Nepal’s Relations with India and China: Advantage Dragon?

Issues Details: 
Vol 10 Issue 6 Jan - Feb 2017
Page No.: 
Sub Title: 
The interplay of Nepal China and India Relations
Defstrat Editorial Team
Monday, February 6, 2017
Nepal has an interesting geography of being a landlocked country sandwiched between two large neighbours. While the 1,868 km of border with India, bordering the Indian States of Uttarakhand, UP, Bihar, West Bengal and Sikkim is an open border, its 1,236 km border with China is topographically harsh terrain.  
Over six million Nepalese work in India whose remittances form a significant component of the Nepalese GDP.  In 2012-13, remittances to Nepal were around $ 3.5 billion, amounting to a quarter of the nation’s GDP. Around six lakh Indians are living/domiciled in Nepal. These include businessmen and traders, professionals such as doctors, engineers, IT personnel besides labourers who have been living there for a long time.
Initial Years: Advantage India
After India attained Independence, it is the Indo-Nepal Treaty of Peace and Friendship, 1950 that has formed the basis on which relations between the two nations were based.  Significantly, this Treaty states that “neither government shall tolerate any threat to the security of the other by a foreign aggressor” and obligated both sides “to inform each other of any serious friction or misunderstanding with any neighbouring state likely to cause any breach in the friendly relations subsisting between the two governments.”  
A special relationship developed between India and Nepal over the years that granted Nepalese the same economic and educational opportunities as Indian citizens in India.  The Indo-Nepal border became open, with nationals of both countries being able to move freely across the border without passports or visas.  On the political plane however, the relations between the two nations have been eventful.   
In regard to China, the invasion of Tibet by the People’s Liberation Army in 1950-51, in fact pushed Nepal to seek military ties with India and was a factor that led to the conclusion of the Indo-Nepal Treaty of Peace and Friendship of 1950.  China too, on its part, ordered restrictions on the entry of Nepalese pilgrims and contacts with Tibet.
The Nepalese Citizenship Act of 1952 allowed Indians to immigrate to Nepal and acquire Nepalese citizenship with ease.  This however became a source of resentment in Nepal as the number of Indians living and working, particularly in the Terai, region increased steeply.  This is an aspect by which seeds of future discord were sown. 
The beginnings of positive relations between Nepal and China began to emerge. Diplomatic relations between Nepal and China were restored on 1st August 1955 and resident Ambassadors were exchanged by 1960, the year in which the two nations signed the Sino- Nepal Treaty of Peace and Friendship, besides a border agreement.  Nepal on its part supported the Chinese bid for a seat in the UN.  An all-weather road between Kathmandu and Tibet was agreed to be built in 1961. 
The 1962 Sino-India War
The defeat of Indian forces in 1962 provided Nepal a position of advantage to extract important concessions, including transit rights through India.  Relations however soured in 1969 when Nepal challenged the then existing mutual security arrangement and asked for Indian security check posts to be withdrawn. 
On the Chinese side, a large number of Tibetans entered Nepal, particularly after the 1959 Lhasa uprising.  King Mahendra had earned considerable gratitude for granting Tibetan refugees asylum and setting up relief camps and shelter homes for them. Nepal, however took steps to suppress any political activities by them against China. Nepal maintained complete neutrality during the Sino-Indian War of 1962.
Sikkim Annexation and Consequences
India’s annexation of Sikkim in 1975 became a major watershed in Indo-Nepal relations, one that induced both insecurity and uncertainty. Nepal openly criticised the annexation and in a move that reflected insecurity regarding India’s motives, proposed it (Nepal) be regarded as a ‘Zone of Peace’.  While China and even Pakistan supported the proposal, India did not.  It was only in 1978 after Nepal’s formal acknowledgement of Sikkim as an Indian state that India agreed to separate trade and transit treaties.
Nepal’s quest to strengthen its relations with China arose post India’s annexation of Sikkim in pursuance of a policy to balance the competing influences between its two large neighbours. 
A ‘Difficult’ Friendship
Nepal has accused India of providing tacit support and use of its territory to Nepalese opposition parties agitating against the Nepalese government.  
In 1987 India expelled Nepalese settlers from States neighbouring Nepal and Nepal retaliated by introducing a work permit system for Indians working in Nepal. 
In 1988, when the two extant Treaties on Trade and Transit were due to expire, Nepal refused to accept India’s position for a single treaty on grounds of violating the principle of freedom to trade.  The two treaties expired in March 1989 after two extensions resulting in a virtual Indian economic blockade of Nepal that lasted until April 1990. India withdrew preferential customs and transit duties on Nepalese goods entering or passing through India. It also allowed agreements relating to oil processing and warehouse space in Calcutta for goods destined to Nepal lapse and even cancelled trade credits that had been extended to Nepal.  
On its part, Nepal decoupled its rupee from the Indian rupee with India retaliating by denying Nepal port facilities at Calcutta which affected oil supplies to Nepal. Separate trade and transit treaties were signed and a special security relationship established in June 1990 and the thirteen month economic blockade of Nepal was lifted. 
 On the China side, However, Nepal took strong steps to eliminate Khampa rebels fighting against the Chinese rule in Tibet from its northern borders. Under Chinese pressure, it signed a treaty with China in 1986 that included a commitment to impose restrictions on the entry and transit of Tibetan Refugees into Nepal. An even stricter border control policy has been adopted since 1989 raising the question as to whether the interests of the Tibetan refugees were being bargained for Chinese assistance and goodwill.
The Dragon Advances
The reign of King Gyanendra was a period when relations took a further downturn.  In February 2005, the King assumed direct authority to suppress the Maoist insurgency for which he sought arms and weaponry from India and other nations including the UK and USA. 
Refusal by other nations provided China an opportunity as the King sought and obtained Chinese arms. According to media reports, the Chinese army escorted eighteen trucks carrying arms and ammunition to Nepal’s border where ‘plain-clothes’ Nepalese troops took them over. Interestingly, on its part, China put aside its ideological affiliation with Maoists against whom the arms were intended to be used. On his part, the King put all his eggs in the China basket, which became evident at the regional summit in Dhaka in November 2005, when Nepal became the most vocal supporter of immediate Chinese affiliation with SAARC. 
Nepal Relents
In 2006, the newly formed democratic parliament of Nepal passed a citizenship bill that bestowed Nepalese citizenship, by virtue of naturalisation, to nearly 4 million stateless immigrants in its Terai region.  A long-standing issue between India and Nepal had thereby been addressed to general satisfaction of all parties. 
Dragon Ahead again
In an unexpected move that broke from tradition, the newly elected Prime Minister Prachanda (August 2008), broke tradition by becoming the first ever Nepalese leader to visit China before a visit to India. Although the then Law Minister elaborated by stating that the visit “cannot be regarded as directed against India.  The Maoist Government wants to follow a policy of ‘equi-distance’ from India and China.” 
The Infrastructure ‘Compete’
However, Indo-Nepal relations saw an upswing in 2008, with the decision to commence the reconstruction of the breached Kosi embankment.  India opened a credit line of Rs 150 crores and Nepal assured initiating measures to promote Indian investments in Nepal.  India also opened a credit line for $50 million in 2010.  
On 20th February 2016, Nepal and India signed agreements that would facilitate transit facilities between Nepal and Bangladesh and rail connectivity between Nepal and Vishakhapatnam port. 
On 27th October 2016, Nepal and India agreed to set up a mechanism to clear the bottleneck in India-funded projects in Nepal. 
The Mahakali Bridge and irrigation projects to be implemented through the $1 billion concessional loan provided by India in 2014.
The HulakiRajmarga (Highway) that would connect Eastern and Western Nepal in the Terai and its feeder roads.  
The (ongoing) Biratnagar-Jogbani and Bardibas-Bijalpura-Jaynagar cross-border railway projects 
Initiation of works on three other agreed cross-border rail link projects--Nepalgunj-Nepalgunj Road, Kakarbhitta-New Jalpaiguri, and Bhairahawa-Nautanawa.
Setting up the Nepal-India Friendship Polytechnic Institute (NIFPI) at Makawanpur, Hetauda in Nepal.
China on its part has virtually ‘invaded’ Nepal with direct investments in nearly every field ranging from military aid, roads and highway networks, infrastructure projects, telecommunications and hydroelectric power. Some major infrastructure projects being:
Upgrading and expansion of the Kathmandu Ring Road, the Tatopani Dry Port project and construction of the Upper Trishuli 3A Hydro Power Station, for which the Chinese government has provided a concessional loan. 
• The 770-kilometre railway connecting the Tibetan capital of Lhasa with the Nepalese border town of Khasa.  
Completion of the Prithivi and Arniko Highway, the Pokhara-Baglung Road and the Narayanghat-Gorkha Highway.
PM Modi’s Outreach
Prime Minister of India Narendra Modi’s visit to Nepal in 2014 was the first by an Indian Prime Minister after 17 years. He announced a credit line of $ 1 billion besides Rs 25 crores for the development of the Pashupatinath Temple. A deal for India building a 900 MW hydropower plant was signed in November 2014. Another sum of $ 250 million was also
granted for reconstruction post the earthquake. 
The 2015 ‘Blockade’: Advantage Lost?
Nepal accused India of imposing an undeclared blockade that caused a serious economic and humanitarian crisis in September 2015 that was lifted only in February 2016. Though India placed the blame for the ‘blockade’ on Madhesi protesters within Nepal, the perception in Nepal on India’s tacit role is indelible. All of Nepal’s petroleum supplies come through India.  The number of fuel laden trucks entering Nepal from India dwindled from around 300 to just 5-10 per day leaving little to imagination on the consequences of the short supply. Though vehicles carrying fruits and vegetables were allowed to pass, the supply of medicines and even earthquake relief material was said to be affected.  
Normalcy returned only after passage of a constitutional amendment by Nepal to increase the number of parliamentary seats from the 20 districts in the southern region of the country and enable equitable Madhesi representation. Certain incidents during the period of this ‘blockade’ reflect the extent of trust deficit regarding India that had developed in Nepal and its people.
• During Prime Minister Modi’s visit to UK on 12 November 2015, a demonstration was held at 10 Downing Street by a large number of UK based Nepalese that included many ex-military personnel and families (Gurkha Regiment). 
• On 25th  November 2015, troops of the Sashastra Seema Bal (SSB)  shot four Madhesi Nepali youths trying to bring food and fertilizers into Nepal. (The SSB claimed the incident to have occurred in Indian Territory).  
• On 29th November 2015, as many as 13 SSB personnel were ‘caught’ in Nepalese territory and were held by Armed Police Force of Nepal for a day. 
In sum, the momentum generated by Prime Minister Modi’s two visits to Nepal had petered out due to the Madhesi agitation, which was seen by Nepal’s political leadership as a handiwork of India. 
Dragon Ahead?
On the China front, the relations continued to strengthen and in March 2016, China and Nepal signed a Trade agreement besides several other pacts.  Some of the major agreements reached between the two nations are : 
• Nepal to use China’s sea ports. 
China to build a regional international airport in Pokhara and provide economic and technical support for implementation of the Pokhara airport project.
Possibilities of signing a bilateral free trade agreement to be explored. 
China to explore the possibility of finding oil and gas reserves in Nepal
China to build, manage and maintain Xiarwa Boundary River Bridge at the Humla (Hilsa)-Sera (Taklakot) crossing road in the Western region of Nepal. 
China to distribute solar panels in Nepal’s rural areas by tapping its Climate Fund
(The China- Nepal Friendship Highway already connects Lhasa to Kathmandu). 
Under Kharga Prasad Oli’s Prime Ministership from 11 October 2015 till his coalition Government shrank into a minority on 13 July 2016, Nepal sought to enhance its ties with China.  A deal signed by the two countries to extend China’s Tibet rail network to Kathmandu, created special economic zones for Chinese firms and sealed a long-term agreement for petroleum imports rang alarm bells in New Delhi.
The ‘Recalibration’
The fall of the Oli Government that had taken a stridently anti-India stance, brought back Prachanda as Prime Minister for a second tenure. Unlike during his first tenure when he had visited China first, Prachanda this time chose to come to Delhi and the visit that took place on 16 September 2016 re-established a semblance of balance in Indo-Nepalese relations. In the words of a diplomat, “a deliberate recalibration away from what the previous prime minister planned, which was a closer relationship with China” was being made.  The circumstances for Nepal, which was struggling to recover from the impact of two earthquakes that had caused the deaths of over 9,000 people, were far different now.  The two sides signed a pact for Line of Credit of US$ 750 million for post-earthquake reconstruction of Nepal. India also agreed to extend an additional Line of Credit for new projects such as Phase-2 of Terai Roads, power transmission lines, substations and a polytechnic in Kaski. Security cooperation was also discussed with Prime Minister Modi-who prodded a settlement of the Madhesi issue by stating that under Prime Minister Prachanda’s  “wise leadership, Nepal will successfully implement the Constitution through inclusive dialogue accommodating the aspirations of all sections of your diverse society.”  India therefore views PM Prachanda this time around as far more dependable to do business with.  
A ‘dynamic’ balance’?
In the words of the Nepali commentator Kanak Mani Dixit, the five month-blockade on the Nepal-India border had however “pushed Nepal to open its northern borders with China for transit trade.” He adds that though “Historically, the Himalayas were seen as barrier but now the Himalayas can be a connector between Nepal and China”, emphasising that the transit and train agreements between Nepal and China “will create new dynamics in South Asia”. 
Even if India has managed a ‘swing back’ to its relative advantage for the time being during the  September 2016 visit of Prime Minister Prachanda,  China’s investments in developing its relations with Nepal are large and hold enormous potential for the future. The long term advantage could well be on the side of the Dragon.