Dealing with the dragon
by Virendra Parekh on 28 Dec 2010 3 Comments

Though devoid of any spectacular announcement, the Chinese Premier Mr. Wen Jiabao’s recent visit to India stands out as the most significant among the slew of high profile visits hosted by New Delhi in recent weeks. China is fast emerging as the country that matters most to India and New Delhi’s relations with Beijing are trickiest of all.  
The dragon breathes fire, but Chinese premier Wen Jiabao made all the right noises in a measured tone during his recent visit to India. He quoted from Upanishads, showered praises on Mahatma Gandhi and usually kept smiling through gritted teeth in his public appearances. He brought with him the largest ever business delegation from China to India. At the end of the visit, the two Asian giants pledged to work for greater economic cooperation. Yet, the visit was more remarkable for what was omitted than what was committed.
India’s growing economic importance and China’s quest for a modified role in the world economy brought Mr. Jiabao to India. China has already built up a huge foreign exchange reserve of some $2.5 trillion - most of it held in low-yield US government bonds. It has no appetite for more dollar funds. Also, the US, EU and Japan show little promise of going back to their pre-recession growth rates in the foreseeable future, and resentment against Chinese economic policies (specially the undervalued yuan) is growing in the West.

o, China is trying to gradually move away from its export-led growth strategy built on selling manufactured goods (mainly) to the Western world with the help of high savings, low wages and undervalued yuan, to a model which has to allow rising wages, higher domestic consumption, a more market-determined exchange rate, more sales to non-Western markets through exports and setting up production-cum-servicing facilities abroad.

It is here that India, with its $1.3 trillion economy growing at a phenomenal 8 per cent fits into the Chinese scheme. Despite various political irritants, the pragmatic Chinese leaders have no problem in engaging economically with India so long as it serves their interests. On its part, India showed commendable maturity in separating business from politics and signing more deals with Wen Jiabao than it did with US President Barack Obama - $16 billion with Wen versus $10 billion with Obama - despite all the problems on the diplomatic front.

China has already replaced US as India’s largest trading partner. India-China bilateral merchandise trade was $42.8 billion in 2009-10, against $12.7 billion in 2004-05 and $1.8 billion in 1999-2000. While India has a negative trade balance of $20 billion with China, it is still aiming at increasing bilateral trade, expected to reach $60 billion by March 2011, to $100 billion by 2015.


India and China have agreed to grant permission to each other’s banks to open branches and representative offices. China hopes that at least one of its banks will be allowed to operate in India. In return it has agreed to take measures to promote greater Indian exports (especially of pharmaceuticals and IT) to China, apart from ensuring speedier completion of phyto-sanitary negotiations in agro products.


These measures are long overdue to redress the growing and unsustainable trade imbalance that has emerged between the two countries. For now, India has taken the view that Chinese imports help Indian industry remain competitive and so are desirable. But if the two countries have to start talking about a Free Trade Agreement, some of India’s trade concerns will also have to be addressed.


Reducing India’s trade deficit of $20 billion in a bilateral trade of $60 billion would not be easy since China’s share in India’s top 5 exports is miniscule. China hardly imports India’s top two export products - gems and jewellery and petroleum products, and its share in India’s electrical and non-electrical machinery exports is hovering in the low range of 3-4 per cent. The record is worse when it comes to other important export products like apparel, pharmaceutical and transport vehicles, the other three booming Indian export products. Although India exports items such as pharmaceuticals to developed European and American markets, the Chinese market remains largely closed.


Apart from being one-sided, India-China trade follows the colonial pattern: China imports raw materials from India and exports finished products. The deals signed with Wen include large ones in the power sector, and a large proportion of India’s new 3G telecom networks are to be run on Chinese equipment. But China seems to be in no hurry to reciprocate. Though China accounts for 6.5 per cent of India’s exports, the flows are heavily skewed with just two products - minerals and cotton - accounting for 60 per cent of the flows. If one excludes these two primary products, China share in India’s exports is a mere 3 per cent.


Interestingly, the two countries attract more than $100 billion of foreign investment each year, but have less than a billion of investments taking place between them. Although the Chinese premier has called for easier procedures to move capital and people across the two countries, this is not likely to happen anytime soon.


This is because investment and capital flows would require a much higher degree of trust and understanding of each other’s core interests. It is not possible to segregate political and economic relations beyond a point. And political relations between the two great neighbours remain “very fragile”, easily damaged and “difficult to repair”, as China’s ambassador to India Zhang Yan put it.


India is rightly worried that China is becoming ever more assertive along their 4,000km-long shared border. China is already occupying large tracts of Indian territory. Chinese incursions into Arunachal Pradesh and Ladakh have progressively become deeper and more audacious. China has cheekily started calling Arunachal Pradesh ‘Southern Tibet’ and objected to construction of a dam there by India. China has dropped its official policy of neutrality over Kashmir - by deploying soldiers and construction workers to Pakistan-run parts of the territory, and by refusing to issue visas (or only ones stapled into passports) to Indian Kashmiris visiting China. It is planning to build large dams on rivers that flow from Tibet into India, notably Brahmaputra, which will give China a strategic advantage over India.

China has consistently followed the policy of encircling India. It has given arms to Pakistan and helped it build its atom bomb and nuclear missiles. It is helping Pakistan build nuclear power plants, strategic roads and ports. China is stepping into Sri Lanka and Myanmar with substantial aid and cheap loans. India has reason to believe that recent cyber attacks on important official websites originated in China.


From the Chinese perspective, it too has some cause for hesitation towards India. India has been cozying up to the United States in the past few years, as America has given support for its nuclear programme and for its bid to get a permanent seat on the UN Security Council. India has also started reaching out to fellow democracies in Asia - notably Japan, South Korea and some South-East Asians - which are anxious that China is growing more nationalistic and willing to throw about its military weight in the broader region. From China, it may look as if India is joining a chain of countries that might, in time, try to contain its regional ambitions.


Given these realities, there was never any expectation that Mr. Wen Jiabao’s visit will result in any spectacular decisions that would take India-China relations into a new trajectory of bilateral cooperation. Not surprisingly, three key issues on which there is understandable concern in India have found no mention in the Joint Statement issued after the bilateral talks. The issue of stapled visas was discussed but remained unresolved and found no mention in the joint communiqué. In response India has not allowed a reiteration in the joint communiqué of China’s sovereignty over Tibet. If that is a stand-off, then there has been real gain for India in the mention of “good cooperation” between the two on “trans-border” rivers.


Similarly, China refused to criticise Pakistan for promoting cross-border terrorism or not doing enough to bring the guilty men of 26/11 to justice. Indeed, Mr Jiabao declared from Pakistan, which he visited next, that China will not take sides between India and Pakistan on terrorism. Here again, why should India expect every passing visitor to berate Pakistan? Others fight their own battles, we should fight ours. China did not seek India’s endorsement when it forced Gen. Pervez Musharraf to raid Lal Masjid after its mullahs had abducted Chinese citizens working in a massage parlour.


As for India’s membership of the UN Security Council, it is pie in the sky and that is how much of the world sees it. Its omission makes no real difference.


Yet, it would be wrong to write off Mr. Wen Jiabao’s visit as inconsequential or lacking in importance. The two Asian giants need to be engaged in constant dialogue at all levels, and symbolism has its own role in shaping bilateral relations.


Since China is so important to India, relations with it must be regarded as extremely fragile and handled with utmost care. Even a single misstep can cost us dearly. China is already a major economic power and is likely to acquire even greater economic clout in the years to come. This will induce it to be even more aggressive in pursuing expansionist ambitions camouflaged as the border dispute.
India’s strategy must be to carefully avoid any kind of provocation, stand firm on one’s own ground and work assiduously over time in improving capabilities, be they in manufacturing or defence preparedness. It should follow the policy outlined by none other than Den Xiaoping: “Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile and never claim leadership.”

The author is Executive Editor, Corporate India, and lives in Mumbai

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