Indo-Nepal Strategic Partnership for the Asian Century

From Dependency to Interdependence, Landlocked to Transit State, And Buffer to Bridge State

Madhukar Shumshere J.B.Rana*

Rationale, Aims and Assumptions

This essay purports to address vital issues for more trustworthy, harmonious, and mutually beneficial Indo-Nepal political, security, and economic relations. Peace, prosperity, and brotherhood between the two countries are vital for the modernization and stability of both nations in the wake of the new age of globalization and the imminent rise of Asia in a multi-polar world order.

The nature and scope of this paper is complex, attempting, as it were to undertake a holistic overview from the perspective of the past, present, and with an eye to the future. Its major contention is that Indo-Nepal bilateral relations must be remodelled into a strategic partnership that seeks to promote security, modernization, prosperity and well being of all the peoples of South Asia while ensuring that South Asia emerges as a geo-economic centre of the evolving new world order in the Asian century.

An evolving world order will be overwhelmed by an international paradigm of crises, conflict, violence, insurgencies, civil wars, and terrorism as its prominent features. Without doubt, these are the prospects up to 2020 when India hopes to be recognized as an industrial, developed nation by the world community of nations, playing its part as a responsible member of the UN Security Council and a major world power in its own right.

Security-Economic Relations' Nexus

Geography, British colonial history, commonalities of civilization, and an inner quest for a unique national identity, given Nepal's history as an independent country since its founding in 1769, are the structural and psychological factors behind the mistrust and unstable bilateral security relations between India and Nepal after India's independence in 1947.

Nepalese national politics are best understood against the background of these forces coupled with the normal big power- small power asymmetry in the relationship that is common to all nations.

This also explains why, even though fundamental political changes have been ushered in in Nepal, with the direct intervention of India in Nepal's internal affairs, most political leaders beholden to India for their coming to power through regime change, from various forms of monarchical rule in 1950 and 1990, have to bow to public sentiment and national pride.

By the mid-1950s, following the demise of King Tribhuvan who was a prime mover in the evolving Indo-Nepal relations, tensions were bound to be high, as happens even in Indian states, when Indian businesses started to pour into Nepal in the 1950s bringing in their own managers and labourers; and when migrant Bihari labourers, w[1]ho came to harvest the land (till the 1970s Nepal was a food surplus nation), chose to settle in the bordering Terai region as tenants. Fear, suspicion of foreigners, and a complex of inferiority among the general population, were inevitable psychological reactions to these new developments when Nepal had just opened its gates to the outside world after 104 years' of a closed- door foreign policy pursued by the Rana regime.

India insists on open borders as another fundamental structure of its bilateral relations with Nepal (and Bhutan). It does so because, then, it can use the 28 passes into Nepal from Tibet for military operations, if needed. At the same time, it obtains 'free-of-cost defence' from Nepal as a dependent buffer state. That, in effect, is the 'India-locked' feature of Nepal's landlocked geography and backwardness and indicated by patronage of the leadership of most political parties. This open border policy created insurmountable difficulties for Nepal in implementing a development policy based on market liberalism because it was not ideologically palatable to India throughout the period from 1950-90 and, as a matter of fact; it sought ardently until 1961 for Nepal to enter a customs' union with India.

A bi-lateral strategic divide arose, for the first time, when King Mahendra assumed direct rule in 1961 and in 1962, during the Sino-Indian border war. He took the bold and far- reaching decision to allow China to build the north-south or Arniko highway to link Lhasa to Kathmandu, which was started in 1963 and completed in 1965.

This divide arose prominently, once again, when India adamantly refused to recognize King Birendra's 'zone of peace' concept. The genesis of this policy lay, most probably, in the annexation of Sikkim by India in 1975 as a part of the Indian union. The policy was reinforced by the fear of 'Bhutanization' (or de facto protectorate status) of Nepal given the rise of India as a nuclear power under the leadership of an authoritarian, aggressive Indira Gandhi-- both internally and externally.

Internally, it took a hard line against the Naxalite peasant's revolution and the Sikh insurgency which were successfully resolved. It managed to contain the insurgencies of the North East. Externally, it fought three wars with Pakistan with its eventual dismemberment in 1971 to create an independent Bangladesh. Furthermore, it was heavily involved in propping up the ethno-nationalism amongst Sri Lanka's Tamil minority that is at the root of the civil war there since 1985.

In Nepal's case, rather than promoting ethno-nationalism, its intelligence apparatus opted to destabilize Nepal through a 'class-oriented' approach-- believing that the political and social elites are anti-India-- by propping up the Maoist movement, whose roots lay in the Naxalite movement of West Bengal. This tactic was pursued after Nepal's body politic refused to respond to the aid, economic and trade concessions in the form of the trade treaty of 1996 that endowed immense non-reciprocal preferential treatment to Nepal and which, significantly, was withdrawn by the trade treaty of 2001 as the political pay-offs did not materialize.

It is thus that an Indian ambassador is on record as having alluded to the fact that "Nepalese politicians are the most ungrateful people…" Two landmark events mark this reaction: one, the national consensus-driven demand that the 1950 treaty was an unequal one that needed revision; two, the tumultuous parliamentary uproars and debates over the continued occupation by India of the northern point at Kalapani at the tri-junction between China, India, and Nepal; and, three, the Tanakpur Agreement on sharing of the Mahakali waters as well as the difficulty with which the Mahakali Treaty was finally ratified by parliament with the required two-thirds majority for sharing natural resources sharing with other nations.

Clearly, with new security dimensions arising on the bilateral horizon—that of water and energy security, it makes for even more contentiousness and volatility in bilateral relations: perhaps more so in defence and security because of the impact on the masses and their livelihoods from the legacy of having got a bad deal in all past water resource agreements executed in the 1950s. A re-visit to the new draft of the India treaty of peace and friendship, handed over to the late King Birendra as the trade-off for continuing with the partyless Panchayat regime, clearly sought to extend the security parameters to include defence, water, energy, and, indeed, first rights over all foreign investments in Nepal. Perhaps even a veto right over multilateral aid projects considered sensitive by India.

The stridency of its Nepal policy against the peace zone concept of 1975 was to be witnessed by the fact that although it had been endorsed by 116 countries of the United Nations, and the late King Birendra considered (albeit in the mid-1980s only) that the 1950 treaty of peace and friendship was not incompatible with it, India refused to endorse King Birendra's vision.

Many analysts believe that had King Birendra accepted the draft new treaty of peace and friendship – and had he correctly felt the winds of political change taking place globally after the fall of the Berlin, wall and, subsequently, the collapse of the Soviet Union— most probably regime change would not have occurred and the peace zone concept would have been endorsed. This would have amounted to Nepal being reduced to a 'virtual protectorate' of India, not unlike Bhutan.

From a position of strength and manifold leverage over Nepal's body politic, India holds the view that the peace and friendship treaty is still valid until it is formally renounced by either party. In addition, it underscores the position that the bilateral security agreement of 1965 is also valid and should be respected along with the maintenance of open borders.

The new Indian strategic design is, probably, to prop up the Maoists until Nepal is obliged to seek all its defence supplies from India, which had been given previously on soft terms (70% grant) to combat terrorism; and if the insurgents get the upper hand to have Nepal call for intervention of the India military—as in Sri Lanka—at least by the Gurkha battalion who are nationals of Nepal.

The 1950 treaty and letters stated that "neither government shall tolerate any threat to the security of the other by a foreign aggressor" and obligated both sides "to inform each other of any serious friction or misunderstanding with any neighboring state likely to cause any breach in the friendly relations subsisting between the two governments."

India has never informed Nepal about its military actions even with the vast contingents of Gurkhas recruited from Nepal. Ironically, Nepal faces security threats from no other nation but India when Nepal seeks an independent defence policy.

Additionally, the 1965 agreement requires Nepal to purchase arms from India or from others with India's permission only. Ironically again, it was India which stopped the supply of arms, during the gravest challenge in Nepal's modern history, combating terrorism and insurgency in 2005, forcing Nepal to buy arms from China and Pakistan. The penalty for this policy was being played out in Nepal when India facilitated the Maoist-seven party understandings in Delhi in March 2006 even given the terrorist tag placed on the Maoists by India in 2001, much before Nepal did so in 2002. It is also alleged by the Royal Nepalese Army that the INSAS rifles were sub-standard equipment which malfunctioned while engaged in counter-insurgency operations.

India argues that it is this letter and spirit that has led Nepal to be provided with development aid, national treatment for Nepalese to live, work and invest in India and all manner of unilateral trade and customs' preferences for Nepal. It further argues that it is these very preferences, coupled with the intense people-to-peoples' matrimonial-cum-socio-cultural interfaces across the open border--- on day-to-day bases practically--- that contribute to a 'special relationship' between Nepal and India that is historically unique amongst nations— even compared to the close relations between Canada and the USA.

When Nepal bought arms and ammunition from its northern neighbour, China, in 1988, India chose to place an economic blockade by refusing to ratify the 10-year transit treaty of 1978 while, on the contrary, threatening to revert to a single -treaty trade-cum-transit framework that had been abandoned in 1978. It needs to be underscored here that all throughout from 1975-78, Indira Gandhi had refused to separate the two treaties arguing that trade and transit are inseparable even in international law. Such was the defiant position of its Chief Negotiator, Mr. George Alexander, former governor of Maharastra state and once candidate for the Indian presidency.

The crux of the problem with the current treaty of peace and friendship is that it is a security arrangement with India that, in theory, compromises Nepal’s ability to pursue an independent defence policy. This thereby constrains the manoeuvrability of its foreign policy. As a quid pro quo for this security arrangement, Nepal receives bilateral economic benefits in the form of non-reciprocal, unilateral preferences from India, including national treatment for Nepalese citizens gainfully employed in India.

There could be a school of thought that believes in the status quo sans the 1950 letters of exchange. Those who argue rest their claim on the pragmatic premise that , in practice, the treaty is more breached than observed by both countries, hence, it is better to let it lie in that state so as not to open the Pandora’s box of the unknown, especially when national politics is so confused and fragmented.

The security arrangement in the 1950 treaty is out-dated for the following fundamental reasons: ( i) the entry of nuclear armaments into both South and Central Asia erodes the relevance of Nepal as a buffer State between China and India; (ii) the break-up of Pakistan and the birth of Bangladesh in 1971 reduce the strategic importance of Nepal as a possible ally of Pakistan;(iii) an identity of national political will towards multiparty democracy and human rights since 1990 has emerged; (iv) China has renounced Maoism and the trans-border export of its ideology; (v) new dimensions to international relations worldwide in the formation of regional and sub-regional blocs—witness the birth of SAARC in 1985 and that of the SAARC Growth Quadrangle (SAARC-GQ)in 1997; (vi) and, last but by no means the least, the emergence of new security threats through such forms as religious fundamentalism, ethnic conflicts, natural disasters, mass migration, rise of the parallel economy based on drug trafficking, smuggling and money laundering, terrorism, and low-intensity military conflicts.

Because of Nepal’s economic weakness in the wake of the population explosion, its over-dependence on aid and, not least, the support rendered by India to opposition politics in Nepal from 1947-06, India has managed to over-extend its influence on Nepal beyond that originally envisaged by the 1950 treaty of peace and friendship. The Ranas sought for Nepal as a buffer State; but not a Nepal which is India’s exclusive sphere of influence.

It is to be noted that, in 1989, India, inter alia, sought not only reciprocal ‘national treatment’ for its citizens in Nepalese territory, but also its first right to access to all of Nepal’s natural resources. Prior to this draft treaty, it had been objecting, on grounds of security, to Chinese contractors doing internationally competitive business in Nepal. Such a policy goes against the tide of world globalization and liberalization. It also seeks to extend Nepal’s economic dependence on India.

Finally, the basic premise of the 1950 treaty is untenable in the post-Cold War world as any reference to “ever lasting peace and friendship” is archaic as no treaty can effectively be valid for all time and purposes without re-negotiation. Article V has the provision for a customs' union which is outdated given the adoption of SAFTA.

As the transit treaty expired in 2005, this time around, unlike in 1989, it could not place an economic blockade on Nepal but had to extend the said treaty. Thanks to our negotiated entry as member of the WTO in 2004 the right to transit trade for all nations was well safeguarded. (The author had advised, as early as 1974, that Nepal should join GATT as per the recommendations of HMG's Task Force on Commerce and Trade 1974-78. Nepal applied in 1989 only when India placed an embargo on its freedom of transit trade). Of course, it is not just the WTO that has caused this change of behaviour; it is also the new geo-economic, geo-political and geo-psychological realities in the age of globalization, terrorism, and the rise of Maoism in Nepal and India.

India did everything possible to create the mirage that the near-eroded Treaty of Peace and Friendship, 1950, was observed more in the breach than in custom by both sides, was still alive, and, diplomatically, would repeatedly dare Nepal to renounce it by giving the statutory one-year notice.

During the 1990s Nepal deputed its Foreign Secretary with his counterpart on numerous occasions–which was really a diplomatic gimmick in self-delusion and deception of the people as the dialogue never progressed beyond generalities. Nor could it do so when Nepal was undergoing intense political instability, having had 15 Prime Ministers in 14 years with 3 general elections, all manner of political experimentation ranging from an absolute majority in parliament to minority to coalition politics with all kinds of party combinations and eventually the dissolution of parliament and local bodies by the Prime Minister in 2002, respectively.

Some analysts might argue that the perfect congruity of bilateral security and economic interests actually existed, firstly, from 1950-55. On surface this is correct; but the fact is that it was a period when Nepal had the Indian military and aid missions practically governing the country with the Indian Ambassador being part and parcel of the Nepalese cabinet consisting of a coalition of seven representing the overthrown Ranas and seven from the political parties.

Briefly, as to why the 1950 treaty has been made, and is currently near-defunct, the following are the indicators: King Mahendra came to reign in 1955 and got Nepal a seat in the UN and thus collective security; he sought diversification of political relations that included the signing, after China dropped its claim to Nepalese territory, of a peace treaty with China and complete demarcation of its borders (with India this is still incomplete); he announced trade diversification as a major thrust in diplomacy which resulted in the signing of the bilateral trade and transit treaty of 1960 with India (which technically is not necessary as per the 1950 treaty of peace and friendship); the massive expulsion of Nepalese nationals from the North East ; national treatment is not given to property ownership as stipulated as it requires all manner of clearances from the ministry of external affairs, home affairs, Reserve Bank of India etc. The construction of the Kathmandu-Kodari highway leading to Lhasa by the Chinese as grant aid, from 1963-65, was the greatest blow to the 'special relations' between Nepal and India.

Beginning in 1965 India's dominant position as an aid provider was being eroded with the entry of China, the USSR and multilateral and financial institutions into Nepal in a big way at the same time as India was pre-occupied with its problems of insurgency in the North East and Punjab, Naxalite terrorism, and food security.

Dependence is falling also as a result of the alternative employment opportunities for Nepalese youth in West Asia, East Asia, and Southeast Asia, and which have become preferred avenues for migration—not to mention the avenues opened to the universities and labour markets of the USA, UK, Australia, and Europe for more qualified youths.

In sum, Nepal does not have a well conceptualized, consistent India policy that is strategic in nature and scope. Since the advent of multi-party, parliamentary democracy in 1990 it has suffered acutely from the vagaries of political instability, with India-baiting being conveniently used by some political parties as a source of electoral votes. None of the parties has a clear policy towards India. So much so that it is not just inter-party rivalry but also intra-party schisms that are a commonplace over how to relate to India (See Annexes I and II for alternative drafts for a new framework treaty. The author is unaware of any drafts being handed to the government of India by any foreign minister despite the demands for each and all for a revised treaty).

It is against this background that Indo-Nepal economic relations must be conceived for a mature bilateral relationship. It has to be strategically designed and implemented in a prioritized manner. Without a dialogue over 'comprehensive security' no breakthrough will be possible. On the economic front we need to move toward the principle of mutual benefit with inter-dependence drawn up within the framework of the WTO principles, rules, and regulations.

Economic Relations 1990-2002

The period 1990-95 were the halcyon days of Indo-Nepal relations. As India was the prime mover for the restoration of 'multi-party parliamentary democracy with a constitutional monarchy', many high-level bilateral goodwill visits resulted in new, imaginative trade, transit, and water and development aid agreements. It could be argued that a convergence of security and economic interests emerged, for the first time ever, in Indo-Nepal bilateral relations, as a reward for the abandonment of the 'zone of peace' concept by the political parties to acquiesce to India for its pro-democracy political and economic support.

The interim government virtually accepted the concept of the 'special relationship' progressively abandoned by the Panchayat regime from1961-1990.

As a reward, a bold attempt was made to patronize Nepalese political leadership and the urban elite with the most generous Indo-Nepal Trade Treaty of 1996, which expired in 2001: that provided unlimited free access to Indian markets with no value-added requirements nor the inclusion of a negative list. This is by all historical accounts an unprecedented concession that proved to be unsustainable for various reasons—mainly political.

The treaty was discontinued for political and security reasons, especially when the UML first, and then all political parties —except the Terai-based regional Sadbhavana party—thereafter, incorporated the revision of unequal treaties in their election manifestos as a vote-generator amidst the nationalists in the electorate.

Significantly, this happened against the background of acute youth unemployment and the gains being made by the Maoists whom India had declared as terrorists in 2001. This was also the time when parliament was dissolved by the then Prime Minister, Mr. Deuba, and the period during which the King assumed indirect governance responsibility by appointing prime ministers to run the administration pending general elections.

The re-emergence of the King n the political horizon of Nepal was perceived as being against the tenor of its two-pillar policy. India feared that King Gynendra would move towards a more assertive post-9/11 foreign policy seeking broader engagement with China, Pakistan, and USA with the theme of fighting terrorism, and also seek 'equi-distance' and 'non-alignment' in its dealings with India and China. And, in the United Nations, where India sought ardently for a seat in the UN Security Council, just as ferociously opposed by China, and with Nepal being undecided.

Meanwhile, India's 'new neighbourhood policy', or the so-called Gujral doctrine of 1996, was based on the principles of Pancha Sheel garnished with the principle of non-reciprocity in bilateral economic relations with its immediate neighbours. It was hoped that the Gujral doctrine would help alleviate the fears of asymmetry amongst neighbours and provide a new economic momentum to regional cooperation within SAARC.

Says S. Narayan (Financial Express: 2006), former finance secretary and Prime Minster's Economic Advisor "India’s exports to Nepal tripled between 2001 and 2004, from around $133 million to over $365 million. Imports from Nepal have been growing consistently from 1998-99 and are around $200 million now. In fact, among the SAARC countries, our trade growth has been fastest with Nepal, and total trade is around half a billion dollars, accounting for around 25% of the total India-SAARC trade. The current political crisis in Nepal has, therefore, significant implications for India in the economic sphere and it is not clear whether these implications have been factored into our strategy in dealing with Nepal. Other disturbed regions have shown that even introduction of democracy requires preparation of the ground. Iraq is a glaring example, as also Afghanistan. Merely calling for democracy may result in chaos. Do we have strategies and choices that would assist in the establishment of a pro-market, liberal regime that would take economic cooperation between the two countries forward? Or are our strategies geared to waiting for the outcome and then reacting? Certainly the trade and industry chambers should be concerned and be ready with alternatives that they can suggest to the government".

The share of India's trade is actually higher than the official statistics would imply. It is estimated that 60% of Indo-Nepal trade is unrecorded, as it is done through informal channels using barter-like payment arrangements by and between the closely knit mercantile classes of West Bengal, Uttar Pradesh, Bihar and Uttar Anchal. Sub-regionally, the share of trade in these states' trade with Nepal is highly significant.

Exports to and investment from India soared to unprecedented levels by 2002. FDI poured from India at record levels. The treaty's objectives were to expand exports, generate Indian investments for industrialization, and create employment to tackle poverty in Nepal. The last objective could hardly be secured with its abrupt termination in 2002.

Says Madan Dahal:

"The Nepal-India Treaty was renewed in 2002 with specific modifications comprising value-addition requirements of 30 per cent, quantitative restrictions on export for vegetable ghee, acrylic yarn, copper and zinc oxide, and existence of a negative list. These conditionalities disrupted efforts towards industrialization in Nepal. The issue of quantitative restrictions on specified items on the pretext of import surge in India from Nepal could be neutralized through regulating deflection of trade at the border" (The Weekly Telegraph, September 1, 2004).

The treaty was annulled when the balance of trade disequilibrium was at a historical high, putting severe pressure on the fixed exchange regime with India. It happened when economic liberalism was taking a momentum of its own grounded, inter alia, on the trade treaty of 1996. Nepal was actually thinking of capital convertibility even before India did so.

Such was the confidence it had with the post-1996 economic growth and dynamism pushed assiduously by the likes of Asian Development Bank, IMF, and the World Bank as conditions for assistance: the World Bank even promising generous budget-support grants along with the possibility of 4-5 times per annum for development aid as incentives for deeper, wider and wider—much to the consternation of the left wing socialists of India working in tandem with our own parties opposed to liberalization.

However, the ostensible reason provided was that India suffered a 'surge' in imports of goods that had far too much third-country import content which unfairly competed with their indigenous industries as Nepalese exports were competitive because of the customs' tariff advantage arising from their differences---Nepal being more liberal.

Actually, problems should be solved with due mutual consultation and joint studies; and this did not happen. Joint action, it turns out empirically, is not acceptable to powers that extend largesse on their own terms. For example, for products that had 'surged' both sides could have demarcated a product strategy for access to Indian markets for each of the contentious products. It could be that Nepal's 'surging' industries were better off being relocated to India or vice versa, depending on the inherent competitive strength with each of the products in question in that state of India that actually felt the ‘hurt’.

It was discontinued mainly because India could not extract its water and energy rights in the wake of the rumbunctiouness of opposition parliamentary politics with constant pre-mature recourse to general elections. It is no wonder that a former Indian Ambassador is believed to have gone on public record as saying that the Nepalese politicians are the most untrustworthy and ungrateful lot for all the support that was provided to them from New Delhi to come to the centre of political power with regime change.

With the climatic change created by the treaty, complemented by economic and financial reforms towards a liberal economic regime, economic growth shot up to new heights during this period. Significantly, it was just during this period of near-take off in the economy; in February 1996 to be precise, that the Maoists withdrew from parliamentary politics (where they had 10 seats) and declared the so-called 'people's war' on the state.

Mistrust and mutual suspicion have grown even after the restoration of multi-party democracy with blatant Indian interference in Nepal's domestic politics, first in 1950; then again in 1990 and, once more, in 2006.

Economic Relations 2002-2005

Nepal needs to move radically away from its past diplomatic paradigm of negotiating non-reciprocal unilateral favours towards a new paradigm of negotiating interdependence for mutual benefit. This necessitates an overhaul of the machinery of state in the direction of strategic national management founded on economic diplomacy. An overhaul that caters to the vital need for the state to be able to balance, on the one hand, bilateralism with multilateralism, and, on the other hand, regional cooperation with sub-regional cooperation.

Indigenous thinking on economic strategies is totally absent as national think tanks are engaged in short-sighted contract research for bilateral and multilateral donors; and the Finance Ministry and the Nepal Rastra Bank are crippled in their ability to design relevant trade-industry-foreign direct investment plans because of the overwhelming domination of the IMF, World Bank, and Asian Development Bank over national creativity.

As with stainless steel products in the 1960s, Nepal now was, once again, mired in the acrimony of film rolls and acrylic yarns and the like, as the foundations of Nepal's industrialization; which was left solely to the initiative of the private sector who naturally sought windfall profits from the opportunities in India.

While this may be the case of the behaviour of the private sector, one has reason to fault the changing goodwill of New Delhi that tends to be aligned more to its short-term geo-political exigencies than long-term mutual gains.

For products that have 'surged' joint studies should have been undertaken; and based on the findings and recommendations of the studies, a product strategy developed with the participation of the states and private sector therein for access to Indian markets for each of the contentious products. To repeat, it could be that the 'surging' industries are better off being relocated to India or vice versa depending on the inherent competitive strength with that product or sub-sector in that state of India that feel ‘hurt’.

A major development at the political level was the permission granted by Nepal for a consulate office in Birgunj in 2002, which request had been a pending from the 1970s. In 2005 Indian assistance to modernize the four main trade and transit points at the border customs in Biratnagar, Birgunj, Bhairawa and Nepalgunj were agreed to, and this should help the logistics' sector significantly with trade facilitation.

The West Seti and Upper Karnali hydro-electric projects also have been approved, and this will give life to the bilateral power-purchase agreement and mobilization of Indian FDI . Further, it may possibly be a better route for more harmonious energy trading with the private sector of the two countries engaged in power trading to harness the 84, 000 MW potential of Nepal, of which more than 20 000 are already assessed to be commercially viable.

More than progress in this period there was regress as bilateral political differences led to stoppage of military supplies to the Royal Nepalese Army and non-implementation of the telecommunication agreement, the largest Indian FDI so far; done for national security reasons related to the counter-insurgency operations against terrorists. In retaliation, India took the unusual step of actually stopping the release of excise refund accounts to Nepal, which were payments received for giving indirect preferential tariff treatment to India's manufactured products to enable them to compete with overseas' imports.

Economic Relations 2006-2020: Approaches to Policy and Institutional Innovations
New institutional arrangements are now required at different levels beyond the trade ministries: (a) National Planning Commissions especially in respect of the regional plans for the FW and MW, (b) FNCCI-CII-FICCI-bilateral CCIs, (c) Joint Economic Commission

Institutional innovations are a must for generating Indian FDI into Nepal. Current institutional arrangements relying mainly on government-to-government---that too at the national level---must be discounted in favour of business-to-business interface that mobilizes participation between both national and states' and districts' business federations, associations, and councils .

Consular Offices, formal and honorary, should be opened in all major state capitals and large towns neighbouring Nepal in addition to the Calcutta Office. Their main task should be to disseminate information on trade, tourism, and investment opportunities and laws as well as to mobilize Indian joint venture into Nepal and vice versa. They should be paid a commission of 0.1% by HMG for the results achieved; when production actually commences and it is duly certified by the investor that the consuls were prime movers for their mobilization.

Cooperation in Development Planning
Nepal is ridden with schizophrenia in balancing its political with its economic strategy with India. Politically, it seeks greater independence while economically it succumbs to a state of dependency by negotiating unilateral preferences that never lead to mutual benefit nor to its industrialization. It is time to adopt a new vision by seeking to negotiate for interdependence and mutual long-term benefit.

The competitive advantage of Nepal lies in transit infrastructure; offshore banking, insurance and finance; hydro-energy and water resources; security services; tourism and retirement homes/villages; ICT and software development; forest and herbal resources; organic farming; high-altitude seed farming; floriculture and horticulture health and education services; legal and accounting services; engineering and construction services.

For all this to happen quickly so as to catch up with the rest of South Asia, managerial and technical know how are needed in abundance: hence the need to drastically liberalize economic, social, land, and immigration policies. If we are to surf the big wave of globalization that is sweeping India and if Nepal is to be benefited by the Indian economy's pull-factor we need trade that is export-led and a mindset that is outward looking, creative, and innovative. We have a huge resource endowment in our favour already in India—firstly the near 2-3 million Nepalese migrants working and living and, secondly, the broader diaspora of the 6-7 million people of Nepalese origin (PON).

Development of ecological complementarities for mutual benefit includes: (a) energy trade, (b) agro-industrials, (c) watershed management, (d) flood control, (e) forestry, and (f) scientific farming. This calls for closer ties between national planning commissions and finance ministries. They hardly hold bilateral dialogue to coordinate resource strategies for sustainable development.

Development of complementarities in manufacturing (components) includes: services (tourism, transport, health, education, R&D in electrification of the transportation systems), information technology, infrastructure (roads, railways, waterways) to integrate Far West and Mid-West Regions into the Delhi- Dehradun-Lucknow growth axes: this maybe the best way of obtaining the evasive regional balance for the highly under-developed Far Western Development Region of Nepal, the hub of the Maoist insurgency. It would mean extending the national transport corridors of India into Nepalese territory, which would simply be doing so at marginal costs to Nepal if unaided.

The approach to planning should be through an integrated commodity framework for internationally competitive products: leather, textiles, coffee, tea, horticulture, sericulture, floriculture, seeds, and IT.

Indo-Nepal economic relations must be sensitive to concerns over domination, concentration, loss of national identity, and WTO compatibility

India-Nepal could cooperate in establishing special Chinese, Korean, and Japanese townships in border areas (Mahendranagar, Nepalganj, Bhairawa) of Nepal for their location here to take advantage of a more congenial climate and environment, cheaper land, labour rates, and electricity tariffs.

Cooperation in Water Resources
The DPR that has languished horribly for 9 years must be moved forward and, now that the power purchase agreement has been signed, the project can best be private sector driven ventures under FDI. This way, it will seek to help develop Nepal's bond and equity markets as well as allow Nepal to access the international capital markets and thus cut down the extreme dependency on multilateral financial institutions with their own agendas not in tandem with our national vision or broad strategic interest.

Cooperation in Infrastructure Trade
The ideal form of interdependence is ‘economic union’. But this may be politically unpalatable for Nepalis to think of at this juncture. The challenge for India and Nepal is, therefore, to be innovative in their negotiations to enhance mutual benefit and interdependence without recourse to any form of union. How may this be achieved? One way is to cooperate in infrastructure development for mutual benefit.

‘Trading in infrastructure’ will sound odd to conventional thinkers, but this is what Nepal has to promote in the new diplomatic paradigm envisaged here. We can trade infrastructure through the promotion of regional and sub-regional cooperation. Nepal’s East-West Highway could be used as the SAARC Highway for Bangladesh’s trade with Nepal as also North India, Pakistan, Afghanistan, and Central Asia. Our second international airport at Lumbini could be the Himalayan hub for international cargo and passenger services for Bhutan, North East India, and Nepal; and a SAARC Investment Area in Panchkhal could serve as a processing-cum-manufacturing centre for products of the entire eastern seaboard of South Asia to be traded with Tibet and its hinterland.

A Mahendranagar-Delhi growth corridor would promote mutual long-term benefits, keeping in mind Nepal’s water and energy resources. India, using the framework of the 1996 trade treaty itself, could support Nepal to establish Free Economic Zones to attract Japanese and Korean businesses to locate their investments exclusively in their own townships set up in the territory of Nepal for exports to India and Nepal. These locations could be anywhere in Dang-Nepalgunj-Mahendranagar.

This would lay the foundation for Nepal’s industrialization, foster balanced regional development, and boost the prospects of the Karnali hydropower project. It will also help to integrate the economies of Uttar Anchal in India and the Far West of Nepal for significant mutual benefit.

With India aiming at a 10% GDP growth rate, Nepal cannot be content with a 6% growth and thus be pushed even more into the periphery or economic backwaters of the sub-continent. With further innovations by India and Nepal, the 1996 treaty could be a worthy model of bilateral cooperation between large and small contiguous, especially between landlocked and coastal, states. The beauty and strength of this treaty could be its impact on not only generating inter-dependence with mutual benefit but in fostering trust, harmony, goodwill, equity, and efficiency in the bilateral relations between India and Nepal. Its strength could be to put into motion India’s new policy of 'enlightened bilateralism' without rolling back the drive for regional and sub-regional cooperation.

Mutual benefit will be a sine qua non for the treaty’s sustainability. Mutual benefit requires a different kind and order of bilateral negotiations on Nepal’s part, namely, for inter-dependence. This has not been attempted so far diplomatically Now is the time to move forward in this direction.

The treaty as a whole does not contravene the WTO convention should India continue to provide Nepal non-reciprocal preferences. However, Nepal must be more cognizant of global rules, regulations and practice, and renegotiate the ‘grey articles’ in the current treaty to be clearly compatible with the MFN stipulation of WTO for its part. Surely when it joins the WTO voices will be raised as to the exclusive preferences for India and China and not others. Surely, too, it will not be justifiable to have differential treatment for trade with Tibet and Hong Kong when both are part of the same country.

Re-negotiating the treaty towards economic interdependence with India, while simultaneously seeking full membership of the WTO as well as actively promoting sub-regional cooperation, is the best strategy of economic diplomacy to serve Nepal’s national interest. In an age of globalization, regionalism, and devolution of political power real economic quid pro quo and enduring commitments are likely to be made in Kolkata, Patna, Lucknow, and Dehra Dun and not just simply in New Delhi, as in the past.

Greater trust needs to be developed between the governments, which can be garnered by developing multi-level relations political with Nepal developing closer political contacts with the states of Bihar, Uttar Anchal, Uttar Pradesh, and Sikkim just as it has been developing with the Tibetan Autonomous Region of China. The ground realities are such that other than customs and security matters all other interfaces are with these federated states and not the centre. It is a pity that such an approach has not yet materialized

The traditional confidence-building actions need innovation. Relying solely on interactions between scholars, retired public servants, and businessmen may be necessary but it is insufficient. More permanent instutionalized approaches are needed for effective economic diplomacy. It is suggested here that consular offices be opened in all the neighbouring state capitals and its major towns to get the people there to learn of the policies, laws, rules,and regulations for trading and investing in Nepal. Local marketing, business consultancy, and economic research organizations should be mobilized profusely and cost effectively by these consular offices to promote Nepal.

Cooperation for Industrialization
India's promise of help for Nepal's industrialization is a powerful motivator for the treaty to continue as is. Hence the strategic question is: how best can we industrialize with Indian cooperation? None of the political parties, national think tanks, has foun answers to this strategic question. Nepal is the world's 40th largest country in terms of population. It has to industrialize to transform its social structures and create jobs for the youth comprising 60% of the population.

A favourable business environment can be gauged by reduction in the level of transaction costs and the time taken for start ups of projects; relatively excellent infrastructure that reduces transport, energy, and inventory costs; and investor-friendly labour laws that allow flexibility of recruitment and separation for all kinds of labour services are fundamentally essential ingredients for a much higher levels of FDI from India –and from elsewhere too. These are the constant complaints of the Indian businesses already established here in addition to the demands for adequate industrial security against Maoist threats and extortion.

Except for a negative list of industries, those mainly requiring environmental impact assessment as well as resettlement of homesteads, all industries should have full freedom to enter, expand, and exit as the market conditions warrant subject to the laws of the land in force. A special Commercial Bench should be created at the Supreme Court and all major lower courts to expedite litigation of a commercial nature and scope.

It has been suggested by RIS' Nagesh Kumar (Dahal and Shrestha:2003) that Nepal needs to rely on SMEs for business and industrial development owing to market size, level of per capita income, and entrepreneurs' investment capacity. His idea of a Joint Revolving Investment Fund to the value of Rs 1, 000 million would give dynamism to Indo-Nepal joint ventures. It may be an opportune mechanism for the development of Nepalese SMEs to venture into joint ventures in India too. For globalization to be meaningfully complete, Nepal needs to be an export-led, entrepreneur-driven economy that fosters Nepalese businesses outside its own territory. It is the best strategy for poverty eradication as has been proven by the transformational economic miracles of Japan, Korea, Hong Kong, Taiwan; and later in Malaysia, Singapore, and Thailand and now so dramatically in China.

New preferential policies are required to provide a level playing field for Nepal's exports: similar products being produced in the Himalayan regions of India should be given the same capital, transport and interest facilities if they are produced by Indian investors in Nepal for exports to India; these subsidies could be imputed as part of the barter payments for the use of water resources from investment in water-storage dams. Furthermore, products with less than 30% value added, if assembled in India, should also be allowed preferential duty free entry on par with the level of excise duties levied on them for a level playing field.

Cooperation in Security and Defence

Without security it will be unlikely that local investment can be attracted, let alone FDI. Where investment does take effect, it would not be of 'good quality' as insecure environments attract highly suspect and unethical entrepreneurs with little or no commitment to national welfare or sustained commitment. Therefore, cooperation between security agencies at the national, state, and local levels are vital, particularly in the wake of Maoism-Naxalite-Terrorism, ethno-nationalism and cross-border smuggling and trafficking.

So fluid and dynamic is the evolution of international relations and so complicated by the rise of non-state actors that what appeared sound in the late 1980s actually appears contradictory under the present scenario. Take for example the Indian trade and transit blockade of Nepal in 1998 caused by the purchase of some air defence weapons from China: a most competitive process, and to combat unknown air incursions into Nepal, but it was considered a blatant breach of the 'defence pact' and a 'threat' to India's national security.

Cooperation in Banking and Finance

Balance of payment support to float the Nepali rupee according to the foreign exchange market; would allow capital convertibility so that the Nepali diaspora in India could be mobilized to invest in banking, tourism, transportation, construction, warehousing and distribution, and wholesale trading.

Free convertibility will permit the local governments at municipal level to mobilize Indian foreign direct investments directly into long-gestation infrastructure projects using local initiatives, especially as BOT legislation is now in place.

Indian joint venture banks should be used as strategic resources for business idea generation and India FDI mobilization with their vast network of banks services. India should allow Nepalese banks and financial institutions to open branch offices in neighbouring states as per the capital adequacy requirements of Nepal. In return, Nepal should permit Indian banks to open branches here as per the NRB rules and regulations. It is believed that such an innovation will cement the free trade, free exchange, and free labour movement between India and Nepal that has remained the hallmark of this unique historical relationship and which should be further developed with free capital movement, access to each other's stock and bond markets, and opening up of land and labour markets to each other's citizens with reciprocal national treatment. If the recommendation is not politically viable in full, then concepts such as SEZ, EPZ, EVP, dry ports and bonded warehousing could be optimal starters.

Another joint fund that India could help Nepal with is a Joint Exchange Equalization Fund equivalent to say 24 months of imports. This will allow Nepal to float its rupee now fixed to the Indian rupee. This has retarded Nepal's exports, discouraged import substitution away from Indian products by providing a level playing field, and also robbed (as per HMG-World Bank-UNDP study on trade competitiveness ) around 0.5% of GDP year as the cost of the policy of fixed exchange (the cost of Maoist terrorism is between 1.0-1.5% of GDP annually). Not to mention the inability of Nepal to have its own interest rate policy on which its policy on inflation, capital convertibility, and the long-term bond and securities' markets will depend.

Closer cooperation between the Governors of the two central banks and also between regional branches of the central banks would help facilitate two-way traffic for join ventures in all areas of business. Allowing Nepalese banks and financial institutions to issue IC savings' certificates would help improve the balance of payments with India: as would also allowing banks and financial institutions to sell power bonds where power is being exported to India help deepen the Nepalese capital market as well as contribute to equalizing the unfavourable balance of payments with India.


Cooperation Transit and Logistics' Sectors

Open skies to short-haul, cross-border flights, particularly to airlift high-value mountain and hill products to neighbouring cities in India, would greatly help farm-to-retail marketing of high-value perishable products in the major adjacent towns within short hauls.

Create a SAARC-SEZ/EPZ at Panchkal in Nepal to assemble and manufacture and to trade overland between Tibet and the SAARC nations. This joint venture will assuage fears of India, while opening up preliminary regional contacts between SAARC and China, which will lay the seeds for collaboration in water resources.

A new area of win-win cooperation has arisen that will benefit not just Nepal but also the entire South Asian region—the concept of Nepal being a transit economy and a land bridge between South and Central Asia.

Transit economy will help build badly-needed infrastructure everywhere in Nepal, but most certainly in its Himalayan regions. China is ranked third on import and sixth on export for India. The transit facility will benefit the adjoining states of Bihar, Jharkhand, UP, West Bengal, Utaranchal, and Sikkim. Later, Bangladesh and Bhutan could also benefit.

The viable routes/corridors at present, in order of priority, would be as follows:
1 Birgunj-Raxaul
Birgunj – Hetaura – Narayanghat – Mugling – Thankot – Kathmandu - Banepa – Dhulikhel – Panchkal – Barabise – Tatopani

or
2. Biratnagar-Jogbeni
Biratnagar – Inarawa - Bharada – Lahan – Dhalkebar – Pathlaya – Hetaura
Narayanghat–Mugling – Thankot – Kathmandu - Banepa – Dhulikhel – Panchkal – Barabise – Tatopani

3. Bhairahawa- Nautanawa (Sonauli)
Bhairahawa – Butawal – Narayanghat Mugling – Thankot – Kathmandu – Banepa – Dhulikhel – Panchkhal – Barabise – Tatopani.

4. Bardibas – Sindhuli – Banepa –Dhulokhel–Tatopani

The strategic road connecting Kimathanka in the Eastern region should receive priority in construction as it would be closer in terms of connecting Bhutan, Bangladesh, and the Indian states of Bihar, UP, Jharkhand, West Bengal, Uttaranchal and Sikkim.

Although three routes were identified, only one route mentioned below has been recommended: Birgunj – Hetaura – Narayanghat – Mugling – Thankot – Kathmandu -
Banepa – Dhulikhel – Panchkal – Barabise – Tatopani (394km.) on the grounds of safety, security, and distance.

In addition to Kodari, the next possible year round transport accessibility point would be Rasuwagadhi as a second main border crossing. The preparation of a design for a missing link of 18 km. from Syabrubesi to the border is learned to have been undertaken by a Chinese technical team. Similarly, HMG/Nepal also needs to consider upgrading the present stretch from Kathmandu – Syabrubesi.

The $ 10 billion being set aside by China as soft loans to favoured developing countries, such as Nepal, could be used to develop the Sino-India transit highway which could re-coup the investment with highway service charges.

Extension of the Indian and Chinese railroads, preferably using electric locomotives for value-adding in Nepal, to meet in Kathmandu as an international junction could also be considered as a BOOT FDI that can be funded by accessing the Asian bond markets.

In both instances, Nepal should move UN ESCAP diplomatically to incorporate the truck road and railway transit route as part of the Asian Highway and Asian Railway Networks linking Tokyo to Istanbul.

Nepal should accede to all international conventions governing rail and road traffic, particularly the EEC's CMR convention that promotes virtual borderless movement of transit traffic.

Following accession to the New York Convention on Land Locked States 1965 by China and India, Nepal should sign a regional protocol for transit-on-traffic using rail and vehicular modes.

It is guesstimated that the direct and indirect revenues from Sino-India traffic-in-transit will wipe out the balance of trade deficit with both these countries and this comfortable balance of payments' position will enhance the need for tying the Nepalese rupee to the Indian and hence ameliorate the freedom of policy choices over foreign exchange, interest, and credit policies—that is at the core of Nepalese dependency on India; both economically and psychologically.

The observer status of China in SAARC could be used to negotiate sub-regional cooperation in transit infrastructure and transit-transport-trans-shipment management.

Installation of the EDI system for traffic monitoring and control is a must. Recourse to conciliation and arbitration for settlement of commercial disputes between transporters and dispatchers would be the ideal way rather than recourse to diplomatic channels to complicate matters by drawing in political with commercial matters.

Conclusions

Under the Sino-Nepal Treaty of 1796, following the Gorkha kingdom's defeat at Nuwakot, China was to be regarded as 'father' , for which it would come to help if Nepal was attacked by a third power. No such help was forthcoming at the time of the Anglo-Nepal War 1814-16. The Sino-Nepal Treaty 1956 replaced the Treaty of Thapathali 1856, where both had agreed to non-aggression on each other; when Nepal had extra-territorial rights in Tibet and a guarantee of military support from China if attacked by "any other prince".

Nepal has signed the Treaty of Peace and Friendship 1950 with India and yet in its hour of gravest national crisis facing unrelenting insurgency, 'people's war', growing terrorism, and grave loss of lives and property it has opted to further destabilize the state by clandestinely supporting the Maoists and facilitating the agreement by and between the Maoists and the constitutional forces in order to promote 'total democracy' in Nepal.

Nepal has not still learned that self reliance in defence makes for an independent nation. This rude awakening has dawned on strategists with the rise of the Maoist insurgency and their declaration of a 'people's war' on the state. Only an independent defence policy executed by highly professional and autonomous military, para-military, security, and intelligence institutions operating with full accountability to parliament can be the appropriate infrastructure for political independence.

These vital organs of a nation state should have as a national mission inscribed in the constitution. To safeguard Nepal's territorial integrity and defend the constitution in line with the broad aims and goals as laid down by the national security agency with its assessment of the comprehensive threats to the nation in the short, intermediate, and long run.

Geo-psychologically, India is afraid of Nepal having 'greater Nepal' aspersions over its territories lost to the British Empire. And, as it develops self-reliantly by effectively harnessing the bountiful Himalayan resources, it will act as a powerful voice of the mountain peoples in the regional and international comity of nations armed with leverage in global power politics over 'water security' and 'energy security'. The 10 million Nepalese speaking people in India are a veritable diaspora that will count for much in Indian regional politics where federalism could move more towards a de facto confederation of states given the uneven regional balance in its development and modernization.

All this is to be witnessed in the irony of modern history where a 'spheres of influence' is beginning to have reverse impact in the hegemonic power's national security interests. The rise of Maoism in South Asia with Nepal's home-grown 'Prachanda Path' is possibly having such an impact.

The double standards being used to promote India's national interests in Nepal have been magnified by the utter contradiction and confusion over what the so-called 'foundations' actually really mean; viz., India's foreign policy towards Nepal. This dilemma manifests the growing geo-strategic importance of Nepal in international affairs that extends beyond the region and, not least, the geo-psychological implications for India grappling with all manner of fundamentalism, and with Nepal as a Hindu state having great appeal for the Indian polity and psyche of the masses.

This is best exemplified by the conflicting public announcements by the Prime Minister of India on the day of handing over power to the political parties by the King of Nepal as a "step in the right direction," presumably considered as being in tandem with India's dual policy of 'constitutional monarchy' and 'multi-party democracy' in Nepal.

This was contradicted, the very next day, when the Nepalese parties rejected the King's offer as being insufficient. Thus the Indian Foreign Secretary said that India supports the wishes of the "democratic forces" and that King Gyanendra "needs to do more"--- presumably implying that parliament should be restored and a constituent assembly elections be held with the people choosing whether to keep the monarchy or not.

Foreign Secretary Saran said " As a close neighbour of Nepal, as a country which has very intimate cultural and ethnic links with this country, it has always been our wish to seek peace and prosperity in Nepal because stability in Nepal is in the best interests of India. We have also believed that democracy in Nepal is the best guarantee of such stability,” Saran added. (
www.nepalnews.com.np April 25, 2006).

Nepal's national vision of the 1950s of being the 'Switzerland of Asia' can only be realized if hitched to India's vision to be a developed industrial nation by 2020 and to China's vision of being the world's foremost manufacturing hub by 2015.

The vision of the 'transit economy' between China an India and 'offshore international financial centre' for South Asia are eminently desirable strategic aims that need diplomatic innovations by Nepal to create a win-win scenario for balanced development of Nepal's regions as well as the SAARC region along with the SAGQ sub-region. The observer status agreed upon in 2006 for China (and Japan; achieved with the threat of a veto by Nepal) in SAARC is an excellent beginning towards this end. Nepal should seek the same status for South Korea, USA, EU, and Russia if they so wish.).

A national consensus must be achieved to keep the above vision beyond the domain of electoral politics for which the united voice of the intelligentsia and civil society is crucial. Otherwise, Nepal's development and modernization will fall victim, as it has since 1950 till now, to the bitter irony of no-gain electoral politics that seeks, ostensibly, to reduce India's influence but, actually, lands up enlarging that very sphere as the recent post-2002 developments have demonstrated.

In an age of globalization, political independence as in defence must be buttressed stoically by dynamic economic inter-dependence. This policy must be supported by rapid economic growth that is sensitive to India and China's security concerns and with its bedrock in economic growth that relentlessly keeps pace with that of both immediate neighbours.

For a country that relies for a good part of its national defence on soldiers from Nepal to serve in the Indian Gurkha regiments, it should not be difficult for India to assist Nepal in the development of its arms and ammunition industries and well as military engineering services so as to help make it self-sufficient in such a vital area.

Nepal's Maoist ideology will begin to threaten the integrity of India itself as it is taking root in the backward regions of India with linkages to the LTTE in Sri Lanka. It could enter, to survive and sustain the insurgency, with the financial resources into an unholy alliance of convenience with Islamic jihadis, and all other criminal non-state actors of all hues engaged in the parallel global economy with their dealings in arms and ammunition; drugs and human trafficking; smuggling, gambling, and money laundering.

It is not impossible to achieve sustained high growth rates given the very low degree of asset creation, relative smallness of the economy, and the fact that we are, after all, a mid-sized nation being the 40th largest nation (from about 200) in the world (in terms of population size) with immense youth power potential blessed by the gifts of Nature—water, energy, bio-diversity, and unique natural beauty in a salubrious climate.

Wrongly, the lesson has not been learned that Nepalese nationalism has always been strong across the length and breadth of the country. India sometimes deludes itself into believing that the monarchy has constantly been the stumbling block to the fulfilment of their security interests in Nepal and that the monarchy exploits sentiments for national security to foster its own regime security. Had this been so why is it that, after the restoration of multiparty parliamentary democracy, all national political parties accepted unanimously the need for a revision of all the past treaties which they describe as 'unequal treaties' signed by past rulers in distress.

Nepal has to decide the fundamental principles of its foreign policy on the basis of national consensus: special relationship, equi-distance, non-alignment or neutrality; independence or inter-dependence; and just how much supremacy of international laws over national laws.

As history comes round full circle, it was the threat from Maoism in China that led to the signing of the 1950 Treaty with India by the Rana rulers. Ironically, it is this time around, the threat of Maoism from within Nepal itself that will give new meaning to this treaty but with a new twist that is yet to unfold as a 'new India' and a 'new Nepal' are poised for new strategic relations with each other.

References

Dahal, Madan and Shankar Aryal (2003); 'Improving Nepal-India Economic Relations: A Study of the Impact of Foreign Direct Investment( FDI) and Transfer of Technology in Nepal' , www.saneitwork.net/pdf/SANIET

Narayan, S (2006); 'Factored Economics in Our Nepal Strategy?' in the Financial Express, New Delhi, http://www.financialexpress.com/fe_full_story.php?content_id=124932

Shrestha, Ananda (2004); 'Study on Transit of Indian Goods to Tibet Autonomous Region of China through Nepal',
Inter-Modal Transportation Board, Kathmandu

Thapaliya,Sangeeta (2005); 'Contesting Mutual Security: India-Nepal Relations', Observer Research Foundation, New Delhi www.observerindia.com/analysis/A004atm

ANNEX- I

PROPOSED NEW INDO-NEPAL TREATY OF PEACE AND FRIENDSHIP
(Model One)
PREAMBLE

Desirous of maintaining and further developing peace and friendship between the Republic of India and the Kingdom of Nepal,

Convinced that the further deepening of good neighbourly relations between the two countries is in the fundamental interests of their two sovereign peoples and conducive to the promotion of democracy, human rights, and solidarity in Asia and the world,

Have hereby decided to conclude the present treaty of peace and friendship in accordance with the principles laid down in the UN and SAARC Charters,

And have appointed as their plenipotentiaries:

H.E. Mr. ……………………Prime Minister of the Republic of India, and

H.E. Mr. …………………… Prime Minister of the Kingdom of Nepal;

Having examined each other's credentials and found them to be in good order and due form,

Have agreed upon the following:



ARTICLE I

The Contracting Parties recognize and respect the independence, sovereignty and territorial integrity of each other.

ARTICLE II

The Contracting Parties undertake to promote relations between them on the principles of the Pancha Sheel and resolve to settle all differences arising between them by means of peaceful negotiations.



ARTICLE III

The Contracting Parties agree to further develop and consolidate their social, cultural and economic relations in a spirit of goodwill, equality and mutual benefit and to respect all existing treaties on these subjects and to enter into new ones as deemed appropriate.



ARTICLE IV

The present Treaty shall come into force following ratification for a term of ten years and the instruments of ratification shall be exchanged in Kathmandu as early as possible.

ARTICLE V

The Contracting Parties are agreed that the previous treaty of peace and friendship concluded in 1950 and documents related to the said treaty shall hereby be abrogated.


ARTICLE VI

The present Treaty shall automatically terminate unless notice to renew or re-negotiate is given by either Contracting Party at least one full year ahead of its date of termination.

Done in duplicate in Kathmandu on…………..in the Hindi, Nepali and English languages with all texts being equally authentic.


Plenipotentiary of the Plenipotentiary of the

Republic of India Kingdom of Nepal

…………………. …………………….




ANNEX- II

PROPOSED INDO-NEPAL TREATY OF PEACE AND FRIENDSHIP
(MODEL II)


PREAMBLE

Conscious of their common civilization;

Desirous of further enriching historical ties subsisting for centuries between their two sovereign peoples;

Aware of the vast interdependence and opportunities emanating from the dictates of geography for sustainable development; and equally so being aware of the geographic disadvantage arising from a situation of being landlocked;

Cognizant of the need to cooperate bilaterally, sub-regionally and regionally in order to be able to eradicate poverty from South Asia and to be able to play their due role in the emergent new world order of the 21st century;

Reaffirming their faith in parliamentary democracy, human rights and shared social and cultural values;

Being determined to promote new and innovative avenues of cooperation between two contiguous neighbours for the common good of the present and future generations and the natural environment,

Have concluded a treaty of peace and friendship to further deepen the unique bonds of peace and friendship between their two governments and peoples, and

Have agreed as provided here under:


ARTICLE I

The Contracting Parties duly acknowledge and fully respect the complete sovereignty, territorial integrity and political independence of each other and agree to be guided by the principles of the Pancha Sheel in all the dimensions of their bilateral relations.


ARTICLE II

The Contracting Parties shall seek to promote everlasting peace and friendship between them and pledge to work for mutual benefit in a spirit of goodwill, fairness and equity.


ARTICLE III

The Contracting Parties shall guarantee freedom for all traffic-in-transit over their territories, be it for access to the High Seas; for transit trade or tranship trade, in accordance with international conventions and norms.

ARTICLE IV

The Contracting Parties shall seek economic union between the two countries by maintaining free, fair and unhampered flow of trade, investment, technology, movement of persons and means of transportation, and by maintaining a common foreign exchange regime together with a common negotiating strategy in all deliberations at the World Trade Organization.

ARTICLE V

The Contracting Parties shall not enter into military alliances with third countries which are in any way directed at each other. Nor are they bound to seek common defence policies and arrangements. As a land-locked State, His Majesty’s Government of Nepal shall be free to import arms and ammunition from anywhere through the territory of the Republic of India for its national defence and internal security.


ARTICLE VI

The Contracting Parties guarantee to disallow the use of their territories by any person or institution from anywhere for all acts which are deemed to be hostile and detrimental to the other's national security.

ARTICLE VII

The Contracting Parties shall enter into separate functional treaties to govern bilateral economic, financial, social, cultural, scientific, technological and labour relations, including treaties for the use of their natural resources and recruitment of the other’s nationals into their security forces.


ARTICLE VIII

The Contracting Parties agree to permit visa-free entry for their nationals to visit the other’s country for social and religious purposes.

ARTICLE IX

The Contracting Parties agree to permit the other’s nationals to be employed in all manner of service in each other’s territory in consonance with their immigration and emigration laws. To ensure maximum benefit to the peoples of the two countries it is agreed that citizens of the other Contracting Party shall be provided either national treatment or MFN treatment whichever provision facilitates the maximum benefit to the individual concerned.

ARTICLE X

The Contracting Parties agree that all disputes arising over this treaty shall be settled peacefully through normal diplomatic channels.

ARTICLE XI

This treaty shall remain in force for a period of ten years .Extensions may be permitted provided one party requests extension at least one year prior to its date of expiry and the other party is equally agreeable.


Done in duplicate in Kathmandu on…………..in the Hindi, Nepali and English languages with all texts being equally authentic.


Plenipotentiary of the Plenipotentiary of the

Republic of India Kingdom of Nepal


ANNEX III

Existing Nepal – Tibet Border Crossings
Table deleted)

(Courtesy: Dr Bipin Adhikari)