The picture of Nepalese Prime Minister, Pushpa Kamal Dahal aka Prachanda, leader of a ten-year long Maoist revolutionary movement who persistently railed against Indian imperialism, laying a wreath at the memorial of India's and history's most famous pacifist Mahatma Gandhi, was perhaps the most surreal and ironic image of Prachanda's September visit to India.

Irony aside, Prachanda's trip has been an essential diplomatic exercise to allay Indian fears over his economic and foreign policy intentions and anti-Indian sentiment. The Indo-Nepali relationship has been most recently tested by Prachanda's well-documented decision to break with tradition for an incoming Nepali PM and choose China rather than India for his first official foreign visit. Indeed, it was a decision that only heightened India suspicions towards the Maoist leader given his history of anti-Indian rhetoric, a situation which has been worsened by the diplomatic blame games which followed the Kosi tragedy.

Central to Prachanda's visit has been a desire to replace the 'unequal' India-Nepal Friendship Treaty of 1950. The Maoists argue the Treaty subverts Nepal's sovereignty, illustrated by one particularly controversial clause which precludes Nepal from buying arms from a third country without India's permission. Moreover, grievances over trade and access to energy are also of great concern to the Maoists. For instance, whilst trade between Nepal and India stands in excess of US$2.3 billion and is still rising, Kathmandu has become increasingly concerned that trade deficit has risen from US$977 million in July 2006 to US$1.1 billion in the same month the following year.

Undoubtedly, there is much credence to the Maoist's argument and there is an urgent need to realign this outdated Treaty. However, given Prachanda's ambivalence towards India in recent months and his anti-Indian rhetoric during the People's War, why has his visit been marked by diplomacy and calm rather than confrontation and bombasticism?

Essentially, Kathmandu's has realized that a strong relationship with India is essential for Nepal's prosperity. Among the several reasons for this is that India is Nepal's primary trading partner, importing over half of Nepali exports. India is also Nepal's main exporter of energy and is currently the only provider of petroleum. Next, India also provides unrivalled access to major sea ports. Furthermore, over five million Nepalis work and own property in India who do not require visas and work permits. Kathmandu can simply not afford to jeopardize these strategic and economic lifelines.

Yet the need for cooperation and partnership has not been lost on New Delhi. Whilst the necessity to improve cooperation with Nepal has been most tragically demonstrated by the Kosi floods in Bihar, there are other strategic concerns which have informed this belief. Although India provides Nepal with much of its energy needs, India also views Nepal as an essential source of hydroelectricity which can cater to growing domestic demand in India.

China's growing influence in Nepal is another important consideration. India is concerned that should the controversial clause in the Friendship Treaty concerning arms sales change, Nepal would choose China as a new supplier of weapons. Furthermore, access to energy from China will challenge India's almost complete monopoly on energy exports to Nepal. If India is to prevent Nepal from slipping into China's hands completely, which economically and strategically it can ill afford, then it can no longer view Nepal as a subordinate partner and must make concessions in realigning the Indo-Nepali relationship.

The 15-point joint statement which followed Prachanda's visit appears to show that both India and Nepal have recognized the need for mutual cooperation. For instance, a Joint Taskforce has been setup to review the Friendship Treaty, although as yet no specific points have been raised. Similarly, a Joint Rivers Commission will explore how to improve the barrage system of the River Kosi in Nepal. Indeed, the Indian government has pledged an aid package worth US$3 million to help with the Kosi victims as well as rebuilding the East-West railway which was damaged by the flooding. Furthermore, a commitment of Indian investment in Nepal, such as assistance in generating over 10,000MW of hydroelectric power and help in creating Special Economic Zones to encourage foreign investment in Nepal, illustrates that India is serious about assisting Nepali development.

The signs are there that Indo-Nepali relations are moving into a new era, but one must be wary about declaring false dawns. It is only when the review commissions have met that one can judge how sincere calls for cooperation have been. Domestic politics will be a key factor as well. On the one hand, Prachanda must balance the need to maintain an open economy which will facilitate foreign investment from India, whilst at the same time pushing ahead with the mandate he has been given by his people to implement a socialist revolutionary agenda. He will have to appease hard-line voices in the party which had hoped for a more confrontational stance towards India. On the other hand, New Delhi must also explain why the shift in Indo-Nepali relations is good for India, not only to other political parties but the public as well, which will be no easy feat. Nevertheless, one must hope that this reinvigorated partnership will be sustained to meet the challenges of the contemporary globalized world which face India and Nepal.