November 1, 2021

Political and Economic Challenges Faced by Nepal and Its Impact on Indo-Nepal Relations

Written By: Raksha Pandey

Nepal is a Hindu majority state with religious, cultural, economic, matrimonial and linguistic relations with India. Thousands of Nepalese have married in India and vice versa which gives the bilateral ties a unique feature. Thousands of Nepalese are enrolled in the Indian Army and form part of the Gurkha Regiment. In addition, India and Nepal share an open border that is not only exceptional but has also facilitated Nepalese and Indian to live and work in each other’s countries. There is no other place in the Indian sub-continent that two sovereign nations enjoy an open border where visas and passports are not necessary. A whole generation of older Nepalese studied and struggled for the independence of India side by side with Indian freedom fighters. These leaders include former Prime Ministers Matrika Prasad Koirala, BP Koirala, Man Mohan Adhikari and Krishna Prasad Bhattarai. But all these unique features are now under stress.

With the flow of time, new generation of Nepalese opt for US, Australia and Europe for their higher studies, not necessarily Indian universities. The open border has been misused by notorious elements including terrorists and both India and Nepalese governments have realised the importance of regulating this border in order to stop organised crime, smuggling, human trafficking, arms trafficking and the growth of terrorism. The political change in Nepal in 2008 ended the Hindu monarchy and brought in secularism. This was done without a referendum. The elections to two Constituent Assemblies saw a period of great instability. Nepal has had 20 Prime Ministers in 20 years and 6 Constitutions in 5 decades. In all these major political changes, India has had a major role as a facilitator. However, the change of 2008 has introduced unprecedented challenges for Nepal as well as for India because of complexity of the polity and influence of extra-regional actors into what was previously an exclusive Indian domain. This paper shall discuss the historic dimension of Indo-Nepal relations in the religious and cultural spheres and discuss some of these challenges.

Post 1950 Nepal:

After India got independence, the Nepalese youth were also incited to end the 104 years of Rana oligarchy that had kept Nepal under the British security umbrella. King Tribhuvan took asylum in India as the anti-Rana movement became big inside Nepal. It was during the last days of the Rana regime that the 1950 Treaty of Peace and Friendship was signed between the two countries. This Treaty remains a bone of contention even till today. The Rana regime collapsed soon afterwards.

The Treaty has some unique features such as Nepalese citizens enjoying same rights as Indian citizens in India, including the right to hold jobs and buy property. However, the Left parties have continuously used this Treaty as an example of Indian hegemony in Nepal. Thus, we can see the period of 1950-1960 as a phase when Nepal saw the light of democracy but was unable to consolidate it. A rift erupted between Matrika Prasad Koirala and his half-brother BP Koirala. PM Nehru’s Nepal policy was also full of dubiousness. On the one hand, he supported democratic forces but on the other he was furious with the first democratically elected Prime Minister (BP Koirala) in 1960 for having established diplomatic relations with Israel and Pakistan. The royal takeover of 1960 took place when the Indian Army Chief was on an official visit to Nepal. While all senior leaders of the Nepali Congress and other parties were arrested, Queen Elizabeth visited Nepal in 1961, giving full political recognition to the royal takeover.  King Mahendra introduced a political system known as the party less Panchayat system, very much like the Indian Panchayati Raj. It survived for 30 years.

During this period, we can easily see that India’s Nepal policy was more low key and reluctant to take any major or hasty decision as its focus was diverted to managing other internal and external crisis. A secure Northern belt provided by the royal regime safeguarded India’s UP and Bihar states with external military action. The Sino-Indian border conflict of 1962 also enabled King Mahendra to expand his foreign policy ambitions to make Nepal more visible to the outside world. Nepal became active in UN, NAM and also in expanding its ties with the US and Europe. Nepal was elected twice to the UN Security Council (1968 and 1988). A number of high-level visits from India to Nepal are also testimony to the fact that relations was satisfactory. Only in 1988, the then Rajiv Gandhi government took some stringent measures that led to the deterioration of bilateral relations. Nepalese term this period as ‘Indian blockade’ when petroleum supplies and daily essentials were stopped. As a result of this, a whole new generation of Nepalese became anti-Indian.

The period 1990-2001 can be termed as a phase of political turbulence but with the constitutional monarchy as a bulwark of stability under popular King Birendra, Indo-Nepal ties did not suffer. Political parties raked up the issue of Kalapani border encroachment and Tanakpur power projects. King Birendra was the guest of honour at the Republic Day function in 1999. However, the political situation was again deteriorating with the onset of the Maoist insurgency in 1996. Initially, only the rural hinterlands were under the influence of the Maoist rebels but by 2004, the urban centres were also increasingly targeted. Due to the unfortunate cause of events of the royal massacre of 2001, stability in Nepal was again threatened. King Gyanendra took over direct power in 2005. India, this time again under the UPA government, brokered the 12-point understanding between the Maoists who had Interpol arrest notice and the political parties in 2005. This led the way to the people’s movement in April 2006.

But democracy in Nepal is still being consolidated. There seems to be a total lack of respect for each other’s vision, ideals and perceptions among the political parties. The main objective of democracy is to establish a strong link between the general people and society. It demonstrates that Nepalese democratic evolution has taken baby steps and has even fallen backwards if one is to see the recent events of weakening of main organs of the state viz. judiciary, legislature and the executive.

Mal-governance, nepotism, corruption and incompetence of Nepalese political party leaders gave many opportunities to the monarch and foreigners to intervene in the political system of Nepal. The Maoist insurgency was one of the most disturbing, unfortunate events in which 18 thousand innocents lost their lives and the nation is still suffering as it lags from economic and political recovery. The deadly earthquake of 2015 gave another blow to the ravaged economy of Nepal. Reconstruction of schools, colleges, private houses, UNESCO heritage sites is still going on at snails pace. India was the first responder to the earthquake. Indian Prime Minister Narendra Modi called by phone to the then PM Sushil Koirala who was on a foreign visit to inform about the earthquake in Nepal. The Constitution enacted soon afterwards, while sit was a progressive document in many respects, failed to be inclusive as the Madhesi grievances remained. The Constitution has envisioned a federal structure for the country. A new experiment for Nepal, it is hoped that the federal states will be able to address the challenges of their particular states in a better way than during a centralised polity run from Kathmandu. It ought to be remembered that 51 percent of Nepalese live in the Terai.

The economic growth has obviously been affected, and the growth rate lingers between 3-4% whereas the target is around 7.5%. Nepal still has agrarian economy which employs the majority of the workforce of the country. But the massive unemployment in the country has forced able, young Nepalese to go to the Gulf, Malaysia, Korea, Japan and other countries for employment. Although remittance that they send contributes about 28 percent of the total GDP, there is fear that even this source of foreign currency may plunge with the COVID-19 closures.

Post 2015 Nepal: A New Hope

Mr. K.P Oli and Mr. Pushpa Kamal Dahal of the CPN (UML) and CPN (Maoist) came together to form a United Communist Party, and the merger secured a near two-third majority in parliament. But a rift soon erupted between these two chairmen of the ruling party. The new dispensation also established party-to-party ties with the Chinese Communist Party. Prime Minister Oli had sufficient time and resources to resurrect the economy and give new hope to the people of Nepal suffering from years of despair and hopelessness. However, he raked up the nationalist sentiment by changing the political map of Nepal that was endorsed by a two-third majority of the Nepalese parliament. This was the time when Sino-Indian border clash was taking place at Galwan valley. Oli also said that Lord Ram was born in Nepal and gave a public jibe at the Indian national motto by saying ‘Simha Mewa Jayate’. Ultimately, after two failed attempts to dissolve the House, he was replaced by Sher Bahadur Deuba who became Prime Minister for the 5th time.

People wanted to embrace a New Nepal in 2015, but the greed for power has brought the country to its knees. All the parties have deviated from the main purpose of a stable political system of nation-building. The leaders seemed to have forgotten that the main aim of their struggle for democracy was to create an environment where all citizens, overcoming differences of caste and creed, get equal opportunity and where all developmental needs are addressed. Instead, post-2008, they have politicised all vital organs of the state including the judiciary. According to the author Kamal Dev Bhattarai, “the country has been riding a wave of political chaos since Maoist rebels launched their war in 1996 – two decades of instability.”[1]

In fact, the power struggle has toppled every single government since 1990. This has also scared away foreign investors, who are unsure of making investments amidst the political uncertainties. The industrialists have lost trust in the government due to the erratic changes not only among ministers but also officials. Political instability gives a negative impact on society increasing frustration among the people, which affects the nation as a whole. Political instability is a breeding ground for the unemployed youth to engage in political violence and armed conflicts. Inequality, inflation and the slow pace of GDP growth all are contributing factors to the instability. According to Deependra Chaulagain, ‘the infighting between the political parties has helped neither the ruling party nor the opposition’[2]. Due to lack of governance, education, health services and the overall economy is suffering. Nepal is even hit harder by the ongoing COVID-19 pandemic. With the relaxation of prohibitory orders, the economic activities are gradually picking up among the income-generating sectors, but the government is still struggling to generate resources to fund the rehabilitation of COVID -19 affected sectors, especially the SMEs.

Because of lock-down in India due to the COVID-19 pandemic, thousands of poor Nepalese migrant labour working in Indian cities returned home in 2020. This caused a massive spread of the pandemic inside Nepal. But with the unemployment in the country and lack of health services including lack of oxygen, they started returning back to India soon afterwards taking advantage of the open border facility. This shows the dependency of the Nepalese economy on India. It also exposed the massive unemployment prevalent in rural Nepal, especially in the far-western region.

Labor migration itself has also put Nepal in the high-risk category of HIV-aids transmission, not to mention other societal costs. The country is suffering from skilled manpower as all are setting out for work outside. Nepal has been unfortunate to face the ill effects of climate change and natural disasters too. Due to global warming, the Himalayas are at huge risk because fast-melting glaciers in the high mountains pose a huge threat to life and property.  Author Sarah Karnot’s ‘disfunctionalism’ concept of the state has been recognised as the primary reason for the persistence of poverty and political instability.[3] Nepal has managed to make progress in some areas, but achievements have not been even. Marginalised communities such as the Madhesis and Dalits need to be brought in the mainstream. There have been some positive strides but this is not enough. Economy has to be resurrected, tourism has to be given priority but for all this, political stability is a must.

Nepal: A Yam between Two Boulders:

Nearly three centuries ago, King Prithvi Narayan Shah had envisioned Nepal as a ‘yam between two boulders’. Nepal should have been able to benefit from being a low-income to prosperous country in between two Asian giants. Though Nepal is rich in natural resources, especially hydro-power, it fails to generate, utilise and exploit this power for sale to other countries in the immediate neighbourhood. This leads to over-dependence on foreign aid. Only recently, Indian help to build transmission lines has created synergy among the two countries and Nepal has been exporting power during the lean season. Nepal’s notorious ‘load shedding’ has also eased due to power import from India. India has been a big contributor in terms of humanitarian assistance during difficult times, like the devastating 2015 earthquake, as mentioned earlier. Modi government was also steadfast in supplying the COVISHIELD vaccines for Nepal in the midst of the covid-19 pandemic. Indian Ambassador to Nepal Vinay Mohan Kwatra also handed over medical supplies worth Rs. 18 crores in June 2021.[4] This aid comprised ventilators, ambulances, PPEs and other equipment. India is one of the major investors in Nepal which helps in generating employment and opportunity for Nepalese people. Nepal’s major trade is conducted through the Kolkata port. India has helped provide assistance to build hospitals and educational institutions which help in exchanging students for achieving a degree.

India under PM Modi has given priority to facilitate improved connectivity and has allocated resources for building border roads and railways that will reduce poverty in Nepal. India is Nepal’s largest trade partner and provides essential transit. As Nepal is a landlocked country, it is very difficult for it to be self-sufficient, and not rely on its powerful neighbour. The two countries have undertaken various connectivity projects to enhance people-to-people linkages and achieve economic progress but the bordering states of UP, Bihar, West Bengal and Uttarakhand also need to be in the same page in terms of giving extra attention to the development of the border regions. In some areas, the Nepalese side is more developed than the Indian side. India is also trying to look out for various ways to develop the inland waterways within its framework of trade and transit to provide access to the sea for Nepal.

Of late, China has also given top priority to Nepal and this is quite visible after the success of the Maoist movement in 2008. Two communist parties have set-up party-to-party ties as their mutual ideology of Marxism and Maoism gives a common kinship. Flurry of high-level visits, awarding of major contracts and tenders such as the Bhairahawa International Airport and Pokhara International Airport to Chinese companies show that Sino-Nepal relations is getting a strong economic tinge. Second largest cluster of tourists to Nepal are Chinese and there is much anticipation inside Nepal of the early completion of the Golmud-Lhasa-Shigatse-Keyrung railway that will connect Nepal to China via the railways. Although Chinese economic footprint is growing all around South Asia, what makes Sino-Nepal relations in the modern era truly exceptional is the dominance of communist parties in Nepali polity. These communist parties were originally having fraternal ties with Indian communist parties. Although Nepal would like to reap benefits from the economic progress of both its neighbours and would want to distance itself from the bilateral problems between India and China, its manoeuvrability is limited in this regard. At times, Indian commentators fail to understand this phenomenon and criticise Nepal as playing the ‘China card’. Nepal’s relations with both India and China need to be seen in their own merit, the latter having become very active in terms of trade, investment, tourism and providing scholarships to students in the recent years. Instead of nitpicking on China’s economic forays inside Nepal, India has to sharpen its own traditional leverages which it has overlooked post 2006.


The political evolution of Nepal since the 50s, the dependence of the economy on Indian economy and the new factors adversely affecting the relationship has been highlighted above. Nepal and India share a unique, deep-rooted relationship of cooperation and close people-to-people cultural ties, but India needs to comprehensively review its Nepal policy from time to time. We not only share an open border for the free, unrestricted movement of our nationals but also have a very close bond through marriages popularly known as roti-beti ka Rishta. We share very similar ties in terms of the common religion – Hinduism and Buddhism. However, official India needs to revisit our common heritage and encourage religious and cultural bonds such as the Ram-Sita Vivah Mahotsav in Janakpur. The Sanatan culture, Sanskrit and revered temples such as the Char Dhams (Four Dhams) in India, Lord Pashupatinath and Muktinath in Nepal, yoga, Kumbh Mela, Shiva Ratri, etc. are embodiments of our common heritage. The ‘Bol Bam’ pilgrims are increasing year by year from India to Nepal. Stressing on physical connectivity is not enough. No other country can replace India inside Nepal if the common religious, cultural and linguistic aspects are stressed and given priority.

Author Brief Bio: Raksha Pandey is a Ph.D. Research Scholar in the Department of Humanities and Social Sciences at Tribhuvan University, Kathmandu, Nepal.


[1] Bhattarai, K.D. (2016). Nepal’s unending political instability. The Diplomat

[2] Chaulagain, D. (2021). Political instability could affect recovery of the economy hit by the pandemic. The Kathmandu Post

[3] Karnot, S. (2006). South Asian Journal of South Asian studies

[4] See India Hands Over Medical Equipment Worth Over Rs 18 Crore to Nepal (


Latest News

Leave a comment

Your email address will not be published. Required fields are marked *

19 − 18 =