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Nepal Relations with India
http://www.photius.com/countries/nepal/economy/nepal_economy_relations_with_india.html
Sources: The Library of Congress Country Studies; CIA World Factbook
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    Even after India had achieved independence from Britain in 1947, Nepalese-Indian relations continued to be based on the second Treaty of Sagauli, which had been signed with the government of British India in 1925. Beginning in 1950, however, relations were based on two treaties. Under the Treaty of Peace and Friendship, ratified in July 1950, each government agreed to acknowledge and respect the other's sovereignty, territorial integrity, and independence; to continue diplomatic relations; and, on matters pertaining to industrial and economic development, to grant rights equal to those of its own citizens to the nationals of the other residing in its territory. Agreements on all subjects in this treaty superseded those on similar matters dealt with in the previous treaties between Nepal and Britain. In the Treaty of Trade and Commerce, ratified in October 1950, India recognized Nepal's right to import and export commodities through Indian territory and ports. Customs could not be levied on commodities in transit through India.

    India's influence over Nepal increased throughout the 1950s. The Citizenship Act of 1952 allowed Indians to immigrate to Nepal and acquire Nepalese citizenship with ease--a source of some resentment in Nepal. And, Nepalese were allowed to migrate freely to India--a source of resentment there. (This policy was not changed until 1962 when several restrictive clauses were added to the Nepalese constitution.) Also in 1952, an Indian military mission was established in Nepal. In 1954 a memorandum provided for the joint coordination of foreign policy, and Indian security posts were established in Nepal's northern frontier (see India , ch. 5). At the same time, Nepal's dissatisfaction with India's growing influence began to emerge, and overtures to China were initiated as a counterweight to India.

    King Mahendra continued to pursue a nonaligned policy begun during the reign of Prithvi Narayan Shah in the mid-eighteenth century (see The Expansion of Gorkha , ch. 1). In the late 1950s and 1960s, Nepal voted differently from India in the UN unless India's basic interests were involved. The two countries consistently remained at odds over the rights of landlocked states to transit facilities and access to the sea.

    Following the 1962 Sino-Indian border war, the relationship between Kathmandu and New Delhi thawed significantly. India suspended its support to India-based Nepalese opposition forces. Nepal extracted several concessions, including transit rights with other countries through India and access to Indian markets (see Foreign Trade , ch. 3). In exchange, through a secret accord concluded in 1965, similar to an arrangement that had been suspended in 1963, India won a monopoly on arms sales to Nepal.

    In 1969 relations again became stressful as Nepal challenged the existing mutual security arrangement and asked that the Indian security checkposts and liaison group be withdrawn. Resentment also was expressed against the Treaty of Peace and Friendship of 1950. India grudgingly withdrew its military checkposts and liaison group, although the treaty was not abrogated.

    Further changes in Nepalese-Indian relations occurred in the 1970s. India's credibility as a regional power was increased--and Nepal's vulnerability was reinforced--by the 1971 Indo-Soviet Treaty of Peace, Friendship, and Cooperation; the 1971 IndoPakistani War, which led to the emergence of an independent Bangladesh; the absorption of Sikkim into India in 1974; increased unofficial support of the Nepali Congress Party leadership in India; rebellions fomented by pro-Beijing Naxalite elements in 1973-74 in West Bengal State bordering Nepal; and India's nuclear explosion in 1974. Nepal adopted a cautious policy of appeasement of India, and in his 1975 coronation address King Birendra called for the recognition of Nepal as a zone of peace where military competition would be off-limits. India showed some flexibility in placating Nepal by distancing, if not disassociating, itself from the Nepalese opposition forces based in India, agreeing to a favorable trade and transit arrangement in 1978, and entering into another agreement on joint industrial ventures between Indian and Nepalese firms. The latter agreement, by opening the possibilities of India's investment, indirectly furthered India's domination of Nepal's economy. India also continued to maintain a high level of economic assistance to Nepal.

    In the mid-1970s, Nepal pressed for substantial amendments to the 1971 trade and transit treaty, which was due to expire in 1976. India ultimately backed down from its initial position to terminate the 1971 treaty even before a new treaty could be negotiated. The 1978 agreements incorporated Nepal's demand for separate treaties for trade and transit. The relationship between the two nations improved over the next decade, but not steadily.

    India continued to support the Nepalese opposition and refused to endorse Nepal as a zone of peace. In 1987 India urged expulsion of Nepalese settlers from neighboring Indian states, and Nepal retaliated by introducing a work permit system for Indians working in Nepal. That same year, the two countries signed an agreement setting up a joint commission to increase economic cooperation in trade and transit, industry, and water resources.

    Relations between the two countries sank to a low point in 1988 when Kathmandu signed an agreement with Beijing to purchase weapons soon after a report that China had won a contract for constructing a road in the western sector to connect China with Nepal (see China , ch. 5). India perceived these developments as deliberately jeopardizing its security. India also was annoyed with the high volume of unauthorized trade across the Nepalese border, the issuance of work permits to the estimated 150,000 Indians residing in Nepal, and the imposition of a 55 percent tariff on Indian goods entering Nepal.

    In retaliation for these developments, India put Nepal under a virtual trade siege. In March 1989, upon the expiration of the 1978 treaties on trade and transit rights, India insisted on negotiating a single unified treaty in addition to an agreement on unauthorized trade, which Nepal saw as a flagrant attempt to strangle its economy. On March 23, 1989, India declared that both treaties had expired and closed all but two border entry points.

    The economic consequences of the trade and transit deadlock were enormous. Shortages of Indian imports such as fuel, salt, cooking oil, food, and other essential commodities soon occurred. The lucrative tourist industry went into recession. Nepal also claimed that the blockade caused ecological havoc since people were compelled to use already dwindling forest resources for energy in lieu of gasoline and kerosene, which came mostly via India (see Energy , ch. 3). To withstand the renewed Indian pressure, Nepal undertook a major diplomatic initiative to present its case on trade and transit matters to the world community.

    The relationship with India was further strained in 1989 when Nepal decoupled its rupee (see Glossary) from the Indian rupee which previously had circulated freely in Nepal. India retaliated by denying port facilities in Calcutta to Nepal, thereby preventing delivery of oil supplies from Singapore and other sources.

    A swift turn in relations followed the success of the Movement for the Restoration of Democracy in early 1990. In June 1990, a joint Kathmandu-New Delhi communiqué was issued pending the finalization of a comprehensive arrangement covering all aspects of bilateral relations, restoring trade relations, reopening transit routes for Nepal's imports, and formalizing respect of each other's security concerns. Essentially, the communiqué announced the restoration of the status quo ante and the reopening of all border points, and Nepal agreed to various concessions regarding India's commercial privileges. Kathmandu also announced that lower cost was the decisive factor in its purchasing arms and personnel carriers from China and that Nepal was advising China to withhold delivery of the last shipment. The communiqué declared that Kathmandu and New Delhi would cooperate in industrial development, in harnessing the waters of their common rivers for mutual benefit, and in protecting and managing the environment.

    Data as of September 1991


    NOTE: The information regarding Nepal on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Nepal Relations with India information contained here. All suggestions for corrections of any errors about Nepal Relations with India should be addressed to the Library of Congress and the CIA.

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Revised 27-Mar-05
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