External Affairs

Will China’s OBOR Open Avenues For Indian Industry?

Analysts have viewed the OBOR more as a strategic dominance ploy than an economic cooperation agenda, but that doesn’t mean Indian industry has nothing to gain.

The inaugural freight train on a line from China to Afghanistan leaves its depot in August 2016. Credit: Reuters

The inaugural freight train on a line from China to Afghanistan leaves its depot in August 2016. Credit: Reuters

China’s belt and road initiative, also known as One Belt, One Road (OBOR), has captured global mind space for the sheer scale of its vision and ambitious projects. Comprising the Silk Road Economic Belt and the 21st century maritime Silk Road as the land and sea routes respectively, OBOR has emerged as an overarching strategy for China’s economic cooperation in Asia, Africa and Europe. The many projects planned within China and in the target regions could offer some opportunities for Indian industry across diverse sectors during the construction phase as well as through the resultant connectivities and facilities.

OBOR has several components and is structured around five key objectives for expanding international cooperation, as per the vision and action document issued by the government in March 2015. ‘Policy coordination’, as the first objective, envisages joint economic development strategies and policies, and new cooperation consensus between China and the countries along the two trunk arteries and sub-routes. The second objective for ‘facilities connectivity’ includes transport infrastructure for connecting all sub-regions in Asia and regions in Asia, Europe and Africa as well as harmonising technical transport standards. In practice, an expansive range of highways, railway lines, ports, industrial corridors, energy pipelines and other infrastructure is proposed and under implementation. Trade facilitation relating to customs and standards, financial integration and people-to-people links are the other pillars of the comprehensive action plan.

The entire state machinery of China’s central government, provincial governments, state-owned enterprises, banks and other entities are involved in promoting OBOR. Already, many projects predating its launch have been subsumed in the plan and a large number of these are functional. For example, freight trains on routes connecting Yiwu with London are trundling 7,500 km across Central Asia, with more than a thousand trains passing through Manzhouli, China’s largest land port, for Europe in 2016. Estimates of potential investments under OBOR range from $1 trillion to $21 trillion, led by the Chinese central and provincial governments, with multilateral development banks, overseas financial institutions and the private sector expected to contribute to the kitty.

Source: HKTDC Research

Source: HKTDC research

India’s concerns

For India, the major concern is the China-Pakistan Economic Corridor, the centrepiece of the OBOR initiative with a projected Chinese funding of $46 billion. The projects envisaged under this component include some in Pakistan-occupied Kashmir and in territory that Pakistan ceded to China in 1963. India has expressed its reservations on this blatant infringement of its position on several occasions during interactions with top Chinese leadership. India also has geopolitical concerns linked to both land and maritime dimensions of OBOR. Given the disregard on the Chinese side to address its legitimate concerns, India’s response to OBOR has been frigid.

The Bangladesh-China-India-Myanmar initiative, underway since well before the OBOR was announced, has also been incorporated by China into its grand plan, as a southern branch of the overland Silk Road Economic Belt. The two new multilateral development banks, Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB), are also increasingly mentioned as part of the belt and road initiative. The AIIB is led by China with a predominant share in it, while India is the second largest shareholder with a much smaller share. The bank has 57 countries as founding members and many more are expected to join shortly. On the other hand, the NDB, headquartered in Shanghai and presently headed by India’s nominee, is equally shared by the five BRICS countries; however, it is commonly associated with OBOR and finds a mention in the official vision document.

Taken in consonance with China’s increasingly active position in India’s periphery including the Indian Ocean region, Indian analysts have viewed the OBOR more as a strategic dominance ploy than an economic cooperation agenda. India’s statements of concern also do not discourage Chinese media from positioning China’s investments in India as part of the vast OBOR campaign, since the South Asian neighbour happens to be located along the Maritime Silk Road as imagined by it.

Economic cooperation

In essence, India cannot endorse the OBOR without compromising its sovereignty and territorial integrity. At the same time, it is keen to step up its economic engagement with China and with Asia as a whole. Trade between the two Asian giants has rapidly increased, standing at over $70 billion in 2016. The skewed nature of this trade, with India’s exports to China just a fifth of its imports from that country, is of concern to both nations. One way to redress the adverse trade balance is to encourage Chinese investments in India. President Xi Jinping’s announcement of $20 billion worth of Chinese engagement in India during his September 2014 visit was directed towards this objective, and India was quick to welcome it.

In 2016, Chinese investments in India went up by a multiple of seven over the previous year, crossing $1 billion, as per official Chinese data. Cumulative Chinese FDI into India was placed at $4.8 billion, although the Indian side counts it as $1.6 billion between April 2000 and September 2016. China has shown interest in India’s railway development, real estate, e-commerce and manufacturing sectors, among others. Such investments can be increased as China has emerged as a major outward investor with close to $130 billion of overseas investments in 2015. Its investments in countries along the OBOR route already touch $50 billion, as mentioned by Chinese President Xi Jinping in his speech at the World Economic Forum annual meeting at Davos in January 2017.

Chinese President Xi Jinping speaks during the opening ceremony of the Asian Infrastructure Investment Bank (AIIB) in Beijing, China, January 16, 2016. Credit: Reuters/Mark Schiefelbein/Pool

Chinese President Xi Jinping speaks during the opening ceremony of the Asian Infrastructure Investment Bank (AIIB) in Beijing, China, January 16, 2016. Credit: Reuters/Mark Schiefelbein/Pool

Indian participation

The OBOR projects are gaining momentum and can be viable opportunities for Indian companies interested in project work and in setting up facilities in the many industrial parks under implementation, both within Chinese provinces and along the land route in Central Asia. This region has witnessed higher activity than other target regions in terms of projects, building on projects commencing before OBOR’s announcement.

There are, however, two reasons why Indian industry’s response to OBOR may be muted. For one, most of the OBOR projects led by Chinese entities are linked to sourcing and contracts from Chinese companies. Loans and investments mostly come tied with procurement directives favouring these companies. Indian companies contemplating project participation may further find themselves relegated behind local companies, the second choice for project procurement.

The second consideration would be the low level of economic cooperation between India and Central Asia. India’s two-way trade with Central Asian republics and Commonwealth of Independent States members (excluding Russia) was just over $3 billion in 2015-16, constrained by lack of direct connectivity. The circuitous route to addressing these underdeveloped markets, including through the new rail route from Europe to China, proves to be too costly for Indian exporters and importers. Recent attempts under the Indian government’s Connect Central Asia initiative are stirring some interest, but this will take time to fructify into concrete trade decisions. Further, the Iran route via Chabahar port and the International North South Transport Corridor linking to Russia may open up possibilities for trade.

In ASEAN, another leg of the OBOR, India has a robust economic engagement which would benefit from Chinese projects but is independent of their progress. The same is the case with West Asia and East Africa, where Indian companies have already made inroads in areas of their choice.

Nevertheless, Indian industry should take a closer look at the OBOR projects coming up in its vicinity for potential business. China has been moving to institute international competitive bidding for projects, which it hopes to expand through the stricter format of AIIB. Indian companies have been active participants in projects and business opportunities provided through the World Bank and Asian Development Bank (ADB) in Asia. For example, India secured 23% of the total contracts offered by ADB in 2009-2013, including energy and infrastructure services sectors as well as consulting services. Indian firms’ technical expertise, long experience and services strength make them competitive bidders for works and services contracts, particularly in power, water, and supply of goods.

The Center for Strategic and International Studies has developed a map of infrastructure projects underway in Asia, including OBOR. Some of the projects under this include:

Other projects are the China-Kyrgyzstan-Uzbekistan railway, high-speed railway in Iran, waterways project in Vietnam and so on. The AIIB’s four identified projects so far include electricity grid coverage expansion in Bangladesh and a slum redevelopment project in Indonesia. About 50 industrial parks are under implementation through Chinese participation in OBOR countries.

Within China too, OBOR is a substantial strategy shift to develop interior provinces in an effort to attain regional economic balance. For example, Xinjiang has developed a dry port and plans a 50% growth rate in fixed capital investments in 2017. Thus, the many ‘new areas’ coming up as industrial cities adjacent to older cities provide attractive incentives for investments, particularly the ones identified along the OBOR. Keen to meet stretch targets for new industry, local governments in these areas offer reduced costs for land, power and urban amenities as well as best-in-class infrastructure facilities and tax breaks. Some sectors where Indian companies could look at opportunities include manufacturing of light engineering goods and consumer goods, professional services, renewable energy, healthcare and life sciences, among others.

To avail of such opportunities, Indian firms need to invest in understanding China’s regulatory and legal systems and business culture. Their engagement has been primarily related to importing from China, rather than investing there. This is not in consonance with their activities in other advanced and emerging countries where they have developed extensive investment and business plans. It is also not aligned to FDI trends in China where foreign investors have invested hugely to transform it into a global manufacturing hub. The country has an FDI stock of $1.2 trillion and received $118 billion in investments from overseas in 2016. Indian firms would also need to develop the right products for tapping Chinese markets and expand their engagement with Chinese partners.

At the same time, China can make it easier for Indian businesses to get work visas, regulatory permits and other requirements. It must also convincingly address non-trade barriers to trade in goods and services of India’s interest. For example, China has been slow to facilitate Indian pharmaceutical firms in registration processes and Indian IT players find it difficult to compete with local and state-owned firms for contracts. China must work much harder to integrate Indian companies into its business environment and build the requisite trust and confidence, including for intellectual property.

OBOR is envisaged as a cornerstone of China’s ‘going out’ policy over its reform-oriented 13th five-year plan and beyond to the year 2049, when the country celebrates its centenary. While India is unlikely to officially align itself with this strategic Chinese vision, Indian industry need not remain aloof from it in the Asian context and could explore opportunities. At the same time, they could seek transparent processes in OBOR projects. If the Chinese wish to deepen cooperation with Indian companies on the OBOR platform, they would need to open up their markets concomitantly and address hurdles to trade and investment. They must also work to make their systems more accessible without expecting endorsement from the Indian government on the belt and road initiative. With its own large domestic market being a key attraction for China, India needs to keep up the economic dialogue with its larger northern neighbour for a more facilitative and balanced business climate.

Sharmila Kantha is a business writer and author of several books on Indian corporate history.