India Forges Closer Regional Ties Amidst Growing Influence of China

Posted by Reading Time: 5 minutes

By Benedict Lynn

DELHI – On Sunday, during the first bilateral visit of an Indian Prime Minister to Nepal in 17 years, Navendra Modi also became the first foreign head of government to address the Himalayan nation’s parliament since 1990. In his 50-minute speech, the Indian Premier urged Nepal’s lawmakers to finish the country’s long delayed Constitution, and offered the impoverished nation a US$1 billion line of credit.

Since the signing of the 1950 Indo-Nepal Peace and Friendship treaty, both countries have shared an open border alongside special trade and security relations. Over time, however, leftist groups in Nepal grew uncomfortable with India’s involvement in the economy, culminating in a 10 year long Maoist insurgency that only ended in 2006.

New Delhi played a key role in ending the insurgency, with Nepal transitioning from a Hindu monarchy to a federal, democratic republic two years later. Feelings of suspicion towards South Asia’s “Big Brother” still remain, often stirred up by Nepal’s leftist parties and their supporters. This “trust deficit” has greatly hampered bilateral cooperation between the two neighbours; in particular, attempts to share resources have been delayed for years.

For example, both nations would benefit hugely from a power trade proposal; water-rich Nepal contributes up to 70 percent of water flowing to India’s Ganges River during the dry season, but suffers regular power outages, as not even one percent of its hydro potential has been tapped. The deeply fractious country also has much to gain from exporting electricity to its southern neighbour—India is not only in dire need of electricity, but also one of the most water stressed countries in the world, according to a recent report by the Nature Conservancy.

RELATED: The BRICS New Development Bank: India’s Power Play?

And yet suspicion on the part of Nepalese politicians, who suspect India of trying to gain a monopoly over its water assets, and exasperation on the part of India had led to the latter turning its attention to the West and its own domestic affairs, leaving a void to be filled by China.

China has been using its giant economy to exert political influence among South Asia’s population of over 1.5 billion for some time, with several smaller countries in the region attracted by the prospect of quick energy and transport project implementation.

The Middle Kingdom has invested considerably in Nepal, which serves as a buffer between China and India, and taken advantage of the young republic’s politically unstable state to build and upgrade its infrastructure for transportation, telecommunications and hydroelectric power. In return, Nepal recognises Chinese claims to Tibet and Chinese goods flow into South Asia.

This growing Chinese presence—with ports under construction from Sri Lanka to Bangladesh and power plants springing up in Nepal—, has worried India, the long-time dominant force in the region. The two Asian giants have a history of mutual mistrust: they fought an armed conflict in 1962 and their border dispute is yet to be resolved. India is also uneasy at the prospect of becoming further inundated with Chinese goods.

RELATED: India and Pakistan Move to Liberalize Trade Ties

“India seems to have realised that in order to be a global power, it has to first begin winning friends in the neighbourhood,” said Sudheer Sharma, editor-in-chief of Kantipur, Nepal’s largest-selling newspaper. “India wants to take the neighbours into confidence.”

And by all accounts this is exactly what Mr. Modi is doing. His first diplomatic visit was to Bhutan, in June, a country that like Nepal shares a border with China. He was well received there, and the two countries are aiming to produce 10,000 MW of power by 2020, the bulk of which will be exported to India.

Although expected to face more political opposition, Modi was well received in Nepal too, with Nepalese Prime Minister Sushil Koirala breaking protocol to greet him at the airport. In his speech to the Nepalese legislature, Modi was careful to state that India would not interfere in Nepal’s affairs, and stressed the mutual benefits of economic cooperation. Several Memorandums of Understanding were signed, most notably for the 18-year delayed 5600 MW Pancheshwar Multipurpose Project, which is to be started within a year.

RELATED: India Strengthening Economic Ties with Israel

Even Maoist leader and regular critic of India Pushpa Kamal Dahal ‘Prachanda’ met with India’s top politician, telling him he had “won the hearts” of the Nepalese people, sparking worldwide media speculation that the Indian premier was bringing decades of mistrust to an end.

However the recent vetoing by the Modi administration of an agreed-upon treaty with the WTO has raised fears that India is focusing on its immediate neighbourhood at the cost of neglecting its ties with the West. This could be bad news for a number of reasons: India relies on technology and investments from the E.U. and the U.S., as well as help in fighting terrorism.

In consequence, Modi’s new government is now left with the  task of striking a careful three-way balance between India’s foreign policy interests in respect to China, the West, and its South Asian neighbor states.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email or visit

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Related Reading

Passage to India: Selling to India’s Consumer Market
In this issue of India Briefing Magazine, we outline the fundamentals of India’s import policies and procedures, as well as provide an introduction to the essentials of engaging in direct and indirect export, acquiring an Indian company, selling to the government and establishing a local presence in the form of a liaison office, branch office, or wholly owned subsidiary. We conclude by taking a closer look at the strategic potential of joint ventures and the advantages they can provide companies at all stages of market entry and expansion.

Taking Advantage of India’s FDI Reforms
In this edition of India Briefing Magazine, we explore important amendments to India’s foreign investment policy and outline various options for business establishment, including the creation of wholly owned subsidiaries in sectors that permit 100 percent foreign direct investment. We additionally explore several taxes that apply to wholly owned subsidiary companies, and provide an outlook for what investors can expect to see in India this year.