displeasure at Nepal's 1988 purchase of Chinese anti-aircraft guns, a breach in Delhi's reading of the 1950 treaty's secret arms clause — Rajiv Gandhi's government declined renewal and closed most border trade points, leaving only two of roughly 15–17 crossings open (counts vary by source). Landlocked Nepal suffered acute shortages of fuel, salt and medicine for roughly 13–15 months until April 1990; Kathmandu distributed subsidised firewood and electric rice cookers and trucked fuel from Bangladesh and Tibet. The crisis fed the 1990 People's Movement; after the Panchayat system fell, interim PM Krishna Prasad Bhattarai restored trade and transit ties in June 1990 — a settlement criticised within Nepal for, among other things, treating Indian fuel stocks as Nepal's own.

The blockade backfired politically: it delegitimised the Panchayat monarchy, energised the democracy movement, and taught a generation of Nepali politicians that supply diversification toward China is a security imperative — a lesson re-learned in the 2015–16 border obstruction during the Madhes movement (often called the 'second blockade'; India denied imposing it), which directly produced the 2016 transit agreements with China and momentum for BRI membership. The trade treaty's economics have their own drama: the 1996 liberalisation gave Nepali manufactures duty-free access on highly liberal rules of origin and briefly made Nepal a re-export platform into India — an export boom in vanaspati ghee, copper and zinc oxide — until India tightened rules of origin and added quotas in the 2002 renewal. Since then Nepal's exports have stagnated while imports ballooned.

The scale of dependence is stark. In Indian FY 2024-25, India's exports to Nepal were $7,334.87 million against Nepal's exports to India of $1,201.48 million — total trade of $8,536.35 million, about 63% of Nepal's total trade; Nepal's own FY 2022-23 figures show imports from India of roughly Rs 1 trillion against exports of Rs 106.68 billion, a roughly 10:1 imbalance. Economists in Kathmandu now criticise the very feature once celebrated — automatic renewal — because it removes the periodic forcing-point for renegotiation: the November 2023 auto-renewal passed without addressing duty-free access for Indian farm products, rules-of-origin simplification, or anti-dumping duties on jute. Companion arrangements round out the regime: the 2004 Rail Services Agreement (liberalised by a June 2021 letter of exchange) and the Motihari–Amlekhgunj petroleum pipeline of 2019.