China-India Relations In The Modi Era

THE INITIAL FOREIGN policy focus of India’s new prime minister Narendra Modi has been on his country’s regional neighbours. Though China is one of them, it has received the least public attention despite recent talk of “a new age of co-operation” between the two, as Xu Changwen, a researcher at the Ministry of Commerce-affiliated think tank, the Chinese Academy of International Trade and Economic Cooperation, recently described it.

Beijing’s initial reaction to Modi’s landslide victory was muted if respectful. A degree of awkwardness for the world’s largest non-democracy in congratulating the world’s largest democracy on a successful transition of power would have been inevitable, even if China and India weren’t both competitive neighbours. Nor would have the eviction from office of the faction-riddled and corrupt Congress Party after a long run in power been an event on which the leadership of the Party in China would want to linger.

However, Beijing does see an opportunity to reset relations between the two countries now the world’s largest democratic election has put in office a politician who while India’s most controversial is also its most business-friendly. The hope is that the change may open the door to progress on trade and investment relations that could offset years of diplomatic strategic mistrust of Beijing on Delhi’s part.

Modi’s campaign promises set high expectations that he will push ahead the economic reforms that had stalled under the previous coalition government. He will have the advantage of not having to worry about coalition partners, but he will find the structural constraints, corruption and slow global economy just the same as his predecessor left them. Nor will Modi be in any hurry to abandon India’s aspirations to be a regional power. Significantly, Modi’s first foreign trip as prime minister was to Bhutan, a former Indian client state that has its own long-running territorial dispute with China.

Modi is a nationalist. His foreign policy rhetoric will continue to reflect that even as he seeks to advance India’s economic interests. The hardline against Pakistan he pursued as a candidate will continue to prove domestically popular. That is what he is most likely to speak about for now as it will take some time for European nations and the U.S. to rehabilitate him diplomatically, though Washington is expected to expedite the process by inviting him speak to a joint session of the U.S. Congress during his visit to the U.S. for the U.N.’s general assembly in September. However, getting his posturing on Pakistan right will be a difficult balancing act. He risks pushing Pakistan more towards China if he gets the tone wrong.

Modi’s nationalist leanings — and the even more pronounced ones within his party — could also trigger stronger posturing on India’s direct territorial disputes with China. Last February, during a campaign trip in Arunachal Pradesh, over much of which which China claims full sovereignty, Modi criticised Beijing’s “expansionist mindset” and reiterated India’s territorial claims over the state. Nonetheless, this Bystander feels that, given the overwhelmingly domestic focus of his campaign, Modi in office is likely to be more pragmatic and less ideological in foreign policy than Modi on the campaign trail. Nonetheless, the new Modi government has allocated $830 billion for infrastructure development in Arunachal Pradesh.

That suggests, at best, a degree of cautious cooperation with China. The litmus test may come in the proposed visit of President Xi Jinping to Delhi later this year, which will be closely watched for signs of a start on the work to strike a grand bargain to settle bilateral territorial disputes.

More immediate rapprochement is likely over trade and investment, and especially at the state level to which Modi wants to devolve more central government powers. That would be a particularly wrenching change for Delhi’s small — India’s diplomatic corps is one-fifth the size of China’s — but tight-knit foreign policy elite. Traditionally it has had neither the time nor taste for advancing India’s commercial interests. India’s multinationals, when entering new foreign markets, have not had enjoyed the cheap credit and diplomatic support their Chinese state-owned counterparts expect.

When Modi was running Gujarat, China was one of three countries he visited in 2011 (Indonesia and Japan were the other two) to pitch for inward foreign investment in his state. Much of China’s $900 million of direct investment in India has gone to Gujarat. A national Modi government is likely to encourage more Chinese investment in sectors such as energy and infrastructure, but it is likely to be states such as Gujarat and West Bengal that cut the deals.

One sticking point will be India’s growing trade deficit with China, now running at an annual rate of $27 billion on total trade of some $65 billion. Beijing is more likely to use that as a lever for more direct investment by Chinese firms in India for local production that would be a substitute for Chinese imports of manufactures. The proposed low-tax special economic zones and manufacturing hubs that the Modi government has just approved in principle would be a step in that direction.

There are also global issues on where the two countries will make common cause, notably climate change and international trade rules. There will, though, also still be plenty of areas of competition between the two regional powers. Both will compete for influence in South Asia and resources in Africa to fuel their economies. We expect Modi to be more assertive on territorial disputes than his predecessor and to seek closer ties with Japan and South Korea, if only to increase Delhi’s leverage with Beijing.

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