India’s Operation Sindoor and the hostilities with Pakistan in May 2025 has once again underscored South Asia’s simmering fault lines. However, the long-term competition for regional influence remains between India and China with no real role for Pakistan.

While New Delhi flexes its military posture to signal resolve both to Beijing and Islamabad, neighbouring microstates like Nepal and Bhutan find themselves compelled to recalibrate their security interests and economic alignments in an increasingly volatile strategic environment.

Nepal, geographically wedged between two nuclear-armed giants, has long championed a policy of non alignment and equal distance from New Delhi and Beijing. However, the resurgence of hostilities between India and Pakistan and the ongoing India-China rivalry have pushed Kathmandu into a delicate balancing act. The costs of miscalculation are steep. Any major confrontation between India and either of its adversaries risks spilling over into and causing collateral damage in Nepal’s airspace and trade corridors.

As India reinforces its military logistics in the Himalayas, Nepal quietly worries that deeper integration into any regional security paradigms could compromise its diplomatic autonomy. Kathmandu can’t afford to provoke China by overtly siding with New Delhi - even if it is more culturally and historically aligned to India than China. China’s Belt and Road Initiative (BRI) also remains a potent lever in Beijing’s regional strategy, and Nepal’s signing of a BRI agreement in 2017 signalled if not a clear pivot, then at least diversification of its economic engagement in the region.

While projects under the initiative have progressed slower than expected, they serve as a strategic counterbalance to Nepal’s dependence on India for trade and transit. Traditionally the Nepali Congress Party dominated the political sphere of Nepal and had good relations with India. However In 2015 when Nepal was under a different regime led by a coalition government of the Communist party, divergences between Kathmandu and New Delhi emerged. As Nepal enacted constitutional changes, protests by one of its minority ethnic groups, the Madhesis, emerged.

The Madhesi community alleged that the constitutional changes discriminated against them in favour of the majority ethnic groups of Nepal such as the Gorkha. The Madhesis also have deep family and cultural ties to India and were in a position to unofficially blockade the flow of trade between the borders of the two countries. However the unofficial blockade was widely perceived in Nepal as a covert punitive measure backed, if not outright enforced, by India.

The disruption and the protests accelerated public and elite interest in alternative trade routes via Chinese controlled Tibet, even if the infrastructure - even in 2025 almost a decade after the disruption - couldn’t hold a candle to the optimised routes facilitating trade between India and Nepal. Bhutan, by contrast, has resisted the allure of the BRI, owing largely to its treaty obligations and defence dependence on India.

The Doklam standoff of 2017, where Indian and Chinese troops confronted each other on a plateau claimed by Bhutan but occupied by China, reinforced Thimphu’s security reliance on New Delhi. Yet that dependence is not without its discomforts. Bhutan’s efforts to demarcate its boundary with China have gained momentum, and New Delhi’s concerns about potential diplomatic convergence between Thimphu and Beijing have grown accordingly. Still, Bhutan’s primary focus remains economic stability.

Hydropower exports to India account for a major share of its revenue, and Indian assistance underpins infrastructure and health spending. Yet Thimphu has shown signs of cautiously asserting agency. It is expanding diplomatic outreach beyond South Asia and seeking to diversify its economy, particularly in sectors such as tourism, clean energy, and information technology. While not a signal of distancing from India, these efforts reflect a broader strategy to reduce single-source dependency. Nepal’s and Bhutan’s overland access routes have traditionally largely depended on India, making them vulnerable to geopolitical shocks.

Bhutan also has limited trade channels with China due to the absence of formal diplomatic relations. Nepal, meanwhile, maintains a delicate balancing act, importing fuel and essential supplies from India while exploring infrastructure linkages with Chinese ports. India’s Neighbourhood First policy has channelled aid and investment to keep its near-abroad engaged, but China’s debt-trap diplomacy disguised as its BRI initiative has certainly presented an alternative.

Neither Nepal nor Bhutan desires to be seen as a pawn in the strategic rivalry of major powers, yet economic pressures often nudge them towards pragmatic choices. For instance, both Kathmandu and Thimphu rely on remittances, foreign aid, and infrastructure development assistance, areas increasingly shaped by the shifting contours of great-power competition and the rivalry between India and China.