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Nepal occupies a crucial geostrategic location in South Asia. It is sandwiched between powerful and competing neighbours in India and China, outstripping the Himalayan nation in size, population, economy and military might. Yet it is one of the few countries that has remained independent throughout history. Maintaining that independence is now just that much more challenging.Geopolitical realities necessitate maintaining a fine balance in Nepal’s relations with its immediate neighbours. Relations with India are deeply embedded in historical, cultural, socio-economic, religious and familial ties.

The open borderarrangement between the two countries eases the flow of people and goods. But politically, India and Nepal have seen ups and downs. Although Nepal and China also share historic relations, the bilateral relations are more focused on political and economic issues rather than people-to-people exchanges. Still, China has greatly increased its influence in Nepal over the past decade. The United States is also now one of Nepal’s most important development partners.

In the 18th century, King Prithvi Narayan Shah labelled Nepal a ‘yam between two boulders’. With a third ‘boulder’ in the United States now showing keen interest in the country, Nepal needs to avoid entanglement in big power rivalry and ensure that its foreign policy remains oriented to its own national interests.

Relations with the first ‘boulder’, India, appeared to rapidly accelerate — after a long and sometimes tumultuous history — in the 2010s. After coming to power in 2014, Indian Prime Minister Narendra Modi proclaimed his ‘neighbourhood-first’ policy. His visit to Nepal only three months after taking office was the first by an Indian prime minister in 17 years, raising hopes of better ties between the two countries. The optimism was reinforced by India’s immediate humanitarian relief within hours of a massive 7.8 magnitude earthquake that struck Nepal in April 2015.

But Modi’s reputation in the Himalayas quickly crumbled as Delhi pressured Nepali leaders to delay the promulgation of a new constitution in September 2015. When Kathmandu did not capitulate, India imposed an ‘undeclared’ economic blockade on Nepal. Then in 2020, Nepal’s then-prime minister KP Sharma Oli published a map encompassing the disputed territories of Kalapani, Lipulek, and Limpiyadhura — which are claimed by Nepal but controlled by India — in response to India’s construction of a road in the area.

The second ‘boulder’ has also sought to increase engagements with Nepal in recent years. China’s top priority in Nepal is concern about anti-China activities, more particularly that the United States, in conjunction with India, might use Nepal’s geostrategic location to contain it.

China directed US$188 million in foreign direct investment to Nepal in fiscal year 2020–21, more than any other country. Nepal and China also signed a transit transport agreement for third-country trade during Oli’s visit to Beijing in 2016. This was a historic move that ended Nepal’s exclusive reliance on India for transit trade. It was also a response to the Indian blockade of 2015. Nepal then became a signatory to China’s Belt and Road Initiative (BRI) in May 2017, although no tangible progress has been made on earmarked projects, including a railway link that would connect Kathmandu with Kerung in Tibet.

In the first visit by a Chinese president in 23 years, Xi Jinping visited Kathmandu in October 2019. His declaration that China would help turn Nepal into a land-linked state instead of a landlocked one had geopolitical resonance. COVID-19 also presented an opportunity for China to leverage vaccine diplomacy in Nepal. But while China–Nepal ties have publicly gained traction, Beijing’s desire to maintain unity among the communist parties of Nepal has not gone unnoticed.

The most recent ‘boulder’ to arrive on the scene — the United States — extended economic aid to Nepal first in 1951 and is now one of its most important development partners. Nepal signed a US$500 million grant agreement with the United States under the Millennium Challenge Corporation (MCC) in September 2017 to develop the country’s electrical transmission lines and road network. This deal has both domestic and geopolitical complexities attached to it, and there was heated debate over the compact until it was finally approved by parliament in late February 2022.

Detractors of the MCC deal claim that certain provisions of the agreement infringed Nepal’s constitution. Critics saw it as a part of the US Indo-Pacific Strategy that aims to contain China and argued that it would make Nepal a pawn on the region’s geopolitical chessboard.

The ruling coalition — the Nepali Congress, Communist Party of Nepal (Maoist Center), and Communist Party of Nepal (Unified Socialist) among others — did not have a unified position on the issue. While the Nepali Congress, led by Prime Minister Sher Bahadur Deuba, strongly advocated MCC’s parliamentary approval, his coalition partners were less enthusiastic and only approved a conditional agreement. Several fringe leftist and rightist parties launched public demonstrations against the deal.

In the run-up to the February 2022 tabling of the MCC agreement in parliament, the United States and China engaged in a war of words accusing each other of using undiplomatic means to influence Nepal in the matter. The geopolitical wrangling saw Nepal’s Ministry of Foreign Affairs issue a statement that asserted the sovereign right of Nepal to decide on what development aid it needed in the best interests of the country. After a lot of political wrangling, the government came up with an ‘interpretative declaration’ for the MCC compact clarifying their position on the matter and it was finally ratified by the parliament on 27 February 2022.

As the adage goes, ‘geography does not argue, it simply is’. Nepal’s location defines its situation. China does not want an increased US presence in Nepal. The United States thinks Chinese influence on Nepal’s democracy and development is malign. India does not want either to threaten or undermine its own leverage over Nepal’s affairs.

As a landlocked country with a weak economy that is caught between these three powers, how can Nepal set a viable independent foreign policy?

Despite geographical and cultural proximity, Nepal–India relations have been marked by a trust deficit in recent years. To reverse the trend, Nepal needs better economic engagement with India. Regarding China, Nepal has always supported the ‘One China’ policy. Nepal needs to carefully prioritise projects under the BRI that are in its national interests and avoid being led into excessive debt. Nepal’s engagement with the United States should focus on economic development, and carefully avoid being part of any strategy that threatens the security of its immediate neighbours.

Nepal can use its geostrategic location to its advantage in maintaining good relations with its partners as none are willing to lose Nepal to the others. The geopolitical stakes are bound to increase in Nepal’s periphery in the coming years.

It will always be difficult for Nepal to balance its foreign policy options. But the policy of non-alignment and adherence to Panchsheel (five principles of peaceful coexistence) are enshrined in Nepal’s constitution, and they are suited to safeguarding Nepal’s sovereignty while promoting its development. Staying out of others’ arguments will keep the ‘yam’ safe from the ‘boulders’.

Gaurab Shumsher Thapa is President and Managing Director of the Nepal Forum of International Relations Studies (Nepal FIRST).

This article appears in the most recent edition of East Asia Forum Quarterly, ‘East Asia’s Economic Agreement’, Vol 14, No 1.