Reimagining India-Nepal ties: The decade that was and the road ahead

Oscillating between periods of cooperation and setbacks, the India-Nepal bilateral relationship is considered ‘special’ and ‘unique’ by all who observe their dynamics. Thus, the failure of the two sides to maximize their potential and fully capitalize on the factors that make this partnership different is often criticized. In the past decade, under India’s ‘Neighbourhood First’ policy, the focus of the Indian leadership has been on working on the convergences, while preventing the issues of contention from casting a shadow on progress. This approach has found a receptive audience in Nepal as well, with the two sides increasing cooperation. Even as China strives to solidify its presence in the country, Nepal, owing to its strategic location, has (in)voluntarily become a part of the geopolitical churning that is taking shape in South Asia. As the current government in India completes its second stint in power, the timing is opportune to briefly reflect on the trajectory that the bilateral relationship has taken up in the past decade and the course it will adopt in the coming years.

Unprecedented developments

For India, Nepal is an integral part of its ‘Neighbourhood First’ policy. New Delhi has consistently supported Nepal in its developmental endeavors and is the country’s top development partner. This year’s budget saw InRs 700bn earmarked as developmental assistance for Nepal, the second highest amount followed by Bhutan. Beginning with the Indian Prime Minister’s visit to the country in 2014, the two sides have seen a flurry of high-level visits throughout the decade. This is a testament to the consensus on both sides regarding the need to build the relationship further and also a response to the change in the geopolitical environment and the growing cleavages between India and China.

While the decade began on a positive note with the Prime Minister’s visit, a multitude of factors derailed the progress that was made at the time. The devastating earthquake in Nepal, followed by concerns regarding how Indian media portrayed the aid delivery, the adoption of a new constitution in 2015, the subsequent protests and the alleged economic blockade placed by India cumulatively dented the goodwill that was generated the previous year. At around the same time, China’s expanding presence in the country also complicated the dynamics between the two countries.

Fast forward 2024, while some endemic issues of contention have persisted between the two sides, the priorities have significantly altered for both countries. There is a subtle shift in how both Kathmandu and New Delhi want the relationship to move forward—a focus on pragmatic considerations and working together to enhance cooperation in connectivity and economic integration. Back in 2014, India committed to supporting Nepal with the ‘HIT’ model i.e. the construction of highways, information ways and transmission lines. In the last few years, India has refocused its attention on these aspects of the relationship.

For both India and Nepal, the complementarity that they share in terms of hydropower, i.e. Nepal’s willingness to export it and India’s need for energy has been one avenue in which the two sides have cooperated extensively. At present, as per some estimates, Indian companies have licenses for the generation of 4000 MW of hydropower. Starting in November 2021, India also began to buy Nepal’s hydropower with the latter selling Rs 11bn worth of hydropower to its neighbor between June and Dec 2022. On his maiden visit to India, Prime Minister Dahal oversaw the signing of memorandums of understanding (MoU) on the Arun Hydroelectric Project and the Upper Karnali project. A project development agreement was also signed for the 669 MW Lower Arun Hydroelectric Project. The two sides also inaugurated and laid the foundation stones for new integrated checkposts.

The signing of a power trade agreement during India’s EAM S. Jaishankar’s visit to the country in January this year, under which Nepal will export 10,000 MW of power to India over the next 10 years, is considered a major landmark in the growing partnership between the two countries. This was also discussed during Prime Minister Pushpa Kamal Dahal’s visit to the country along with the Nepal-Bangladesh power-sharing agreement, which will be facilitated by India. Another manifestation of connectivity has been in the sphere of digital connectivity with Indian nationals now able to make payments through the Unified Payments Interface (UPI) starting Feb 2024. This, as evidenced by some analysts, will smoothen the flow of remittances and also give a push for increased tourism in the country.

In trade, India is Nepal’s biggest trading partner with the total volume of bilateral trade reaching
Rs 1,134.53bn in the fiscal year 2022-23. It also has the highest FDI stock in the country, close to 33 percent of the overall volume. The transit trade agreement between the two sides was also renewed, revised and signed by the two last year. India’s High Impact Community Development Programs also completed 23 years last year, with New Delhi successfully finishing 475 of the 535 projects that it took up. India’s lines of credit were pegged at $1.65 as of Aug 2023 and 73 percent of the assistance offered by India goes into infrastructure development.

Observers see India’s relationship with Nepal on a strong footing, as the three important components of India’s relationship—security, economy and connectivity—have all seen progress in the past decade. But while there is optimism about the trajectory of the relationship, there is also some caution, with calls for ‘strategic reformulation’ and discarding the ‘roti-beti’ lens of looking at the country. This is because of how the world and the region around them is in a constant state of flux.

The impediments

Despite the progress made in enhancing economic integration and connectivity between the two countries, certain bilateral issues have persisted. The degree to which they can affect the positive momentum in the relationship depends on multiple factors. Recently, a cabinet meeting in Nepal decided to have a picture of the country’s map on the new Rs 100 notes. The map was the one that the then Prime Minister Oli released in 2020, showing the Kalapani, Lipulekh and Limpiyadhura regions as a part of the country. At that time the relations hit a new low. India deemed the decision as  ‘unilateral actions which don’t alter the reality on the ground.’ While there is no denying that the issue won’t have any immediate adverse impact on the positive momentum of ties between the two countries, the act itself and its timing indicate how long-standing issues can suddenly prop up with the potential to dampen the relationship. In a recent lecture, Nepal’s Foreign Minister articulated commitment to resolving bilateral issues through bilateral consultative mechanisms that have been set up for that purpose, based on historical facts. India’s External Affairs Ministry also highlighted that the issues are being discussed through established platforms. So, while the consensus is there on both sides to take this up mutually, the delay allows certain sections to use them for the perpetuation of their power or for making a political point, more often for a domestic audience.

The calls for the revision of the 1950 Treaty of Peace and Friendship, the boundary issue as mentioned above, the report of the Eminent Persons’ Group, and the opening of new air routes are all issues, which have propped up in the conversations between the two countries in the past decade. While for the time being it seems prudent to focus on the positives and create enough trust and goodwill that can then help in addressing the more contentious issues—as has been the sentiment in Nepal as well—a long-term approach will require active engagement on these issues.

With China’s growing presence in Nepal, there is a need for New Delhi to recalibrate its options and further push in areas where it has already achieved significant progress. The obstacles that delay the completion of projects like the Pancheshwar Multipurpose Project, other concerns related to delay in implementing projects on loans granted by the Exim bank, and assuaging Nepal’s concerns about the rising trade deficit are all issues that should be taken up with the other side. As Nepal’s then Prime Minister had articulated in 2016, remarking on the country’s ‘historic tilt’ toward India, security and development can’t progress in isolation.

As the growing cleavages between China and the US start playing in the neighborhood, for India and Nepal to strengthen their partnership, it is imperative to rejig the bilateral relationship. The two countries have the potential to build on the positives and adopt a pragmatic approach. However the rather quick changes in government in Nepal and the limits that it imposes on adopting a consistent foreign policy toward India does affect progress. With India on the cusp of concluding the voting for the general elections, one hopes that the two countries sustain the progress that they have made in the last decade and become more open in resolving the issues that plague the relationship.