India-Nepal ties
File photo of PM Narendra Modi with Nepal's Prime Minister K.P. Sharma Oli | PTI
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India and Nepal share deep social, cultural, strategic, political, and economic ties that have been forged over many centuries. Unfortunately, ties wither if exposed to the changing fundamentals of time. India-Nepal ties have frayed slowly as the economic bonds between the two countries have failed to keep pace with India’s modernization and growth. The opportunities offered by India’s prospering economy have become increasingly inaccessible, and thereby irrelevant to ordinary Nepalis.

The persistent border dispute between the two countries is an opportunity for them to modernize old ties towards a shared vision of prosperity. India and Nepal must do more than merely resolve boundary issues. They must return to the core strengths of their unique social, cultural, strategic, political, and economic bonds and modernize ties to directly connect its people, markets, finance, and technology.

Old ties fallen into state of disrepair

Thousands of people in India and Nepal cross the open border every day to work, buy, sell, and transact businesses. India remains Nepal’s dominant trade partner, steadily accounting for approximately 60-65% of all trade with Nepal even as other countries, such as China have made significant inroads in the last few years. But behind the numbers on India-Nepal trade is a complex network of informal arrangements across borders that has made it possible. Cousins deal with one another across the borders; business associates with sons and daughters married into each other families. Lenders and suppliers that offered credit based on family references. Cash that moved easily across the border.

Such informal ties and the simplicity of those traditional businesses are now under stress. The Indian economy is modernizing, transitioning from the informal into the formal economy. Contracts are being required. Complex documentation is needed to move products across borders. Stronger controls are making it difficult to move cash and make payments. The India-Nepal border that had once never prevented cousins, brothers, sisters, friends and associates from doing business with one other has now become a boundary that separates.

For many small and medium Nepali businesses, it is now easier to trade with China. This isn’t because China has rendered India uncompetitive. Rather, the rules have made it harder to do business with India.

Also read: India-Nepal friction casts shadow on proposed Pancheshwar multipurpose dam project

SMEs are being left behind

India-Nepal trading agreements still carry vestiges of old rules. For example, Nepali traders cannot import products from India that are not manufactured in India. Today’s global scenario has changed: multi-national companies have set up in India and generally assign responsibility of the whole South Asian region to their India office. Large business work around these by routing trading agreements through third country, but small business are unable to do that. Instead, doing the equivalent business in China is much easier.

Despite open borders, complex regulatory requirements have complicated import-export between the two countries. This is disproportionately felt on small businesses. From import export codes to harmonized product codes and invoice sanctity, the practical complexity of trade often leaves it open to high level of the discretionary authority of local customs officials – a sure way to frustrate those seeking to do business. Large business that consistently do business find ways to get around this but opportunistic (or spontaneous) trade, which are often small in volume, are significantly hurt by these rules. The end result: opportunistic trade opportunities that are often the basis and spark for longer term investments are simply put off because the transactions take too much time.

The historic complex informal economic network that is the bedrock of India-Nepal trade will not modernize on its own. But these are the ties that will bind – they cannot be left to wither. Decision-makers must recast these ties: modernize and make it relevant again to the people that share in its benefits. With China now a factor directly or indirectly influencing India-Nepal relations, decision-makers must act swiftly to remove anomalies blocking economic engagements. They must allow people across the borders to share in each other’s growth just as they did before.

Government to government means nothing

Once the single largest source for Foreign Direct Investments (FDIs) in Nepal, India has seen its position erode with growing Chinese investments. In 2019, for instance, China accounted for approximately 40% of new FDIs against India’s 30%. The relative decline in Indian investments in Nepal reflects two underlying factors.

First, the socio-economic ties between India and Nepal have failed to adapt rapidly enough. That network was the main driver of investments in the past: it identified opportunities, secured investments, and facilitated its flow. As these socio-economic networks have lagged, particularly by failing to modernize from the informal to the formal, Indian investments have declined. Second, the Indian government stepped in to lead India’s investment foray into Nepal. The story about growing Chinese investments in Nepal was cast in geo-political terms as the dwindling of Indian influence. India responded by committing investments backed up by its government.

This strategy has undermined India’s efforts in Nepal, further eroding the historic economic ties between people of the two countries. Government of India’s involvement, or at least its announced intention of directly leading investments in Nepal, crowded out the formal and informal networks that had fuelled Indian investments in Nepal in the past.

It also changed the complexion and narrative of India-Nepal relations. Instead of it being about the old relationships between people and cultures, India-Nepal economic ties became about governments with all sorts of geo-political nuances.

While India’s government focused on engaging Nepal’s government through bilateral and government-to-government investments, China, on the other hand, enabled its firms to connect directly with the people of Nepal. Many small Chinese firms arrived in Nepal. They found local partners and invested in wide range of enterprises across sectors.

In 2019, for example, approximately 1,500 Chinese firms had received approvals for FDIs in Nepal. This was twice the number of Indian firms that had been approved for foreign investment. But on average, Chinese firms were investing much smaller amounts per project than Indian firms. The investments by Chinese firms in Nepal were far more granular and much closer to the businesses and lives of ordinary Nepalis.

While the government of India and Nepal focused on doing business between themselves, underneath where it really matters, a new economic network between the people of China and Nepal has taken shape.

Also read: India’s civilisational approach to ties creating ultra-nationalist Asian neighbours. Like Nepal

Political class is not permeable    

For Nepal, this is an era of exciting change. New awakenings and aspirations have taken roots. Like other governments, India has also rushed to engage with Nepal’s new government. But India’s relationships with Nepal is broader than engagements with governments alone. It works, for instance, directly with many young people and communities across Nepal.

Sadly, these Indian development initiatives that seek to connect directly with Nepalis have been sabotaged. Consider the example of scholarships that India provides to Nepali students for higher education in Indian institutions. While technically based on merit, many of the scholarships are awarded on the recommendations of Nepal’s political class. The awards fuel a network of patronage and but fails to make India’s growth accessible to Nepalis in need.

India also works directly with communities and local organizations supporting a wide range of development projects (e.g., building school, health centres, energy projects, providing ambulances). Most of projects, however, go to places where there is a clear political connect. While such projects provide development benefits to people in the area, the local politician harvests a much richer dividend. India’s approach of connecting with the people of Nepal is being undermined by local intermediaries. The political class in Nepal, even under the new dispensation, thus far, haven’t proven to be been any more permeable than the ones before. Development dividends don’t flow through so easily.

Nepali aspirations have been unshackled. India must recognize this. As an immediate priority, it must realign its geo-political and economic outlook on Nepal to craft a new approach that allows ordinary Nepalis to access the opportunities India’s economic growth offers. There are many things that India and Nepal could do to modernize ties. They could create modern business hubs that enable young tech-savvy Nepali entrepreneurs to connect with India’s innovations. It could offer credit lines that small and medium enterprises could directly access for cross border trade and investments. It could harmonize and ease cross border trading rules. Most importantly, it must encourage Indian and Nepali businesses to speak with each other and provide them the confidence that their governments want them to succeed.

Centuries of social, cultural, political, strategic, and economic ties can only remain strong if they can remain relevant to changing times. The governments of India and Nepal must reset the narrative, modernize their policies, and get out of the way so that the ties between people thrives again.

Atul K Thakur is a policy professional and columnist. Bishal Thapa is an economist and a columnist. Views are personal.

The article was first published on the Observer Research Foundation website.   

Also read: Modi said Neighbourhood First and then ranked Nepal low in India’s priority list


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  1. Indian people China excuse on Nepal whenever Nepal brings border issue with India is the ultimate example of bullying.
    India has been encroaching Nepali lands for decades and everytime they use ‘China’ excuse.
    FYI, Nepal has TWO neighbours. Nepalese people like both countries equally and it turns out that one of them is a second richest nation in the World. Why wouldnt anybody take this opportunity to do business with the more advanced and modern country ?

  2. Whatever you do Nepal and all those possessed neighbours will find fault with you. Money and power talks. India cannot compete China and should not race with China. First home, then neighbour. Many things to be done at home. Modiji tried his best with neighbour appeasement policies. Did it yield any result? How can a country like Nepal betray India when 80 lacs of its subject are brought up in India engaged in various pursuits. When every survival items goes from India. When actor like Monisha Kairala doing her acting career in India and commenting against India?

  3. To China it’s a marketplace for their products, cheap and inferior quality. Its a good place to dump n their economy prospers on it. Nepal in sleeping mode the faster they wake up is better

  4. The rules are there so that Nepal does not become proxy of china to push/dump Chinese products via Nepal. China is already doing a this using Asean countries with which india either a free Trade agreement or lower tariffs.

  5. Dragon has palm and five finger policy.

    Nepal is next on the block along with Bhutan to be usurped by dragon.

    Not only Nepalese villagers are being chased away by dragon but dragon has occupied border villages which are Nepalese territory.

    On top of that Nepal government is thinking about creating tunnels through the Himalayas on dragon loan.

    The communist government in a zeal to spite Bharat has dismantled the shared culture and heritage and on top of that desecrating the abode of pashupati and parvati.

    This is what Nepalese deserve from a religious and spiritual hinterland to a soulless communist.

    Next year we will be hearing Kung pao chicken has replaced the momos as traditional Nepalese dish.

  6. Lots of talk about what India should do to improve ties, nothing about what Nepal can do or why India stands to gain from Nepal vs vice versa?
    India and Nepal are not equals, no matter what some pahadi jokers think in Kathmandu. They need to either start teaching their children Mandarin or get off their current path of delusional grandstanding. Because continued antagonism wont be tolerated forever by India and if Nepal doesnt value ties with India, that sentiment will be reciprocated and in much greater magnitude its effects on Nepalis will be devastating.

    • That’s great reply to most y the Communist Columnists….! Why there’s only lecture India…. nothing wrong about Nepalese Communist…..? These type of journalists are actually paid by…. everyone knows who…..!

      • @Ghurka Naukar – Already tried it Ghurka joker – how many times you want to stand in line?? We are not equals.
        Your country has less GDP, lesser education, lesser military, lesser technology, lesser in sports, lesser in area, lesser in resources, lesser industry, etc…i can go on! Nepal’s GDP is not even as much as Sri Lanka or Bangladesh, forget India.

        If you think you are equal to India, you are even more illiterate and delusional than your Chinese puppet PM.

  7. Nepal gunned down an Indian citizen to decimate the people to people tie. So who responsible? India need not feel guilty regarding loosing Nepal which is already under the ideological grip of China.

  8. And what Nepali will hear from Indians afterwards is tumhari aukat Kya h hamari Wajah se ho rha h and all This Indian generation is the worst ever in terms of character and language you know what will be better If Nepal trades with China instead let’s India be only a non interference neibhour that’s all itna kardo bas bahut h secondly if Indians get into Kathmandu market and all their people and influence will rise and Indians don’t like to leave .Rapes corruption capitalism etc etc all will rise through them

  9. What is Nepal brining to the table except entitlement? I was cheated by a Rudraksh bead seller at the world trade fair organized in New Delhi a couple of years ago and that shameless seller refused to give me my entire amount of money back even after he had to admit that he sold me a fake Rudrkash bead. And that’s the same betrayal that’s continuing to date from Nepal’s side at the national or political level. You want India to help or have your back then throw away the Chinese ambassador out of your country and do as New Delhi says. Any attempts to hedge China against India or attempting to reap undue benefits from the India-China rivalry may only be destructive for Nepal. The onus is on Nepal to be wise and keep up with the pace. Inclining towards China for economic prosperity may prove to be more expensive than what you might hope to gain!

  10. China will never be able to be to Nepal what India is to it because of various factors, geography and informal relationships being a big part of it. The complexities brought in by protocols are there exactly because they were necessary and shouldn’t be removed unless we find a way where we are 100% sure that India doesn’t lose much in it. Nepal’s growing closeness shouldn’t threaten India in any manner. Just closing the informal nature of the borders, forget about blocking its trade routes would be enough on its own to throw the entire country into chaotic recessions which can never be “completely” revived just with the Chinese help. Nepalis understand that retaliation in any substantial form is not an option to them and we need to assess the situation in a relaxed manner. India cannot and should not make its relationship with Nepal as the feeding competition that China and Russia made with NK, ever. Let Nepal grow however close to China as it wants. Even in the worst situation of a 2 front war, Nepal cannot allow or facilitate the Chinese to use its own lands. If it does it knows well that it will reach its own end. They are just throwing whatever informal repulsion they can afford to throw right now so that relations on an official landscape dont detiriorate and it doesn’t risk paying actual losses, similar to what Modi did when he went to Ladakh recently.

  11. It is not very clear from the article how difficulties in Indo Nepal trade can be resolved by trade with China. Trade with India and China are in different spaces – with India, it is more people centric and informal and hence, more wide spread whereas with China, it will be more in the formal sector. Besides, to have balance of payment, what is that Nepal is exporting to China? Nepal is a natural partner for India and it should not create artificial barriers for its trade with India, by politically aligning with China and crossing India’s red lines. India has no ill will or designs against Nepal and India has no issue if it wants to trade with or have normal relations with China, provided it is not a threat to Indian sovereignty and integrity. Hopefully, Nepalase communist leadership will think in its national interest and course correct. It will be easy to be a vassal of China like Pakistan but it will not gain much and lose a lot. Hope Nepal does not become like Pakistan ( a terrorist heaven for India activities) or a non-nuclear North Korea!

  12. Nepalese government has become it’s own people’s worst enemy. After Tibet it will be Nepal for Chinese army.

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