Last week, India poured cold water on Nepal’s ambition of attracting foreign direct investment in the power sector, particularly export-oriented projects. Issuing the Guidelines on Cross Border Trade of Electricity last Monday, the Indian government said that only Nepal-based companies wholly owned by the Indian government or the public sector, or private companies with 51 percent or more Indian stake would be eligible to export power to India. This contradicts the Power Trade Agreement (PTA) signed between India and Nepal in October 2014 during Indian Prime Minister Narendra Modi’s visit to Nepal.

The PTA had eased a key bottleneck for attracting FDI to Nepal in export-oriented power projects, opening doors for expediting the power development process of many projects. But the new rules are replete with protectionist measures even in a sector such as energy in which India has a ballooning deficiency.

According to the new rules, companies owned or controlled by the Nepal government will be allowed to sell power in India upon obtaining a one-time approval from Indian authorities. This makes the Nepal Electricity Authority (NEA) and other projects owned or controlled by the government eligible to export power to the southern neighbour. While that may sound all right, the fact is that Nepali investment alone cannot tap the approximately 43,000 MW of the country’s hydro potential.

Other companies eyeing the Indian power market, however, can export power to India only “after obtaining the approval of the designated authority on case-to-case basis”, according to the guideline. This is designed to discourage foreign investors other than Indians in Nepal’s power sector.

This also goes against Modi’s much-touted emphasis on trade and connectivity with neighbours and his credentials as a pro-market and pro-business politician. While India has a history of putting in place protectionist measures to discourage exports from Nepal, including repeated use of tariff and non-tariff barriers to make Nepali exports expensive in India, many in Nepal had hoped that these sorts of measures would be a thing of the past under Modi.

Clearly the goal of the new guideline is to dictate power trade in New Delhi’s terms and to give undue advantage to Indian investments and companies. Ironically, Indian investment in Nepal’s hydro sector has a sullied reputation of promising but not delivering.

The Nepal government needs to raise this issue at the highest level. It can begin by raising the issue during the Joint Steering Committee meeting between the energy secretaries of the two countries slated to be held in January. Nepal should strongly object to India’s repeated use of these tactics to undermine Nepal’s economy.