Repairing ties with Nepal: A strategy of two hands, 10 fingers

Nepal is set to lose its Least Developed Country (LDC) status on November 24, but has requested a three-year extension from the UN. Despite the extension, the deadline will return in 2024. In 2024, Nepal adopted the Smooth Transition Strategy (STS) to ensure graduation from LDC status by 2030, recognizing that remittances currently drive consumption, reserves, and imports but have not yet led to domestic investment or increased exports.

A Nepal-India joint strategy incorporating both economics and technology could further the STS. Recent bilateral engagements have eased tensions in relations. Now is the opportune moment to work together to transition Nepal away from low-investment, remittance-led growth towards a more sustainable economic paradigm. The loss of LDC status would result in a 9% increase in tariffs, a 4% loss in exports, and Nepal's existing key safety valves - stronger macroeconomic buffers and bilateral tariff agreements with India - will help mitigate the impact.

Nepal has grown at about 4% annually for three decades, but its most significant risk remains its low-investment trap. To diversify, Nepal opened up to the Belt and Road Initiative (BRI) in 2017, now conducting one-sixth of its trade with China. However, Chinese-backed projects are delayed due to questions over grants versus debt.

India and Nepal share one of South Asia's most unusual relationships with an open border, shared river basins, power grids, and data flows. Indian policymakers must consider Nepal's concerns about economic dependence on a "Big Brother" with care, humility, and generosity. The older ambition of progressing from free trade towards a customs union and ultimately a common market is still a strategic idea that must guide their relationship.

India must be Nepal's most reliable partner, replacing perceptions of unfair dominance with a joint two-hand, 10-finger strategy. The economic hand entails stable commerce rules, secure supply chains, single windows for venture capital funds, public and private joint ventures, and a deeper Nepalese capital market. The technology hand involves optical fibre connectivity, interoperable digital public infrastructure, power transmission, space-tech, and joint disaster risk reduction.

Three risks must be addressed simultaneously: over-securitizing the border, preventing adverse perceptions of India's interest in economic dependence, and eliminating bureaucracy. Many elements of this strategy are already in place, with high-level exchanges and technical meetings on river waters, railway connectivity, customs, energy, borders, and payment mechanisms taking place.

The key is to act swiftly and maintain stability and continuity. By working together, India and Nepal can build a brighter future.