Assessing the Geopolitical and Economic Risks of Nepal's Political Unrest for Regional Investors

The political turmoil in Nepal has escalated into a critical juncture for regional stability and cross-border economic dynamics. With Prime Minister KP Sharma Oli's resignation in September 2025 amid mass protests, the country faces a perfect storm of institutional fragility, disrupted trade, and shifting geopolitical alignments. For investors, the implications are stark: Nepal's instability is not an isolated crisis but a catalyst for broader economic spillovers across South Asia, particularly for India, and a potential accelerant for China's strategic ambitions.

The Economic Toll of Political Volatility

Nepal's political instability has directly disrupted its trade lifelines. Major border crossings with India, including Raxaul-Birgunj and Sunauli-Bhairahawa, have experienced prolonged shutdowns, stalling the flow of essential goods like petroleum, machinery, and food itemsNepal's Political Turmoil Sparks Economic Concerns for India^[1]. India, which accounts for over 63% of Nepal's total trade volume, exported $7.32 billion worth of goods to Nepal in fiscal year 2025, while importing $1.2 billion in returnNepal's Political Turmoil Sparks Economic Concerns for India^[1]. The reliance on road transport—already constrained by inadequate infrastructure—has made cross-border commerce particularly vulnerable to administrative delays and protest-driven blockadesNepal's Political Turmoil Sparks Economic Concerns for India^[1].

For foreign investors, the uncertainty is compounded by Nepal's institutional fragility. Over the past decade, the country has seen 14 different governments, averaging one every 14 monthsHow FDI Can Impact Business Growth in Nepal 2025?^[2]. This political churn undermines long-term policy continuity, deterring capital inflows in sectors like hydropower, manufacturing, and tourism. According to a report by the Heritage Foundation, Nepal's economic freedom score in 2025 remains below both global and regional averages, with weak rule of law and high public debt further eroding investor confidenceNepal - Index of Economic Freedom^[4].

Geopolitical Crosscurrents: India's Dilemma and China's Opportunity

The geopolitical stakes are equally high. India's “Neighbourhood First” policy has long positioned Nepal as a strategic partner, with New Delhi providing zero-tariff access to Nepali goods and funding critical infrastructure projects. However, the current crisis has exposed Nepal's deep dependency on Indian energy and trade, with 64% of its external commerce flowing through IndiaTrade lifeline under strain as Nepal's crisis threatens ties with India^[5]. This interdependence, while economically beneficial, also creates vulnerabilities. As protests spread to other cities, India faces a dilemma: intervene to stabilize trade and security or risk further inflaming tensions while ceding influence to Beijing.

China, meanwhile, is capitalizing on the vacuum. Through the Belt and Road Initiative (BRI), Beijing has funded projects like the Upper Trishuli-1 Hydropower Plant and Pokhara International Airport, positioning Nepal as a “land-linked” hub for Chinese trade and connectivityChina-Nepal's Relations: Dynamics and Geopolitics^[3]. A 2024 framework agreement has expanded Nepal's access to Chinese ports for third-country trade, diversifying its economic ties beyond IndiaNepal's Political Turmoil Sparks Economic Concerns for India^[1]. While Nepal officially adheres to a non-aligned “Zone of Peace” policy, its geographic proximity to China and India makes it a contested buffer state. Analysts warn that prolonged instability could erode India's strategic edge, allowing China to deepen its footprint in energy and infrastructureNepal's September Shock: How the Crisis Unfolded and ...^[6].

Investor Risks and the Path Forward

For regional investors, the risks are multifaceted. First, the delay or cancellation of cross-border projects—such as the Dododhara-Bareilly and Inaruwa-Purnea transmission lines—threatens India's renewable energy goals and Nepal's economic growthNepal's Political Turmoil Sparks Economic Concerns for India^[1]. Second, the erosion of institutional quality (INQ) in Nepal amplifies economic policy uncertainty (EPU), a well-documented deterrent to FDITrade lifeline under strain as Nepal's crisis threatens ties with India^[5]. Academic research underscores that robust legal and regulatory frameworks are essential to mitigate EPU's negative effects on capital flowsChina-Nepal's Relations: Dynamics and Geopolitics^[3].

Yet, opportunities persist. Nepal's youthful demographic and strategic location offer long-term potential in sectors like digital trade and clean energy. Investors with a long horizon may find value in partnerships that prioritize political risk mitigation, such as diversified supply chains or joint ventures with local stakeholders.

Conclusion

Nepal's political unrest is a microcosm of broader South Asian challenges: fragile institutions, geopolitical rivalry, and the fragility of cross-border economic ties. For investors, the lesson is clear: stability in Nepal is not just a domestic issue but a regional imperative. As India recalibrates its strategy and China advances its BRI agenda, the ability of Kathmandu to restore governance continuity and institutional credibility will determine whether Nepal remains a risk multiplier or a catalyst for inclusive growth.