At a time when China and the US are expanding their influence in Nepal by increasing financial assistance and aid, Nepal’s southern neighbour, India, is set to increase the budget for each “small development project” from the current Rs50 million to Rs240 million.

Finance Minister Prakash Sharan Mahat confirmed to the Post that his ministry has given a nod to increasing the grant disbursed under the Indian small development project scheme. A memorandum of understanding on the increase will soon be signed, said Mahat.

India had initially proposed a grant of IRs150 million or NRs240 million for each project, but now the Ministry of Finance has trimmed it to Rs200 million, according to finance ministry sources. Nepal proposed slashing the aid amount as it has to bear 20 percent of the project cost, a financial burden the government currently lacks funds to cover, sources said.

Although the Cabinet is yet to approve the Indian proposal, given the decline in foreign aid, assistance, and grants by several bilateral and multilateral donor agencies, the government is considering it, a finance ministry official said. The finance ministry has given final touches to the text, which will soon be tabled in the Cabinet.

The finance ministry has forwarded the text of the MoU to the Prime Minister’s Office for Cabinet’s approval, a secretary at the Prime Minister’s Office told the Post.

The Indian side, during the time of Prime Minister Pushpa Kamal Dahal’s India visit in May-June, had insisted and communicated that it wanted to significantly increase the budget being disbursed under the small development project scheme in Nepal.

According to a bilateral arrangement, the scheme, which was launched in 2003, had to be renewed every three years. But after its renewal in 2014, no project under it had been implemented until 2017. The scheme was extended in 2017 and later again in 2020 with some amendments.

According to the Ministry of Urban Development, with the change in the country’s governance system, the responsibility for project implementation was handed over to the respective district coordination committees.

“As the Constitution of Nepal 2015 barred direct donations of funds to the local level, there was a hiatus in project implementation for a long time. The Cabinet decision of December 23, 2019 approved the new implementation modality and appointed the implementing agencies, paving the way for the resumption of project implementation,” stated the ministry.

As per the new modality, the Ministry of Federal Affairs and General Administration (MoFAGA) acts as the coordinating agency between local governments and the Nepal-based Indian embassy. The project proposals that the MoFAGA receives from local governments are sent to the Ministry of Finance, which forwards them to the Indian embassy for implementation.

“After this, a tripartite agreement has to be signed among the MoFAGA, Indian embassy, and the local unit concerned for project implementation. This modality provides that the local government should bear 20 percent of the total project cost,” said the urban development ministry.

As the cost of the construction materials has gone up, daily wages of workers in construction and other sectors have shot up, Rs50 million that India was providing for a project has become insufficient, given the demands from the local level for executing medium-level infrastructure projects, another finance ministry official said.

With the new increased budgetary arrangement, the scope of the projects will increase, the official added.

India has been building schools and hospitals and other small projects under the scheme. The proposed adjustments will address resource gaps for the execution of internal infrastructure projects or acquiring necessary equipment for the projects in accordance with Nepal’s proposal.

An Indian embassy official confirmed to the Post their proposal for a significant budget increase under the small development project scheme, but did not share the details. “We have already forwarded our proposal to the government and are waiting for their final decision,” the official said on the condition of anonymity as the matter is in the hands of the government of Nepal.

Both China and the US have increased their disbursement in Nepal for various projects in the recent past and their aid, grant, and economic assistance besides the Chinese Belt and Road Initiative and the US Millennium Challenge Nepal Corporation, have significantly increased.

“Not to be left behind by China and the US, the southern neighbour has committed to scaling up the scope of the projects from small- to medium-level development projects, which will also meet our developmental appetite,” said the secretary at the prime minister's office who is familiar with this proposal.

Formerly known as small development project scheme, the Indian side has rebranded it as High-impact Community Development Projects (HICDPs). Initially launched in November 2003, the Indian Embassy extended economic assistance to various projects at the local level, including schools, colleges, and hospital buildings under the scheme.

Amid the political turmoil, India used to allocate funds for small projects individually based on requests from relevant stakeholders. The formal agreement to this effect was signed and formalised through an MoU in August 2008 after the first elections to the Constituent Assembly.

HICDPs are short-gestation projects with a maximum financial outlay of NRs50 million, according to the Indian embassy website.

Since 2003, over 535 HICDPs have been taken up by the government of India of which 476 have been completed while 59 are ongoing, and the total cost of all projects is around NPR 11.55 billion, the website said.

The MoU is scheduled to be signed ahead of the visit of India’s External Affairs Minister S Jaishankar’s Nepal planned for the first week of January, officials said.

Finance Minister Mahat said that there is a mechanism within the government that will channel and execute the projects. “There is a mechanism for selecting projects, starting from the local level up to the ministry. We are looking for grant and economic assistance for small and medium-size infrastructure projects that this new proposal will fulfil,” said Mahat.