India-Nepal relations soar high

Prachanda's visit highlights the two countries willingness to move beyond contentious issues and focus on mutually beneficial aspects

By visiting China in 2008, Pushpa Kamal Dahal, also called Prachanda, became the first Prime Minister to break the tradition of Nepalese premiers choosing India as their maiden destination of visit. Fast forward to June 2023, Prachanda not only chose India to be his first destination, but also expressed contentment with his four-day visit, dubbing it an “astounding success”. The recent visit indicates that India and Nepal are moving beyond their fraught phase and taking this “hit” relationship to “Himalayan Heights.” During these four days, both countries prioritised convergences over divergences, signing five projects and six memorandums of understanding (MoUs). Areas such as hydropower electricity, connectivity, and people-to-people relations remained the centre of this fruitful engagement.

Hydropower cooperation was at the top of the agenda. In recent years, India has taken the lead in accelerating this win-win partnership. In November 2021, India began to purchase Nepal’s hydropower electricity and permitted it to export 452 MW. As a result, in 2022 alone, Nepal’s hydropower electricity exports generated a revenue of ~12 billion. Building on this momentum, the two sides have now agreed to increase Nepal’s hydropower export quota to 10,000 MW over the next 10 years. They also signed new MoUs for Indian firms to develop Arun and Karnali hydropower projects and agreed to act swiftly on the detailed report of the Pancheshwar Multipurpose Project. Additionally, India also agreed to facilitate Nepal’s hydropower exports to Bangladesh.

Connectivity, trade, and people-to-people contacts also took precedence during the visit. Both countries signed MoUs for a cross-border petroleum pipeline, cross-border payments, infrastructure development for check posts, and cooperation between foreign service institutes. They also renewed the Transit Treaty, virtually inaugurated integrated check posts, and flagged the inaugural run of a cargo train from India to Nepal.

Throughout the visit, the two leaders focussed on areas of convergence that are mutually beneficial rather than attempting to resolve contentious and sensitive issues. Although both sides agreed to settle the border dispute, there was no in-depth engagement on the same. This finite focus on mutually beneficial areas is due to India’s neighbourhood policy, Nepal’s domestic developments, and geopolitics.

Following the alleged 2015 Nepal blockade, India has focussed on perception management and has shied away from commenting on Nepal’s domestic developments. Its Neighbourhood First policy has prioritised accommodating its neighbours’ interests, economic needs and aspirations through economic integration and connectivity. This is despite increasing criticism of India’s foreign policy from Opposition parties.

Domestically, Nepal continues to be politically unstable. The lack of a clear majority in Parliament and the recent unveiling of the Bhutanese refugee scam have kept Prachanda’s fragile alliance on its toes. The domestic environment limits his ability to seek a non-partisan consensus on solving Nepal’s major issues with India. It is also likely that Prachanda focussed on mutually beneficial areas, as discussing contentious issues would have triggered criticism from different political parties based on their partisan policies.

Nepal’s economy is in bad shape as well. It is facing food and fuel inflation, shortage of essential commodities, and depleting foreign exchange reserves. Kathmandu is experiencing a recession with an increasing trade deficit, inflation, unemployment and declining foreign direct investments. Currently, Nepal is also seeking assistance from an extended credit facility offered by the International Monetary Fund. Thereby, its immediate focus is on containing inflation, maintaining foreign exchange reserves, raising capital, and reducing the trade deficit, in which trade and economic integration with India is crucial.  

Geopolitically, despite China’s infrastructure and assistance, Beijing has fallen short of Kathmandu’s expectations. Border infrastructure remains underdeveloped, and the trade deficit with China has grown disproportionately. Beijing has continued to turn a blind eye to Nepal’s request for grants to proceed with the Belt and Road Initiative (BRI) projects. As such, none of the nine projects have been implemented to date. China has also begun to intervene in Nepal’s internal politics to further its interests. A desperate China is even propagating Pokhara International Airport as part of its BRI, though Nepal has denied the claim. China’s limitations in being a viable alternative to Kathmandu have thus compelled the country to focus on beneficial Indian projects and partnerships.

That said, India-Nepal relations are not free from irritants. Nepal continues to urge India to amend the 1950 treaty. It has requested India to open new air routes, reverse anti-dumping measures, and resolve boundary issues. Adding to Nepal’s anxiety, India has also restricted its markets to Chinese-assisted Nepali infrastructure projects, hydropower plants, and airports. While both countries have no choice but to resolve these issues, engagements on such contentious matters require more trust and an opportune time.

The success of the recent visit, however, illustrates that both India and Nepal are increasingly realising the mutual benefits of their partnership and cooperation. They recognise the strategic importance of each other in the evolving global order and have maintained a positive momentum despite some political challenges and divergences. It is only through such sustained engagement that they will be able to address their mutual suspicions and build trust.

The writers are, respectively, vice-president for studies and foreign policy, and a junior fellow at the Observer Research Foundation, New Delhi