India Diplomacy 
India-Nepal Relations in the Contemporary Geopolitical Context

RANJIT RAE/ NatStrat | 28/01/2024

Courtesy: NatStrat

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Nepal is increasingly buffeted by geopolitical cross currents. With an economy only recovering slowly from the COVID 19 pandemic, Nepal was hit by the soaring oil, fertilizer and food prices following the Russia-Ukraine conflict. Thereafter the possibility of the Israel-Palestine conflict expanding to the wider region has also led to fears of a spurt in oil prices.

However, it is the ongoing US-China contestation for global influence and the India-China tensions that pose the biggest challenge for Nepal.

Nepal-China-US Interplay

The public US-China spat in Nepal before the adoption by Nepalese Parliament of the USD 500 million Millennium Challenge Corporation (MCC) grant for road maintenance and construction of transmission lines is only a precursor of things to come. The Nepalese political class is deeply polarised. The Communists, egged on by China, felt that the MCC was part of the Indo-Pacific Strategy that was aimed against China. The Nepali Congress and other parties supported the grant on the grounds that it contributed to Nepal’s economic development. A compromise was finally worked out with a declaratory statement in Parliament that enabled adoption of the MCC. However, another proposal of the US, the State Partnership Project (SPP) that involved cooperation between the Nepalese Army and the Utah National Guards primarily for humanitarian assistance and disaster management was rejected on the grounds that Nepal cannot join any military pact despite the US stating categorically that the SPP did not imply any military alliance.

Following the adoption of the MCC compact, the US has stepped up its activities in Nepal. A series of high-level visits from the US have taken place in recent months. These visits include the Deputy Secretary of State Victoria Nuland, the USAID Administrator Samantha Power, the Under Secretary for Human Rights and Tibetan Affairs and several other officials, also from the military. The CIA Director too had wished to pay a visit but this was politely declined by the Nepalese. The Nepalese Foreign Minister has paid an official visit to Washington. Though Nepal has endorsed the MCC pact, it remains opposed to the Indo-Pacific Strategy.

Meanwhile, Nepal, which under Oli was an enthusiastic supporter of the Chinese Belt and Road Initiative, (BRI) has seen little forward movement in terms of project implementation. None of the nine flagship connectivity projects, including the Trans Himalayan railway have seen significant progress.

No framework plan for BRI was finalised during PM Prachanda’s recent visit to China, 23-30 September 2023. Similarly, no consensus has emerged on modalities for financing these big-ticket projects with Nepal insisting of grants or concessional loans (a salutary lesson learnt from the Sri Lanka economic and debt crisis) which the Chinese are reluctant to agree to.

A controversy has also arisen within Nepal on whether or not the Pokhara International Airport that was commissioned recently is within the ambit of the BRI; the Chinese insist that it is and Nepal disagrees. This is not a simple matter since the airport was built on the basis of a financial package comprising concessional and commercial Chinese loans that could become a precedent for future BRI projects. As of now, the airport appears to be a white elephant with few, if any, international flights. Nepal’s efforts to persuade the Chinese to convert loans for the project into a grant also do not appear to have borne any fruit.

Of the many Chinese initiatives, Nepal has signed on to the BRI and the Global Development Initiative, though it has so far not endorsed the Chinese sponsored Global Security Initiative and Global Civilizational Initiative, even though the then President of Nepal Bidya Devi Bhandari did participate in a GSI event organised by China in September 2022. The Nepalese and Chinese Communist parties, particularly under PM Oli had significantly stepped-up engagement with an MOU signed between them prior to President Xi Jinping’s visit to Nepal in October 2019. However, efforts by China for a united communist front in Nepal have not been durable though some, albeit temporary success was achieved with the formation of the Nepalese Communist Party (NCP) following a merger of the Communist Party of Nepal (Unified Marxist–Leninist) and Maoist Centre in 2018. This was short-lived; the merger collapsed after three years due to internal contradictions and the poor interpersonal relationship between the top leaders. China, however, is a long-term player and their strategic goal for a united Communist front in Nepal will remain, particularly in light of growing US involvement.

One less commented development during Prachanda’s recent visit to Nepal relates to Taiwan.  For the first time the Nepalese Government has explicitly expanded its commitment to the ‘One China’ policy to include Taiwan. The Joint Statement issued at the end of the visit stated that “Recognizing that the Government of the People’s Republic of China is the sole legal Government representing the whole of China, and Taiwan is an inalienable part of China’s territory, the Nepali side is against “Taiwan independence.”

India-Nepal Relations

The poor state of the India-China relationship has also impacted Nepal. India’s refusal to buy power from Nepalese projects that have a Chinese footprint has led to some resentment within Nepal. Several articles have appeared suggesting that India wants to corner the entire hydro-generation capacity of Nepal. During Prachanda’s recent visit to China, the two countries have agreed to establish a Trans-Himalayan transmission line, a means for Nepal to diversify its power exports to countries other than India.

On balance however, bilateral India-Nepal relations appear to be progressing well. Contrary to the usual practice of raising all bilateral issues, during his official India visit from 31 May to 3 June 2023, Prime Minister Pushpa Kamal Dahal ‘Prachanda’, chose a novel, more productive approach. Instead of focussing on a long litany of complaints and irritants in the relationship such as the 1950 Treaty of Peace and Friendship, the non-acceptance of the Eminent Person’s Report, the boundary dispute, and the question of Gurkha recruitment under the Agniveer Scheme, Prachanda decided to concentrate on the substantive, economic dimension of bilateral ties. This gelled with India’s own priorities under the Neighbourhood First policy of connectivity and development. 

Connectivity Projects

Significant progress was made towards developing the region as an open, interconnected, interdependent and mutually beneficial economic space where each country could exploit its own comparative advantage to the fullest potential, thereby benefitting itself and indeed, the wider region. Projects including trans-border railway lines, the Raxaul-Kathmandu railway, Integrated Check-Posts for enhanced logistical connectivity, transmission lines, oil and gas pipelines, and digital connectivity with the extension of India’s digital financial sub-stack including the Universal Payments Interface (UPI) to the sub-region made steady progress. Problems remain about flight clearances for the new ADB financed, Chinese constructed Lumbini Airport at Bhairawaha that receives few if any international flights. It would have been more prudent for Nepal to have sought India’s concurrence in advance of the construction since it is close to the Indian border and most flights landing or taking off immediately exit/enter Indian airspace.

Nevertheless, India should try and resolve this issue in a practical manner since it will strengthen the Buddhist Circuit and encourage tourism in both countries, failing which this airport would become another white elephant that Nepal can ill afford.

Hydropower Cooperation

Perhaps the most far-reaching developments relate to cooperation in the field of hydro-power. The vision statement adopted in April 2022 was further fleshed out with major initiatives during PM Prachanda’s recent India visit.

India agreed to purchase 10000 MW of power from Nepal over a ten-year period. Already, India is purchasing almost 650 MW of power of which over 500 MW is sold in the energy market and the rest through a longer-term power purchase agreement (PPA).

Last year alone Nepal sold USD 800 million worth of power during the wet monsoon season. This figure will only increase with time.

Nepal is not only permitted to sell power in the day ahead market but on the spot/real time market as well, thereby reaping higher peaking power prices. Several Indian promoted hydro-power projects are moving ahead. The 900 MW Arun III project together with two other projects on the Arun River, the 669 MW Lower Arun and 490 MW Arun IV are being developed by Indian PSU Satluj Jal Vikas Nigam. India’s NHPC will also develop the West Seti (750 MW) and Seti River-6 (450 MW) and Phukot Karnali 480 MW projects, the last in cooperation with Nepal’s Vidyut Utpadan Company Ltd (VUCL).

Unfortunately, the 900 MW Upper Karnali Project promoted by GMR appears to be in a limbo with efforts by the private sector company to secure a strategic investor not successful thus far. Fortunately, some of the problems relating to the sale of GMR power through India to Bangladesh have been resolved; this would imply some progress towards the finalization of a PPA, essential for raising debt to finance the project. Though agreed at the level of the Prime Ministers, the adoption of the detailed project report (DPR) for the massive 6000 MW + Pancheshwar Multipurpose Project has not been completed within the three-month deadline. With political will and a policy of give and take, the remaining differences over water sharing and cost/benefits of the project should be satisfactorily resolved. The project should be viewed strategically; it will bring about a fundamental transformation in the economies of the less developed far western region of Nepal and Uttarakhand’s Kumaon region.

The long pending Sapt Koshi High Dam project, essential to tame the ‘River of Sorrow’ is seeing a new lease of life with the agreement between the two countries to expedite studies that would enable the completion of the DPR. However, a lot of ground work would be required, particularly to persuade the local inhabitants of the area of the benefits that would potentially flow from the project.

Finally, India’s willingness to enable export of Nepalese power to Bangladesh through India’s transmission grid opens up significant new prospects for the development of a sub-regional electricity grid that will benefit all countries. Already, an agreement of sale of 40 MW of Nepalese power to Bangladesh has been finalised, though the implementation framework needs to be fleshed out. While cooperation in hydropower remains a primary goal of both countries, it is critical to factor in environmental and climate change considerations in the Himalayan region, particularly in light of the recent Glacial lake outburst flood (GLOF) outburst in Sikkim that led to the destruction of the dam of the Teesta III project and adversely affected several downstream projects.

Political Issues

Though political issues did not form a salient part of Prime Minister Prachanda’s visit to India, there are several issues that on balance would be preferable to resolve, sooner rather than allow them to fester.

The question of Gurkha recruitment to the Indian Army is a sensitive issue with strategic implications. India has over 30,000 Nepalese servicemen in her Army. Pension payments are made to some 1,25,000 Gurkha retirees in Nepal adding up to 2% of Nepal’s GDP. With the new Agniveer Scheme, all Gurkha recruitment into the Indian Army has ended. The Nepalese Government is fearful of re-introducing individuals well-trained in weaponry back into society after their four-year tenure of an Agniveer ends, given the historical backdrop of the violent Maoist insurgency. A consequence of this impasse is disturbing reports of several Nepalese joining Russian mercenary forces as well as the Ukrainian Army and potentially facing each other in the Russia-Ukraine conflict. There are also reports that China is interested in recruiting Nepalese Gurkhas for providing security to their projects in Nepal as well as Pakistan. India should engage in urgent discussions with the Nepalese authorities to find a mutually satisfactory resolution of the issue of Gurkha recruitment.

It is unlikely that the Agniveer scheme will be amended solely for the Nepalese, but at the very least, facilities offered to Indian Agniveers post-retirement in terms of alternative avenues of employment, should be extended to the Nepalese as well.

The Boundary question has become extremely complicated due to parliamentary endorsement by a two-thirds majority of Nepal’s unilateral expanded claims in the sensitive areas near the India-Tibet border in Uttarakhand. It is impossible for India to accept this claim that has been raised some 205 years after the Treaty of Sugauli was signed between Nepal and the British East India Company. The only dispute that India has accepted in this sector relates to the limited territory of Kalapani. Nevertheless, eventually, some bilateral talks would need to be held; to begin with, perhaps, talks about laying the ground rules for discussions, could be the way forward.

The Eminent Persons Group (EPG) report for all practical purposes is moribund but discussions on the key issue in the Report, namely the 1950 Treaty of Peace and Friendship between the two countries should resume expeditiously. India is publicly committed to considering Nepalese proposals on the matter; we have successfully renegotiated the 1949 Treaty with Bhutan and there is no reason why the 1950 Treaty cannot be successfully updated for mutual benefit. The Foreign Secretary-level mechanism should be convened to begin the dialogue.


Despite some political differences, overall, India-Nepal relations, focussed on economic development and mutual prosperity are strong and expanding. Nepal’s multiparty democracy and democratic institutions such as the media and judiciary are robust, though there is some disenchantment with domestic political processes and widespread corruption and the inability of the ruling class to fulfil the aspirations, especially of the young Nepalese. New political forces such as the Rashtriya Swatantra Party, comprising young, educated and charismatic leaders, are emerging. Similarly, those forces, such as the royalists that felt left out following the adoption of the new Constitution in 2015 are reasserting themselves.A worrying development relates to several instances of tension between diverse religious and ethnic communities. This is something new. Incidents of Hindu-Muslim tensions, especially in the Terai, as well as between Hindus and some Janjatis in Dharan, can potentially destroy social harmony. Fortunately, all political parties have condemned such incidents and the authorities have clamped down hard and are taking steps to prevent their recurrence.

It is in India’s interest for peace and stability to prevail in Nepal. Conflict and disharmony can make Nepal vulnerable to external forces that may be inimical to both Nepal and India, as we have experienced in the past. The new Constitution of Nepal was adopted after long, violent struggles. Reopening core elements that have been agreed upon could potentially, destabilize Nepal. In any event, these are issues for the Nepalese to decide amongst themselves. India should adopt a very cautious approach and not get pulled into these highly charged and sensitive matters. 

(This article was first published by NatStrat). 

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