Originally Published 2018-06-07 10:48:20 Published on Jun 07, 2018
Modi’s new China policy

In Singapore recently, addressing the IISS’ Shangri-La Dialogue, Prime Minister Narendra Modi declared his  friendship with China. In his words “Asia and the world will have a better future when India and China work together with trust and confidence”. China has appreciated this sudden turn in Modi’s policy. This is not a new realisation on Modi’s part because he has always known that the Chinese dragon and the Indian elephant command enormous power in the world arena because of their huge population and because they are the two fastest growing economies in the world.  Modi has promoted India-China cooperation in the past, especially at various BRICS summits and even at the last summit in Xian, China, in 2017 post Doklam. After his informal meeting with President Xi Jinping at Wuhan, the relations between the two countries have warmed up further.

China and India have found a common voice at the WTO many times but wide differences remain in other spheres and China has continued to block India’s bid for a permanent seat at the UN Security Council and entry into Nuclear Supplier’s Group. Today when the world is talking of China’s power with its $14 trillion economy and huge manufacturing base, it is hard for India to ignore its clout especially when China is also playing a major role in building infrastructure in our neighboring countries. In Europe, China’s takeover of big iconic industries like Pirelli in Italy is giving EU firms a scare.  China is also challenging the USA’s hike in tariffs on steel and aluminum. In Africa and Latin America, China is playing the role of a major investor. Thus around the world the Chinese dragon is something to be reckoned with.

Modi is playing the role of a good neighbour also wanting to make peace with the regional hegemon. He does not want any trouble on its 2200 km border with China in the next one year, critically important for the peaceful and smooth conduct of the General elections in 2019.

When he talked of ‘many layers of friendship with China’, he probably was referring to the past ties when Hiuen Tsang, the  great Chinese scholar and monk, visited India in the 7th century and lived many years in India, learning Sanskrit and taking back with him precious Buddhist manuscripts that led to the spread of Buddhism in China. For the average Chinese today, India is most importantly the land of the Buddha.

In retrospect, given Modi’s current mood, he should have signed China’s Belt and Road Initiative in which more than 60 countries are participating. It is a mega trade and infrastructure project ning Asia and Europe. Chinese firms could help in building infrastructure in difficult Himalayan terrain. Roads, railways and shipping links would facilitate trade and investment because of greater connectivity. But the overwhelming objection for India at the time of the BRI initiative in 2017 was that China’s Pakistan Economic Corridor goes through Pakistan Occupied Kashmir.

Modi could have also agreed to the recent proposal from China to have the trilateral economic corridor between Nepal, China and India. While Nepal has signed the trilateral agreement, India has abstained. It is perhaps afraid of China’s dumping its goods on India via Nepal. India is also hesitant in signing the RCEP mega trade treaty involving 16 countries including both India and China for the same reason. China does have excess manufacturing capacity and is looking for countries to sell its spare production and India’s huge market is very attractive.

India’s biggest competitor and trade partner is China today and although Indians complain about the poor quality of Chinese goods, they are buying more than ever because they are relatively cheap.  Being are very price sensitive, they have no qualms about buying Chinese goods over Indian products. In 2017 trade increased by 18.2 per cent over previous year. India’s industries have been groaning under the weight of Chinese competition and the government is also very concerned about the ‘unfair’ competition from China which has led to the biggest trade deficit India has ever had with any country. ‘Unfair’ because Indian manufacturers cannot compete with the low cost of capital of Chinese companies, cheap power and the lack of a proper accounting in the pricing of their products. Also, Chinese companies have deep pockets and sell cheap at first but after an assured market, they raise prices. Many SMEs and handicraft industries have suffered due to influx of Chinese imports.

Thus India’s trade deficit of $61 billion with China refuses to shrink as India is unable to export more manufactures and less primary and intermediate goods to China and amount to $12.5 billion. In desperation, the government raised tariffs on imports of steel products from China in 2015 by 2.5 percent to 10 percent and as a result of the protectionist measure, the steel industry is doing well again. In Budget 2018, duties on electronics, solar components and mobile phones were raised in a bid to curtail imports from China. The US too has started raising protectionist barriers against Chinese goods. President Trump wants to reduce the huge trade deficit that US has with China of $375 billion. Yet Trump cannot act really tough because he is afraid of retaliation from China. It holds $1.2 trillion in US Treasury Bonds and can easily unload some of the Treasury bonds in the market which will result in a crash of the dollar. It can stop buying US agricultural products like Soya beans and that will jeopardize its farm economy of the US making farmers angry whose votes are important.

The Indian government is also afraid of any economic backlash from the Chinese giant and reconciliation of past disputes is the best policy. India is welcoming Chinese investments which have a huge potential even though it was a mere $2 billion of Chinese FDI in 2017. India and China are natural trade partners as they complement each other. India is specializing in software and pharma and IT services while China is specializing in manufacture of electronic hardware and infrastructure building. Despite differences, the two countries have signed over 100 trade agreements amounting to $2.38 billion in recent times.  As PM Modi put it in Singapore “Differences must not be allowed to become disputes”. Will the same mood prevail when he goes again to China soon for the meeting of Shanghai Corporation Organization in Qingdao?

This commentary originally appeared in The Tribune.

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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