King Prithvi Narayan Shah, the founder of modern Nepal, once stated, ‘Nepal is a yam between two boulders.’ This statement has become an evergreen mantra for understanding and managing Nepal’s foreign affairs. According to him, the ‘two boulders’ are India and China, and Nepal’s strategy has always been the ‘strategy for survival,’ as rightly pointed out by Leo E Rose. In realpolitik, all strategies are inherited within the geography of the country—‘Geography is the mother of strategy’. Secondly, geography stands as the most prime factor in implementing the foreign policy of any state because, in most cases, it is ‘fixed’.
Within Nepal, the sentiment of the people has always been a fear of two dynamics: the fear of foreign intervention and natural disasters/earthquakes. To elaborate further, Nepal shares close ties with India in many aspects, from geography to politics, economy, and culture. People in Nepal often find themselves in a forced position to balance ‘sovereignty and integration’ with India. At the same time, China is no longer an ‘inactive’ force in global politics and has an interest in South Asia. That ‘interest’ is sometimes ‘hard’ too. As a Nepali, the fear of being caught in the ‘radar’ of these giants, including the impact of extra-regional powers like the US, can’t be ignored. Nepal resides in an earthquake-prone area, and the foundation of every development must focus on earthquake resilience. These two ‘fears’ have been haunting Nepal and its people for quite a long time.
Power centers have a ‘natural’ interest in the country located between two giants with a comparatively low level of governance efficiency and societal development, allowing foreign aid ‘projects’ to flourish, thanks to an unfavorable investment climate that curtails FDI in the country.
Nepal-India development partnership
Since the 1990s, India’s foreign aid to Nepal has been largely guided by the Gujral Doctrine. The doctrine states that, “India does not ask for reciprocity with its neighbors like Nepal, Bangladesh, Bhutan, the Maldives and Sri Lanka. Instead, it gives and accommodates what can be given in good faith and trust.” However, as a neighbor, India has not effectively translated these narratives with its smaller neighbors, resulting in tensions from time to time.
When Indian Prime Minister Narendra Modi assumed power in 2014, he endorsed the Neighborhood First policy, making five trips to Nepal—unprecedented in the past 17 years for any Indian Prime Minister. These visits symbolized strong ties and demonstrated a commitment to collaborating with Nepal based on its development needs. Since May 2014, there have been 17 exchanges at the level of Head of State/Head of Government. Aligned with the ‘Neighborhood First’ policy, Indian Prime Minister Modi has visited Nepal five times, and the Nepali Prime Minister visited India eight times since Jan 2015.
Since 1954, after the establishment of the Indian Aid Mission in Nepal, India has supported Nepal in the development of major infrastructure projects, including the construction of Tribhuvan International Airport, water supply systems and hospitals.
After India’s economic blockade in 2015, India has been actively involved in the development of connectivity with Nepal through construction of Integrated Check Posts and Railways in Nepal. To facilitate the construction of two broad-gauge cross-border railway links—Jayanagar-Bardibas and Jogbani-Biratnagar—financial and technical assistance was provided to Nepal. Furthermore, MOUs were signed to conduct the Final Location Survey for the proposed broad-gauge line between Raxaul and Kathmandu in October 2021. The Draft Detailed Project Report resulting from this Final Location Survey was submitted to Nepal in July 2023 for review and consideration. In FY 2020-21, India provided a grant of $10.93m, a loan of $60m, and $1.38m as Technical Assistance.
India’s shift
The year 2015 marks India’s shift away from engagement in politically sensitive issues with Nepal (in most cases), replacing it with a focus on development agendas. Additionally, India’s grassroots engagement has been facilitated through High Impact Community Development Projects (HICDPs). In Jan 2024, the cap of each project under HICDPs was increased to Rs 200m. Due to India’s intense engagement in Nepal’s political affairs since 1950, HICDPs have been at the center of debate in Nepal, with concerns about India's alleged intervention at the grassroots level to promote its vested interests.
Challenges
Despite such collaborative efforts, Nepal’s trade deficit with India has been steadily increasing. In 2015-16, Nepal’s trade deficit with India stood at $3,581m, with exports amounting to $419m and imports reaching $4,000m. By 2021-22, Nepal’s exports to India had increased to $1,330m, while imports surged to $9,580m, resulting in a trade deficit of $8,250m. In May 2024/25, Nepal’s trade deficit with India reached $9.63bn. This growing trade deficit is primarily due to Nepal’s heavy reliance on Indian petroleum products, vehicles and consumer goods, while Nepal’s exports, mainly agricultural products, struggle to compete in the Indian market.
In April 2022, both countries released a ‘Joint Vision Statement on Power Sector Cooperation’ to enhance power cooperation. However, within Nepal’s political circles, many Nepalis perceive this vision statement as India’s attempt to control Nepal’s water resources while discouraging investment from other foreign players. This perception has been reinforced by India’s consistent reluctance, both in actions and statements, to purchase electricity generated through Chinese capital or contractors in Nepal.
Way forward
Concluding all of the above, India has been focusing on connectivity issues between Nepal and India after India’s economic blockade in 2015, moving away from hardcore political issues. The increasing connectivity with India will help Nepal unlock new potentials, but due to Nepal’s own internal limitations and turbulence, this has resulted in a deeper economic dependency on India rather than interdependence.
India’s involvement at the grassroots level, aimed at empowering local communities through foreign aid and accounting for 35 percent of FDI stock, undeniably highlights its significance in Nepal. Furthermore, Nepal’s geographical positioning—surrounded by India on three sides—places it in a ‘locked’ relationship with India. The interplay between geographical proximity and distinct national identity has led to numerous fluctuations in their political dynamics since the 1950s.
From Nepal’s side, there is a growing perception that India is accelerating its connectivity development projects in Nepal at a time when Nepal is overwhelmed by multiple development commitments from China. Whether India is responding only after Chinese pledges to Nepal or if this is merely a coincidence remains a matter of debate. However, the narrative in Indian media and public discourse about Nepal shifting toward a pro-China stance is a fabricated attempt to undermine bilateral relations between Nepal and India.
Summing up, Nepal and India should move ahead by taking into account each other’s security sensitivities resulting from the open border.
