Authors: Sounak Ghosh and Dr. Karamala Areesh Kumar
Nepal is a miniature state nestled in a strategic position between China and India, two of the emerging powers of the contemporary world. Due to its geographical location, Nepal is an important buffer state and gives China and India equal opportunity to influence the region. In terms of national strength, Nepal’s relations with China and India are asymmetrical. The primary interest of China’s intervention is to prevent Tibetans from using Nepal’s territory as a base for its movement for autonomy. The Chinese government has made significant attempts to build its economic presence in Nepal since 1950, and simultaneously bilateral relations strengthened between both countries.
Along with its geographical location, vast river systems, sustained by glaciers and monsoon rains, make Nepal an ideal location for hydroelectric power generation. The country is among the richest in the world in terms of water resources per square kilometre, with an estimated 83,000 MW of hydro potential. As an aspiring power, China considers Nepal’s water resources as an alternative to meet its energy demand and needs in the southwest region. Under the bilateral cooperation, China expressed its interest in initiating a joint hydropower project, which can help both states.
Given the current circumstances, Nepal has chosen to maintain a non-alignment approach while hedging with both India and China. To address geopolitical obstacles, Nepal hopes to use Beijing’s economic and infrastructure development initiatives, such as the Belt and Road Initiative (BRI). India, on the other hand, sees China’s increasing influence in Nepal as posing a serious threat to its interests. The gap and lack of trust between India and Nepal increased China’s presence in Nepal. From 1975 onwards, Sino-Nepalese relations have been tight and have grown significantly. China’s investments in Nepal have increased dramatically over the decades. In terms of total investments made in Nepal, China surpassed India for the first time. Between 2014 and 2021, Nepal’s exports to China amounted to $196 million, while its purchases from China reached $12.4 billion. In comparison, Nepal brought in $49.9 billion from India and exported $5.37 billion to that country (OEC 2021). China overtook India for the first time in 2015–16, accounting for 42% of all foreign direct investment (FDI). With China securing project contracts worth $10.74 billion in Nepal during the following five years, till 2022, Chinese companies emerged as the main players in Nepali projects.
2016 saw the signing of the Trade and Transit Agreement (TTA) and Nepal’s inclusion as one of the original members of China’s Belt and Road Initiative (BRI), among other major accords during Prime Minister K.P. Sharma Oli’s visit to Beijing. Positive changes in infrastructure, economy, and military cooperation were evident during this time in Nepal-China relations (Mainali 2022). From 2017 forward, Nepal has made an effort to improve ties with China by welcoming more Chinese business and investment. This move away from India’s long-standing dominance in Nepali foreign policy was welcomed by the leftist parties, especially the Communist Party of Nepal-Maoist Centre and the Communist Party of Nepal-Unified Marxist Leninist (CPN-UML).
China accounted for 14.5% of foreign direct investment in Nepal in 2021, while India accounted for 33.3% (Nepal Central Bank Report 2022). Over the previous 27 years, Chinese exports to Nepal have increased at an annual rate of 13.9%, from $53.4 million in 1995 to $1.78 billion in 2022. China became a significant player in Nepali infrastructure projects in 2022, and Nepal’s imports from China reached $1.78 billion. China’s growing sway aside, India continued to be the primary recipient of foreign direct investment and kept a careful eye on the shifting dynamics. During fiscal year 2022-2023, India purchased items worth USD 839.62 million from Nepal, while its total exports to Nepal came to USD 8015.99 million. To traverse challenging geopolitical environments and take advantage of chances for economic and infrastructural growth, Nepal has balanced its relations with both China and India.
If Nepal changes its allegiance and accrues debt to China, it could affect India’s dominance in the region. If Nepal’s financial problems lead it to ask for more aid, that might affect India’s commercial relations. If tensions along the border rise due to Nepalese instability, India might have security worries. Additionally, it could lead to a wave of refugees into India, straining its already limited resources. Concerns have been raised about China’s financial support to Nepal. It’s called “debt-trap” diplomacy by critics. Beijing disputes this, but the concern endures. Nepal needs to exercise caution and look for grants and soft loans rather than commercial loans that can trap the country in debt. The major concern lies in the attempted Chinese debt trap, following a similar pattern seen in Sri Lanka. India advises Nepal to be cautious and prioritise sustainable financing options.
Nepal drifting from India could have strategic consequences. India’s immediate neighbours hold immense importance for regional stability. A weakened alliance with Nepal may impact India’s security interests, trade routes, and influence in the Himalayan region.
Despite India’s worries about Nepal’s growing commitment to China, it is important to recognize that Nepal’s relationship with China presents a unique combination of opportunities and problems. Although India may view Nepal’s stronger connections with China as a challenge to its hegemony in the region, Nepal’s efforts to build its infrastructure and economy with China could benefit both parties and promote stability in the area. Concern still lies in how Nepal will tackle the wrath of China which they can’t foresee, and how it affects India’s relation with Nepal.
