Weighing in on business as usual with China

From strategic, security and economic angles, India would do well to take a differentiated policy towards economic relations with China

Recent media pieces have speculated on whether India’s fraught relations with China are headed towards a relative thaw and suggestions are being put forward for a more liberal attitude towards foreign direct investment (FDI) from that country. Such a policy prescription of doing away with restrictions on Chinese FDI involves a radical departure from the policy of linkage between the state of borders and the state of overall relations.

Speaking in Geneva on September 12, India’s Minister of External Affairs S. Jaishankar remarked that about 75% of “disengagement problems” with China have been sorted out but the “bigger issue” has been the increasing militarisation of the border. Hours later, National Security Adviser (NSA) Ajit Doval met Member of the Communist Party of China (CPC) Political Bureau and Director of the Office of the Central Foreign Affairs Commission, Wang Yi on the sidelines of the Meeting of BRICS NSAs in St. Petersburg, Russia. The readout of the Ministry of External Affairs noted that “both sides agreed to work with urgency and redouble their efforts to realize complete disengagement in the remaining areas”. However, there was no indication of a breakthrough in negotiations on disengagement in Depsang Plains and Demchok. Nor was there any indication that India is reviewing its stance of not normalising relations with China unless there is restoration of peace and tranquillity in the border areas.

Following China’s transgressions of the Line of Actual Control (LAC) at multiple locations and disturbing the status quo in Eastern Ladakh in 2020, what will constitute restoration of peace and tranquillity in the border areas remains unclear. Restoration of the status quo ante along the LAC, which India insisted on while resolving earlier stand-off situations, is not being mentioned. There is little visibility in the public domain on the terms of disengagement that have been worked out so far along the so-called “friction points”. Reportedly, Indian border forces are unable to access at least 15 patrolling points they were traditionally visiting in Ladakh. Are we prepared to accept the “new normal” created by China?

Also Read | Economic Survey 2023-24: FDI inflows from China can help India increase global supply chain participation

The economic commentary

Despite this national security situation, the Economic Survey 2024 has favoured India plugging itself into China’s supply chains through Chinese investments in India rather than importing from China. This view has been echoed by some economists and industry members who seem to think of FDI from China as a panacea for meeting India’s investment gaps and insufficient presence in global supply chains. Most of these commentaries fail to factor in the complex dynamics of both India-China relations and the imperative of economic derisking vis-à-vis China.

The supposed dividends from closer integration with the Chinese supply chains and wooing investments from China are questionable.

China’s demands

One, in recent Track-1.5 and Track-2 dialogues, Chinese scholars and officials did not deny that the status quo had been changed but expected India to accept the altered facts and to move on to full normalcy in relations. They reiterated four specific demands: a level playing field for Chinese companies; facilitation of visas; resumption of direct flights; and permitting Chinese journalists to be stationed in India. India pointed out that these issues were merely symptoms of a more fundamental problem that they had created, and that they must redress it first.

India came away with the clear indication that the Chinese were not yet prepared to accommodate India either on the issue of the border or on other structural challenges in the relationship. They appear to be engaged in a game of attrition and expect the Indian side to cave in incrementally and acquiesce to the new facts on the ground they have created in Eastern Ladakh. Their playbook is one they have successfully deployed in other theatres, particularly the South China Sea.

The Chinese mindset is revealed in an intemperate opinion piece in the Global Times of September 8 (“India’s diplomacy has a ‘S. Jaishankar problem’”). Though the article has since been removed from the English edition of the People’s Daily-linked newspaper, it is available in the far more influential Chinese edition.

Second, the Chinese are not inclined to address India’s long-standing problem of a huge bilateral trade deficit and the impediments faced by Indian companies in accessing the Chinese market. According to International Trade Centre data, India’s trade deficit with China exceeded $105 billion in 2023 (up from $64 billion in 2021), while its exports declined to $16 billion in 2023 from $23 billion in 2021. There has been no improvement in India’s import dependencies vis-à-vis China in critical sectors, which is a source of great vulnerability, as China has an established track record of weaponising such dependencies.

Third, both the United States-led West and China are increasingly securitising their economies and de-risking and diversifying vis-à-vis each other. According to a Rhodium Group report, India has the highest score (2.86) of all emerging and developing countries as a potential alternative investment destination to China. If India seeks closer integration with Chinese supply chains, global companies might be discouraged from considering India as their alternate node for global value chains.

Fourth, China is still not a market economy. The Third Plenum of the CPC in July 2024 doubled down on industrial policy, with a growing role for the state sector and co-option of the private sector to subserve the strategic objectives of the party-state.

China’s objective of dominating future industries, including critical sectors such as electric vehicles, solar equipment and lithium-ion batteries, and its preference for exporting its way out of its economic difficulties, rather than prioritising domestic consumption, would aggravate existing tensions in economic relations with both advanced economies and emerging economies such as India.

The game plan

Fifth, China’s rigorous scrutiny of outward flows of investment and technology by its companies aims to maximise domestic value chains and make the country indispensable in global technology production, as a recent Mercator Institute for China Studies (MERICS) study brings out. Another credible report suggests that China has strongly advised its carmakers to ensure that advanced electric vehicle technology stays in the country and they produce key parts domestically and export so-called knock-down kits to their foreign plants. India has been specifically mentioned in this regard.

Going by past experience, it would be naive to expect that China will help build India’s manufacturing capacities. Instead, Chinese companies have preferred to invest in sensitive sectors in India, including through acquisitions, which led to Press Note 3 in April 2020, before border tensions escalated. Giving free access to Chinese companies will attract low value-addition investments and be a recipe for retarded industrialisation in a large number of sectors that China seeks to dominate the world globally.

Sixth, the expectation that imports from China can be reduced by boosting FDI from China is not borne out by the experience of other geographies which have received substantial Chinese investments. For instance, the Association of Southeast Asian Nations (ASEAN) imports from China increased from $386 billion in 2021 to $438 billion in 2023, as sourcing of intermediates from China soared. China has rerouted its exports through countries such as Vietnam and Mexico to circumvent tariffs imposed by the U.S., but this loophole is being progressively plugged.

Thus, from strategic, security and economic perspectives, India would do well to take a differentiated policy towards economic relations with China. India cannot decouple itself from the economy of China, the world’s largest manufacturer and exporter. But India must decide which sectors of its economy it can selectively allow Chinese FDI based on its manufacturing strengths and strategies, and keep in mind the interests of its national security and industrial development.

Ashok K. Kantha is a former Ambassador to China, now associated with think tanks.

Published - September 24, 2024 01:10 am IST