External Affairs

Investment the Way to Reduce India-China Trust Deficit

Prime Minister Narendra Modi meeting Indian community people at a reception in Shanghai on Saturday. Credit: PTI Photo

Prime Minister Narendra Modi meeting Indian community people at a reception in Shanghai on Saturday. Credit: PTI Photo

The future relationship between India and China, the two most populous nations which will be engines of global growth, is a subject of intense speculation all around the world. When two dynamic, civilisational societies interact, it creates a huge burden of expectations. It is also a very delicate task for the political leadership of the two nations to fully absorb the complexity of the relationship in order to articulate its future shape.

One thing is certain though — the 2.5 billion people of India and China, 40% of global population — have the potential, by their sheer numbers, to create a new vision for 21st century. Chinese leader Deng Xiaoping used to say China and India have to necessarily work together to shape the Asian century. As ancient civilisations, they have the potential to create an alternative modernity which does not blindly ape western patterns of production and consumption. They have the opportunity to imagine a different framework that may be culturally more in sync with an Asian way of life. Marxist historian Eric Hobsbawm had speculated about the possibility of the Protestant Ethic giving way to the Confucian Ethic as a driver of materialism, in this century.

Long term perspective needed

So it may be appropriate that Prime Minister Narendra Modi should tell his Chinese counterparts that they should look at India-China relationship in a long-term strategic perspective. This perspective must at all times override other diplomatic irritants which will remain, given the baggage of history which takes time to resolve. Modi frankly told his Chinese counterparts that some aspects of China’s attitude prevent the bilateral relationship from achieving its full potential. What exactly are these aspects?

The key problem between the two nations is a pronounced trust deficit. This was visible during the unprecedented border incursion by the Chinese army into Indian territory during the visit of President Xi Jinping to India.  Although not a single shot has been fired on the India-China border for decades, there is still lack of trust on both sides about deeper engagement on the political and economic front. For instance on the eve of Modi’s visit, the foreign secretary, Mr.S Jaishankar, issued a statement that India was upset about the Chinese President’s recent commitment to invest $47 billion in rail, road infrastructure and a virtual trade corridor connecting West China to the strategic Gwadar port in Pakistan.

This will enable China to carry oil and gas from Iran and Arab countries via Gwadar port which was also built by China. India’s objection is that the trade corridor and rail-road link goes through Pak occupied Kashmir. In fact, it has been a sore point for India that the Chinese have been given access to part of PoK by Pakistan. Thus is obviously provocative to India. Perhaps this is what Prime Minister Modi was hinting at when he told the Chinese Premier yesterday that some aspects of China’s approach did not help in realizing the full potential of a long-term strategic partnership between the two nations.

But Modi nevertheless is pressing on with deeper cooperation in areas where there is less trust deficit. Admittedly, the India-China border problem, given its history, will take longer to resolve and Modi has rightly endorsed the stance that the two sides will work towards a “fair, reasonable and mutually acceptable solution”.

While there is commitment to maintain peace and tranquility on the disputed borders, India has rightly focused on scaling up dramatically its cooperation with China on building infrastructure within India. The formal development cooperation agreements between specific cities of India and China, as well as the collaboration between Indian Railways and China’s State Railway to build new high speed rail infrastructure will go a long way in correcting the gap in mutual trust that has existed so far in investment cooperation among the two nations.

Low investment inflows from China

Just one statistic proves this. Though China is India’s largest trading partner with bilateral trade having grown from less that $3 billion in 2000 to $70 billion in 2014, there is hardly any investment coming from China, the second largest economy of the world. Total investment from China over the past many decades is just about $800 million whereas over $200 billion of cumulative Foreign Direct Investment (FDI) flows have come to India between 2000 and 2013. China’s share in the total FDI flows into India has been a minuscule 0.4 %. This is totally skewed and unacceptable.  The second largest economy can’t have less than 1% share of FDI flows into India. This skew is sought to being corrected by Modi’s initiatives to involve big Chinese investments in India’s infrastructure. If successfully executed this might even somewhat wean China away from its special connect with Pakistan which irritates India no end. If the Chinese develop a substantial stake in India’s economy, things will begin to change.

Greater investment interaction will also help in substantially opening up the Chinese market for Indian goods, and will normalise the current skewed trade pattern where we suffer a trade deficit of $48 billion with China. This is unsustainable and China needs to remove trade barriers for Indian goods. But that will happen only when the investment interaction picks up. Investment drives trade and vice versa. India will have to take a call at some point on whether it must become a partner with China in the massive rail, road, port and gas pipeline infrastructure China plans in the wider Eurasian region. After all India is actively part of the Asian Infrastructure Investment Bank floated by the Chinese in which allies of the US are also stakeholders. India may then have to be more nuanced in its response to infrastructure being built by the Chinese in the Central Asian and South Asian region.

Finally, to manage a long term relationship of trust with China, India will also have to make sure it is not seen as a junior partner or ally of the United States in the emerging security architecture in the Indian Ocean and Pacific seas where the US wants to deploy 60% of its naval assets. As former NSA Shivshankar Menon has argued in an article published in The Wire, any new security architecture will have to be a participative one, involving all the three powers: US, India and China. This is a very critical component for reducing the mutual trust deficit between the two neighbours in the future.