Nepal is scheduled to lose its Least Developed Country (LDC) status on November 24, but has sought a three-year deferral from the UN, citing delays in transition. While it is likely to receive the deferral, given Nepal’s high credibility in the comity of nations, the deadline will come again. In 2024, it adopted the Smooth Transition Strategy (STS) to ensure sustainable graduation from LDC status by 2030, while recognising that remittances currently support consumption, reserves and imports, but have not yet engendered domestic investment or a surge in exports.

The appropriate move to further the STS could be a Nepal-India two-hand strategy: Economics and technology. Recent bilateral engagements appear to have eased aberrations in relations. Now is the most opportune time to jointly strive to move Nepal out of its low-investment, remittance-led growth, onto a higher, sustainable economic paradigm.

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LDC status brought preferential tariffs, market access and concessional financing. Withdrawal would affect labour-intensive, high-growth export sectors such as garments, synthetic textiles and carpets. The WTO expects a ~9 per cent increase in tariffs, while the UN’s International Trade Centre estimates a loss of ~4 per cent in exports. Nepal possesses two key safety valves to mitigate the impact. One, macroeconomic buffers stronger than many comparable economies, and two, bilateral tariff agreements with India, including the foundational agreement on a fixed NPR-INR rate of 1.6 since the 1990s. These factors have contributed to Nepal’s monetary stability, especially during the Global Financial Crisis (2008), Taper Tantrum (2013), and the Covid pandemic (2020-21). Nepal has grown at about 4 per cent annually for three decades, supported by low debt, 18 months’ worth of FX reserves and $15bn in annual remittances. However, the most prominent risk to a promising economy remains its low-investment trap.

To diversify, Nepal opened up to the BRI in 2017, perhaps worried about over-dependence on its southern partner. It now conducts one-sixth of its trade, mostly imports, with and through China. However, Himalayan heights make northern connectivity expensive and prone to weather-related disruptions. Many Chinese-backed projects are delayed, in contestation over the grants-versus-debt question.

India and Nepal have one of South Asia’s most unusual relationships: Exceptionally intimate in geography and society, with an open border. The challenge is to embed arrangements that expand Nepal’s choices while assuring India that intense economic and technology integration will not create new security vulnerabilities. The relationship should be seen through shared river basins, power grids and data flows. Indian policymakers must address Nepal’s concern of economic dependence on a “Big Brother” with care, humility and large-heartedness. The scars of the last decade have receded, given the political change in Nepal and multiple exchanges since May. The older ambition of progressing from free trade towards a customs union and eventually a common market is an unfinished strategic idea and must be the guiding ambition. India must be Nepal’s most reliable partner, replacing perceptions of unfair dominance with the joint two-hand, 10-finger strategy. The economic hand: Stable rules for commerce; secure and smooth supply chains; single windows for PE/VC funds; public and private JVs with balanced equity share; and a deeper Nepalese capital market. The technology hand: Optical fibre connectivity; interoperable digital public infrastructure; power transmission; space-tech; joint disaster risk reduction.

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Three risks must be resolved simultaneously. First, over-securitising the border causes unnecessary impediments to legitimate access and trade and creates a rentier class and illegal trade. An open border need not be an insecure one: Technology and intelligence-led enforcement are the way. Second, reverse adverse perceptions that India turns economic dependence into a vulnerability through freer travel, tourism, television, movies and music. Finally, “death by process” should be put to death: A problem that is as old as the relationship itself.

Many fingers of the above formulation are already in effect. While high-level exchanges are limited, several important technical meetings on river waters, railway connectivity, customs, energy, borders, UPI-NPI payment mechanisms and technologies have been held. Momentum has been built and trust re-established. Speed is of the essence, with stability and continuity. India and Nepal will remain where they are, whether every argument is forgotten or amplified. What gets built in the meantime is the only variable. So let’s put the two hands and 10 fingers to work.

The writer is a former IPS officer