The China factor in India-Nepal relations-Read

While it is reasonable to assume a strong cultural bond between India and Nepal, complacency could be detrimental, especially in the face of tough competition from China

By Dhananjay Tripathi

Recently, India-Nepal ties re-emerged in the news headlines due to KP Oli’s decision to visit China. Oli, the present Prime Minister of Nepal, took the oath in July 2024. His visit to China drew the attention of Indian analysts as many believed it was a break of traditions. Oli opted for China over India for his first visit to the neighbourhood. However, Nepal experts allege that New Delhi has delayed the invitation.

Whatever the reason, he went to China, signed nine agreements, met President Xi Jinping and discussed the revival of the Belt and Road Initiative (BRI) in what is termed a framework for Belt and Road Cooperation. It is to be noted that Nepal was a signatory of the BRI but due to apprehension of being overloaded by debt, it moved cautiously and the projects envisioned under it have not been operationalised according to the plan.

Failed BRI — A Case of Pokhara International Airport?

Due to the lacklustre progress of the BRI) in Nepal, several projects that received support from China have since been classified under the BRI. A prime example of this is the Pokhara International Airport. This airport was constructed at a cost of over $216 million, with nearly $215 million provided by the Chinese government in the form of a soft loan. Although the airport is classified as an international facility, it currently has no direct international flights. To demonstrate its success, China arranged a chartered flight from Sichuan to Pokhara International Airport in June 2023. However, in practical terms, the number of international flights to this destination remains very limited.

Curious Case of Chinese Debt

There are several direct flights from Kathmandu to Pokhara. Nevertheless, experts believe that given the current revenue generation, it may be difficult to repay the loan within 20 years after the end of the initial grace period. Estimates indicate that Nepal must repay the loan for the construction of the airport with an interest rate of 2%, although some independent sources report the interest rate could be as high as 5%, in addition to other costs.

Interestingly, similar to other projects in South Asia, the contract to build the airport was awarded to a Chinese company. China CAMC Engineering Company Limited was responsible for constructing Pokhara International Airport, resulting in a significant portion of the loan being recycled, as the construction contracts were granted to the Chinese firm.

India remains the largest source of FDI in Nepal but China’s overall investment is increasing and trade between them stood at around $1.8 billion in 2023

The repayment amount, including interest, will be substantial for Nepal, especially considering the current flight operations at this airport. A report indicates that the airport requires approximately 100 daily domestic and 50 international flights per week to cover its expenses. Currently, there are no more than 30 domestic flights each day and no international flights operating from this airport. In summary, the airport will need an extraordinary intervention to repay the Chinese loan. There have been reports that both Prachanda and, more recently, Oli have requested concessions from China, but they have yet to receive a positive response from Beijing. Even for those who disagree with the “debt trap theory” in principle, this case provides grounds for examination.

India remains the largest source of foreign direct investment (FDI) in Nepal; however, China’s overall investment is increasing. In 2023, trade between China and Nepal reached approximately $1.8 billion, which is an increase of more than 7% compared to the previous years. China is significantly investing in infrastructure projects, particularly in the energy sector, with many of these initiatives funded by Chinese capital. As a result, Chinese debt in Nepal is also rising. According to a World Bank report, this debt grew from $0.07 billion in 2016 to $0.26 billion in 2022. While this amount is still much lower than the Chinese debt owed by other South Asian countries, Nepal is concerned about the steady increase in this figure.

Strategy of China

Upon close observation, it is evident that China employs a two-pronged strategy to expand its influence in South Asia. The first approach involves straining the economies of these countries by flooding the market with its products, offering loans for unnecessary mega-infrastructure projects, and leveraging its economic power to secure investments for Chinese companies. The second focuses on cultivating a pro-China civil society and promoting political parties and leaders that align with its interests.

China provides generous scholarships to students, grants and funding for projects to think tanks and NGOs. It also offers travel opportunities for scholars, bureaucrats and journalists. Additionally, the country grants PhD fellowships and sends influential elites, academics and members of the Communist Party to various South Asian nations. According to reports, there has been a significant increase in training programmes organised by China for bureaucrats in Nepal. This strategic initiative creates a favourable intellectual environment for China while sidelining or diminishing the voices of critical and independent thinkers in these countries.

For instance, despite the strengthening ties between China and Nepal, some analysts in Nepal are opposed to requesting debt restructuring from China due to concerns about potential backlash from Beijing. Additionally, many in Nepal employ the logic of balancing relations with India and China in the national political discourse. This approach tends to be more rhetorical than substantive. Nevertheless, the idea that Nepal must balance its relationships with both neighbours has become a widely accepted narrative.

What about India?

The discussion about China’s influence in Nepal cannot take place without addressing India’s role. The relationship between India and Nepal is rooted in history and is deeply connected through culture, extending beyond mere political considerations. It involves the people, their traditions and a sense of unity. Notwithstanding, there are contentious issues between the two nations, and China’s growing presence poses a challenge for New Delhi. Beijing has exploited regional tensions and strategically strengthened its foothold wherever India has encountered obstacles due to political factors.

Despite India’s continued investment in the region, it struggles to maintain its strong position, particularly evident in Nepal. At times, India’s foreign policy establishment seems to take certain aspects of this relationship for granted. While it is reasonable to assume a strong cultural bond between India and Nepal, complacency could be detrimental, especially in the face of tough competition from China.

India must work on reinforcing cultural ties with Nepal and engage more with civil society and the younger generation. Given Nepal’s developing status, there is an urgent need for attractive fellowships and enhanced exchange programmes. Additionally, Indian companies should consider investing in Nepal’s social sector to further strengthen these connections.

Many people view China as being more influential than India in Nepal, which is concerning. A more proactive approach from India, aimed at engaging the young and articulate generation, along with a genuine effort to address political differences, could significantly enhance India’s image in the region. Fortunately, some members of Nepal’s political class, regardless of their party affiliations, remain sceptical about China’s involvement, especially in the economic sector. However, this sentiment may not last indefinitely.

(The author is Associate Professor, Department of International Relations, South Asian University, New Delhi)