Foreign Policy Watch: India-Nepal

Controversy around the $500 million MCC grant to Nepal


From UPSC perspective, the following things are important :

Prelims level : MCC

Mains level : Chinese influence in Nepal

Nepal’s House of Representatives has ratified 500 million US Dollar grant assistance-Millennium Challenge Corporation (MCC) pact along with the “interpretative declaration”.

What is Millenium Challenge Corporation?

  • The MCC was founded in 2004 as a US foreign aid agency that acts in accordance with governments that have demonstrated a commitment to good governance, economic freedom, and citizen investment.
  • It was envisioned as an organisation that would follow the Paris Declaration on Aid Effectiveness’ key principles.
  • MCC works with countries that have been identified as being eligible for assistance to develop programmes that are based on MCC’s purpose of decreasing poverty via economic growth.
  • MCC’s results framework, which is based on the fourth and fifth principles of the Paris Declaration, Results and Mutual Accountability.
  • It provides a framework for applying the agency’s rigorous methods for projecting, tracking, and evaluating the effects of its programmes.
  • MCC uses this framework to address basic questions about aid effectiveness.

Investments made by MCC

  • Compact and threshold programmes are the two types of programmes in which MCC invests.
  • Compacts are large, five-year grants implemented by an accountable entity established by each partner nation.
  • Thresholds are smaller funds focusing on policy and institutional transformation in selected countries implemented by MCC.

The background of the project

  • MCC’s partnership with Nepal began in 2011, when the country requested assistance.
  • MCC first chose Nepal for a smaller threshold grant, and subsequently in December 2014, for a larger compact.
  • Three years later, in September 2017, the MCC-Nepal compact was signed, with the US committing $500 million and Nepal committing $130 million.
  • Nepal is expected to generate an electricity infrastructure with 400kVA transmission lines through the MCC project, which will be used to distribute power both domestically and to India.
  • Furthermore, the MCC’s implementation could boost the Nepalese economy by increasing employment possibilities and increasing per capita income.

Issues with the project

  • It is estimated that if the agreement is not passed by Parliament, the power producers in the country are likely to lose a staggering Rs. 142 billion every year.
  • As a result, PM Sher Bahadur Deuba is striving to get the MCC passed in Parliament as soon as possible, even if it means splitting the coalition government.
  • In addition, if he fails to get it through Parliament, there is a possible risk of losing his international credibility.

America vs China: Objections around MCC

  • The MCC agreement has created a political divide in Nepal.
  • The compact has been criticised in Nepal as endangering the country’s sovereignty, integrity, and constitutional autonomy.
  • The claim that the MCC agreement supersedes the national charter and shall prevail over Nepal’s domestic laws.
  • Many have interpreted this to suggest that the compact replaces the constitution, compromising Nepal’s sovereignty.
  • The MCC’s inclusion in the Indo-Pacific Strategy (IPS) is considered problematic for Nepal, as the majority of the country’s political class views the US strategy as anti-China.

India’s role in the ongoing political crisis in Nepal

  • Few claim that the electricity generated by MCC will be only for export to India and will not be for the local public.
  • As a result, it will not benefit the local economy directly.
  • Nepal’s hydroelectric generation potential is huge, with over 6,000 large and small rivers.
  • However, through a series of barrages and dams, India has control over the majority of Nepal’s major rivers.
  • Nationalists in the Himalayan country have strongly objected to this.
  • In Nepal, where India is still perceived as a meddling big brother, its goal of strengthening India’s military capabilities through this agreement to counter China’s was questioned.


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