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C3S Discussion: Perspectives on Emerging India-China Strategic Dynamics

C3S Article no: 0003/2017

The following is text of a dialogue held among C3S members on the article: Perspectives on Emerging India-China Strategic Dynamics: Understanding OBOR; By Col. R. Hariharan VSM 

B.S. Raghavan IAS (Retd), Former Policy Advisor to UN (FAO), Chief Secretary, State Governments of West Bengal and Tripura, Secretary to the Ministry of Food and Agriculture, Government of India.

Raghavan

Col R. Hariharan’s paper provides a welcome and timely stimulus for revisiting India-China relations in the current context. Most pieces of the jigsaw puzzle are there, except the most important one: The rocking of the US-China boat by the new bull(y) in the China shop. Already, Donald Trump has ruffled the Chinese feathers by directly communicating with the Taiwanese President, and has responded with the equivalent of “Mind your own business” when China protested. Trump is a person with a short fuse, and will not brook any blocks in the course he sets for himself. And when the chips are down, all the countries which kowtowed to China will desert it and herd with the US. There is a latent, unspoken undercurrent of angst against China among the countries of the rest of the world, especially the industrial democracies, and they will love to see China being given a few jolts by the US under Donald Trump.

India need not lose sleep over OBOR or CPEC. OBOR will collapse under its own weight, and Pakistan will drag its feet until Trump’s future approach is clear. China dangles a concept, but the US dangles the carrot which is vital for Pakistan’s survival. One has personally always maintained that China’s dalliance with Pakistan is a dispensable short-term tactic: China, with its millennia old wisdom, knows that tying up with Pakistan in a zero-sum manner will be extremely foolhardy, if not foolish, given Pakistan’s unstable politics, feckless governance, untrustworthiness in keeping its word – all tantamount to a failing, if not failed, state.

China knows that as between India and Pakistan, the former is always the better bet in the long run. India should take in its stride the imbroglio created by the NSG and Azhar episodes and bide its time. By seeming to get agitated, it will only make Pakistan happy. One somehow has a firm conviction, which at the moment is only based on intuition that eventually relations between India and China will emerge into the “broad, sunlit uplands” of mutually reinforcing, creative “competition”, a blend of harmonious cooperation and healthy competition. That is where their ultimate, lasting interests lie.

Col Hariharan may see whether his paper needs any revision in the light of the latest white paper titled “China’s Policies on Asia-Pacific Security Cooperation” brought out by China. It is unbelievably upbeat.

A few quotes: “Since 2015, the China-India strategic and cooperative partnership for peace and prosperity has been further deepened. The two countries have set the goal of forging a closer development partnership, made new progress in exchanges and cooperation in various areas and stayed in close communication and coordination on regional and international issues……..the two countries have maintained communication and coordination on international affairs and enhanced collaboration in the UN, BRICS, G20, China-India-Russia and other mechanisms….They have cooperated on climate change, the WTO Doha Round of negotiations, energy and food security, reform of international financial and monetary institutions, and global governance. Such cooperation has helped safeguard the common interests of China, India and other developing countries”.

As regards the military, it says: “The relations between the Chinese and Indian militaries remain healthy and stable in general, with increasingly close communication and exchanges, and pragmatic cooperation in greater breadth and depth…..Sound cooperation in personnel training, professional exchanges and other fields is being carried out….The two sides have also conducted border defence cooperation which plays a positive role in maintaining peace and tranquility in the border areas between China and India”.

Referring to the eight rounds of defence and security consultation and six joint military anti-terrorism training exercises have been held so far and the visits of military officials of both sides in 2015 and 2016, it talks of the “important consensus” reached “on strengthening pragmatic cooperation between the two militaries and working together to maintain peace and stability in the border areas”. This document is worth a deep study.

Mr.Sivaraman IAS (Retd.),

Former Revenue Secretary, Ministry of Finance

Government of India.

sivaraman

The only take I see in the article of Col Hariharan is that India should join the OBOR. Why and to whose advantage should India join OBOR? What will be the quid pro quo? Will China assure all countries that it will never be used for any military purpose not even for transporting military personnel and military hardware by any country? Will there be a commitment by all the countries joining the OBOR to that effect?

When China is selling billions of dollars of military hardware to Pakistan to be used against India it threatens India when we want to give Vietnam military assistance. China has not made any investments here in India to talk about when compared to the billions of dollars of trade surplus they have with India. They are only assembling third grade phones calling it manufacture.

One was personally one of those who wanted close relations with China. But China showed only its kid gloves as it thought that  Modi was naive with his “Unjal diplomacy” (which was somewhat  out of place but excusable as Modi was new to diplomacy) and they can become a big brother. Now the gloves are off. They are losing ground economically and the reality is that India’s GDP when the unaccounted economy is counted would be closer to three and a half trillion dollars, they are feeling threatened on the economic front also. They were accustomed to the lackadaisical approach of the Congress rule in India with its dynastic fixation.

The decision of Modi to demonetize 80% of the currency in circulation in such a large economy of India with its one billion people using only cash, irrespective of the fact whether there will be rich dividends or not, the clear signal to the world is that here is a man who will dare to take a ruthless decision when he feels that it is right for the country. This is nothing to be mocked at which only decision takers can appreciate not the arm chair critics who find fault with everything, as they know not how and when to decide.

China has realized it. So they are worried.

China asking India to join CPEC defies all logic given that the project itself is already being executed on Indian soil without its approval. India cannot spend on infrastructure that could potentially be utilised by terror outfits to attack India nor can India strengthen its foe – Pakistan’s economy which will enable them to be more aggressive against India.

With Trump asking for return of factories to the US, China is on a slippery ground. They have shut down 45 million tons of their steel capacity according to one report. But they intend to cut a total of 75 million tons capacity with its attendant consequences.

They have been rattled with the successful test of AGNI V and the speed with which the Mountain strike corps is being raised. They are also worried at the speedy indigenization of weapons systems particularly with the Rs 6000 crores order for howitzers given to L&T. The development and successful testing of the Indian Howitzer capable of  launching shells up to 45 kms with all capabilities considered better than world class today and the launch of the India made nuclear submarine with more on line are pointers to a govt. that does not want to have a lay back attitude. With all these the dragon thinks that its fires are getting extinguished.

Col Hariharan

Col.Hariharan

Thank you for your insightful comments. Yes I have seen the latest White Paper you have referred to, because the strategic scene is a work in progress with a lot of issues messing up South Asia. So I have confined to those aspects which I considered relevant to the topic at hand. Of course, mine is no final word.

I did not factor Trump’s arrival on the scene in the paper, because I find the issue has not yet matured; even American brain trusts like Dr Stieglitz are only speculating on the future of US-China relationship after Trump -the elephant in the China shop gets going; they are in fact  waiting for more indications from both White House under Trump and China’s response thereof.

Thank you Mr Sivaraman for raising the very valid issue of quid pro quo for joining OBOR and India under Modi impacting the India-China dynamics particularly with the up-gradating of our all round military capability and international influence.

But I am not so sure that India should join OBOR because it’s opaque and involves complex issues. But one thing is clear: without India’s active involvement in shaping the project its development would be incomplete and lopsided and investments might never become justifiable.

This idea may be Utopian; but I feel China missed a golden opportunity to lodge itself in the Indo-Pak scene by mooting and selling the idea of promoting the section of CPEC through POK as a China-Pak-India joint venture. Of course Pak’s economic vulnerability to Chinese largesse might have enabled China to twist Pak arm, to close down terrorist camps in POK, arrest terrorist leaders inciting the situation in J and K and normalize its trade relations with India. Even if it did not succeed China would have made India rethink its China strategy. And though China failed to muster India’s participation it cannot afford to give up so easily. We can expect China to keep India in the loop with its hot and cold comments. At some stage we can expect Putin to get into the act; the indications are there.

It is a command decision for Modi on getting our act further on China. Modi will probably wait and see how Trump shapes up in taking Indo-US security relations further and balances his relations with Putin and Xi.

K.Subramanian

Former Joint Secretary (Retd.) Ministry of Finance, Government of India.

KS IMAGE

The paper begins by giving a broad idea of the OBOR and how it has evolved over years, especially under Xi. Then it moves on to narrate the recent India-China differences or increasing tensions on some issues. Some of them like India’s membership of NSG or UNSC antedate OBOR as adopted and pursued by Xi. CPEC is indeed a new factor thrown into OBOR even though the growing anti-India China-Pakistan relations are older. Col. Hariharan’s paper seems to lump them together as current factors which militate against India joining OBOR. There is also a kind of unstated confusion between cause and effect.

To be able to take a view  on whether India should join OBOR, we need to understand what OBOR stands for. Chinese commentators sing hosannas over it and see visions of new hemispherical economic linkages or heavens emerging under the baton of China. The irony is that OBOR is not a program carved in stone. It is a fusion of emotive ideas involving a host of strategic, economic, social ideas relevant only to China. The NDRC statement on OBOR released on March 28, 2015 is a chunky document which bundles up China’s hope and aspirations and draws up far reaching economic linkages for the coming years, both regional and across the frontiers. It includes some projects already completed or in progress. Many analysts take the view that “a mix of strategic and domestic factors drives OBOR.” This will be deliberated on later.

Many analysts agree that by this strategy, China is trying to get over the problem of its slowdown by creating external demand for the excessive capacities created in sectors like steel, minerals, coal, etc due to over investment in a credit driven economy. China has already expanded its wings as a global trader and wants to reduce the costs of transportation. The most important rationale is that China has huge foreign exchange reserves estimated at over $4 trillion in 2014 which it invests in low yielding US treasury bonds and a diversification into high yielding projects visualised in the OBOR is desirable and justified. It is also a fact that China has already taken action to create supporting financial structures like the AIIB, Silk Funds, etc.

Without a well prepared project report listing out the projects and also working out their cost/benefit, China has been able to play on the hopes and aspirations of smaller, friendly neighbouring countries in Asia. China’s offer of huge assistance in terms of loans at concessional rates allures them and gets them on board. Another positive factor is during the last two decades China has extended its economic sphere is a big way in Central Asia. It has invested billions of dollars, expanded trade substantially with them, built road and bridges, laid pipelines to carry gas or crude oil. It is in a dominant position in Central Asia and even Russia has been driven to cooperate with China over its forays in the region. The Central Asian projects triggered the idea to expand them to other areas.

Likewise, China has also secured a dominant position in Asian trade and has become the fulcrum of Asian trade. A major part of Asian exports pass through China and the secret of their success is their ability to create supply chains either by itself or by supporting the programs of big multinational companies like APPLE. MICROSOFT, INTEL, etc. China also dominates in the trade and investment relations in South Asia or the Mekong region. It was assisted by the Asian Development Bank through its program for the development of Upper-Mekong.

It was in more recent times that the Middle East was included in the OBOR. For a power entrenched economically in Central Asia like China, a project like CPEC is a natural addition. Either due to the quirks of geography or by design (Political?), it passes through a territory which is ‘illegally’ occupied by Pakistan. As argued earlier, is it possible for China to negotiate (or renegotiate?) with Pakistan to redraw the alignment?

As we watch the unravelling of the OBOR, it appears that China uses it as s diplomatic ploy to get as many members on board as possible. OBOR is a flexible, evolving and fungible program. It is a program steered by China to subserve its strategic and economic interests. As far as India is concerned, the route of the OBOR does not pass through India. The only interest is in the BCIM Corridor Project.It seeks to link Kolkatta with Kunming in Yunan. Xi has been repeatedly urging our PM to speed up the project. Despite the assurances by our PM in BRICS and elsewhere about our commitment, the progress has been tardy to say the least. (Hariharan’s paper under preparation will throw more light on this.) Does it mean that we are not going along the OBOR as visualised by China?

There are strong grounds why India should not go along with the OBOR in the inchoate manner in which it is offered or being advocated. It is evident that the OBOR on date is set to serve China’s interests; it is steered by China, and terms are set by China. This is not a sound basis for propounding or trying to implement programs which transcend borders and corridors. One would expect a program negotiated by participating member countries both for the coverage, contents, terms of financing and systems for implementation together with accountability. There are already reports on the unsustainable terms set by China for projects financed by it, including the CPEC. One of the severest comments on CPEC has come from one of the Economists of the IMF. Even earlier, some of the African NGOs have attacked Chinese projects for similar infirmities.

Though we need not openly attack the OBOR, we may not fail to take note that it works against the interests of India. For instance, we are nearly marginalised in our economic relations with the Central Asian countries. China’s hold on their governments may not promote our interests. In Asia, whether East or South, China is the dominant player and has got integrated in Asian trade through many of its trade agreements leading RECP (Regional Economic Cooperation Partnership). ASEAN is dominated by China and its members can no longer unite to fight against China. India is sitting on the sidelines, not being admitted as a full member!

If the OBOR  progress even in part or fitfully, it will strengthen China’s hand in those countries or region. The growing economic clout of China will have nearer term strategic consequences affecting India.

Though the options on date appear to be limited, we have to work out strategies in cooperation with like-minded members to counter the adverse effects of OBOR such as over trade barriers, creation or diversion. At one state US sponsored TPP seemed an appropriate counter strategy. Unfortunately, TPP itself was badly structured and flawed. In any case President elect Trump has thrown it out. Even so, we may not give up the idea of working out alternatives to OBOR. We have to play for time and a lot will depend on countries who are willing to join.

There is a silver lining to our pessimism. China’s OBOR strategy is based on the assumption that its foreign exchange reserves are abundant and will continue to grow. Events of the last two years have poured cold water over this assumption. In 2014, China had a total reserve of $4 trillion and it was the peak level. Since then, it has come down closer to $3 trillion. Several factors have been at work. China’s central bank -People’s Bank of China- has been under compulsion to hold the value of the Yuan rate against US dollar. It pumped in more than$900 billion to maintain the Yuan value and continues with its struggle even the US dollar hardens. Private capital is fleeing out of China in billions of dollars draining the reserves and adding more misery to the value of the Yuan and to the efforts of the PBOC. Current market trends suggest that China’s reserves will fall further and create a grim scenario for the government and the PBOC. Conventional estimates by monetary economists are that China will need to hold at least $2.8 trillion in reserves to be able to avert a major crisis resulting from an attack on the Yuan or capital flights. Current calculations show that China may have only $400 billion as surplus for overseas deployment. The longer term estimates of China’s growth and earning foreign exchange do not suggest more than modest accretions. That may imply that China will have to cut the scope of the OBOR and remain modest. It can no longer afford to create the impression of an economic power which can distribute largess indiscriminately.

The last para may suggest that we need not be in a great hurry to commit ourselves to OBOR. We may do it, if it is globally negotiated and terms are settled to the satisfaction of participating members. If this option is Utopian, we may participate in those sectors/segments which are in our larger interests. One’s own hunch is that China’s own financial constraints will shrink the OBOR in the coming years. If we add to this brew other factors like growing protectionism spearheaded by Donald Trump, growing terrorism and ethnic struggles in many parts of the world and loss of faith in globalisation, the ardour for OBOR will evaporate. China itself may feel happy to rebalance its economy and live happily with its “new normal” growth rates.

Col Hariharan

Col.Hariharan

Thank you KS for your detailed comments which I agree with.

My objective was to examine the dynamics of China-India relations are shaping up under Modi-Xi leadership with special focus on OBOR, Xi’s showcase project to realise the China Dream.

Leaders do not always take strategic decisions by right brain only. They bring a lot of emotion to it. Hitler and Churchill did it. Even Xi and Modi are doing it. That’s why some of Modi’s actions are seen as right wing nationalistic. This is how I analyse strategic situations because guns alone don’t win wars.

The paper was not prescriptive but only trying to understand why Xi is behaving as he does and what are Modi’s dilemmas. China-India relations are poised to undergo course correction more than once as environmental drift pushes them. But I don’t think Xi will give up OBOR so easily because his and nation’s prestige is entangled with it. So we will have to watch and understand as it develops.


K.Subramanian

KS IMAGE

It is indeed necessary to study the dynamics of Modi/Xi interactions and the  role of OBOR in it. My own guess is that China does not visualise any role in the OBOR for India except to the extent of our involvement in BCIM Corridor.

Unfortunately, our performance on the ground in terms of implementation has been tardy. Though Xi has appealed to India in the meetings of BRICS or G-20 to speed up the OBOR, he has clearly limited our role only to BCIM which has a longer legacy.

OBOR as conceived and pursued by China works against the interests of India. One has narrated how we have been marginalised in trade and economic relations in Central Asia and other parts of Asia such as in South Asia. Even as China gets more and more integrated  with ASEAN, we seem to get less and less, rather wait for the crumbs to fall from the table. One has gone on to examine the options open to us to counter the adverse impact of OBOR  on us. One option is Utopian and others are pragmatic.

One has argued that we have to play for time. This is against one’s personal assessment that China’s financial troubles which seem to be mounting in the last two years and could get worse with the anti-China approaches on Trump’s agenda. These developments will strain the capability of China to go the whole hog with the OBOR. One did not say they will abandon the OBOR, but only turn modest and cut it down to modest levels.

I end this with a reference to our handling of Mongolio with an offer of assistance of $1 billion during Modi’s visit to that country in May last. Sadly, aid did not reach that country. Later, feeling emboldened with India’s offer of aid, when Mongolio sent an invitation to His Holiness Dalai Lama provoking the ire of China and resulting in economic sanctions which began to cripple its economy. China steps in with an offer of $3.2 billion and the Mongolian government cancels its invitation to His Holiness. I am drawing attention to this for two reasons: one is our inability to match our rhetoric with action; and the other is the stranglehold China has on countries in Central Asian region.


Col. R.Hariharan

Col.Hariharan

I had mentioned in the conclusion the Sino-Indian relations are work in progress. But CPEC and BCIM and 21st century maritime silk road are inseparable from the OBOR. That’s how the Chinese are progressing it. So if we accept BCIM we silently endorse OBOR.

Frankly there is no comparison of India and China which respectively have regional and global ambitions and strengths. So Central Asia will continue to be more under Chinese influence than Indian regardless of our aid and investment. To be realistic, Modi cannot perform magic just because the BJP says he is doing. For instance India’s reach and ability to influence Mongolia are much less than China due to its historical, ideological and religious affinities of the past and present. China will find the same in respect of India when it comes to Sri Lanka despite investments aid and sending warships.

I agree that India has no choice but to play for time particularly as a new axis of Russia-Pak-China seems to be emerging. Inevitably this could push India closer to Af and the US with Iran sitting on the fence. New realignment of Russia-Turkey and strangely Russia-Syria-Iran configuration is adding to the confusion. So we are in for Great Game Version.2 and Version 2.1. Let us watch and enjoy.



(All views expressed in this dialogue are the members’ own.)

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