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Illustration: Rebecca Zisser / Axios

For centuries, the Himalayas served as a buffer between India and China, but now China's reach stretches into South Asian countries like Nepal that have historically been part of India's sphere of influence. Increasingly, those countries are playing host to a geopolitical competition between the world's fastest-growing powers.

The bottom line: India can't compete with the scale and speed of Chinese investment. And the new economic competition — which has emerged over the last two decades — is likely to force changes in how India deals with its neighbors and with economic powers like the United States.

What to watch: To maintain its power in the region, India needs to re-examine its relationships with its neighbors and enlist the United States and Japan to keep China at bay, says Tanvi Madan, an expert on China and India at the Brookings Institution.

Setting the stage: Until recently, India's ethnic and cultural similarities with its South Asian neighbors allowed it to maintain its status as the sole power in the region. But "for decades, India failed to act as the economic locomotive that one might have expected because of its size," Tom Fingar, former deputy director of National Intelligence for Analysis who's now at Stanford, tells Axios.

Now, China has emerged as a rival. Since the 1990s, China has started to direct its surplus capital to India's neighbors — and it's forcing India to up its game.

The big picture
  • China's interest in the Indian Ocean region precedes its massive Belt and Road initiative, which most South Asian countries have signed up for, according to Madan.
  • China has had a presence in South Asia to protect its trade routes for oil coming in from the Middle East, but now it has the economic capability to make big investments in those countries — and outspend India.
  • "China has enormous capacity in infrastructure-related industries: cement, steel, construction equipment," Fingar says. "And China has lots of otherwise unemployed construction workers, millions of them," because it has scaled down domestic building, he says.
  • What concerns India, according to Madan, isn't the scale of Chinese projects in its neighboring countries, but the terms under which those contracts are signed and the consequences of China's clout.
  • The big question: Will China shape these countries' foreign policy choices and change the way they deal with India?
    • The quick answer: Yes, and in some cases, it's already happening. Nepal is a prime example.
Over the Himalayas
  • With the right infrastructure, Nepal has the potential to generate massive amounts of hydro-electric power for its fast-growing neighbors, thanks to its mega-rivers. But none of that power has been harnessed. China has the resources to build that infrastructure, and it has made Nepal big-ticket offers.
  • Nepal's new prime minister said earlier this month he'll "restart a Chinese-led $2.5 billion hydropower project that was pulled by the previous government considered friendly towards India," per the South China Morning Post. He also floated the idea of pulling Nepali troops from the Indian army, which would deal a big blow to Indo-Nepali relations.
  • "Every country looks out for their own interests, and we have to look out for ours," former Nepali Prime Minister Baburam Bhattarai tells Axios. "The best case scenario for Nepal is to have a strong relationship with both [India and China]."
  • One clear change has already happened: China has prompted India to re-examine its behavior toward Nepal. In 2015, just months after Nepal was hit by a devastating earthquake, India blocked all supplies of goods to the country, citing concern regarding violence in southern Nepal against ethnically-Indian Nepali citizens.
    • The unofficial blockade — which India has not acknowledged as such — led to a dire shortage of food in Nepal during a crucial period of reconstruction.
  • "India has made clear that something like the blockade won't happen again," says Shiva Kumar Mandal, former Minister of Supplies. And that's in part due to the threat of a Chinese takeover.
The other countries to watch
  • Sri Lanka has had a long-standing understanding with India that it will give India a heads-up when foreign ships arrive at its ports. But recently Sri Lanka didn't alert India to the arrival of a Chinese submarine, which made India nervous, Madan says.
  • Bangladesh is China's third largest South Asian trading partner, but Chinese exports comprise the bulk of that trade. Bangladesh has long struggled with debt, but the massive trade deficit with China has exacerbated the issue.
  • The Maldives, which are currently in a state of emergency, are strategically and militarily important for India, which has ships and bases there. But recently, Chinese warships have sailed the East Indian Ocean to the Maldives — an immediate red flag for India, Reuters reports.

Go deeper: The biggest rivalry you're not hearing about

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