The Chinese Encirclement: Within and Without

The recent geopolitical dispute highlights the fraught and schizophrenic nature of the India-China relationship

The recent border dispute has again raised the spectre of Chinese encirclement. It comes close on the heels of India’s boycott of the ambitious Belt and Road Initiative (BRI) summit in China. What is unfortunate, though, is that the dreaded encirclement may have already occurred and, if anything, the recent dispute highlights the fraught and schizophrenic nature of the India-China relationship.

The fresh skirmish at the tri-junction of India, Bhutan and China is part of on-going border tensions. The stand-off continues with both sides raising the temperature gradually, much like the dial on a thermostat; apart from incendiary statements, China recently increased its fleet presence in the Indian Ocean Region. In the past, many similar border misunderstandings were resolved quietly. The latest one burst into the headlines with impeccable timing during Prime Minister Narendra Modi’s visit to the US.

India ignored the BRI summit because it objects to the China Pakistan Economic Corridor (CPEC) which passes through Pakistan-occupied disputed territory. India’s contention is that CPEC is a unilateral validation of Pakistan’s claim on disputed territory. There are other reasons for India’s nervousness. China’s BRI is viewed as a strategic encirclement of India: Hambantota port in Sri Lanka, CPEC traversing west China via Gilgit-Baltistan all the way to Gwadar port in Balochistan, a road from Yunan province cutting through Myanmar to end at a deep-sea port in Kyaukpyu.

But, apart from the geopolitical squeeze, developments seem to indicate that a Chinese geo-economic encirclement may have already happened. While there is popular concern over the overwhelming presence of China-made idols of Indian gods or cheap toys, these are the proverbial iceberg’s tip. What seems to have gone unnoticed is an insidious China creep within the Indian trade, business and financial landscape.

News from the cricket world provides a glimpse: Chinese handset manufacturer Vivo won rights to cricket tournament Indian Premier League (IPL). Vivo will pay Rs2,199 crore for the next five years, which works out to 267% premium over base price of Rs120 crore a year. The next closest bidder was Oppo, which bid Rs1,430 crore for five years. Vivo’s bid is impressive, when compared to Oppo’s bid or the base price, or even amounts paid by previous sponsors (such as, DLF or Pepsi).

But it’s hard to miss the irony. Brands Vivo and Oppo are actually siblings and manufactured by the same Chinese company, BBK Electronics (which also owns brand One Plus). The IPL bidding process should have treated them as parties acting in concert, though that seems to have been overlooked in the general brouhaha over the money on the table. Chinese handset brands now command over 50% of the Indian smartphone market share.

Here’s another example. Chinese capital goods manufacturers have made deep inroads into India, with some critical sectors now highly dependent on Chinese spares and after-sales servicing. For instance, in the boiler-turbine-generator (BTG) segment, many Indian power producers have installed Chinese BTGs. In the 12th Plan alone, close to 30% of generating capacity was sourced from China, with the trend continuing in the 13th Plan as well. What tipped the scales, apart from shorter delivery windows, was cheap buyers’ credit (through Exim Bank of China), with installation crews and maintenance staff thrown in.

Chinese portfolio investors are the other angle in geo-economic encirclement. Among the list of banks managing the recent Central Depository Services Ltd initial public offering was a curious name: Haitong Securities India Pvt Ltd. Haitong, as per its website, is China’s second largest securities firm. Many of the firm’s senior management members hold, or have held in the past, organizational positions in the Communist Party of China. Haitong gained a toe-hold in the Indian market through its global acquisition of Espirito Santo. But, what is really interesting is that Haitong Securities was the book running lead manager in an IPO in which government-owned banks—State Bank of India and Bank of Baroda—were divesting their shareholding.

The Chinese footprint in the digital economy is also expanding rapidly. Numerous Chinese companies—Alibaba, Tencent, CTrip, Beijing Miteno Communication Technology, Bytedance—have made large investments in the Indian digital ecosystem, a mission-critical segment for Modi and his ministers.

India suffers a trade deficit with China which has increased over the years: from $38.7 billion in 2012-13 to $51 billion during 2016-17. One of the reasons for the large deficit are Chinese tariff and non-tariff barriers which constrain Indian exports; for example, Indian pharmaceutical exports have found it difficult to penetrate the Chinese market. Increased Chinese foreign direct investment was suggested to counter the rising trade deficit. But, there were no discussions on the nature of that investment: whether for manufacturing or for assembly jobs.

It would be hasty, and perhaps imprudent, to advocate slamming the doors or erecting barriers. But it is difficult to ignore the duality in rhetoric from both sides. The high decibel in security and strategic issues seems to be disengaged from trade and investment realities. One key question, therefore, needs to be answered: What kind of cost-benefit is involved in keeping engaged or in disengaging?

The above article was originally published in Mint newspaper and can also be read here

The Budget Sidesteps Geostrategic Risks

Arun Jaitley’s budget seems to contain very little—by way of either allocations or strategic intent—to mitigate risks that endanger the Indian economy

Both the budget document and the Economic Survey have painstakingly detailed risks that endanger the Indian economy and can disrupt growth and employment impulses. Yet, the budget seems to contain very little—by way of either allocations or strategic intent—to mitigate these risks. The focus seems to be on surmounting immediate electoral challenges and neutralizing near-term policy distortions like demonetization.

Both Union finance minister Arun Jaitley and his chief economic adviser Arvind Subramanian see major risks emanating from the external sector. Jaitley’s budget lists multiple Fed rate hikes likely in 2017, commodity price uncertainty (especially crude prices) and “…signs of increasing retreat from globalization of goods, services and people, as pressures for protectionism are building up”. The Economic Survey also underlines the last two risks.

Given these clear and visible risks, it would be fair to expect defensive action, especially in areas of India’s strengths. The budget small print belies that belief.

Start with this year’s Economic Survey, which identifies clothes and shoes as ideal candidates for low-skill, high-employment manufacturing potential and for occupying crucial trade space being vacated by China. The survey also finds India has competitive advantage in these two items despite myriad challenges—such as domestic labour laws and tax structure, or the duty preferences enjoyed by competing countries in key buyer markets.

Given the Survey’s clear strategic direction, check out allocations for the commerce and industry ministry under the expenditure budget. Jaitley and his team have allocated only Rs0.01 crore to the Footwear Design and Development Institute, compared with Rs109.99 crore in 2015-16 and Rs25 crore in 2016-17. The institute provides skilled human resources and technology development to the leather and footwear industry. The Indian leather development programme (ILDP) gets a higher allotment of Rs500 crore, compared with Rs235 crore in 2015-16 and Rs400 crore in 2016-17. But then the ILDP focuses on improving the raw material base for leather units and the Survey actually shows non-leather footwear has achieved higher exports than leather footwear.

This is not the only mismatched allocation in the commerce ministry. There’s a token entry of Rs0.50 crore against the project development fund, which the ministry created with the Exim Bank to promote Indian private sector investments in Cambodia, Laos, Myanmar and Vietnam (commonly referred as CLMV nations) as part of Prime Minister Narendra Modi’s “Act East” policy. The creation of the fund was announced by Jaitley in his second budget in February 2015. There are, of course, no follow-up remarks in subsequent budgets.

The budget documents are littered with such examples. The geo-economic strategy, drawing from Modi’s repurposed foreign policy, betrays an excessive strategic reliance on select developed countries which could be a risk. The readout from the White House after US President Donald Trump’s brief telephone conversation with Modi reiterates that the US “…considers India a true friend and partner in addressing challenges around the world.” While these “challenges” remain undefined, Trump’s recent trade policy announcements now renders this alliance vulnerable. While it might be too early to declare doomsday, India needs a hedging strategy which includes exploring alternative markets.

And, yet, the budget sidesteps this obvious alternative. Take the example of Chabahar port in Iran, to which India has attached great geostrategic significance. The port offers India a land bridge to Afghanistan and Central Asian markets that bypasses Pakistan, and can become an alternative route to north Europe via Russia. Unfortunately, India continues to drag its feet on Chabahar, even though India and Iran started discussing it in 1997 and signed the first agreement in 2003 as part of the Delhi Declaration. This was further consolidated through a Trilateral Transit and Transport Corridor agreement signed during Modi’s visit to Iran in 2016.

Chabahar port has been allotted only Rs150 crore under the ministry of external affairs, compared with Rs100 crore in 2016-17. One could argue that since the project is being executed by special purpose vehicle Indian Ports Global Pvt. Ltd, a joint venture between Jawaharlal Nehru Port Trust (JNPT) and Kandla Trust, it might make sense to identify capital allocation to these two ports. The two ports have been allotted Rs1,850.30 crore and Rs393.90 crore for 2017-18, against Rs562.38 crore and Rs130.18 crore, respectively, during 2016-17. But there’s a catch: Both amounts have been listed under the head “IEBR”, or internal and extra budgetary resources, which means the government will not contribute any money and the two ports will have to generate these amounts from profits, loans and equity. Importantly, both ports are also implementing significant expansion plans (the JNPT’s plans include two new container terminals, two dry ports in Wardha and Jalna, and a special economic zone, among other things) and it is moot how much funds they can spare for Chabahar.

Is India going deliberately slow on Chabahar, given the Trump administration’s recent statements and executive order against Iran? India’s on-now, off-now engagement with Iran may have pushed the country closer to China through a joint military cooperation agreement and possible One Belt, One Road connectivity. The budget lost an opportunity to make some critical course corrections.

The article originally appeared in Mint newspaper on February 8, 2017, and can also be read here