China’s supply of gasoline to Nepal marks the end of India’s decades-old monopoly over fuel sales to that country. Will this new arrangement will begin to able to erode India’s grip over Nepal’s foreign trade or will geography continue to favor India? An examination of Nepal’s geography and historical ties with India and China points to what the future holds for its relations with the two Asian giants.
Sandwiched between India and China, Nepal is a landlocked country making it dependent on its neighbors for international trade and access to the sea. Geography creates a stark contrast between Nepal’s borders with its northern and southern neighbors. Of its two neighbors, India provides it with the geographically more convenient trade route. The terrain between Nepal and India is comprised of mountains ranging between 600 meters and 2,200 meters in height, valleys and plains. In contrast, the terrain to Nepal’s north consists of mountains of an average height of 6,100 meters, which face the icy and arid Tibetan plateau. Most of the passes between Nepal and China are snow-bound throughout the year. Hence, travel and transport through the Indian plains is the easier option. From Nepal, the distance to Indian industrial towns, trading hubs and ports is also far less than to those in China. With travel to the Indian plains easier—and with less daunting terrain––the 1,751 km long India-Nepal border is a porous one. Population flow between Nepal and India has always been “continuous and unrestricted.”  Thus it is with India that Nepal has traditionally had closer relations and greater socio-economic interaction and cultural exchange.
Nepal’s location between nations as large as India and China, particularly given their history of conflict, has enhanced its strategic value. Consequently, their decades-long competition for influence in Nepal has sharpened in recent years.
Nepal’s strategic value to India soared after China’s annexation of Tibet. With its Tibetan buffer gone, Nepal emerged as India’s shield against China. It was in this context that Kathmandu and Delhi signed the Treaty of Peace and Friendship in 1950. The 1950 treaty and related documents attached to it tied Nepal’s security to that of India; the treaty stated that any aggression against Nepal would be considered as aggression against India, which would respond accordingly. The treaty also regulated Nepal’s acquisition of military equipment. Nepal could acquire military hardware from India or through the territory of India, but the latter required the Indian government’s “assistance and agreement.” The treaty also dealt with economic aspects of the bilateral relationship. It provided for an open border between India and Nepal. Their nationals could travel freely to each other’s countries, live and work there, engage in business and own property. 
The 1950 treaty and other agreements that followed provided a shot in the arm to the historically strong India-Nepal interaction. Economic cooperation deepened. Around six million of Nepal’s 28 million-strong population live and work in India, and around 600,000 Indians do the same in Nepal. Despite Nepal’s efforts to diversify its trade partners, its dependence on India persists—India is Nepal’s largest trade partner, accounting for nearly two-thirds of Nepal’s foreign trade and providing a market for around 70 percent of its exports (MEA, July 2014). According to a Nepal Rashtra Bank report, “India’s share of Nepal’s exports ballooned fourfold while its share of imports swelled three times” between the 1990s and 2010 (Kathmandu Post, February 4, 2014). As for foreign direct investment (FDI), until recently, India was Nepal’s largest investor (Kathmandu Post, July 21, 2014). It has played a huge role in Nepal’s infrastructure building, especially in the construction of roads, bridges, airports and hydropower projects as well as in the development of its human resources.
Bilateral defense relations have also been robust. India is Nepal’s largest supplier of military equipment. Besides, the two militaries cooperate through joint exercises, training and educational exchanges.
Cultural and religious bonds and socioeconomic ties have drawn India and Nepal closer. However, Nepal’s extreme dependence on India and the latter’s rather overbearing approach and insensitivity to its smaller neighbor’s sovereignty has undermined friendly relations and generated anti-India sentiment in Nepal. “Vested interest groups” have also fueled anti-India sentiment to serve their narrow political and economic interests (Institute for Defence Studies and Analyses, April 18, 2011; Hindustan Times, September 30). Nepal’s monarchs, peeved with India’s support to pro-democracy movements, reached out to China to undermine India’s influence, and Nepalese political parties have stoked anti-Indian protests to trigger unrest and destabilize governments. Playing the “China card” has also enhanced Kathmandu’s leverage and helped it gain more from an insecure India.
China’s Rising Profile
From China’s perspective, Nepal’s significance stemmed largely from the fact that it borders Tibet. Unsurprisingly then, Chinese engagement with Nepal has aimed at getting it to crackdown on Tibetan activism on Nepalese soil (China Brief, June 17, 2011). Nepal’s importance to China grew in the wake of deteriorating Sino-Indian relations. Especially in the context of its sanctuary to the Dalai Lama and the large Tibetan exile community, India’s dominating presence in Nepal, so close to restive Tibet, aroused fear in China that India would stoke unrest in that region, and is the underlying reason for Chinese attempts to weaken India’s presence and influence in Nepal. Nepal also offers China potential use against India in times of war (Chennai Centre for China Studies, July 12, 2011). Lastly, China sees Nepal as its gateway to the vast South Asian market.
China’s role in Nepal has expanded steadily over the last seven decades. Although difficult geographic terrain has restricted bilateral trade, China’s strategic road construction in the Himalayas has helped trade grow. In 2013, China was the fourth largest market for Nepal’s goods, absorbing four percent of its exports and the second largest (15 percent) source of its imports (Atlas of Economic Complexity, 2013). Sino-Nepalese trade was worth $23 billion in 2014.
Since the 1960s, Chinese investment and development aid to Nepal has gone largely toward infrastructure. In 1967, China completed a highway linking Kathmandu to Kodari near Nepal’s border with China. Several other roads followed such as the Kathmandu-Bhaktapur highway and the Kathmandu-Pokhara highway. China is also investing in hydropower projects, cement, real estate and tourism in Nepal. Chinese FDI in Nepal has surged in recent years; in fiscal year 2012–13, it touched $19.39 billion (30.89 percent of Nepal’s total FDI) to topple India as Nepal’s top investor (Global Times, August 21, 2013).
China’s military relations with Nepal have intensified over the last decade. In 2005, when India halted military supplies to Nepal in the wake of King Gyanendra’s imposition of emergency rule, China quickly stepped in to provide weapons. In 2008, China announced a military aid package of $1.3 million to Nepal, and pledged a further $2.6 million in non-lethal military aid (China Brief, June 17, 2011). It would be willing to consider arms sales to Nepal, but “would treat this with great caution.” 
Unlike India’s tempestuous relationship with Nepal, Sino-Nepal relations have been stable. This is largely because Beijing has cultivated all Nepalese regimes, whether autocratic or democratic. This is quite in contrast to India, which has backed anti-monarchy movements and insurgencies in Nepal. Moreover, anti-China sentiment in Nepal is “less intense” as the people of the two countries do not mingle as much as Nepalese and Indians. The Nepalese “like and respect the Chinese for keeping out of Nepal’s internal politics.”  China is also working assiduously to build bridges with the Nepalese people. It has set up Confucius Institutes and Chinese language centers across Nepal with a view to strengthen Nepal’s understanding of China and its culture (Xinhua, June 14, 2012).
China’s chipping away of India’s dominant role in Nepal, whether in trade, investment or defense cooperation, stands to gain the most from the fuel supply deal. The “unofficial Indian blockade” has underscored to Nepal yet again its extreme vulnerability to Indian pressure and has set off a wave of anti-India sentiment outside the Terai. Calls for reducing dependence on trade with India are getting louder (Kathmandu Post, October 11).
This isn’t the first time that Nepal is in this predicament. In 1988–89, India imposed an economic blockade on Nepal when it entered into a secret deal with China on intelligence sharing and the purchase of weapons that included anti-aircraft guns. One account notes that in response to Nepal’s request for help during this time, China provided “modest assistance.” Difficulties of transportation and financial constraints were cited as the reason for its limited help. However, Beijing did not provide even “the monetarily costless forms of political support” to Nepal at the United Nations. Its public criticism of India was “indirect and opaque.” Indeed, Beijing told Nepal quietly not to expect it to bail it out and advised it to come to the best terms possible with India. 
Since 1989, not only is China in a stronger economic position to help Nepal, roads to Nepal from China have vastly improved. However, logistical challenges persist. Higher transportation costs make Sino-Nepal trade economically unviable. Nepal’s turn to China to meet its long-term fuel requirements is unrealistic. China is still not in a position to match India in supplying fuel to Nepal. Nepal’s annual purchase of fuel from India reached 1.37 billion liters. China’s recent supply of 1.3 million liters of gasoline to Nepal—though it might make great press—can realistically only meet Nepal’s needs for a day or two (Hindustan Times, November 4). Furthermore, China encountered major logistical challenges when transporting the gasoline. According to one Nepalese commentator, “India cannot be substituted by any other county in Nepal. Its strong civilizational, cultural and historical ties with Nepal combined with its control of two-thirds of Nepal’s trade cannot be substituted overnight.” 
Importantly, is China willing to take the risk of drawing India’s ire when Sino-Indian relations are improving and trade is booming? The gains that robust trade with Nepal promises are unlikely to compensate for the losses that China would incur by provoking India. India regards Nepal as “a vital security zone and views growing Chinese influence there as creeping encirclement.” In the context of growing American and Japanese courtship of India, Beijing will have to tread carefully “lest its growing power prompt a coalition to balance or contain China. This gives New Delhi great leverage.” 
India continues to hold the advantage in Nepal, at least with regard to the geographic terrain. However, India cannot afford to sit back. Playing the China card may not be “immediately viable” but “opportunities have been opened for China in Nepal that may not give comfort to India in the long run” (The Wire, November 8). China’s infrastructure building in the Himalayas is moving at a furious pace. It is extending the Golmud-Lhasa railway line up to Khasa, a trading town on the Sino-Nepal border. When complete, Beijing will be able to send trainloads of fuel and other goods to Nepal. Worryingly, China is keen to extend the Lhasa-Khasa rail to Kathmandu, and Nepal is not averse to the idea. Such a train link would weaken India’s grip over Nepal’s foreign trade significantly (Asia Times, October 16, 2010).
To counter China’s inroads in Nepal, India will have to act speedily to improve its decrepit overland infrastructure in the Himalayas. It is several decades behind China in this regard. Importantly, Delhi will need to improve its diplomacy vis-à-vis Nepal. India’s big brother behavior toward its smaller neighbors is costing it heavily. India must realize that its “coercive diplomacy, intended or unintended, declared or undeclared,” has its limits (The Wire, November 8). And finally, Nepal as well as India and China are more likely to gain if they view Nepal as a bridge of opportunity between the Asian giants rather than a battlefield for influence.
Dr. Sudha Ramachandran is an independent researcher and journalist based in Bangalore, India. She has written extensively on South Asian peace and conflict, political and security issues for The Diplomat, Asia Times and Geopolitics.
- Sangeeta Thapliyal, “Movement of Population Between India and Nepal: Emerging Challenges,” Strategic Analysis, Vol. 23, Issue. 5, 1999. http://www.idsa-india.org/an-aug9-6.html.
- “Treaty Of Peace And Friendship Between The Government Of India And The Government Of Nepal,” July 31, 1950. Indian Ministry of External Affairs (MEA). http://mea.gov.in/bilateral-documents.htm?dtl/6295/Treaty+of+Peace+and+Friendship.
- Author’s Interview, John W. Garver, Emeritus Professor in the Sam Nunn School of International Affairs, Georgia Institute of Technology and author of Protracted Contest: Sino-Indian Rivalry in the Twentieth Century, November 2.
- Author’s Interview, Yubaraj Ghimire, political commentator, Kathmandu, October 28.
- John W Garver, Protracted Contest: Sino-Indian Rivalry in the Twentieth Century (New Delhi: Oxford University Press, 2001), pp. 157–161.
- Author’s Interview, Ghimire, October 28.
- Author’s Interview, Garver, November 2.