China is the rival India cannot live without
(Courtesy of www.asia.nikkei.com)
On Feb. 11, India and China reached an agreement to de-escalate a long-standing border dispute that erupted into a clash in the spring and summer of 2020. The agreement, which involves both sides pulling back along the Line of Actual Control that passes through the Indian region of Eastern Ladakh, restores some normality to fraught relations between the two Asian giants.
Last summer’s dispute led to an Indian retaliation that impacted Chinese investments in India, with regulators following through on a threat to ban popular Chinese apps such as TikTok. Chinese companies were also barred from bidding on infrastructure projects, even indirectly through joint ventures, and there was a much-publicized call by government supporters to boycott Chinese goods and “buy Indian.”
Further, India entered into an agreement with Australia and Japan to create a Supply Chain Resilience Initiative intended to diversify away from Chinese domination.
Fast forward to the present, and the bellicose rhetoric and action have been tempered by the pragmatic realization that China is simply too important to India’s economic fortunes. The two economies are too intertwined to realistically decouple without seriously damaging an Indian economy already reeling from the double whammy of COVID-19 and a ham-handed lockdown that failed to curb the virus but managed to cause an economic contraction that was the worst among advanced and emerging economies.
Tepid economic growth of 0.4% in the last quarter of 2020 is more suggestive of a protracted U rather than a rapid V-shaped recovery. This makes re-engagement with China doubly important for the beleaguered Indian economy, a reality that seems to have finally hit home with policymakers.
Breaking into Chinese-led supply chains is also a daunting challenge, given that India has opted out of both the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership, two mega-regional trade and investment deals that between them involve all of the major economies in the Asia Pacific region, with the singular exception of India.
It is clearly no coincidence that, within days of the border agreement, India was set to ease its restrictions on Chinese investments put in place during the standoff. Among the affected projects, reportedly totaling around $2 billion, was a proposed acquisition of a General Motors plant in India by Great Wall Motors of China.
Indian officials have suggested that investments in areas deemed as not sensitive to national security were likely to be cleared in the coming weeks. There is also talk that Chinese investments amounting to a minority stake of 20% or less may be put back into what is known as the automatic route which does not require government approval.
In a further telegraphing of improving bilateral relations, India’s Foreign Secretary, the country’s top diplomat Harsh Vardhan Shringla, suggested last month that the trade relationship required a reset, as the trade balance was heavily tilted in China’s favor, but pointedly did not hint at any new sanctions.
Meanwhile, Rajiv Bajaj, managing director of Bajaj Auto, one of India’s largest automotive manufacturers, argued bluntly that India has no choice but to continue to do business with China or else risk getting left behind. Crucially, his remarks focused on the continued centrality of reliable supply chains, pointing to the disruption caused last summer when Indian officials held up the import of Chinese components as part of their retaliation during the border standoff.
Just how important China is to India is shown by the fact that China once again became India’s top trading partner in 2020, despite all of the disruptions caused by the border dispute and retaliatory measures taken by the Indian side. In the first nine months of India’s current fiscal year, which began in April 2020, India exported $15.3 billion worth of goods to China as against imports of $44.5 billion. This makes China significantly more important than the United States, which is India’s second-largest trading partner.
The imbalance of power between China and India is reflected not just in the trade statistics nor in the Chinese incursion into Indian territory, which the recent agreement ostensibly resolved, but the many levers that China has to punish India if it wants to. Chinese authorities did nothing publicly to react to India’s economic retaliation last summer: perhaps because they chose to retaliate differently.
A study published in February by Recorded Future, a Massachusetts-based research firm which studies threat intelligence, demonstrates conclusively that a massive power outage in Mumbai, India’s most important commercial center, that began on Oct. 13, 2020, the worst such outage in decades, was the result of a Chinese cyberattack, although Chinese authorities have denied this. Indian officials, too, having first raised the possibility, are now also reticent on possible Chinese involvement in the cyberattack. As reported in the New York Times on Feb. 28, it appears that there was an increase in Chinese state-sponsored cyberattacks on sensitive Indian facilities in the latter half of 2020.
In spite of all of this, India evidently has calculated that re-engagement with China, especially on the economic front, while shifting the border dispute to the back burner, is the only realistic course of action if it has any hope of re-energizing the country’s flagging economic miracle.
Rupa Subramanya
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