On December 26, 1961, King Mahendra appointed a council of five ministers to help run the administration. Several weeks later, political parties were declared illegal. At first the Nepali Congress leadership propounded a nonviolent struggle against the new order and formed alliances with several political parties, including the Gorkha Parishad and the United Democratic Party, which had been strong critics of the Nepali Congress when it ran the government. Early in 1961, however, the king had set up a committee of four officials from the Central Secretariat to recommend changes in the constitution that would abolish political parties and substitute a "National Guidance" system based on local panchayat led directly by the king. By late 1961, violent actions organized by the Nepali Congress in exile began along the Indian border, increasing in size and number during early 1962.

The political situation changed completely when war broke out between India and China on October 20, 1962. In a series of rapid movements, Chinese troops occupied mountain areas east and west of Nepal in an attempt to resolve border disputes with India by simply occupying disputed territories. The reversal suffered by Indian forces took the leadership in India by surprise and forced it to reevaluate the strategic situation in the Himalayas. Because India needed strong friends rather than insurrections in the region, it withdrew support from insurgents along the border with Nepal and established closer relations with the king's government. In Nepal, King Mahendra extended the state of emergency indefinitely. The army trained by India during the 1950s proved itself capable of handling guerrilla warfare. In the midst of increasing desertions from his cause, the leader of the Nepali Congress, Subarna Shamsher, called off the armed struggle.