The Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA) organised a Monday Morning Meeting on 27 July 2026, featuring a presentation by Ms. Sneha M., Research Analyst, MP-IDSA on “Recent Political and Foreign Policy Developments in Nepal.” The Session was moderated by Dr. Ashish Shukla, Associate Fellow, MP-IDSA. Ambassador Sujan R. Chinoy, Director-General, MP-IDSA and scholars of the Institute attended the meeting.

Executive Summary

Under Prime Minister Balendra Shah’s leadership, Nepal has undergone significant political and institutional transformation following the 2025 Gen Z movement and the March 2026 parliamentary elections. During its first four months in office, the government has prioritised anti-corruption measures, institutional restructuring, administrative reforms, and economic liberalisation as part of a broader governance reform agenda. While these initiatives reflect a strong commitment to institutional reform, their implementation has remained uneven owing to governance bottlenecks and limited administrative capacity. Externally, Nepal appears to be pursuing a balanced and independent foreign policy centred on developmental diplomacy; however, intensifying strategic competition among India, China, and the United States has made the pursuit of strategic equilibrium increasingly complex, particularly as Nepal prepares for its graduation from Least Developed Country (LDC) status in November 2026.

Detailed Discussion

The moderator, Dr. Ashish Shukla situated recent developments within Nepal’s broader democratic trajectory since 2008, observing that prolonged political instability, institutional weaknesses, and persistent corruption culminated in the September 2025 Gen Z movement. He described the movement as marking a generational shift in Nepal’s politics, noting that the Rastriya Swatantra Party’s (RSP’s) electoral victory in the March 2026 parliamentary elections represented the first single-party mandate of its kind since 1959.

Highlighting the government’s initial policy orientation, Dr. Shukla explained that Prime Minister Balendra Shah had adopted a zero-tolerance approach to corruption, citing the dismissal of ministers facing corruption allegations and the Prime Minister’s increasingly central role in decision-making as defining features of the new administration. He further observed that, despite the government’s ambitious reform agenda, implementation of its proposed 100-day action plan has remained uneven, with a substantial number of commitments yet to be fully realised. Referring to Nepal’s external engagement, he noted that the government has sought to maintain balanced relations with both India and China while pursuing a foreign policy guided primarily by domestic priorities and national interests. He also underlined that Balendra Shah has been making an attempt to introduce new political and governance culture in the country.

Ms. Sneha M. began her presentation by tracing Nepal’s democratic transition since 2008. She observed that recurring political instability, institutional fragility, entrenched political leadership, and systemic corruption collectively generated widespread public dissatisfaction, ultimately contributing to the Gen Z protests of September 2025. She explained that the parliamentary elections conducted on 5 March 2026 resulted in a decisive electoral mandate for the RSP, leading to the appointment of Mr. Balendra Shah as Prime Minister.

Discussing the government’s domestic reform agenda, the Ms. Sneha organised policy initiatives under three principal pillars comprising anti-corruption and accountability, institutional and administrative reforms, and economic reforms. She noted the high-profile arrests of former Prime Minister KP Sharma Oli and former Home Minister Ramesh Lekhak, the reduction in the number of federal ministries, the introduction of e-governance initiatives such as expansion of the Government Integrated Office Management System (GIOMS) and the Nagarik App, However, she noted that challenges remain. Many of those arrested have been released due to insufficient evidence, exposing weaknesses in the government’s prosecution capacity. She observed that major reforms, including the Civil Service Bill and proposed constitutional amendments, are likely to face political resistance, particularly as the RSP lacks the two-thirds majority required in both Houses of Parliament. She added that opposition from Madhesh-based parties, which view the provincial system as essential for political representation, inclusion, and regional autonomy, could further impede these reforms.

Examining Nepal’s economic conditions, she outlined the country’s largest-ever national budget for FY 2026–27, highlighting its emphasis on privatisation, urban infrastructure development and 7 per cent annual growth in GDP. She assessed that Nepal continues to function as a lower-middle-income economy with average annual GDP growth of around 4–5 per cent, while a weak manufacturing base has sustained import dependence despite the services sector remaining the main driver of economic activity. She noted that the government has adopted an ambitious market-oriented reform agenda to attract investment and accelerate growth. However, declining foreign direct investment, Nepal’s grey-listing by the Financial Action Task Force and the World Bank’s growth projection of 3.9 per cent against the government’s seven per cent target underscore the gap between policy ambitions and economic realities, making effective implementation the key challenge.

Assessing governance performance, she observed that the government continues to face criticism over cabinet coordination, administrative effectiveness, land governance disputes, and policy implementation. She noted that the Prime Minister’s relatively low cabinet attendance, the appointment of party-affiliated individuals to ministerial positions, and the incomplete implementation of the government’s 100-day governance roadmap have raised concerns regarding administrative capacity and the effective translation of policy commitments into measurable outcomes.

Turning to Nepal’s external engagement, she noted that the RSP government has articulated a balanced and independent foreign policy centred on development diplomacy, so far. She observed that while these principles continue to shape Nepal’s external engagement, evolving regional strategic dynamics have increased the complexity of maintaining equilibrium among major external partners.

Discussing Nepal’s relations with India, she observed that India has remained Nepal’s largest trade and investment partner despite initial frictions following the RSP government’s policy changes, including customs duties on Indian imports and the postponement of a planned visit by India’s Foreign Secretary. She noted that subsequent diplomatic outreach, including visits by RSP Chairman Rabi Lamichhane and Foreign Minister Shishir Khanal to India, together with continued cooperation in the energy sector and other high-level bilateral engagements, reflected both governments’ commitment to preserving the traditionally close bilateral relationship.

Referring to Nepal’s relations with China, she observed that Beijing has traditionally enjoyed closer political relations with Communist-led governments, which initially resulted in cautious engagement with the RSP government. She explained that Foreign Minister Shishir Khanal during his mid-June 2026 visit to China reaffirmed Nepal’s commitment to the One China Principle and support for the Belt and Road Initiative, while both sides reiterated their commitment to strengthening cooperation in infrastructure, energy, trade, and investment. She further noted that although Chinese-funded infrastructure projects remain central to bilateral cooperation, controversies surrounding projects such as the Pokhara International Airport have highlighted implementation and operational challenges amid Nepal’s evolving political landscape. She added that the visit underscored China’s interest in safeguarding its long-term strategic and economic interests in Nepal. Remarks by Foreign Minister Wang Yi reflected Beijing’s preference for prioritising relations with neighbouring countries amid evolving regional geopolitical dynamics.

On Nepal’s engagement with the United States, she emphasised the increase in working-level diplomatic engagement during the early months of the RSP government. Discussions focused on the implementation of the Millennium Challenge Corporation (MCC) Compact, investment promotion, trade, digital infrastructure, and telecommunications cooperation, including Starlink. She observed that these developments reflected Washington’s growing economic and strategic interest in Nepal, particularly in areas extending beyond traditional development cooperation. At the same time, she noted that Nepal has sought to engage the United States pragmatically while carefully balancing its relations with India and China, as initiatives such as Starlink have generated geopolitical sensitivities and the relationship has yet to progress to sustained high-level political engagement.

Concluding, she argued that Nepal’s foreign policy has gradually evolved from diplomatic idealism towards greater pragmatism. While the traditional balancing strategy remains central to Nepal’s external engagement, intensifying strategic competition among India, China, and the United States has narrowed the country’s diplomatic space. She further observed that Nepal’s scheduled graduation from Least Developed Country status in November 2026 is likely to reduce concessional financing, preferential trade access, and technical assistance, thereby increasing the importance of maintaining constructive engagement with all major development partners. These developments, she concluded, demonstrate the growing interdependence between Nepal’s economic priorities and its foreign policy choices.

Q&A Session

Ambassador Sujan R. Chinoy noted Nepal’s continuing interest in participating in Indian-led developmental initiatives. He further observed that Nepal’s appeal for UK’s involvement in the Kalapani issue does not align with India’s longstanding position that boundary disputes should be addressed exclusively through established bilateral mechanisms.

Addressing broader regional strategic developments, Ambassador Chinoy situated India–Nepal relations within the evolving strategic competition among India, China, and the United States, observing that the United States is increasingly emerging as an important strategic factor influencing bilateral dynamics. He also highlighted persistent trust deficits and declining people-to-people engagement between the younger populations of India and Nepal, citing the reduction in the number of Nepali students pursuing higher education in India alongside China’s expanding engagement with Nepal’s youth. Responding to these observations, Ms. Sneha noted that although Nepal has sought to strengthen youth-led exchanges, India’s engagement through youth-focused initiatives appears to have declined in recent years when compared to China and the US. She added, however, India’s cooperation in areas such as humanitarian assistance, energy, and development continues to remain robust.

Subsequently, MP-IDSA scholars raised questions regarding public perceptions of Prime Minister Balendra Shah, the nature of United States engagement in Nepal, governance constraints affecting the RSP administration, the implications of the Nepal–China counter-terrorism exercise, the party’s approach towards Madhesi politics, the evolving role of traditional political parties, and the government’s handling of India–Nepal border issues.

Responding to the discussion, Ms. Sneha stated that the present government has not downplayed border disputes, noting that established bilateral mechanisms continue to provide the primary institutional framework for addressing such issues through sustained diplomatic engagement. She further observed that left-oriented political parties appear to be moving towards greater unity in preparation for the forthcoming provincial elections. With regard to Madhesi representation, she highlighted continuing concerns regarding limited participation within state institutions, as reflected in cabinet composition and engagement with region-specific priorities. Discussing Nepal–China counter-terrorism exercises, she assessed that the initiative was unlikely to evolve into broader military cooperation between the two countries.

In conclusion, she observed that the RSP government’s first 100 days reflect an ambitious commitment to strengthening governance, transparency, and institutional accountability, although significant implementation challenges persist owing to administrative centralisation and weak interinstitutional coordination. She noted that sustained political stability and stronger coordination across government institutions will be essential for translating reform commitments into effective policy outcomes. On foreign policy, she argued that the government’s initial emphasis on strategic autonomy has gradually evolved into a more pragmatic approach towards neighbouring states, reflecting the enduring influence of geography, economic interdependence, and regional geopolitical constraints. Overall, she concluded that while the RSP leadership may reshape the style of governance and diplomacy, the scope for lasting policy change will continue to be determined by Nepal’s institutional capacity and broader structural realities.

The Report has been prepared by Mr. Cyrus Ghosh, Intern, South Asia Centre, MP-IDSA.