In Bid to Counter China, India Must Stay Wary of Western Alliances

Mike Pompeo recently said that India holds an exciting promise to wean global supply chains away from China.

Besides India, the only other country with which China had set up such a dialogue process was the US.

(Photo Courtesy: Shurti Mathur/The Quint)

In a recent media interaction with CNBC-TV18, Indian external affairs minister S Jaishankar voiced skepticism of binding alliances, a characteristic feature of Indian foreign policy since Independence. The Indian strategic community is clearly wary of joining a global anti-China coalition that would prominently feature the US, other Western democracies, and middle powers. What is the source of this skittishness?

Over the past few weeks, the India-China conflagration at the Line of Actual Control (LAC) in Galwan has triggered a rush of nationalistic anti-China domestic sentiment in India.

Based on the current domestic political calculus in India, Prime Minister Modi commands considerable leeway in solidifying alliances with the US and the West, especially if they are couched in opposition to China.

What Motivates Caution?

A dominant strand of Indian elite opinion is loudly advocating for a closer alignment with the US to ameliorate India’s vulnerability from China. Besides the US, several major powers are deeply unhappy with China since the outbreak of the COVID-19 crisis, raising the spectre of India joining an anti-China coalition of the willing.

However, the reality of Sino-Indian commercial ties is one of the many factors that stand in the way. Besides the institutional memory and legacy of India’s non-aligned grand strategic posture, the costs of economic decoupling from China motivates India's caution.

The current economic constraints in India’s China policy can be traced back to the 2010 visit of the then Prime Minister of China, Wen Jiabao.

The highlight of this visit was the launch of the Strategic Economic Dialogue (SED) focused on improving bilateral economic ties.

Besides India, the only other country with which China had set up such a dialogue process was the US.

The SED dialogue mechanism was designed to delink the historically contentious India-China boundary issues from their bilateral economic relationship.

The SED began with five working groups focused on infrastructure, environment, energy, high-end technology, and policy coordination. In 2019, the pharmaceutical sector working group was added to the SED as well. In 2013, India became China’s largest trading partner and fourth-highest export destination.

The SED formed the basis for minimising frictions in India-China bilateral economic ties in the years that followed.

The Doklam Context

This geniality facilitated bilateral cooperation in other issue-areas such as climate change talks, the Doha Round of the World Trade Organization (WTO), and deep engagement in multilateral forums like BRICS, the Russia-India-China trilateral and the Shanghai Cooperation Organization (SCO).

This amiability in bilateral ties was rudely disturbed in June 2017 when boundary problems reared their ugly head at Doklam inside Bhutan.

Honouring the terms of the India-Bhutan Friendship Treaty of 2007, India authorised its troops to stop the Chinese construction of a road in the disputed territory. This action precipitated a three-month-long stand-off between the armed forces of both nations.

Prime Minister Narendra Modi shrugged off the Doklam setback and continued to invest in summit diplomacy with his Chinese counterpart, Xi Jinping. The meetings at Wuhan, China in August 2018, and Mamallapuram, India, the following year, were the highlights of this charm offensive led by PM Modi.

PM Modi’s public pronouncements contained several references to the “Wuhan spirit” and the “Chennai Connect,” indicating his general satisfaction with the course of Sino-Indian ties. PM Modi’s diplomatic strategy relied on the bet that greater market access would be enough of a carrot for China to take India’s concerns on the boundary question seriously.

Apps Banned and Projects Stalled

Following the recent violence at Galwan, there is near-universal consensus in India that PM Modi must reverse his post-Doklam China policy. So far, this has translated into a modest decoupling of India’s economy from Chinese influence.

India has banned 59 Chinese apps. The Indian Ministry of Commerce is also reviewing the subsidies on the yarns exported from China. Under the rules of the WTO, India is permitted to impose a countervailing duty on China if it can demonstrate that the Chinese government is supporting its yarn exporters with subsidies.

Many agreements of India’s state-owned public sector undertakings (PSUs) with the Chinese entities have been put on hold. The Department of Telecom (DoT) has directed government-owned telecom giant Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nagar Limited (MTNL) to cancel existing tenders for upgradation and maintenance of their 4G mobile network.

Indian Railways has even terminated the contract of Rs 471 crore given to Beijing National Railway R and D Institute of Signal for a project on the Eastern Dedicated Freight Corridor.

Most observers concur that reducing India’s economic dependence on China will not be easy. While significant, these measures are still low-hanging fruit. More importantly, these are not going to hurt the Chinese interests in a significant manner. The rubber of India’s decoupling with China will soon meet the proverbial road when China-dependent Indian private firms are forced to make hard choices.

While PSUs might be able to absorb the adjustment costs of disengagement from China, most private players cannot do the same. For example, domestic mobile phone brands like Micromax and Lava International are unlikely to replace their Chinese inputs overnight. They are most likely to source them via Singapore, Hong Kong, or other parts of Southeast Asia and will try to pass off the additional costs to the consumer.

Chinese investors have become increasingly vital for the Indian private sector in the last few years. The volume of Chinese investments increased five-fold at $5.6 billion in 2018 compared to a mere $668 million in 2016 and around $3 billion in 2017.

Further, eighteen out of the some of the most well-known Indian start-ups like Zomato, Pay TM, Swiggy, Byju’s, Big Basket, have been funded by Chinese venture capital firms in the past few years. If India pursues this strategy of economic disengagement with China, a clear-eyed cost-benefit assessment of reducing Chinese involvement with Indian private firms will be imperative.

Exercising this option requires open communication between the Indian government and trade and industry associations on the feasibility of practising economic nationalism vis-a-vis Chinese trade and investment.

Impact on India’s Presence in Global Supply Chains

At the US India Business Council (USIBC) annual “Ideas Summit” a few days ago, the US Secretary of State, Mike Pompeo, said that India holds an exciting promise to wean global supply chains away from China. Notwithstanding the encouraging words of Secretary Pompeo, India’s presence in global supply chains will suffer a setback if India-China economic relations continue to get derailed.

Global supply chains integrated within Chinese territory have proved remarkably resilient despite the worsening US-China trade dispute over the past few years. Global firms integrated with Chinese supply chains seem to have priced in the risk of geopolitical changes in the post-COVID world.

Thus far, the advantages of doing business in China continues to outweigh the disadvantages for most global firms. For instance, some of the leading Japanese firms have decided to operate in China despite the Shinzo Abe government trying to attract them to move their operations to Japan.

These companies argue that there is no sense shifting their operations to distant places to serve customers rooted in China.

India has routed most of the Chinese capital investment in its infrastructure projects through the multilateral mechanism of the China-based Asian Infrastructure and Investment Bank (AIIB).

The AIIB is the centrepiece of the Chinese alternative to the US-dominated Bretton woods multilateral institutions. In 2018, the AIIB advanced $2 million as a loan to India’s National Infrastructure and Investment Fund (NIIF), a sovereign wealth Fund body set up to boost infrastructure.

Recently, the AIIB approved a $750 million loan for India’s COVID recovery efforts. At $3.06 billion, India is currently the highest recipient of loans from AIIB.

China is the largest capital subscriber and shareholder in the AIIB, accounting for 31 percent of total subscriptions and with 26.6 percent of voting shares. On the other hand, India merely accounts for 7.6 percent voting power in the AIIB.

Given China’s disproportionate stake in the governance of the AIIB, India will find it difficult to reconcile its reliance on AIIB loans with increasingly hostile relations with China.

India has recently announced that it will not derail diplomatic engagements with China in multilateral forums like BRICS and the SCO. India will be attending the foreign ministers meeting of both these multilateral platforms later this year. If India-China relations continue to deteriorate, this balancing act will become harder to sustain.

Chinese ‘Wolf Warrior Diplomacy’

China’s global status has taken a hit as it faced extraordinary international opprobrium since the COVID-19 outbreak. China has responded with increasing aggressiveness on multiple fronts – a self-described strategy of “wolf-warrior diplomacy.”

It is not known whether the Galwan episode is part of its post-COVID Chinese grand strategy or a series of accidental escalations.

Indian policymakers must act on the assumption that China is unlikely to back down from its currently offensive posture in the near future. India’s current public stance is that the Galwan border clashes mark an inflection point and India-China relations will not be business as usual until the reversion to status quo ante along the Line of Actual Control (LAC).

Both nations are currently engaged in painstaking negotiations to resolve contentious boundary issues in a bilateral forum known as the Working Mechanism for Consultation and Coordination on India China Border Affairs’ (WMCC). The latest press reports indicate that the Chinese are not being very accommodative to Indian demands in these border negotiations.

PM Modi was willing to expend considerable political capital to reset Indo-China ties after the fracas at Doklam. An encore of the post-Doklam diplomatic reset appears practically impossible as a policy option for him today. Before the fatalities in the Galwan confrontation, anti-China sentiment in India’s mass consciousness was already entirely inflamed due to China’s role as the alleged progenitor of the coronavirus.

China has become much more brazen in coaxing and cajoling India’s smaller neighbours like Nepal and Bangladesh to take overtly hostile positions that would embarrass India. The growing proximity in China-Iran relations is also of extreme concern to India because Iran is crucial to India’s modest regional connectivity projects.

Furthermore, as China’s aggressive posture in the South China Sea grows, the more India will be pressurised by the US to join a more formal defence alliance. While in the short term this may seem a convenient solution to India’s China problem, India will find it hard to accept the onerous terms and conditions that the US tends to impose on its middle power allies.

It is tempting to conceive of an alliance of prominent middle powers like India and Japan along with the Western democracies to counter China’s “wolf-warrior” foreign policy.

For now, the general skepticism of alliances expressed by EAM Jaishankar is much more preferable given India’s national interest and strategic realities.

(Dr G Venkat Raman is an Associate Professor, IIM Indore, and Dr Bappaditya Mukherjee is an independent scholar and has completed his PhD at the University of Maryland. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)