India and China Vie for Influence in Nepal

In the titanic struggle for world supremacy fought between the U.S. and USSR between 1945 and 1991, all eyes were focused on their attempts to bring Third world nations to their side, and the subsequent U.S.-Russian Federation continues to dominate headlines today.

Now, that battle for influence continues to dominate the media, but has shifted to Western attempts to inveigle former Soviet republics to decouple from Moscow's influence and move towards Western values and economic integration, most notably in the Baltic and Central Asian states.

But in the past two decades a parallel tussle has developed, which has intensified between two of the world's rising BRIC powers, India and China, over supremacy over the states along their borders.

This time, the clout comes in economic form, and one of the frontline states is - Nepal, a formerly Hindu monarchy governed by Maoists. So, something in the political grab bag for both sides.

So, who's ahead? On the eve of a four-day state visit to India, Nepal's new Maoist Prime Minister Baburam Bhattarai told reporters that he intended to seek a $1 billion long-term loan. Two days later in New Delhi, Nepal and India signed a Bilateral Investment Promotion and Protection Agreement, which gave Nepal a $250 million "soft" loan, but Bhattarai told reporters that while India is the biggest foreign investor in Nepal as well as its largest trading partner, "There is a serious imbalance in our trade. Nepal's trade deficit with India was $3 billion" during 2010-11, when bilateral Indian-Nepali trade totaled $4 billion.

And China?

According to the Nepali Ministry of Foreign Affairs, Chinese-Nepali trade is largely conducted through Tibet and Hong Kong, and increasing every year. Nepal's recently bilateral trade  with China has grotesquely favored the latter, as Nepal exported products worth $9.27 million to China during the 2010/11 fiscal year while imported $579.83 million worth of Chinese products.

But now China has surged into the lead in its rivalry with India for influence in Kathmandu, as earlier this month China signed a $1.6 billion agreement to develop the 760-megawatt West Seti Project hydropower plant in Nepal, marking China's entry into Nepal's water and power sector that India has dominated for years.

The loan follows the brief 14 January visit of Chinese Prime Minister Wen Jiabao to Nepal, who stopped over on his way to the Persian Gulf, but before leaving, announced a $120 million grant to Nepal.

And Nepal's hydropower potential is immense, having been estimated at 83,000 megawatts even as current actual production is only 1 to 2 percent of that. The West Seti hydroelectric cascade could allow Nepal to become a major electrical exporter to India particularly as neighboring Bhutan has one of the highest per capita incomes in South Asia, partly because of electricity sales to India. Nepal Electricity Authority has a 25 percent equity stake in the West Seti project.

In fact, things are going so well in the Himalayan nation that last month the NEA grandly announced that it had decided to reduce power outages from their current level of 80 hours a week to 75 hours.

It is increasingly obvious that Beijing has three major strategic interests in Nepal. The first is to constrain Tibetan refugees south of the Himalayas and halt their anti-China activities as much as possible lest they inflame the already tense situation in Tibet proper. Secondly, Beijing is interested in degrading India's traditional influence in Nepal and to establish a pro-China regime there. As part of that effort, China in the past few years has focused on upgrading its engagement policies, including such "soft" diplomatic measures as people- to-people contacts, cultural relations, student scholarships and increased economic aid. The third pillar of Chinese policy towards Nepal is China's rising investment in strategically important infrastructure projects like airports and highways.

So, who will win the covert struggle between the two BRICs for Nepali hearts and minds?

It's never easy to predict anything in Asia, but it would seem that whichever nation manages to help the NEA close that 75 hour per week blackout window of electricity generation will likely have the inside track.

By. John C.K. Daly of Oilprice.com