Interview with Madhukar SBJ Rana
August 7, 2011
Professor Rana, former finance minister of Nepal, shares his candid and insightful views on myriad aspects of India-Nepal relations with Romi Jain, Vice-President, Indian Journal of Asian Affairs.
RJ: Indo-Nepal relations have been punctuated by recent political developments in Nepal if we trace them to the capture of power by CPN Maoists and then to formation of current government under CPN (UML). How do you assess the impact of these developments on the Indo-Nepal relations?
MSBJ: I would like to say that somehow the Indo-Nepal relations are at a lower point because I think somehow India has lost its paddle in dealing with Nepal.
RJ: Can you please elaborate on it?
MSBJ: The rise of the Maoists in Nepal is not that the Indians were supporting. Their rise is an indigenous phenomenon. However, in my view, it was later on used by the Indian government to destabilize the then regime led by the King of Nepal, which resulted in the signing of the 12-point in New Delhi. Indian government maneuvered the unity between the two parties, namely the Congress Party and the United Marxist-Leninist Party along with the Communist Maoist Party to sign this 12-point agreement. The agreement ushered in the revolutionary changes in Nepal, resulting in its destabilization with the renunciation of its traditional institutions such as the monarchy, the Hindu State, and also the unitary state moving towards an unknown destination— ethnic federalism.
RJ: India-Nepal relations have been conducted in accordance with the 1950 Bilateral Treaty of Peace and Friendship. But after the installation of CPN- led governments in Nepal, the Indian government agreed to their demand for review of the Treaty and that was during the visit of then Prime Minister Prachanda to India in 2008 and that of M.K. Nepal in 2009. What do you think about the review of the treaty?
MSBJ: The question of the review of the 1950 Treaty is a perennial affair. It has gone on and gone, as far as I remember from 1975. It is just rhetoric because somehow in all honesty India does not want a change in the treaty. As a matter of fact, rather than negotiating a new treaty, it uses its power to say: well, you can always have the choice of renouncing this treaty and then moving on to a new [one]. So I don’t believe that India really desires a change in this treaty.
RJ: Coming to the 1996 Mahakali Treaty between India and Nepal, what are the problems inherent in this Accord that led Nepal to demand review?
MSBJ: It was a landmark treaty in many respects because somehow we had hoped with that treaty we would be having not just the export of power but also the development of the very backward region, which was fuelling the Maoist insurgency, through greater economic regional balance, and so forth, through the utilization of water. But somehow nothing has progressed in so many years. India was to come up with the detailed project report in six months and nothing has happened since 1996 when two-thirds of the Parliament endorsed this treaty. Nepal is caught in a bind as to whether we should follow the Bhutan model which is basically to export its power to India and give water for free, and there is the other school of thought that says that more valuable to the nation is the water that should be charged for, and not the electricity, and this is the debate that is going on in Nepal.
RJ: I would like to know your viewpoint on China’s increasing geopolitical and geoeconomic proximity with Nepal. What do you think is its fallout on Indo-Nepal relations?
MSBJ: I think it has immense fallout on Indo-Nepal relations because already we are seeing it daily in the press: the expected arrival of the National Security Council on the 16th of August  with a14-member delegation that is going to take up the relationship between Nepal and China very comprehensively, which may even involve the proposal to sign a new treaty of Peace and Friendship, and also something that India was also interested in–to sign a treaty of extradition. So I think the fallout is immense geopolitically, geoeconomically, and geopsychologically.
RJ: So what could be the pragmatic strategies for India to wean Nepal away from China’s increasing influence?
MSBJ: The fact of the matter is that India and Nepal are very close: 85 percent of the Nepalese are Hindus, 85 percent of the Indians are Hindus, and this relationship
is an everlasting relationship through a common religion, and nothing can destroy that between people to people. The problem is between states to states; somehow the equilibrium has not arrived. It [Nepal] still is dominated upon and, of late, it’s feeling that it’s being micro-managed in all aspects of its polity.
Coming to what we should do, I would say that we should have a new treaty.. seeking economic integration that allows for the maximum utilization of our resources which are water, tourism, natural beauty, and agriculture. I would go so far to [suggest] an integrated commodity arrangement where we are given the opportunities for value addition through niche products that are not in competition with India, such as tea or coffee, herbs, floriculture, sericulture, and so forth.
I look upon Nepal as not just one economy; for us what matters is the economy of UP, the economy of Bengal, the economy of Uttarakhand, and the economy of Bihar. We have to be integrated to these economies.
RJ: What do you say about the impact of the WTO on Nepal’s economy?
MSBJ: We have negotiated our agreement with the WTO and we are respecting it. We are reducing our custom duty in line [with WTO provisions] and we are opening our banks, allowing for branch banking. In fact, in my latest article I wrote that Chinese should also come up with branch banking in order to help foreign investment.
To me, the importance of the WTO was not so much for trade as it was for the opportunities mobilized for foreign direct investment. That we have not been able to do.
RJ: Prof. Rana, Nepal has been reeling under energy crisis. The World Bank recently approved a $99 million package for Indo-Nepal cross-border energy cooperation. What is your comment on the potential of Indo-Nepal hydropower cooperation as a win-win proposition?
MSBJ: The debate is about whether we go for mega projects or small projects. The mega projects would require huge stations and huge investments, and the costs are also highly escalated. But it fails to utilize water through adequate storage unless one creates multipurpose schemes such as the Mahakali with benefits for irrigation and transportation. Just exporting hydroelectricity is not a win-win situation for Nepal. The other alternative is to go for small projects, small micro mini hydro projects that will eliminate the local communities, and by the way at one point [in time] we had our own project which was discontinued by the World Bank, which was expected to develop 450 megawatts of hydro-electricity, but somehow it was discontinued because of the controversy over small versus big, export versus import substitution.
RJ: Prof. Rana you referred to geopsychology. Do you think the geopsychology of Nepalese people and ruling elites is based on a perception that Nepal has not been fairly treated by India in respect of foreign, defense and security affairs?
MSBJ: Well, yes! I might say that this concept of geopsychology is the wisdom endowed upon me by Prof. B.M. Jain of Rajasthan University, Jaipur. And I think it is a most valuable concept in understanding our relationship because Nepalese have a sense of inferiority with India- that’s no doubt. But it [Nepal] does also have the feeling that it has been done unfairly in terms of not getting its due share. We are not interested in aid, we want mutual beneficial projects, but somehow India has still stuck on to the old paradigm of the Panikkar Doctrine of a hegemonistic asymmetrical relationship which was discontinued with the Gujral Doctrine in 1996, which was a huge breakthrough in Nepal-Indo relations. The Mahakali Treaty was signed as a result of the Gujral Doctrine, and then with Vajpayee we go back to something called ‘regionalism through enlightened bilateralism’ which is opposed to the concept of regionalism.
RJ: In 2009, India and Nepal signed a treaty of Trade and Agreement on Cooperation to control unauthorized trade. That was an improvement on the 1996 Trade Treaty. In light of this, where do you think Indo-Nepal trade relationship is headed? Do you see any improvement or what?
MSBJ: The breakthrough in Indo-Nepal trade relationship came in 1978 when a new treaty was signed with the separation of the Treaty of Transit with the Treaty of Trade: two treaties instead of one, and concessions were given and then the next bigger breakthrough came in 1996 and the benefits were immense, unbelievable. But then the next turnaround: it’s all withdrawn. So there’s no stability in the Indian policy towards Nepal. Other than that, what is happening is that India is giving concessions, whether giving tax concessions or subsidizing industries, to the mountainous areas of India such as Sikkim, Uttarkhand, and the north east. So why will people come to Nepal? They would rather go to Uttarkhand, to Darjeeling, to Sikkim, to Northeast, to benefit from the fiscal incentives. According to the 1950 treaty, we are supposed to get national treatment, but somehow we are not getting that.
RJ: What is your perception on the imperative of fostering strong and stable relations between India and Nepal?
MSBJ: For a strong and stable relationship between India and Nepal, I believe that it should have a strong relationship on the economic front. It should have a new treaty that demarcates our borders once and for all. We don’t want dependency. We want inter-dependence with Indian economy through the utilization of our resources for mutual benefit. We have to settle our river boundary problem; we have to get to understand that somehow, as a upper riparian state, we have our rights and we should not be disallowed from building dams and so forth…..[make the] best utilization of our natural resources, be they forests, be they water, be they the beauty of our land through tourism, exploration of minerals, agriculture, and [achieve] integration of our economy.
The other thing I would like to emphasis is this that we are caught in a bind of having a fixed exchange rate system with India. And this to me, as an economist, is not helping our economy. If we devalue, the political implications are severe because we are going to import massive inflation, so this will not be tolerated politically. But if we don’t devalue, what we are doing is: subsidizing the Indian exports to Nepal and harming our own agriculture exports to India. So I’m suggesting that India should be generous enough to endow us with funds, a soft loan to allow us to move to a managed flexible exchange rate system where our currency can be in the basket with other currencies to have one exchange rate for the world, including India. This will help us to promote import substitution on a competitive advantage or comparative advantage basis. I think this should be the greatest gift to Nepal.
The other thing is that and this is very important for the security – no country can be said to be sovereign if it cannot have its own defence policy. India does not allow, according to the 1950 Treaty, the import of arms from third countries. Nepal [should be allowed] to have its own defence policy and we can have a security agreement with India.
RJ: Thank you very much Prof. Rana for your time and for sharing your views.
MSBJ: Thank you very much.
* Interview appeared in Indian Journal of Asian Affairs, Vol.24, No.1-2, June-Dec.2011,
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