MP- IDSA Fellows Seminar on “Understanding Nepal’s Foreign Aid and Investment Partnerships with India, China and the US since 2015”

A presentation at the MP-IDSA Fellows Seminar by Mr. Saurav Raj Pant, Visiting Fellow, South Asia Centre, on “Understanding Nepal’s Foreign Aid and Investment Partnerships with India, China and the US since 2015” was held on 5 December 2023. It was chaired by Dr. Ashok K Behuria, Senior Fellow and Coordinator of South Asia Centre, MP-DSA. The Internal Discussants were Dr. Uttam Kumar Sinha, Senior Fellow, Non-Traditional Security Centre, MP-IDSA and Dr. Nihar R. Nayak, Fellow, Non- Traditional Security Centre & Expert on Nepal, MP-IDSA.

Executive Summary

Nepal's economic relations with India, the United States, and China are multifaceted and driven by trade agreements, Foreign Direct Investment (FDI) deals, and Official Development Assistance (ODA). The above countries play prominent roles as development partners, export destinations, and sources of imports and foreign investments for Nepal. The significant reliance on foreign aid and investment partnerships, constituting a substantial portion of the government budget, underscores its importance for Nepal’s development. To ensure effective utilisation of foreign aid, prioritizing transparency and efficiency, coupled with efforts to improve the investment climate, becomes crucial. The reestablishment of Bilateral Investment Promotion and Protection Agreements (BIPPA) and adopting a multi-alignment approach in foreign policy is imperative to safeguard national interests amid the evolving global dynamics.

Detailed Report

In his opening remarks, Dr. Ashok K Behuria provided insights into Nepal's relations with India, China, and the United States. These engagements are influenced by historical, cultural, and geographical factors and play a crucial role in shaping Nepal's political and economic landscape. He assessed that ties with India, rooted in affinities, face challenges related to sovereignty and integration. With China, Nepal navigates political implications arising from its expanding role and regional influence. The United States' involvement emphasises democratic principles, impacting internal politics. He iterated that balancing these dynamics is vital for Nepal's foreign policy to safeguard national interests, maintain stability, and contribute to regional dynamics.

Mr. Saurav Raj Pant commenced his presentation by providing a brief overview of the strategic importance of Nepal in world politics. In his presentation he delved into the intricate geopolitical dynamics shaping Nepal's foreign affairs, drawing from King Prithvi Narayan Shah's metaphorical characterisation of the nation as a yam between India and China. He underscored that Nepal as a buffer state between two major powers and marked by a relatively lower level of governance efficiency and societal development, garners notable interest from influential power centres. This interest, he claimed, contributes to the thriving foreign aid industry within the country.

Mr. Pant explained that Nepal's diplomatic engagements with India, China, and the US span a spectrum of critical domains, including post-earthquake reconstruction in 2015, development partnerships, water resources, power collaboration, defense, trade, COVID assistance, and technical support. He pointed out that the relationships sometimes extend beyond economic and strategic interests, to encompass educational and cultural exchanges that deepen mutual understanding. Furthermore, the Speaker provided a detailed analysis of the annual Official Development Assistance (ODA), Foreign Direct Investment (FDI), and data on exports and imports by India, China, and the United States from the year 2015 onwards through graphic representation.

The Speaker also underlined that Nepal’s developmental approach to India and China is characterised by a responsive stance, tailored to Nepal's specific needs. Conversely, the United States employs a comprehensive three-pillar approach, emphasising the reinforcement of institutions and resilience, the promotion of inclusion, and support for federalism.

In his analysis, he highlighted that India participates in Nepal's development through the High Impact Community Development Project (HICDP), cultural endeavours, people-to-people interactions, religious connections, and contributions to both small and large-scale infrastructure projects and FDI. He pointed out the Chinese involvement in Nepal encompasses contributions to projects ranging from small to large-scale infrastructure, FDI, and community engagement on a smaller scale. He explained that, the United States is involved in Nepal through extensive social empowerment initiatives, policy advocacy and lobbying at the government level, and limited participation in FDI.

Mr. Pant concluded his presentation by emphasising that Nepal and its government must undergo three crucial changes. Firstly, there is a need to adopt an efficient debt management system to utilise loans, aids, and grants for driving productivity in the country. Simultaneously, implementing transparent reporting mechanisms becomes imperative to instill confidence among donors. Secondly, improving the investment climate is pivotal for FDI, requiring a reinvigorated Bilateral Investment Promotion and Protection Agreement (BIPPA) with India and new agreements with China and the U.S. Finally, the adoption of a multi-alignment foreign policy that meets mutual requirements without jeopardizing any interests is paramount for Nepal's diplomatic manoeuvring.

Following the presentation, the Chairperson invited the Internal Discussants for comments. 

Dr. Uttam Kumar Sinha, complimented the Speaker for his meticulous presentation of data and stated the need to analyse foreign aid dynamics in a holistic manner. He provided valuable insights into Nepal's dynamic nature, challenging the perception of it being solely a buffer state due to its strategic orientation. He recommended that the Speaker refine the research topic to enhance focus and depth. Additionally, he suggested exploring pre-2015 data, emphasising the unique aid dynamics of the 1960s in Nepal. He raised concerns about the potential drawbacks of foreign aid, noting that it may create more problems than it resolves. He also questioned the effectiveness of Nepal's political approach in managing and accepting foreign aid, highlighting the need for a rigorous and well-thought-out strategy.

Dr. Nihar R. Nayak, initially commented on the discussion, noting a bias towards highlighting the negative aspects of foreign aid without due consideration of the positives. He underlined the superiority of investments over aid, reiterating their developmental orientation. He raised a question about the potential impact of the loss of trade preferences, as Nepal is set to graduate from the Least Developed Country category in 2026. He also questioned the relevance of using Africa as a reference point in the study. He suggested that better methodology and sampling techniques be adopted, which could in turn lead to more in-depth analyses. Additionally, he observed that there was a lack of uniformity in the presented information, underscoring the need for a consistent approach in evaluating the subject matter.

During the discussion, the Chairperson, Dr. Ashok Behuria expressed skepticism regarding Chinese aid initiatives and presented arguments favouring India's effectiveness in this regard. He cited China's overseas development projects, which faced scrutiny for high costs and substandard construction. Using the example of the Pokhara airport, he highlighted the risks associated with adopting China's infrastructure-at-any-cost development model. Dr. Behuria inquired about the shifting stances of various political parties regarding foreign aid acceptance or denial. Additionally, he raised concerns about the muted stance of the Nepalese media, pointing out biases between India and China that could strain relations. He also advised the Speaker to focus on enhancing the analysis section of the paper for a more comprehensive understanding.

Questions and Comments

The floor was opened for comments and questions. The issues discussed included Nepal’s foreign policy orientation with regard to FDI, the politics of aid and issues of accountability as well as the country’s ability to absorb foreign aid.

The speaker responded to the comments and queries raised by the attendees.

Report prepared by Ms. Sneha M, Research Analyst, South Asia Centre, MP-IDSA.