For one, China
would have overtaken Japan and India to become Nepal’s biggest creditor. World Bank estimates suggest that Nepal’s debt repayments to China
in 2024 would be the highest among all nations Kathmandu has borrowed money from to kick-start its economy.
At present, Japan is Nepal’s biggest creditor; it has extended the Himalayan nation $220 million on easier terms than what nations like China
and India generally lend for. Nepal owes China and India $99 million and $95 million, respectively. A fifth of the country's bilateral foreign debt is owed to China and India each. Half the bilateral external debt is owed to Japan.
By 2024, Nepal will shell out $10 million a year to China in principal repayment and interest – a third of all its bilateral debt repayments. Meanwhile, debt re-payments to Japan and India each will be a quarter of its debt obligations. Nepal would be on the same indebtedness trajectory as various African, Central Asian and South Asian nations, with the influx of Chinese money in their territories.
“China’s investments in Nepal mirror its investments in other developing countries. China charges a much higher rate of interest on its loans for infrastructure projects than, say, Japan. The more desperate a country, the more likely it is that China will lend money at usurious rates. China starts as an economic partner of another country and eventually becomes its economic master. This is the danger Nepal faces,” says strategic affairs analyst Brahma Chellany.
This rise in Nepal’s indebtedness to China would run concurrent to enhanced Chinese largesse in the form of aid and grants for development. This, in turn, has been concomitant with India’s declining role in development funding and business investment in the country.
A decade ago, China’s official development aid to Nepal was $19 million – just about two per cent of the global assistance to that country. India’s assistance was more than twice China's, at over $50 million. In 2018-19, China contributed $150 million to Nepal – almost thrice as much as India. While India’s assistance to Nepal has stultified over the years, Chinese money has swamped the nation, rising from two per cent to 10 per cent of all development assistance received by the land-locked country.
During the past few years, China has raced ahead to exceed India’s $445-million decadal assistance from 2010 to 2019 to Nepal. The country’s finance ministry noted that official development assistance to it in 2018-19 declined from global institutions as well as individual countries, even as China’s share increased. In December 2019, Nepal’s finance ministry’s annual report noted: “Disbursement decreased by 2.7 per cent despite a significant increase in contributions from China, pointing to a reduction in support by traditional partners. Notably, support from China appears to have increased, while support from the European Union and the United States of America appears to have decreased.”
The key difference between India’s and China’s assistance is the fact that in 2018-19 more than $100 million of the $150 million paid by China to Nepal was in the form of grants, whereas India’s assistance primarily consisted of loans. Nepal’s official statistics seem to suggest that the Chinese are using a potent mix of debt and grants (which Kathmandu has no obligation to repay) to enhance its footprint in the nation. While it may look rosy, the World Bank has, in the past, stated that China’s lending to various countries remains obscure.
“The Chinese economy is three times the size of India. So, naturally, China would be in a better position to provide financial support. But the economic relations between India and Nepal go beyond just aid money. Nepalese are treated on a par with Indian citizens in matters of employment in India. Thousands of them get work opportunities here and send money back home. They have special representation in India’s armed forces. It’s a special relationship that goes beyond aid diplomacy,” says Chandrashekhar Dasgupta, who served as India’s ambassador to China in the early 1990s.
Chinese efficiency vs Indian laxity
Much of this money from China and India flows into development projects. A look at the status of various projects being undertaken by China and India shows that while Beijing has been fleet-footed in envisaging, executing and completing projects, India’s initiatives are stuck in a quagmire. Indian inefficiencies were pointed out to PM Modi by Nepalese politicians during his historic 2014 visit. But nothing seems to have changed on the ground.
Since 2015, when a deadly earthquake devastated large parts of Nepal, both China and India have undertaken an equal number of development projects not necessarily concerned with post-quake reconstruction efforts. Both nations have committed roughly $1 billion to Nepal apiece. But China has spent $341 million – or a third of its commitments to date. India, meanwhile, committed over a billion dollars but spent only $256 million executing its projects.
In particular, China has been playing a key role in Nepal’s civil aviation sector – a critical need to connect people in the country’s rugged and inhospitable terrain.
Take the case of the Pokhara international airport, envisaged as an alternative to the Tribhuvan International Airport at Kathmandu. China has been funding the development of this greenfield airport, at Nepal’s most popular tourist destination, through a concessional loan of $213 million. China and Nepal had signed an agreement for this in 2016. The Nepalese had availed of $48 million in various tranches until 2019, after which a shortage of Chinese engineers due to the coronavirus pandemic slowed down the project. China has sold and gifted its domestically manufactured aircraft to Nepal’s national
carrier and even invested in joint ventures with one of Nepal’s most prominent private airlines.
India, which has been executing road projects in Nepal for many years, committed $330 million for road improvement across the country, including the famous Lumbini Buddhist circuit road in 2015. To date, just about $15 million has been released in loans and several of the road improvement projects are yet to see the light of the day.
The Chinese have been more active in providing direct budgetary support to Nepal than India. In 2019, Nepal’s finance ministry got $113 million to allocate on energy projects it wished to spend on. Chinese companies have bagged contracts for hydroelectric projects, for which Beijing has given loans to Kathmandu.
India’s hydro power project assistance has been stuck in limbo. Take the case of Rahughat hydroelectric project, for which state-owned Bharat Heavy Electricals Limited (BHEL) won a contract in February 2020. The project was envisaged in 2007 and India promised to provide $98 million for the project by 2010. To date, just $7 million has been sanctioned. The Solu Transmission line project, for which India had committed $58 million by 2012, also met a similar fate. Less than one per cent of the money has been released so far.
The Chinese, meanwhile, have been progressing faster on projects like the Upper Trishuli Hydropower project, where, despite delays, more than two-thirds of the $129 million worth of commitments have been released to Nepal.
India seems to have faltered even in executing politically sensitive projects like its plan to strengthen and build over 500 kilometres of roads in the Terai region of the country. The Terai region sees itself culturally closer to India and has often erupted in protests citing discrimination from the powers that be in Kathmandu. In 2016, India pledged $73 million for the project. Nothing has been released to date.
Corporate China’s growing love for Nepal
India’s waning economic influence in Nepal has as much to with the increasing role of Chinese businesses, as it has to do with the proactive approach of the Chinese state. In recent years, many Chinese companies have bagged crucial projects, even acquiring Indian companies in Nepal. Foreign direct investment
(FDI) has been a negligible contributor to the country’s gross domestic product (GDP)
over the years and Indian firms have generally been second to companies registered in the West Indies pouring money into Nepal. China has been a distant third with about $90 million in FDI flows.
Nepal’s latest official statistics suggest India’s FDI was more than twice that amount. According to the Investment Board of Nepal, Chinese businesses have several key projects. The Hongshi Group, one of China’s biggest construction companies, is setting up a cement plant that aims to double the capacity to 12,000 tonnes this year. The project was awarded in 2017 and reportedly provides employment to around 2,000 Nepalese people in addition to providing million-dollar annual royalties and taxes to the government.
Huaxin Cement is implementing another cement project worth $140 million in what is being billed as the biggest cement plant in the country. The Upper Marshyangdi hydropower project, which was being developed by a subsidiary of India-based GMR group, was taken over by a consortium of Chinese companies in 2017.
In 2019, the memorandum of understanding (MoU) for the China-Nepal Friendship Industrial Park was signed to establish a business zone to manufacture electrical goods, transport and communication equipment in Nepal’s Jhapa district. Jhapa is the constituency of Prime Minister KP Sharma Oli. A Chinese company has reportedly promised to invest $1 billion in the project, with the approval for half that money already accorded by the Nepalese government.
China’s companies are also competing with India’s state-owned railway companies for the lucrative Kathmandu metro rail project. Even as China is diversifying its business interests across sectors in Nepal, India’s focus continues to be on hydropower generation, a part of which is bought by India to power its own economy. The highlight continues to be the Arun–3 hydropower project being executed by India’s state-owned Satluj Jal Vidyut Nigam (SJVN), along with a host of private Indian contractors.
“China’s clout in Nepal has grown steadily. The appointment of a Communist government in February 2018 opened the path to a greater Chinese penetration in Nepal. The Chinese ambassador in Kathmandu has been acting as if she is Nepal’s matriarch,” says Chellany.
India’s disaster of a disaster relief
One of the key facilitators of China’s ever-growing presence in Nepal was the 2015 earthquake, when international aid and assistance flooded the country. In many ways, the disaster opened a window of opportunity for the Chinese to increase their economic and cultural footprint there. India, on the other hand, largely failed to live up to its grandiose commitments. International organisations and various nations committed $3.6 billion to Nepal for post-earthquake rehabilitation and reconstruction. India and China promised $1 billion and $767 million, respectively. Nepal’s official statistics show that India has disbursed only $7 million so far — the least among all nations.
China hasn’t done too well, either, disbursing just three per cent of its commitment. Both India and China contribute to organisations like Asian Development Bank, World Bank and others, which have poured in millions of dollars for reconstruction in Nepal, and much of the assistance is often routed through these agencies to ensure efficient and corruption-free implementation of projects, for which funds are allocated. However, much of India’s earthquake relief measures still remain on paper.
Even as Nepal has been redrawing its borders to repudiate India’s territorial claims and the Nepalese PM has been theologising on the nationality of Hindu gods, the Chinese have been subtly increasing their projections of soft power. Nepal’s private schools reportedly made Mandarin mandatory after China promised to financially support them in teaching the language to students. Local reports suggest this could be extended to government schools as well.
The Chinese embassy has been proactively promoting Chinese films, cultural shows and a host of other attractions to improve China’s visibility among the Nepalese. More than half of all scholarships granted for higher studies in other countries by the Nepalese government was for those pursuing a masters’ degree or PhD is China.
While China is definitely making purposeful progress in all spheres in Nepal, some believe that the umbilical cord between Delhi and Kathmandu is too strong to be snapped by either Chinese money or cultural proselytising.
Prafulla Ketkar, the editor of Rashtriya Swayamsevak Sangh’s (RSS) magazine, Organiser, says: “The rise of the Communist Party in Nepal and the rising Chinese influence are happening simultaneously. They may be ideologically similar but are poles apart culturally. India-Nepal ties are immemorial. The country still follows the Vikram Samvat calendar. The Gorkhas have an unbreakable bond with India. Our people-to-people interaction cannot be matched by China. There is an attempt to dilute Indian links through the delimitation exercise which has disenfranchised the people of the Terai region. China can use as much money power as it wants, but it can never replicate India’s cultural might.”