The Economic Costs of Nepal's Open Border with India: A Case Study on Smuggling

Nirmal Gurung

No q4vwt_v1, SocArXiv from Center for Open Science

Abstract: The border between Nepal and India, which was opened in 1950 by the Treaty of Peace and Friendship, has created unprecedented conditions for developing cultural and social ties between the countries. However, the open border has also led to severe negative consequences for the national economy of Nepal. This research aims to discuss the effects of smuggling through the 1,880 km border and analyse the situation in the context of the foreign trade deficit and the deteriorating economic situation in the country. Based on the data presented by the study, it is possible to draw the conclusion that smuggling contributes significantly to the trade deficit between Nepal and India. Smuggling of gold, drugs, agricultural products, and people constitutes a substantial part of trade between the countries. It is reported that 42.5% of the officially recorded trade between Nepal and India is smuggling, which results in a loss of 33.5 billion rupees for the Nepalese economy. In addition to the loss from unofficial trade, the state loses 3.58 billion rupees in duty and 3.71 billion rupees in value-added tax. The article also reports that the trade deficit in Nepal this year amounts to NPR 180 billion, of which a considerable part is caused by smuggling. Thus, the current situation in which Nepal allows free trade between the countries is extremely disadvantageous for the national economy. The study provides multiple examples that prove the severity of the problem, including the cases of Badhaiyatal and Bardibas, where the largest seizures of marijuana, gold, and peas in recent years were registered. According to official data, 30,000 people are trafficked illegally into Nepal every year, resulting in significant losses for the economy. The causes of the problem include the initial policy of open borders, insufficient control mechanisms, corruption, and taxation issues. However, the authors of the article believe that a smart border is necessary to ensure the prosperity of the Nepalese economy through trade with India.

Date: 2026-09-19
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:q4vwt_v1

DOI: 10.31235/osf.io/q4vwt_v1

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