China’s expanding influence in Nepal, marked by substantial infrastructure investments under the Belt and Road Initiative (BRI), is a strategy to enhance regional connectivity and foster economic growth. China’s BRI footprint includes critical projects such as roads, airports, and hydropower plants like the Marsyangdi Hydropower Station, a cross-border optical fiber link, and the Pokhara International Regional Airport. The Kerung-Kathmandu cross-border railway project is most critical as it offers Kathmandu a way out of the so-called India-lockedness. It grants Nepal much needed alternative access to the rest of the world. Additionally, It signifies a move towards modernizing Nepal’s infrastructure and stimulating economic development However, these investments also raise concerns over the sustainability of the debt burden and the risk of "debt-trap diplomacy," a term used to describe the predicament where a country becomes overly indebted to China, potentially leading to a compromise in its financial independence and sovereignty.

Critics of the BRI argue that China’s investments, while beneficial, often entail loans with higher interest rates and unfavorable repayment terms compared to those offered by multilateral lenders like the World Bank or the Asian Development Bank. For example, the loan for the Pokhara International Airport carries a 2 percent interest rate, significantly higher than what multilateral lenders offer. This financial dilemma raises apprehensions about Nepal’s future autonomy, especially considering its ongoing recovery from natural disasters like the 2015 earthquake. The discourse around China’s investments in Nepal reflects a critical examination of whether these infrastructural advancements pave the way for economic prosperity or ensnare the nation in a cycle of indebtedness that could impinge on its sovereignty.
          On the other hand, India is Nepal’s main trading partner and foreign investor. It is the only country that provides trade transit for landlocked Nepal, via twenty-two recognized routes to Kolkata/Haldia. Around two thirds of Nepal’s trade passes through Birgunj-Raxaul. New Delhi seeks to expand its influence in Nepal, and like China is also investing in infrastructure like including hydropower plants, roads, and railways. Nepal’s engagement with China’s BRI and its financial policies could have profound effects on its relationships with India. By increasing economic ties with China, Nepal may gain infrastructure development and economic growth opportunities but also risks falling into a debt trap, potentially increasing China’s influence over Nepal’s domestic and foreign policies. Furthermore, the Chinese are putting pressure on the Nepalese government to rectify the Belt and Road Initiative and also, at the same time, accept the Global Security Initiative and Global Development Initiative, which have been recently proposed by the Chinese side to counter the Indo-Pacific strategy in the region. This dynamic necessitates a delicate diplomatic balance for Nepal to manage its ties with India. The relationship between China and Nepal was further strengthened with the visit of Chinese President Xi Jinping in September 2019. During his trip, the bilateral relations were upgraded from a "Comprehensive Partnership of Cooperation Featuring Ever-lasting Friendship" to a "Strategic Partnership of Cooperation Featuring Ever-lasting Friendship for Development and Prosperity." The benefits that Nepal has obtained from the inclusion of the term "strategic" in its diplomatic approach remain uncertain, but it undeniably resulted in a victory for China both in letter and spirit. Narayan Kaji Shrestha, who has recently been appointed as Nepal’s deputy prime minister and foreign minister, visited China on March 24 for his inaugural tour instead of India. The visit occurs within three weeks of the formation of the new government in Nepal on March 4, due to a prompt invitation from the Chinese Foreign Affairs Ministry and the Chinese Communist Party (CCP) Politburo. On May 24, 2024, Mr. Shresta visited Chentang Town, Shigatse City, Tibet Autonomous Region, his second visit to China in two months. During this visit, he honored the event as the Chief guest for reopening trade routes. On the occasion, he stated, "This landmark decision will greatly contribute to make the daily lives of the bordering peoples easier and comfortable, facilitate cross-border trade, foster economic ties, and further elevate the exemplary bilateral relations." China’s strategic move in the Tibet Autonomous Region and the development of infrastructure along the border will likely enhance India’s security concerns in the region. 

However, the leftist parties, such as the Communist Party of Nepal-Maoist Centre and Communist Party of Nepal-Unified Marxist Leninist (CPN-UML), have proposed shifting away from India’s dominant role in Nepali foreign policy. This aligns with their political agenda and ideological affinity with China. Consequently, Nepal must carefully navigate these relationships to maintain its sovereignty and leverage benefits from both neighbors without alienating either, which demands a balanced approach that respects historical ties with India while engaging with China’s offer of economic opportunities.

The Balancing Act: Crafting a Sovereign Future

Nepal’s strategic balance between China and India is pivotal in crafting its sovereign future. Diversifying its international relations is essential for reducing dependency on any single nation, thereby enhancing Nepal’s diplomatic leverage and economic stability. Adopting a ‘multi-aligned’ diplomatic strategy, Nepal can engage both neighbors in a manner that avoids favouritism, fostering a balanced relationship that prioritizes Nepal’s national interests. Economically, fostering an investment-friendly environment to attract a broad spectrum of international investors is crucial. This diversification can mitigate the risks of heavy indebtedness and ensure that investments are aligned with Nepal’s sustainable development goals.

Strengthening ties with multilateral institutions and engaging in regional cooperation frameworks, like the South Asian Association for Regional Cooperation (SAARC), can further augment Nepal’s bargaining power on the international stage. For instance, the E.U. authorized a €2 million aid package that will provide shelter, potable water, sanitation, healthcare, and other materials. Similarly, a U.S. development agency announced that Nepal would receive up to USD 85 million over five years for the education of marginalized and early grade pupils. Moreover, Washington and Kathmandu signed the Millennium Challenge Corporation Nepal Compact (MCC-Nepal) grant in 2017 to improve infrastructure. Domestically, investing in internal capacities such as workforce skill enhancement and institutional capabilities is fundamental for self-reliance and effective management of external influences. Additionally, economic resilience through infrastructural improvements and economic diversification is vital for mitigating the impacts of natural disasters and thereby diminishing the necessity of foreign aid.

Conclusion

Nepal’s foreign policy shifts reveal resilience and diplomatic agility following its experience of foreign aid and the maneuvers of larger Asian powers. In responding to geopolitical challenges, Nepal has taken significant steps to balance its ties with China and India, leveraging investments to bolster its economy while carefully navigating the complexities of ‘debt-trap diplomacy.’ This delicate balancing act has involved enhancing disaster preparedness, diversifying economic partnerships beyond its immediate neighbors, and engaging in multi-aligned diplomacy. These efforts reflect Nepal’s commitment to maintaining sovereignty and fiscal autonomy, showcasing its success in fostering a stable, prosperous future amidst the dynamics of regional power play.

The effectiveness of Kathmandu’s strategy to hedge its bets in the Indo-Pacific region relies heavily on the level of domestic political stability. Hence, the primary obstacle that lies ahead for Nepal is to build a bipartisan consensus among the political parties and leadership over its foreign policy aims. Nepal’s crucial national interests must not be compromised, regardless of any shifts in government and leadership. Ultimately, Nepal’s ability to navigate geopolitical complexity hinges on the determination of its leaders to effectively handle them in order to protect the country’s national interest. Therefore, Kathmandu must proceed cautiously in its internal politics and external relations to guarantee stability in both areas, which is sine quo non for its pursuit of strategic autonomy.

Author’s Bio: Irfan ul Haq, is Ph.D. Political Science, University of Kashmir, Srinagar, India. He also worked as a senior research fellow. The author has published research papers in reputed journals like sage and Routledge.

The author thanks Dr. Indu Saxena for her extensive review, editing and feedback for the paper.