Nihar R. Nayak

There are multiple levels of relationship between India and Nepal. This article deals exclusively with their bilateral transit relations, focusing on their negotiations in the context of Nepal as a landlocked developing country (LLDC). While LLDCs consider their free access to the nearest seaport through a transit country as a natural right, the transit countries often bargain with them from a position of strength.

• Nihar R. Nayak |
• March 2016 |
• Strategic Analysis

To recover ground, India must engage all political parties on the Madhesi issue

At a time when India is confronted with growing negative sentiments in Nepal, China has been reaping a good harvest of positive perceptions. Despite the delay in signing the oil trade agreement and slow progress in reopening the existing Nepal-China trading routes, there has been a phenomenal improvement of Chinese influence and popularity in Nepal over the last few months.

While Indian projects have witnessed attacks by radical Maoist groups and local people due to the perceived blockade from the Indian side, Chinese companies are being allotted new infrastructure projects.

Economic heft

On December 17, 2015, the Nepalese government allotted Chinese CAMC Engineering Company, a subsidiary of China National Machinery Industry Corporation (SINOMACH), to carry out a feasibility study for construction of the Kathmandu-Pokhara electric railway. This project could be part of the trans-Himalayan railway, envisioned by China, to connect Kathmandu.

China is also building a regional international airport in Pokhara. This is the second biggest infrastructure project undertaken by China in Nepal. Moreover, over a dozen hotels in Pokhara have Chinese owners. Chinese telecommunications major Zhong Xing Telecommunication Equipment (ZTE) has four data centres: in Biratnagar, Kathmandu, Hetauda and Pokhara.

Media reports also indicate that 15 Nepalese districts bordering China have received special concessions on grazing land and humanitarian and developmental aid of RMB 10 million ($1.6 million) annually from 2014 to 2018 from Beijing. The Chinese language is also getting more popular in Nepal. Chinese universities are increasingly becoming the preferred destination for Nepalese students.

Other than soft power, China has used its economic diplomacy to project itself as a non-interfering neighbour by welcoming the new constitution of Nepal. It was perceived as a saviour when it agreed to supply 1.3 million litres of petrol to Nepal as grant-in-aid assistance during acute fuel shortages in Nepal due to irregular supplies from the Indian side. China has also agreed to reconstruct the damaged Nepal-China trade routes and open new trading points for easy supply of goods.

China has allowed resumption of Kathmandu-Lasha bus services after 11 years. Moreover, China has been the second largest donor to the ongoing earthquake reconstruction programmes in Nepal. In March 2015, China increased its annual aid assistance from RMB 150 million to RMB 900 million.

Disadvantage India

To boost Nepalese morale further, Chinese Foreign Minister Wang Yi, in a statement, said recently, “China has all along believed that countries irrespective of their size are equal. China and Nepal have always treated each other sincerely and as equals. We hope that the same policy and practices will also be adopted by India.”

Nepal reciprocated the gesture by waiving visa fees for Chinese tourists. There could be three major reasons for the revision of China’s stance vis-à-vis Nepal. First, over a period of time, China has improved its capacity in terms of its technological prowess and economic growth to feel confident to extend support to Nepal across the Himalayas. Second, China wants to use its flexi power as a vision of President Xi Jinping, to disseminate Chinese values and re-establish China’s image at an international level. Third, China did not want to lose this opportunity when it perceived that India’s influence was in decline.

India’s so-called relationship has been based on soft power like history, culture, people-to-people contacts; non-reciprocity in facilities offered by the 1950 treaty. Although India is Nepal’s top economic partner of Nepal in terms of bilateral trade, investments, technical cooperation and annual aid assistance, it has never been treated as a benign power.

Madhesis’ agitation

India-Nepal relations have reached their lowest ebb. India foresaw that the Madhesi agitation could have a spillover effect. On the other hand, there was a strong perception in Nepal that the Madhesi movement intensified especially due to the tacit support it received from India.

The slow movement of cargo from India and the shortage of essential commodities in Nepal due to agitation in the Madhes region has been perceived as an ‘unofficial India imposed blockade’ on Nepal. Some radical Maoist groups have taken advantage of

the situation and attacked the Arun III project office, which is being constructed by the Sutluj Jal Vidyut Nigam (SJVN). Media reports also indicated that suspected Maoists attacked the GMR Energy office in Kathmandu and GMR’s Upper Karnali hydropower project in Surkhet district. Earlier, the Cable Operators’ Association of Nepal stopped broadcasting Indian television channels.

The political crisis in Nepal has led to either cancellation or postponement of regular bilateral meetings between India and Nepal on a host of issues. No substantial progress has been made with regard to the 10 MoUs signed during Prime Minister Narendra Modi’s visit to Kathmandu in November 2014. There are reports of an increase in the activities of Pakistan-based terrorists and the circulation of fake Indian currency.

If Nepal gets an oil pipeline from China — the deal could be inked during Xi Jinping’s visit to Kathmandu sometime in 2016 — the contours of politics in the Himalayan border region of India could change.

The gains for China will always be disproportionately higher than the losses that India would incur if there is a prolonged crisis in the Madhes region. At the same time, leaving the Madhesis high and dry in the present situation, when there is a perception in Madhes that India might reverse its course to placate the leadership in the hill region, could complicate the Nepalese situation. There is a need, therefore, to engage leaders of all political parties and craft another consensus. This can ensure Nepalese unity and integrity at one level and cement India-Nepal ties on the other.

The writer is an associate fellow at the Institute for Defence Studies and Analyses

This article was originally published in BusinessLine..

Breaking its four-decade-long record of dependency on India for fossil fuel, Nepal entered into an oil trade agreement with China on October 28. A memorandum of understanding was signed between the Nepal Oil Corporation (NOC) and China National United Oil Corporation (PetroChina) in Beijing. While confirming the deal China reportedly indicated that it “could well become a long-term fuel supplier to Nepal”.

The agreement was signed while Nepal was passing through a serious oil crisis due to the blockade by people living in the Terai region (read Madhesis) since September 22. However, a large number of Nepalese people perceive the internal blockade as an “unofficial embargo by India”. Media reports indicate that the agreement with China provided a framework for future cooperation between the two countries on oil trade.

Break in tradition?

In fact, Indian Oil Corporation (IOC) has been supplying petroleum products, diesel and kerosene to Nepal at Indian market rates for the last 40 years. There has been an official contract between IOC and NOC for this trade. According to the revised trade and transit agreement of 2006, India allowed 26 trading points, including six points for transit purposes, for both bilateral and transit trade through Indian territory.

The Birgunj-Raxaul trading point is responsible for about 60 per cent of the total (bilateral and transit) Nepalese trade. Oil products from India are carried by both Nepalese (roughly 30 per cent) and Indian (70 per cent) tankers from the nearest oil depots of India to the India-Nepal border.

This arrangement was paralysed after the stir in the Madhesi region gathered momentum following the finalisation of the Nepalese constitution on September 20. The Madhesis felt betrayed by the way the constitution was adopted by the majority in the constituent assembly in clear disregard of their concerns. The response from India was one of concern over the way the majority parties ignored its suggestions to generate a consensus.

The entire Terai belt witnessed violence and mayhem after the constitution was adopted. This inevitably impacted on the trade flow from India as private players felt it was against their interest to continue with their transport services.

In an interesting turn of events, the external affairs ministry voiced the security concerns of Indian transporter associations carrying goods to Nepal due to intensification of the anti-vonstitution agitation in the Terai region by the Samyukta Loktantrik Madhesi Morcha (SLMM) and other groups. . Essential items such as oil could not be transported. Nepal witnessed a severe oil crisis because of the tactic adopted by the SLMM agitators to impose a blockade on major trading points. Shortage of oil severely affected normal life, the healthcare system, public transportation and business in Nepal. Most importantly, earthquake reconstruction work was also affected.

Strain in India-Nepal ties

Bilateral and track-II level interactions between India and Nepal failed to normalise supply of oil from India. Even the visit of the newly appointed foreign minister Kamal Thapa to Delhi failed to improve the situation. A week after the visit, Thapa was reported to have told the Nepalese parliament that “India did not facilitate the supply as per its commitment”.

The Nepalese side looked upon the MEA’s press statement about self-imposed restrictions by the Indian transport association not to carry goods to Nepal for security seasons as an indirect effort by the government to impose a blockade on Nepal. Other examples of Indian insensitivity being cited by many Nepalese observers are: India’s cold response towards Nepal’s request to re-route movement of the tankers; non-cooperation from the Indian side to take action against the agitators for using no-man’s-land to stop movement of transport vehicles; and undue delay being caused at customs and security check points on the Indian side to slow down the movement of oil tankers into Nepal (10 tankers per day as against over 1,000 earlier).

Strategic gain for China?

Two days after Thapa’s visit, the new Nepalese government explored an alternative arrangement for oil supply. In this regard, a high level meeting was organised on October 23 under Maoist leader Narayan Kaji Shrestha, who visited Beijing after the formation of the new government in Kathmandu. It was decided to send an eight-member team to negotiate with China for exploring an alternative arrangement for oil supply. The move was later endorsed by the Nepalese cabinet.

Although India has not officially responded to the bilateral oil trade agreement between Nepal and China, the IOC chairman and managing director stated in a media interaction that they would soon increase the volume of oil supply to Nepal. He also expressed his concerns about the possible loss of IOC’s share in its business volume with Nepal after Chinese entry into the scene. It would surely affect the business of hundreds of Indian transport companies associated with the IOC.

Until the SLMM blockade came into effect, the IOC used to supply around 1.3 million tonnes of petroleum products worth around ?9,000 crore annually to Nepal. Moreover, even if there is scepticism about the sustainability of Chinese supply of oil to Nepal, China’s entry may dramatically alter the strategic bilateral relationship between India and Nepal.

Optimists in India would hold that the IOC will continue to play a dominant role in Nepal’s fuel supply given the unfavourable terrain and absence of infrastructure for passage of heavy cargo through the Himalayas to bring bulk goods from China. But some analysts in India would argue that India has lost some strategic space to China. So far, China had sought to create a space for itself in the region on the sly. For the first time, perhaps, it has stepped in to reduce Indian influence in Nepal quite openly, and encouraged leaders in Nepal to ignore Indian concerns more confidently.

Therefore, the political and strategic message that flows from this deal is more relevant for India than the volume or sustainability of Chinese supply of oil to Nepal. The entire episode has also left a deep scar in the minds of policymakers in India and Nepal.

This article was originally published in BusinessLine.

The Indian reaction has led to notes of caution by some major countries. China, for instance, has suggested to Nepalese leaders that they should make the Constitution broad based.

• Nihar R. Nayak |
• September 28, 2015 |
• IDSA Comments

The BBIN-MVA would enable seamless sub-regional connectivity, deeper integration on economic issues and people-to-people contact between the four counties.

• Nihar R. Nayak |
• June 19, 2015 |
• IDSA Comments

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• Nihar R. Nayak |
• June 09, 2015 |
• IDSA Comments

In spite of the existence since October 2006 of a SAARC Disaster Management Centre, the Nepal earthquake brought to the fore the difficulties faced by this organization and its failure to rise to the occasion.

• Nihar R. Nayak |
• June 02, 2015 |
• IDSA Comments

• Nihar R. Nayak |
• 2014 |
• Book

Compared to the worst Maoists-affected state of Odisha, in the neighbouring states of Andhra Pradesh, Chhattisgarh and Jharkhand, the level of violence has come down substantially. In the coming years, Malkangiri and other south-western border districts of Odisha will continue to bleed because of the Maoist quest for safe havens in these districts during hot pursuit by the Chhattisgarh police.

• Nihar R. Nayak |
• January 23, 2014 |
• IDSA Comments

• Nihar R. Nayak |
• 2014 |
• Book