Prime Minister Narendra Modi was the first international leader to congratulate Prachanda on becoming Nepal’s new Prime Minister

Newly elected Nepal Prime Minister, Pushpa Kamal Dahal, popularly known as ‘Prachanda’, inaugurated the Pokhara international airport, built with loan from China, amidst great fanfare, as amongst his first events post his swearing in on the Christmas day.

The Nepal government had signed a US $ 215.96 million loan from China’s EXIM bank for its construction in 2016. Speaking on the occasion Prachanda stated, “With the opening of this airport, Pokhara's relationship with the international region has been established.” The question remains on whether this airport will be financially viable.

Very few flights are expected to operate from Pokhara due to environmental, technical, and social issues. Nepal’s three international airports are separated by just 200-km from each other. It is unlikely that even after 20 years, Pokhara would generate income to repay the loan. Nepal may fail in its commitment and the airport may suffer a similar fate as Uganda’s Entebbe airport, which was taken over by China on account of default of only US$ 200 million. It could also be another grabbing on lines of the Hambantota port of Sri Lanka. For India, this could be a strategic setback as like Hambantota, China could exploit the same for military purposes.

The Pokhara airport was claimed by the Chinese embassy in Kathmandu, as a flagship project of the Nepal-China Belt Road Initiative (BRI). The truth was that it was constructed under a Chinese loan and not a part of the BRI. The Nepal government has thus far not accepted any project under the BRI, despite signing for the same.

Then Nepal Prime Minister Sher Bahadur Deuba’s media advisor quoted him after a meeting with a Chinese Communist official, saying, “PM Deuba told the Chinese leader that Nepal is not in a position to afford commercial Chinese loans for infrastructure building under the BRI because the national economy is already under stress due to several reasons including the depletion in foreign currency reserves. Therefore, Nepal wants only grant assistance from China.”

Pushed by Communist Party of Nepal-Unified Marxist-Leninist (CPN-UML) Chairman and ex-Nepal Prime Minister K P Sharma Oli, the minority government-led by Prachanda is expected to signal its acceptance to the BRI--becoming a Chinese pawn in India’s backyard. In 2019, Oli, as the then Prime Minister had proposed 9 projects under the BRI, however local resistance ensured that the projects never commenced. Protests were on account of environmental degradation and debt traps.

China is pushing Nepal to sign for the Trans Himalayan Tibet Nepal railway project. As per a Japan Forward estimate, the cost of the project for the Nepal segment alone would be US$ 4.8 billion. This exceeds 10% of Nepal’s GDP and hence funding would come in the form of loans from China--another debt trap in the making. Will similar protests stop Prachanda from signalling a return to the BRI remains to be seen.

In February last year, Nepal lawmakers passed a US $ 500 million infrastructure grant under the US Millennium Challenge Corporation (MCC), a counter to the Chinese BRI, amidst turmoil and protests with opposition members led by Oli claiming it would undermine Nepal’s laws and sovereignty. This despite the grant having no preconditions. There is no doubt that this would give the US leverage in the country.

Post the announcement of results and expected swearing in Dueba, the Indian and US ambassadors regularly met Dueba and Prachanda, hoping their pre-poll alliance would continue. Its sudden collapse indicated a failure of India’s strategic intelligence agency, RAW. There were complaints that Indian overreach could draw in the Chinese, but it was ignored. Ultimately, it was the Chinese who had the last laugh.

In the past sixty-year Nepal has had 50 prime ministers and several political systems, including transitional governments, elected governments with monarchy, palace coups followed by absolute monarchy, constitutional monarchy, and a democratic republic. Since becoming a parliamentary democracy in the early 1990s and a republic in 2008, Nepal has had 33 governments in 30 plus years. Kathmandu’s politics are complex, challenging, and unpredictable. There is a perceptible fight for power. Alliances are made and broken solely to garner power at the centre. Prachanda joined hands with Oli, only a year after dumping him, when he refused to hand over the PM chair to him as per an earlier agreement.

There are claims that the International Liaison Department of the Communist Party of China broke the Dueba-Prachanda alliance, suppressed the ambitions of Oli and paved the way for Prachanda to become PM. The Prachanda government in Kathmandu, backed by pro-China Oli will be exploited by China. The Chinese intent is to pull Nepal away from India, force it into a debt trap and revoke the MCC, thereby ensuring limited role for India and the US in the Himalayan country. Simultaneously, China has been salami slicing Nepalese territory, over which Kathmandu is forced into silence.

For China, Dueba was frustrating. He improved ties with India and the US, stood firmly against Chinese loans aimed at making Nepal into a second Pakistan and Sri Lanka in the South Asian region. He had to go. Prachanda has promised to follow a balanced foreign policy and stated that, as per tradition, his first visit as the Prime Minister would be to New Delhi. He recently mentioned, “I am not against India, will forget the old disputes and move forward.” Whether he can, under pressure from Oli, remains to be seen.

If Prachanda continues with Dueba’s policy of not seeking Chinese loans but only grants and keeping the BRI at a distance, he will do immense good for Nepal as also improve ties with India. For New Delhi, the outlook of the new government will be determined on its handling of the West Seti hydropower project, awarded to India by the Dueba government, opposed by Oli. It was earlier awarded to a Chinese company. Another indicator of change would be if the government follows Chinese diktat and scraps the MCC.

Currently, Nepal’s trade deficit is higher than its annual budget. Inflation is rising and there are limited foreign exchange reserves. Simultaneously, it is at risk of being Greylisted by the FATF as there are deficiencies in both its legislation and enforcement of laws related to money laundering and terror financing. It needs support and India could assist, provided Nepal toes a neutral line and ensures India’s interests. Nepal is expected to play both sides seeking to take advantage of India-China tensions.

Indian Prime Minister Narendra Modi was the first international leader to congratulate Prachanda, though he had refused to meet him, when he made a personal visit to New Delhi last year. Prachanda had met NSA Ajit Doval, EAM S Jaishankar and Foreign Secretary Vinay Mohan Kwatra. The reason given for Modi’s refusal to meet Prachanda was that the Indian Prime Minister was not keen on displaying support for a specific political party. For the moment, India will have to wait and watch the influence of Oli and the directions Prachanda takes. It may need to apply the carrot and stick policy in case Oli pushes for closer ties with Beijing.