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Former Nepali Ambassa­dor to China Tanka Kar­ki espies a ‘troubling pattern’ in South Asia. “The common thread that binds the cur­rent events in the Maldives and block­ade-time Nepal is that both were man­ifestations of India’s nervousness at China’s rise in this sub-region,” he says.Karki is referring to the ongo­ing political crisis in the Maldives that was set in motion when the Supreme Court there decided to annul charges against nine oppo­sition figures, including former President Mohamed Nasheed, who has been living in exile in Britain since May 2016. In response, the current President Abdulla Yameen declared a state of emergency and ordered the arrest of two offending Supreme Court judges as well as of some opposition members.

As the tiny island country with a population of under 400,000 has been thrown into political turmoil, Yameen has reached out to China for political support. Meanwhile, Nasheed, who is seen as traditional­ly close to New Delhi, has gone so far as to ask India to militarily intervene to ‘save democracy’ in the Maldives.

It is true that China has stepped up its engagement in the Maldives: buying islands, building roads and sending its warships for ‘special training sessions’ with the Maldivi­an defense forces. China fears that without these ‘gestures of goodwill’ its room for maneuver in the strate­gically important Indo-Pacific seas would be fatally reduced. But India is as convinced that Chinese activ­ism in Pakistan, Sri Lanka and the Maldives is part of China’s ‘string of pearls’ strategy to surround it in the Indian Ocean.

Ports of call

In Pakistan, China has commit­ted over a billion dollars for the construction of the deep-sea port of Gwadar. This is part of the US $62-billion China-Pakistan Econom­ic Corridor (CPEC), a key compo­nent of President Xi Jinping’s signa­ture Belt and Road Initiative (BRI).

Sri Lanka, after its inability to ser­vice Chinese debt, had to recently hand over the Hambantota, another deep-sea port on the Indian Ocean, to China on a 99-year lease. In 2016, President Xi went to Bangladesh, another strong Indian ally, and com­mitted a whopping $21.5 billion for 26 different projects. Even in Bhu­tan, whose security is overseen by New Delhi, China wants to pry the tiny kingdom out of India’s clutch.

All these investments and mus­cle-flexing by China in India’s near neighborhood—in an area Jawaharlal Nehru famously described as falling under India’s ‘sphere of influence’—troubles the Indian establishment. Perhaps this is why Indian commen­tators have started openly talking about the ‘red lines’ that India’s close neighbors cannot cross with China.

“Even during the recent Nepal visit of Indian Minister of Exter­nal Affairs Sushma Swaraj, Indian commentators were warning that Nepal should not cross these red lines,” former envoy Karki says, “This red-line formulation is loaded with meaning.’’

One of the Indian commentators who had been consistently invok­ing the red lines is SD Muni, an old Nepal hand in New Delhi who is currently a Distinguished Fellow at the Institute for Defense Stud­ies and Analysis (IDSA). When this correspondent asked him if there was a lesson for Nepal on what is happening in the Maldives, Muni replied: “Nepal’s only lesson from this could be: avoid crossing red lines on India’s security sensitivities in dealing with China”.

The problem, as former envoy to China Karki points out, is that India does not clearly say what these red lines are, so they can be defined as New Delhi wishes. Nepal was deemed to have crossed one such line when its political leadership pushed ahead with (what India thought of as China-backed) consti­tution without consulting India, result­ing in nearly five months of border blockade.

Indian options

For Muni, one way KP Sharma Oli, the prime-minister-in-waiting, can avoid crossing India’s red lines is by not “roughing up India” over China. “Swaraj visited Kathmandu primar­ily in response to Oli’s request to Modi for support [for his prime min­istership],” says Muni. If Oli crosses India’s red lines, he knows the left alliance remains fragile and India “always has the option of leaning towards his rivals both within and outside the alliance”

Former Foreign Secretary and Nepal’s Permanent Representa­tive to the United Nations, Madhu Raman Acharya, for his part, thinks that while there are similarities between the Indo-China rivalry in the Maldives and their geopoliti­cal battle for supremacy in Nepal, unlike in Nepal, “India does not have extensive leverage over the Maldives, partly because of the dis­tance between the two countries, and partly because of the growing Chinese footprint there.’’

But, then, does he too believe Swaraj’s recent Nepal visit was moti­vated by China? “Definitely, the Chinese have been more active in Nepal and Swaraj came to put a lid on it.’’

In Acharya’s view, Swaraj’s visit, which was undertaken without consulting Nepal, also had a sinister mes­sage: if it serves Indian interests, India will not desist from breaching established diplo­matic norms and, in fact, “going to any extent.’’

Nevertheless, as Muni hinted, India’s intervention in Nepal is not a one-way street. Pramod Jaiswal, author of several books on Nepal-China relations, likewise, believes Swaraj was sent to Nepal only when Modi got a clear signal from Oli that he wanted to mend frayed relations with India.

Waiting and watching

“Yet New Delhi remains wary of Oli,” Jaiswal adds. After all, he says, Oli is someone who until the time of the blockade was reput­ed as one of India’s most trusted friends in Nepal. But then he sud­denly “jumped ship and went into China’s camp.’’ The blockade-time prime minister came to be seen as courageously standing up to the ‘Big Brother,’ and Oli’s brand of anti-India nationalism proved to be a smash hit at the hustings.

Indian Prime Minister Narendra Modi is also an old political fox. In the lead up to the 2019 Lok Shabha election, he sees an opening in Oli’s recent overtures. Going into national elections, Modi would like to project himself as someone who has the support of not just the majority of his people but also of other countries in the region. “This is why India will make every effort to woo Oli,” says Jaiswal. The problem is, China too considers Oli as one of its own.

All these are indications that this old geopolitical game in Nepal, and in South Asia at large, could get curi­ouser and curiouser .

One of the main concerns over federalism is regarding its costs, which, some reckon, are prohibitive. Just to set up the new federal infrastructure, for example, is expected to cost Rs 820 billion over the next three years. The initial signs of profligacy of our political leaders in the new federal set-up are troubling. In a populist measure, for example, the outgoing government decided to drastically increase old-age pen­sions, costing the exchequer Rs 200 billion immediately, and much more in the future.

Tomorrow, given the checkered spending record of our politicians, there could also be a rat race to buy the most expensive bungalows and cars for the new MPs and ministers, and there are bound to be many pitched battles between the seven provinces and the central govern­ment over division of spoils. The country may also have to rely on foreign aid to tide over its expenses. Moreover, the functioning (and the costs) of the new federal provinces and local units is rather tricky to work out.

But it is also a question of wheth­er to see the glass as half-empty or half-full. For there are unques­tionable benefits of federalism, too, for a geographically and ethnically diverse Nepal. Nor are costs a one-way street: while some expenses have gone up, others (in having few­er ministries, for instance) have come down.

“It could all be worth it,” says Khim Lal Devkota, a fiscal feder­alism expert. For the first time in the country’s history, says Devkota, the power of Singhadurbar is being devolved to the grassroots, which is “something to be celebrated”.

Is federalism prohibitively expen­sive for Nepal? Even though the federal system is an irreversible truth after the promulgation of the new constitution and holding of all three constitutionally-mandated elections, the old debate over the cost of the new system refuses to die down. To make their ends meet, the new constitution allows “the federation, province and the local level entity… to impose tax on subjects within their fiscal jurisdiction and collect revenue from such sources”. If rev­enues collected at provincial and local levels are inadequate, “the Government of Nepal shall make necessary arrangements to equita­bly distribute the revenue generated by it from its sources, between the federation, province and the local level entities.” But is the economic pie big enough for all three layers of government?

“For a rough estimate, multiply the costs under the old unitary system by three,” says Ram Saran Mahat, the multiple-time finance minister. “I have always maintained that a federal system is inherently costly and complex. The early signs of implementation of federalism only adds to my suspicion.”

The signs Mahat hints at are the disputes over the designation of pro­vincial capitals. He believes these challenges will get more and more complicated.

820 bn—and counting

According to the Ministry of Finance, Nepal will need Rs 820 billion over the next three years on federal infrastructure alone. To put this into perspective, in the first six months of the current fiscal, Rs 336 billion has been collected in revenues, two billions more than the target of Rs 334 billion. The gov­ernment thus seems to be on course for the yearly revenue target of Rs 730 billion. But a year’s worth of revenues will still be inadequate to meet the added costs.

“All this money for federal infrastructure and administrative tasks will be at the cost of the all-im­portant development expenditure,” says Mahat.

Economist Biswo Poudel is not very sanguine either. He cites the recently introduced voluntary retirement scheme for civil servants, which is expected to cost the exche­quer Rs 50 billion, as an example of the new profligacy under the federal setup. “A civil servant should be ready to go to any part of Nepal that he or she is deputed to. The gov­ernment is setting a troubling, and expensive, precedent for federal Nepal by giving civil servants who don’t want to go to certain places golden handshakes.”

Poudel is also unhappy with what he deems unnecessary expansion of government. The country will now have as many as 825 MPs and 110 ministers. “Even if we assume a low-end salary of Rs 60,000 for each of them, their monthly bill will amount to Rs 49.5 million. This is not factoring in other associat­ed costs like vehicle and secretariat costs.”

But there are also those who believe the initial invest­ment in the federal setup, however big, is worth it. “For those who say federalism is expensive, I would like to ask, ‘On what basis?’” says Uma Shankar Prasad, a professor of eco­nomics at Tribhuvan University. “I don’t know of any systemat­ic study on the financial viability of federalism in Nepal.”

Apples and oranges

Nor does Prasad buy that the sev­en provinces, as proposed, are unvi­able. “People say that Province 2 is unviable as it does not have natural resources. But there are other ways to make money. For instance, there are hardly any good hospitals across the border in Bihar. If we can build good hospitals in Province 2, hun­dreds of thousands of patients from Bihar will come to the province for their check-up every year.”

Likewise, “the apples of Jumla and oranges of Ramechhap” can be processed, packaged and exported profitably. There are many such innovative ways to make the federal system work, Prasad says. Perhaps the reason so many people in Nepal are skeptical about the federal setup, he muses, is that they focus on failed examples of federal­ism: “If the tiny Switzerland, which is much smaller compared to Nepal both in terms of area and popula­tion, can thrive with 26 cantons, why can’t Nepal prosper with its seven provinces?”

Fiscal federalism expert Khim Lal Devkota believes it’s a question of whether to see the glass as half-full or half-empty. “Ever since the first Con­stituent Assembly stated debating Nepal’s federal contours, I had been saying that the federal provinces should be demarcated based on their fiscal viability rather than group identity,” Devkota says. (According to the new constitution, the provin­cial demarcations will be based both on ‘identity’ and ‘viability’).

“Most of the revenues will be gen­erated in areas with high popula­tions. In fact, already, 96 percent of our revenues comes from just 15 districts. So equita­ble distribution of revenues across federal provinces will not be easy,” he said.

But Devkota is optimistic. “Yes, federalism may be a little costly, and complicated as well, but what you cannot deny is that for the first time the power and resources that was centralized in Singhadurbar have been passed down the line. This is something to be celebrated.”

Moreover, federalism is based on a sharing model. Devkota expects the federal model to start functioning smoothly after, in the course of time, a viable revenue-sharing model is worked out. It is true that many new posts and offices have been created, adding to the administrative costs, Devkota adds, but then, to offset these expenses, the number of min­istries have also been reduced, considerably reducing the costs.

Power to people

There are also tangible, if hard to compute, econom­ic benefits of federalism. “Factor in the savings of all those who do not now have to come to Kathmandu for the most minor of things,” Devkota says.

Economist Poudel agrees. “There is also a way to do feder­alism cheaply. But for this the role of the central government in a fed­eral setup should be largely advi­sory”. Core functions like defense, monetary system and foreign affairs remains with the federal govern­ment, Poudel advises, everything else should be delegated.

Even Mahat, the ex-finance min­ister, reckons that federalism can succeed if our leaders show more ‘fiscal discipline’—by learning to live within their means, controlling corruption, maintaining uniformity in taxation and pruning the size of government. “But all this is easier said than done,” he adds.

In the end, it all boils down to the will of our major political actors to make the new system work. For the federal experiment to succeed they must learn to rein in their profli­gate ways and remain true to their electoral promise of meaningful decentralization. Done right, feder­alism can empower each and every Nepali, politically as well as econom­ically—not that we have the luxury to get it wrong.

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 New Delhi is clearly in a mood for ‘course correction’ on Nepal. Having decided to support the border-centric protests of Madhesi parties, which brought Nepal to a standstill for over four months, the new emphasis is once again on directly engaging Kathmandu. The cause of the Madhesi people, if the Indi­an establishment ever believed in such a thing, has been conveniently sacrificed at the altar of the old geopolitical game that was tilting towards China.

Sino-Nepali ties had gotten a boost following the India-inspired blockade, what with KP Sharma Oli going to China to sign landmark transit and fuel agreements in its wake. China has since cleverly used the rising anti-India sentiment to expand its influence in Nepal. The Chinese stock in Nepal, in fact, has never been higher.

This is why Indian Prime Minister Narendra Modi has of late been keen to cultivate Oli, the prime minister-in-waiting, as reflected in his repeated calls to the CPN-UML chief, and dispatching of his foreign minister, Sushma Swaraj, to Kathmandu on the eve of Oli assum­ing power. Gradually being forgotten is the animosity that Oli had built for himself in New Delhi as he inched closer to China post-block­ade. Only by maintaining friendly relations with Kathmandu, New Delhi has discovered, can a semblance of challenge be mounted to China’s growing clout in Nepal. (Too bad the Madhesis don’t figure in this new calculation.)

What is interesting is that KP Sharma Oli seems as keen to improve the frayed Nepal-In­dia ties. So when Modi called on January 21 to congratulate “the new prime minister of Nepal”, and invited him to visit India on assuming premiership, Oli gladly accepted the invite and said he also wanted to welcome Modi and arrange for his visit to Janakpur and Muktinath. Then, on his message on India’s Republic Day on January 26, Oli once again conveyed his eagerness “to work with your Excellency and your government for the bet­terment of our two countries.”

Oli’s overtures to India should come as no surprise. After all, not long ago, Oli was reput­ed as among India’s most trusted in Nepal, one with extensive ties not just with the Indian political parties but also with their bureaucrats and spies. Were it not for the border block­ade and the resulting anti-India hysteria, it is inconceivable that Oli would have dared to bite the hand of his old patrons. As former Indian foreign secretary Shivshankar Menon likes to say: Oli’s cozying up to China after the block­ade was no different to similar efforts of other power-hungry politicians in the region who, like Oli, are ready to do just about anything to get to power.

But there is a wee problem in this reading. It is true that Oli’s growing proximity to China owes to his desire to cash in on the recent nationalist anti-India fervor. Yet, at the fag-end of his political career, perhaps even his life, Oli also wants to leave behind a sterling legacy: of someone who brought back much-needed bal­ance in Nepal’s relations with India and China.

This is why he is for expediting works on establishing reliable road and rail links between Nepal and China, which is only right. After all, Nepal has time and again been reminded—and how!—of the exorbitant costs of overreliance on India. Any self-respecting leader of post-blockade Nepal would work to create a condition whereby no country, not even the mighty ‘Big Brother’ next door, is in a position to blackmail Nepal.

Oli is thus torn between his desire to appease India (to extend his government-stay) and to further improve Nepali’s relations with China (a populist measure that is nonetheless also in Nepal’s interest). It will not be easy. India seems in a mood to make significant conces­sions, including revising the 1950 treaty. In return, it will expect Nepal to keep a calibrated distance with China. But there is now a big constituency in Nepal clamoring for closer ties with China and any Nepali leader who ignores this reality will be committing a polit­ical hara-kiri.

Oli, the consummate politician that he is, may be among the rare Nepali leaders capable of pulling off this delicate balance, at least for some time. But it will be hard to sustain. Unlike in the past, China today, just like India, is looking for Nepal’s unambiguous commit­ment to closer cooperation. This is part of its broader South Asian strategy to minimize ‘American influence’, the influence that is often expressed via America’s regional ‘proxy’: India. On the other hand, India fears that unless the rulers in Kathmandu and Thimpu and Dhaka are quickly and firmly brought back into its camp, its strategic space in South Asia will be forever lost to China.

In the lead-up to the 2019 Lok Sabha elec­tions Modi will want to show his ‘Look East’ policy, and his South Asian policy in particu­lar, has been a success. After all, this is a prime minister who started his tenure by inviting all SAARC heads of state to his swearing-in, send­ing a clear signal of his intent as prime minster.

He will have a tough time tackling a resur­gent China in Nepal. Oli, Modi and company may soon discover, has acquired a harder edge, too