American MCC in Nepal: Setback for China and Implications for India

 By Mohak Gambhir


In the backdrop of raging protests, Nepal’s parliament ratified the Millennium Challenge Corporation (MCC) – Nepal Compact on 27th February 2022 after years of debate over the cost and benefit of the compact for the country.[i] However, the situation was not this politicised when Nepal signed an agreement with the U.S. in 2017 for the USD 500 million grant to improve the country’s power and other infrastructure.[ii]

The MCC was envisaged by the U.S. in the aftermath of the 9/11 attacks as a safeguard against perceived terror threats from the least developed countries (LDCs) by ensuring economic development. While the efficacy of such a security strategy may be questionable, it was an excellent opportunity for such countries to secure interest-free funds to supplement their socio-economic development.

Nepal and the MCC

Nepal decided to apply for the MCC in 2012 under Prime Minister Baburam Bhattarai from the Unified Communist Party of Nepal (Maoist).[iii] It only qualified to sign the compact in 2014 after meeting the minimum policy criteria. The compact was eventually signed in September 2017 under Prime Minister Sher Bahadur Deuba from the Nepali Congress.[iv] It is important to note the political support for MCC from major parties across the ideological spectrum. This support was also extended by the controversial former Prime Minister KP Sharma Oli of the Communist Party of Nepal (Unified Marxist-Leninist) (CPN-UML), the largest left party in Nepal.

Such strong support ran directly against the prolonged debates and utter politicisation of MCC that followed after the compact was signed in 2017. A critical reason behind such opposition to the MCC was historical-political in nature. Considering the left-leaning politics of Nepal, the country’s political elite was always skeptical of the US’s intentions. A long history of U.S. intervention in several smaller countries has not exactly helped its case in Nepal, where it is traditionally viewed as an imperialist power. Given Nepal’s recent expansion in ties with China and the growing US-China strategic tussle, Nepal has increasingly been seeing U.S. activities as part of its larger Indo-Pacific Strategy to counter China. It is possible that more than being afraid of becoming an unnecessary casualty of strategic competition between two great powers, such strong protests to an American led program pointed towards the Chinese reservations being catered to by the larger Nepali political elite across the entire ideological spectrum, highlighting the extent of Chinese involvement in Nepal’s domestic politics.

Nepal’s domestic political landscape is fragile and its democratic institutions are quite new. The fears of yielding influence to yet another great power have, in part, driven the emotive debate across the country for the last few years. This fear, unfortunately, has been amply capitalised by China to curate a thought process hostile to a mere USD 500 million program based on grants and not even loans, a preferred foreign policy tool of China. The U.S did not help its case either when Acting Deputy Assistant Secretary for South Asia, David Ranz, and the Assistant Deputy Secretary of State, Alice Wells categorically said that MCC was indeed part of America’s broader Indo-Pacific Strategy.[v] Although, the U.S later clarified its official position about MCC being purely developmental in nature without any military component involved and “is not, and never has been, a deliverable of the Indo-Pacific Strategy” as well as MCC not prevailing over Nepal’s constitution.[vi] These were some of Nepal’s key reservations about the program.

Setback for China

Nepal’s joining of China’s Belt and Road Initiative (BRI) in 2017 was seen as a major strategic win for China in South Asia. However, as years have passed, BRI projects have stalled and resistance to China’s flagship project is mounting even as its carefully cultivated political setup is dwindling. The fact that the Nepali parliament ratified the MCC with a two-thirds majority no less is as big a political setback for China as it is a strategic one.[vii] It also highlights how China is not an economic invincible giant with a silver bullet for the development woes of LDCs or developing countries.

China has had deep reservations about the U.S. involvement in Nepal. According to some reports in Nepali media,[viii] China took great interest in the MCC and was essentially trying to cripple it. Many Chinese officials, including the Chinese ambassador to Nepal, Hou Yanqi held talks about the MCC with parties across the board. In fact, the Chinese disinformation campaign on social media against MCC was all too apparent in months preceding to the vote on the matter in the Nepali parliament. In September 2021, Prime Minister Deuba and Pushpa Kamal Dahal wrote a letter to the MCC on the need to better inform the masses and their party members about what the MCC entailed by providing accurate information and dispelling apprehensions.[ix] Four of the five biggest political parties in Nepal’s parliament voted in favour to ratify the MCC, with even the former Prime Minister Oli’s CPN-UML abstaining from the vote.[x] For China, MCC ratification points to a highly contested political and economic space in Nepal and hints at possibly similar developments in other countries, particularly in South Asia.

Implications for India

In recent years, China has been actively involved in Nepal’s domestic politics. This is chiefly driven by its aim to shift the strategic balance in South Asia by challenging India in its traditional sphere of influence. For India, the U.S. participation in Nepal and other South Asian countries is a necessity in the short to medium term as it tries to check China’s expansionist policies. These expansionist aims are supported by both military and economic tools. India recognises the need to partner with the U.S. in order to counterbalance China.

The U.S. for its part has been careful in its approach to Nepal. Even the projects identified under the USD 500 million MCC grant, a 400 kV transmission line (MCC to fund only the Nepali side of the line) to help Nepal conduct power trade with India and upgrading road connectivity to Nepal’s East-West Highway that would, in turn, help the country achieve greater internal and external (with India) connectivity.[xi]

For India, however, deep American influence may be as undesirable as the Chinese in its area of influence. And although the U.S. and India may work together in the foreseeable future as their interests remain converged, global politics has provided enough evidence to highlight the ever-changing nature of national interests and how quickly they can evolve. For India, the key remains to ensure a balance between its intermediate and long-term national interests.


[i] Biswas Baral (2022), “Nepal Ratified the MCC Compact. Now What?”, The Diplomat, 14 March, Available at:, accessed on 15 March 2022

[ii] Ibid

[iii] Biswas Baral (2022), “Nepal’s Fierce MCC Debate”, The Diplomat, 08 February, Available at: , accessed on 15 March 2022.

[iv] Ibid

[v] Ibid

[vi] “THE MCC-NEPAL COMPACT TOP TEN FACT”, U.S. Embassy Kathmandu, 03 March 2022, Available at:, accessed on 15 March 2022

[vii] Hari Bansh Jha (2022), “The American Millennium Challenge Corporation and Nepal”, ORF, 09 March, Available at:, accessed on 15 March 2022.

[viii] Ramesh Kumar (2021), “China Lobbying Against MCC”, Nepali Times, 23 December, Available at:, accessed on 15 March 2022.

[ix] “Dahal under pressure as his and Deuba’s letter to MCC becomes public”, Kathmandu Post, 06 February 2022, Available at:, accessed on  16 March 2022

[x] Biswas Baral (2022), “Nepal Ratified the MCC Compact. Now What?”, The Diplomat, 14 March, Available at:, accessed on 15 March 2022

[xi] Hari Bansh Jha (2022), “The American Millennium Challenge Corporation and Nepal”, ORF, 09 March, Available at:, accessed on 15 March 2022.