Nepalis caught in the middle have fled their villages by the hundreds of thousands. The country's military budget has increased at least three times more than peacetime levels. Most of the money has been diverted from development projects. Weapons are getting more sophisticated: the latest purchases are two Indian-made light attack helicopters that cost NRS 500 million apiecee.

The Maoists have suffered military setbacks and desertions, but have benefitted from reports of human rights abuses by the forces as well as infighting between the palace and the parties, and between hawks and doves among Nepal's donors.

However, the biggest blow to the Maoists has been the dramatic extradition by India of senior Maoist leaders Matrika Yadav and Suresh Ale this week. An Indian embassy official confirmed the handover and said it was kept low key because of the "legal implications back in India" as the Indo-Nepal bilateral extradition treaty is not yet in place.

Maoist leader Prachanda lashed back, saying in an online statement: "By kidnapping a popular tarai leader and a member of a downtrodden janjati group, India's rulers have distanced themselves even further from the hearts of the Nepalis." These are the harshest words the Maoists have used against India in the recent past.

The government hasn't been able to hide its delight. However, spokesman Kamal Thapa denied there would be any peace overtures to the Maoists as a result. "We will carry on with our military operations, and strongly mobilise the security forces against them," he told us.

Although losing safe havens in India will be a disadvantage to the Maoists, analysts say one test of whether or not attitudes have changed will be India's response to a big rally planned in New Delhi on Sunday by the 'Nepalese People's Right Protection Committee, India' that has close ties with Nepali Maoists.

"Officially, this sends the message that India is no longer safe. The Maoists have two options: give up violence and join the political mainstream, or antagonise India further," says Shyam Shrestha, editor of the leftist monthly magazine Mulyankan.

With the government maintaining a hawkish line, the Maoists commemorating their anniversary with a series of strikes and sabotage attacks and the palace-party polarisation getting worse, it looks like the country is heading into another spring of turmoil and instability.