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C3S CW In-Focus: Crossroads of Influence: Recent Developments in Indo-Nepal and Sino-Nepal Relations; By Deeptha Vasanth

Reviewed by Sruthi Sadhasivam, Research Officer, C3S.

Image Courtesy: Asia Society

Article: 26/2024


Pushpa Kamal Dahal "Prachanda," the prime minister of Nepal, removed the Nepali Congress (NC), the main coalition partner, from office in March 2024 and replaced it with the Communist Party of Nepal—Unified Marxist-Leninist (CPN-UML) and two other smaller parties (Bhattarai, 2024a). Despite reports that Prachanda was dissatisfied with the performance of his finance minister, a member of the Nepali Congress, many question the role that China is playing in this new 'leftist resurgence' (Chaudhury, 2024). It was widely known that KP Sharma Oli, the head of the CPN-UML and a former prime minister, was anti-Indian and pro-China (Thakur & Ranjan, 2024). The Chinese, who have been pushing for this new partnership between the two main left parties for a while now—sometimes even in public—were the first to formally applaud it. The coalition’s new Foreign Minister departed from convention by making his first official foreign visit to Beijing rather than New Delhi (Bhattarai, 2024b). 


With increased economic and military collaboration with China, Nepal is largely a recipient not only of Chinese economic assistance but also of its political influence. As a small, landlocked country between India and China, both of whom see the nation in their sphere of influence. The nation's strategy of maintaining a non-alignment foreign policy while hedging with both neighbors highlights its attempts to strike a compromise between security concerns and economic potential (Mainali, 2022). Nepal wants to overcome geopolitical obstacles and improve its possibilities for economic growth by looking to Beijing for commercial and infrastructure development opportunities. India sees this tendency as posing a threat to its established influence over Nepal. India is becoming increasingly concerned about Beijing's growing influence in its immediate vicinity as a result of the two countries' growing relationship.  


In this article, I will examine the recent dynamics of Indo-Nepal and Sino-Nepal ties by assessing Nepal’s proximities and tensions with China and India in the economic, military, and cultural domains. 


China’s Economic Assistance to Nepal

One of the main aspects of China’s economic assistance is Nepal's involvement in the Belt and Road Initiative (BRI). Nepal became a signatory to the Belt and Road Initiative in 2017, but no major projects have been completed so far (Mulmi, 2023). In fact, out of the 9 projects initially agreed upon by both countries, two have been handed over to India due to India’s hydroelectricity policies, and one university that was proposed to be built with Chinese funding has been built with only the Nepali government’s funding and inaugurated last year. Other projects are stalled due to commercial viability, geological, and technical factors (Shekhawat, 2024). An often-cited reason is also that the specific methods and terms by which these projects would be financed were never agreed upon during the signing. It has been widely reported that Nepali leaders want grants for projects instead of soft loans proposed by China (Tiwari, 2023). The BRI implementation plan, which is supposed to help iron out these details, has not yet been signed by the Nepali government (Varma, 2024). 


India already has a passenger railway service operational between Bijalpura in the Mahottari district of Nepal and the Indian town of Jayanagar, which borders the country. The cross-border railway is to be extended to Bardibas in the Mahottari district. India is providing grant support for the construction of the wide-gauge railway line. It has been developing a plan to construct a railway line of 141 kilometers, connecting Raxaul, India, with Kathmandu, Nepal (“Survey This Week for Railway,” 2023). 


On the other hand, China has proposed a 75-kilometer railway connecting Kerung, China, with Kathmandu, Nepal, which has been in the feasibility study stage, funded by China, since 2022. Nepal’s section of the 73-kilometer railway network between Kerung and Kathmandu needs tunneling that could cost the nation about US$3–3.5 billion, which exceeds close to 10% of the nation’s GDP (Giri, 2022). The Himalayan Nation is unwilling to take the project forward not only because of the herculean task of constructing the railways in the mountainous terrain but also because of the debt financing they will need to undertake from China (Jha, 2024). 


When a senior journalist on X (formerly Twitter) asserted that the loan given by China's Export-Import Bank to Nepal for the development of the Pokhara International Airport was being serviced by Nepal at a rate of 5% and not 2% as was being publicly claimed by Chinese authorities (Mishra, 2024), the Chinese ambassador to Nepal, Chen Song, faced accusations of overstepping diplomatic boundaries. Another fundamental concern is that Beijing would use loan default as a cover to station military personnel at the airport and, consequently, on Nepalese territory, undermining Nepal's sovereignty (Singh, 2024). Situated in the second-largest city in Nepal, Pokhara International Airport, which was constructed prior to Nepal becoming a part of the BRI,  has the potential to grow into a major travel destination. Based on these forecasts, if Nepal is unable to repay its loan, China, like in the case of Sri Lanka, can choose to take over the daily management of the airport, giving it significant infrastructure in South Asia and a closer presence at India's border.


China's refusal to provide Nepal with concessional loans or grants, coupled with its reluctance to abandon projects despite their commercial unviability and Nepal's financial incapacity to repay the loans, underscores China's strategic pursuit of debt trap diplomacy. 


Nepal’s Energy Dilemma 

While Chinese influence is growing, it's important to note that Nepal’s public opinion regarding India has also been affected by past events. India’s unofficial blockade in 2015 caused a widespread energy crisis in Nepal, effectively isolating the landlocked nation from the outside world at a time when the country was recovering from a major earthquake. India's blockade led to severe humanitarian impacts, including fuel shortages that forced the only international airport to deny foreign carriers fuel, and disrupted essential supplies and transportation, causing public anger and economic shutdowns. Nepal distrusts India as a primary fuel exporter due to the blockade and India's perceived political interference, which exacerbated the crisis by allegedly restricting fuel supplies. Consequently, Nepal seeks to lessen its reliance on India for fossil fuel imports to avoid future vulnerabilities and to ensure a more stable and independent energy supply (Ojha, 2015). India denies that it imposed a blockade and maintains that the crisis was caused by Madhesis trying to get their demands met. In December of that year, Nepal looked to China to help with fuel shortages. Beijing agreed to give Nepal 1.4 million liters of fuel, and the state-owned PetroChina and Nepal Oil Corporation struck a deal for PetroChina to export fuel to the Himalayan nation, therefore breaking India's forty-year fuel monopoly in the region (Tiezzi, 2015).


However, as of 2024, India continues to be Nepal's primary source for importing fuel and other crude oil products, primarily due to its geographical proximity, established infrastructure, and the absence of other viable alternatives. China is also unable to take India’s place as a primary exporter since it not only faces the logistical problem of transporting oil by land across the mountainous Sino-Nepal border but also the costs of doing so will make it commercially unviable in the long term (Gadkari, 2018). China started a project in May 2024 to survey areas of Dailekh in Nepal to find oil reserves. The initiative, which was funded by the Chinese government and received technical assistance from it, is a component of a 2007 agreement between China and Nepal. This will be the first exploration for oil and gas in the Himalayan nation since a similar operation in southern Nepal failed to produce any results in 1985 (Zhou, 2024). CPN (UML) Chairperson KP Sharma Oli said the exploration of petroleum products would help achieve the long-term goal of prosperous Nepal. Thus, Nepal wants to lessen its reliance on India for the import of fossil fuels. As it currently has no known deposits of either gas or oil, it needs to import fuel from other countries like India. However, Nepal seeks to diversify its sources of oil imports due to its tensions with India. 

 

Nepal’s Hydropower Policies

Nepal’s rivers have the potential to generate more than 42,000 megawatts (MW) of hydroelectric power. The country is developing this infrastructure to meet domestic electricity demand and to establish a significant export commodity. In 2014, India and Nepal agreed on a power export deal, which lasted until 2018 when India revised its policy, stating it could not purchase power produced with investment from countries lacking a “bilateral agreement on power sector cooperation.” This policy effectively meant India would not buy power from Nepal if it involved Chinese investment or involvement in terms of equipment or workers. Consequently, Kathmandu had little choice but to align with New Delhi regarding the future of its hydropower sector (Sritharan et al., 2023).


Following India's policy shift, Nepal removed Chinese developers from six hydropower projects and awarded four hydroelectric contracts to Indian companies. Notably, two of these plants were initially assigned to Chinese firms, one of which was part of China's Belt and Road Initiative (Pokhrel, 2023). According to the Nepal Electricity Authority’s (NEA) annual report, Nepal’s hydroelectricity exports to India increased significantly, reaching 1,346 GWh in FY 2022–2023, compared to 493 GWh the previous year.


The NEA has raised concerns about surplus unsold energy, particularly during the monsoon season when production exceeds demand. If India does not purchase this power, it goes to waste. In the previous year, Nepal produced a surplus of 500 MW of energy per day between June and October, resulting in approximately $90 million worth of unsold electricity, according to the NEA.


China has not yet imported electricity from Nepal due to the technological challenges of constructing transmission lines across the Himalayan border. Instead, China is focusing on developing Tibet’s hydropower capacity, including the ongoing construction of the Lianghekou Dam, the highest dam in China (Ranjan, 2021). Nonetheless, China has engaged in discussions with Nepal about future electricity imports and is keen on investing in Nepal’s hydroelectric sector (Shreshta, 2023). The Asian Development Bank, Exim Bank, and Asian Infrastructure Investment Bank have provided loans to the Upper Trishuli Hydropower Project, with Chinese contractors involved in the project. Additionally, one of Nepal’s largest plants, the Upper Tamakoshi Hydropower Project, was primarily built by a subsidiary of China’s PowerChina Group. This marks another effort by China to enter an industry dominantly influenced by India. 


Nepal's reliance on the Indian market for electricity exports highlights a vulnerability to India's policy changes. This dependency limits Nepal’s ability to fully leverage Chinese investment and technological expertise in its hydropower projects. Despite the technological hurdles, China remains a potential future partner, reflecting a geopolitical balancing act for Nepal between its two powerful neighbors. The unsold energy surplus during the monsoon season signifies a pressing need for diversified export markets and enhanced storage capacities. For Nepal, achieving a balanced and resilient hydropower strategy is crucial, as the newly built hydropower represents a possibility for Nepal’s economic prosperity.


Nepal’s Military relations with China and India 


Pal (2021) argues that for Beijing, the importance of connectivity and infrastructure is due to its security concerns with regard to the presence of Tibetan refugees in Nepal across the northern districts. Since 2008, when pro-Tibet protests in Nepal broke out, led by the Tibetan exiles living there, the two sides have signed numerous agreements on intelligence sharing (Poudel, 2022). To increase the Nepalese Police Force's "anti-riot capacity," it started making investments in them. China built an Armed Police Academy as an aid project, which was handed over to Nepal in 2017. With gracious efforts like this, China hopes that Nepal aligns with China on the issue of Tibet. China hopes to maintain regional stability and safeguard its interests in national security by strengthening Nepal's security capabilities and thwarting any anti-Chinese activity on Nepalese soil (Jones, 2023). 


China and Nepal have not had any meaningful defense cooperation for twenty years, since 1990. However, the then-K.P. Sharma Oli administration started a new chapter of defense cooperation with China after India's blockade in 2015. The two countries held "Sagarmatha Friendship-1," their first-ever joint military exercise, in Kathmandu, and "Sagarmatha Friendship-2," their second exercise, in September 2018. (Sharma, 2021).


Chinese producers were Nepal's favored ammunition suppliers until 2022. Still, Chinese ammunition is still of poor quality. As a result, Nepal chose to purchase ammunition from SSS Defense, an Indian business. In an open bidding deal, this Indian company outbid Chinese manufacturers (Philipp, 2022). Despite this, China continues to assert its influence in Nepal's defense sector.  The PLA has suggested implementing an ammunition plan to undermine Indian re-entry into the Nepali Army’s munitions stockpile (Kumar, 2024a). Agreements were made in August 2023 to bring back the Sagarmatha joint military exercise series and to provide Nepal Army officers with several places at Chinese military training institutes (Giri, 2023). Additionally, China provided four places to Nepali soldiers for the yearly Defense and Strategic Studies Course in China’s College of Defense Studies (CDS) (Kumar, 2024a). 


Kumar (2024) argues that China believes that by strengthening the military capabilities and leadership of the Nepali Army, it can help these countries engage with India from a position of greater strength and confidence. Additionally, because of the Agnipath program, military ties with India are deteriorating at this time (Satgainya, 2024). Due to this new scheme, only up to 25 percent of the cadres from each batch will be enrolled as regular rank holders in the Indian Army after the service time period of 4 years. This means that Nepali soldiers who get into the Indian army now do not have the assurance of a permanent posting and pension after their service. The Nepali government has continuously declined to send Gurkha candidates to the Indian Army recruitment rounds since the Agnipath Plan went into effect in 2022. Nepal views the use of Gurkha forces as a breach of the tripartite agreement between India, the UK, and Nepal. Furthermore, Nepal is still worried that a sizable portion of young people with military training may return jobless after four years, potentially upending social order (Kumar, 2024b). 


Disputed Borders with India


After Jammu and Kashmir's special status was terminated in 2019 by the abrogation of Article 370 of the Indian Constitution, India revised its political maps to incorporate the disputed territories with Nepal. Nepal objected to the inclusion, arguing that the Sugauli Treaty of 1816 made these regions a part of  the Sudurpaschim province of Nepal. According to India, the 35-square-kilometer Kalapani area is situated in Uttarakhand's Pithoragarh district. On the other hand, Nepalese territorial claims were deemed incompatible with the Sugauli Treaty by Indian authorities (Ghimire, 2024). 


In May 2024, Nepal unveiled new Rs 100 denomination bank notes featuring the country's map, which included the disputed territories of Lipulekh, Limpiyadhura, and Kalapani, as there had been no progress in the dispute negotiations (Sagar, 2024). The triangular border between China, Nepal, and India at Kalapani, Lipiyadhura, and Lipulekh has long been a source of contention.


The Lipulekh Pass holds significant security implications for India. Following the devastating border war with China in 1962, India has been concerned about the possibility of a Chinese incursion through the pass (Ethirajan, 2020). Consequently, India has been keen to maintain control over this strategic Himalayan route to safeguard against any future threats.


A high-altitude, 80-kilometer road was opened in May 2020 by Defense Minister Rajnath Singh to help pilgrims go to Kailash Mansarovar in Chinese-controlled Tibet. The travel time to Kailash Mansarovar has decreased because of the high-altitude road that connects Dharchula and Lipulekh Pass in Uttarakhand. The other two routes to the shrine go through Nepal and Sikkim. Nepal claims that this "unilateral act" goes against the two nations' agreement to settle their border disputes. Nepal issued a statement, denouncing India's "unilateral act" and stating that it "runs against the understanding reached between the two countries." Nepal also urged for diplomacy to be used to resolve boundary disputes. In the same year, the disputed territory was included in a new political map that Nepal published in response, to which India declared it to be "artificial" and "not acceptable to the government of India." 


Even though there have been several media reports alleging China is encroaching onto Nepal’s border (Bristow, 2022), this has been refuted by both the Nepal Ministry of Foreign Affairs and the Chinese Embassy in Kathmandu. However, the then and current opposition party, the Nepali Congress, accuses the ruling coalition of keeping silent on the issue in order to appease China (“NC Leader Saud Criticizes Oli ,” 2021). 


The situation has deteriorated significantly if Nepal felt compelled to release a currency note featuring disputed territories to prompt India into resolving the border issue. This move reflects the severity of the diplomatic deadlock and Nepal’s frustration over the lack of progress in negotiations. The inclusion of disputed regions on currency notes is a powerful political statement, symbolizing national sovereignty and staking a public claim. Such actions can escalate tensions and complicate diplomatic relations, as currency is a daily reminder of national identity and territorial assertions, making the dispute a prominent and contentious issue domestically and internationally.


Cultural ties and Buddhist Diplomacy 


The "Indian vision of Buddhism," which "appeals to ancient history while rooted in contemporary geopolitical concerns," is what religion journalist Raymond Lam (2022) claims Modi has promoted. A global Hindu-Buddhist initiative called "Samvad" was also started by Modi, according to which Modi has claimed that India is taking the lead in boosting the Buddhist heritage across Asia. Religion is one of the important facets of interactions between India and Nepal. In recent decades, religion has become increasingly significant in bilateral relations between India and Nepal, given its cultural importance. India aims to enhance mutual trust between the two nations through Buddhist diplomacy, leveraging religion as a key component of its soft power strategy.


Das (2019), in his paper, proves that Nepali nationalism frequently feeds anti-Indian feelings in many regions of Nepal. India is likewise focused on boosting trust in bilateral relations and overcoming this issue through close interaction. In this regard, India is mainly focused on two objectives: first, reestablishing historical cultural connections; and second, supporting the establishment and restoration of Buddhist heritage sites in Nepal (Joseph, 2022).

 

In May 2022, Prime Minister Modi visited Lumbini, which is considered to be the birthplace of Lord Buddha, on the occasion of Buddha Purnima. During the visit, the Indian Prime Minister, along with the Nepalese Prime Minister, performed the inception ceremony for constructing the India International Centre for Buddhist Culture and Heritage in the Lumbini Monastic Zone of Nepal. The centre is envisioned as a world-class Net-Zero facility with prayer halls, a meditation centre, a library, an exhibition hall, a cafeteria, and other amenities open to Buddhist pilgrims and tourists. Besides, Prime Minister Modi announced a grant of USD 15 million to promote Buddhist ties, according to a press release by the Indian High Commission (2022). 


However, India is not playing this game alone. China, built a Buddhist monastery in the core area of the Lumbini Development Project and offered to spend $3 billion to build the city as a “world peace city” (Ghimire, 2022).  Xi Jinping’s “Buddhism with Chinese characteristics” is a Buddhism to be used to further the soft power of the Chinese state, “an asset that can enhance relations with neighbors.” This rivalry highlights Nepal's importance as a cultural and geopolitical battleground, where India's influence will depend on its ability to effectively leverage historical connections and soft power in the face of China's assertive diplomacy.


Despite Nepal and India being predominantly Hindu, their religious soft power diplomacy focuses on Buddhism, reflecting the religion's deep historical and cultural significance in the region. This strategic emphasis highlights Buddhism's potential to foster mutual trust and cultural ties, especially given Nepal's pivotal role as the birthplace of Lord Buddha. India's efforts to promote Buddhist heritage aim to counteract anti-Indian sentiments in Nepal, while China leverages Buddhism to expand its influence. 


Conclusion 

China's approach in Nepal focuses on economic investments, military cooperation, and cultural diplomacy aimed at enhancing its influence. Economically, initiatives like the Belt and Road Initiative and energy projects provide alternatives to Nepal's reliance on India, establishing Beijing as a key development partner. Militarily, joint exercises and training programs with the Nepali Army strengthen Nepal's defense capabilities, reducing India's historical dominance in this area. Culturally, China's Buddhist diplomacy competes with India's efforts to deepen religious and cultural ties, highlighting Nepal's strategic significance in soft power dynamics.


These developments present challenges for India. Economically, Chinese investments in Nepal could weaken India's influence and traditional economic relations. Militarily, closer Sino-Nepali defense ties may alter regional power dynamics, complicating India's security considerations. Despite the longstanding fraternal relationship between India and Nepal, dating back before China's engagement, the 2015 embargo strained bilateral ties significantly. Thus, Nepal’s dual engagement and hedging of its interests with India and China represent opportunities for economic and military growth as well as challenges. As Nepal moves forward, maintaining flexibility and strategic independence will be pivotal in safeguarding its interests and fostering constructive partnerships with both neighbors.



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(Deeptha Vasanth is an undergraduate student pursuing Economics and Finance at Shiv Nadar University, Delhi. Her research interests include ESG, corporate governance, political economy and international trade. The views expressed are those of the author and does not reflect the views of C3S.)

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