Now China is leading a project worth $3bn to transform the small town into the premier place of pilgrimage for Buddhists from around the world.  Little Lumbini will have an airport, highway, hotels, convention centre, temples and a Buddhist university. That's in addition to the installation of water, electricity and communication lines it currently lacks.

That's a lot of money anywhere - but especially for a country like Nepal whose GDP was $35bn last year. That means the project is worth almost 10 per cent of the country's GDP. So what does China want back?

The organization behind the project is called the Asia Pacific Exchange and Cooperation Foundation (APECF), a quasi-governmental non-governmental organisation. Its executive vice president, Xiao Wunan, is a member of the Communist Party and holds a position at the National Development and Reform Commission, a state agency.

With the backing of the UN, Xiao has said he hopes Lumbini will bring together all three schools of the faith: the Mahayana as practised in China, Japan, and South Korea; the Hinayana as practiced in Southeast Asia; and Tibetan Buddhism.

Indeed, the APECF says it has already received full support from Buddhists representing all three schools. With one exception. Apparently, no one from the Lumbini project has reached out to the Dalai Lama's office.

The Dalai Lama, head of the Gelug, or "Yellow Hat" branch of Buddhism, is spiritual leader to millions of Buddhists around the world. This would make him a top candidate for involvement in the Lumbini project. But he's also China's enemy. Is it even fathomable that China would allow the Dalai Lama to traipse around Lumbini's grounds after building the place at a cost of $3bn?

"It's just not a question we're looking at, for the moment," says Xiao. "We're pulling together experts in finance, investment; we've got economists. Our primary focus is on building infrastructure, setting up running water and electricity. We're focusing on developmental issues."

Indeed, these are early days and a project this size has many dynamics and issues that go beyond the Dalai Lama. As Xiao has acknowledged, it's an investment opportunity. Nepal will need to contract international builders to make this dream a reality. The sheer scale of the investment will give China significant clout, as Chinese construction companies line up for a portion of the $3bn pie.

Xiao's background as a former employee of China's Industrial and Commercial Bank would certainly help facilitate any deals, or at least get the two sides talking. Xiao is also convinced that if he builds it, they will come. Some 500,000 visitors already make the pilgrimage to Lumbini every year. This could balloon to millions of visitors each year when the project is complete.

There are also real benefits for the Nepalese people. Lumbini will become a special development zone, similar to some of China's successful zones such as Shenzhen, with preferential treatment, tax breaks and investment incentives.

Hu Yuandong of UNIDO, which will advise on the creation of the development zone, says the focus of the project is job creation, poverty alleviation and environmental protection.

Xiao has made clear that the $3bn investment is not coming from the Chinese government, but rather from various funds "around the world" - even from the Middle East. But it would be difficult not to see this as a smart move by China and an extension of its soft power.

If not directly piloted by the Chinese government, Lumbini is close enough. It was the first place China's new ambassador to Nepal visited following his appointment this week. And if its creators had no intention of stirring up the political pot, the project has nevertheless alarmed India. Nepal is sandwiched between the two giant countries.

Just this month, the Centre for Air Power Studies, a think tank in New Delhi, warned that Lumbini would "help China achieve its long-term strategic goal of bringing Nepal irrevocably under its influence". The think tank said further that the project would mean that "China will have crossed the Himalayas and established its influence up to the lower foothills bordering India".

There may be little justification for Indian fears, but that doesn't change the fact that they exist.

"This is more significant than it might at first appear because Buddhism has no overarching international structure," says Robbie Barnett, director of the Modern Tibetan Studies Program at Columbia University. "So that makes any initiative by a powerful government to establish some kind of organising structure for the religion more significant than in other religions."

If the project results in undermining the Dalai Lama's influence, while China's political and economic influence in Nepal are built up, then all the better from a Chinese point-of-view.

From an outsider's perspective, there may be a cognitive dissonance about the entire venture. Communist China, officially atheist, is seen deeply involved in a multi-billion dollar religious project. But it could all actually be part of the ideology.

Chinese President Hu Jintao has been promoting a "harmonious society" as part of his socio-economic vision, and some years ago Party officials began to entertain the notion that religion, if carefully managed, could play a positive role in building such a society. Buddhism's historical connection with China made it the likeliest candidate as the contributor.

"It is seen as an indigenous Chinese religion, not a foreign one," says Barnett. "And because it doesn't have a single, institutional structure such as in Catholicism, it's viewed as being less likely to oppose the state."

In that sense, the project is partially a sign China is concerned about the spiritual deficiency of its own population in a country whose ideology is communist, but whose practice has become capitalist.

That would be Lumbini at its best. At worst, Lumbini's goal is to marginalize key Buddhist leaders who challenge Chinese state dominance, and is meant to co-opt the global Buddhist conversation to make it less Tibetan-influenced.

What role, for example, will the university at Lumbini play?  Would it offer scholarships for free monastic education to monks around the world?  And if so, what would it teach? A Chinese-sanctioned version of Buddhism?  Or will monks have the opportunity, as is the tradition in many parts, for spirited theological debates?

In the end, the question does goes back to the Dalai Lama and whether he'd be welcome at Lumbini. An invitiation there would send a signal that the project's intention is strictly religious and even economic - but not political. Shutting the Dalai Lama out of the project would only confirm ulterior Chinese motives.

The signal is mixed. Xiao Wunan himself is a devout Buddhist, who appears dedicated and enthusiastic, along with others around him working on the project. They say they'd like Lumbini to become the Buddhist Mecca.

On the other hand, the Dalai Lama has not been allowed to visit Lumbini since the late 1980s, and the Nepalese government, under pressure from Chinese diplomats, continues to show little tolerance of its Tibetan refugee community.

On the Dalai Lama's birthday last week, Nepalese riot police prevented Tibetans from celebrating, over concerns the gatherings would turn anti-Chinese - perhaps a nod to its $3bn benefactor.