Chinese President Xi Jinping, third from left, Chinese Premier Li Keqiang, second from left, with Indian Vice President Hamid Ansari, at a commemoration of 60 years since their countries agreed to principles of peaceful coexistence. Photo: AP

Q&A: 'Asia’s best-kept secret' are China's improving ties with India, says Gupta

Wang Feng

Last month marked the establishment of the New Development Bank, a bank funded by the BRICS countries - China, India, Brazil, Russia and South Africa - at a summit in Brazil.

The South China Morning Post asked Anil K. Gupta, a professor of strategy and globalization at the University of Maryland, how the new bank and new leadership in both countries will affect China's ties with India. Gupta is the author of the newly published The Silk Road Rediscovered, which sheds light on the growing economic relationship between the world's two most populous nations. He has visited China regularly since 1997, and taught at the Smith UIBE EMBA programme in Beijing since 2003.

You’ve called the growing economic ties between India and China “Asia’s best-kept secret”? Where will we see these ties expanding?

These ties have already been expanding rapidly since 2000. During 2000-last year, bilateral trade between China and India grew at an annual rate of almost 30 per cent, a much faster pace than the 19-20 per cent growth rate in either China’s or India’s exports to the world or the 9 per cent annual growth rate in world trade.

Bilateral trade between China and India currently adds up to about US$65 billion (HK$503.9 billion). Importantly too, the economic relationship between these two Asian giants is on the verge of a transformation – from one driven largely by trade to becoming driven heavily also by investments.

The primary factor driving the growth of economic linkages between China and India is the gravitational pull of market size and growth rates. Despite a slowdown in both countries, they remain two of the fastest growing economies in the G-20. By 2025, China will definitely be the world’s largest economy.

Also, by then, India will be the third or fourth largest economy in the world. As such, the bilateral economic ties between the two will be among the top five to ten largest bilateral ties between any two countries in the world.

Also, as the recently-elected Modi government starts ramping up infrastructure development in India, we can expect to see a rapid growth in Chinese investments in India – especially in the infrastructure sector. This investment will not be in the form of actually running power plants or high speed rail networks. Rather, it will be in form of manufacturing power equipment, high speed locomotives and rolling stock, etc.

Workers install doors with subway carriages in a manufacturing workshop in Zhuzhou, Hunan. Some carriages were ordered by India. Photo: Xinhua

How is Prime Minister Modi’s China policy different to his predecessor Manmohan Singh’s approach?

The big difference will not be in terms of the policies but whether the policies get implemented and lead to real actions. Mr Modi is a man of action and, from his track record in the state of Gujarat where he was chief minister for over ten years, it’s clear that he is a tough and demanding task-master.

He believes in making sure that his ministers and bureaucrats talk less and focus their energies on getting this done on the ground. In contrast, with Mr Singh, there was a lot of talk but hardly any action.

It’s also important to note that Mr Modi knows China well. He visited China four times during his stint as chief minister of Gujarat. Also, Gujarat was the state which attracted more Chinese foreign direct investment than any other. Thus, I’m very optimistic about rapid growth in China-India economic relationship over the coming decade.

Mr. Modi is also a tough negotiator. The discussions in Brazil leading to the creation of the New Development Bank (NBD) provide a good example. China wanted the total capital base to be US$100 billion with it contributing a bigger portion than any of other four BRIC countries.

However, Mr. Modi was clear that, for India to be a part of the NDB, there had to be equal contribution from all five countries. Also, in turn for making Shanghai the HQ of the new bank, Mr. Modi got Mr. Xi to agree that the first president would be from India.

Narendra Modi speaks ahead of the Indian parliamentary elections he won in May. Photo: AP

How do you see nationalism and territorial disputes affect these new and growing economic ties?

The territorial disputes are unlikely to get resolved any time soon. However, unlike the relationship between, say, China and Japan, there is no emotional baggage or historical fault-lines in the relationship between China and India. Importantly, leaders on both sides have repeatedly said that they believe that a peaceful resolution to the border disagreements is possible and will eventually be found.

As a result, the likelihood of a border war between China and India is close to zero. In my view, the creation of the NDB and CRA [The “Contingency Reserve Arrangement” is the BRICS’ newly established monetary fund] also eliminates the risk of a border war between India and China.

If there were to be a war, the NDB and CRA will collapse. How can two countries that are at war pretend to cooperate in these BRICS institutions?

Once both sides accept that, even though they have disagreements regarding the national borders, they are not going to get into a hot war, it becomes clear that there no longer exist any barriers to full-blown economic linkages. In fact, stronger economic linkages will make it easier to arrive at an earlier resolution of the border disagreements.

A Chinese soldier stands guard in 2006 while Indian soldiers work at the Nathula Pass in Tibet. Photo: AP

What projects could the BRICS countries’ New Development Bank fund in China and India that would otherwise go unfunded?

The infrastructure investment needs of emerging economies, including the BRICS, are very large – an estimated US$1 trillion per year. India alone needs to invest about US$200 billion annually. Thus, in terms of capital, the NDB can help fill only a small fraction of the gap. I should add, however, that the world does not suffer from a scarcity of capital. Just look at the bulging coffers of the oil rich countries.

Why many emerging economies are unable to attract the needed foreign capital is because they have not undertaken the necessary policy reforms to reduce the political risks for foreign investors to an acceptable level. In terms of infrastructure-focused capital needs, like the World Bank and the Asian Development Bank, the NDB can at best play only a small role.

Bulk of the capital will still need to be from the private sector. However, these multilateral institutions do help by going in as co-investors and their participation significantly reduces the political risk faced by private investors.

Brazilian President Dilma Rousseff, Russia's President Vladimir Putin, India's Prime Minister Narendra Modi, China's President Xi Jinping and South Africa's President Jacob Zuma at the 6th BRICS summit in Fortaleza, Brazil, on July 15, 2014. Photo: AFP

Where do you see the possibility of friction or competition among the NDB member states, especially India and China?

Like any two economies - such as Germany and France or the US and the EU -, India and China will collaborate as well as compete. That is normal and healthy.

Clearly, unresolved border disagreements will remain a source of friction between India and China for quite some time. Also, it’s likely that the coming decade will see greater competition between the two countries in both manufacturing and services.

As India’s infrastructure weaknesses begin to get addressed, India will become much stronger in manufacturing and should start to replace China as the factory of the world. At the same time, as the Chinese economy moves up from manufacturing to services, it should start to give a tougher competition to the Indian service sector companies.

Notwithstanding the above sources of friction, I believe that India and China’s partnership in the creation of the NDB significantly reduces the risk of border tensions flaring into a hot war. Thus, we can expect pubic sentiments on both sides to become significantly more favourable towards collaboration.

Chinese Foreign Minister Wang Yi meets with Indian Minister of External Affairs Sushma Swaraj in Naypyidaw, Myanmar, on Saturday. Photo: Xinhua

What changes will the new bank and the Contingency Reserve Arrangement bring to the global financial system?

I see the NDB and the CRA as mini versions of the World Bank and the IMF respectively. The subscribed capital base of the NDB will be US$50 billion as compared with US$223 billion for the World Bank.

Similarly, the capital base of the CRA will be US$100 billion as compared with the nearly US$800 billion for the IMF. Obviously, the World Bank and IMF are established institutions with very strong capabilities. It’ll take the NDB and CRA time to become powerhouses. After their creation, even the World Bank and the IMF took almost two decades to become strong and well-established institutions.

Since the NDB and the CRA will provide the BRICS with their own multilateral platform; their creation may not necessarily accelerate the reform of the WB and the IMF. By taking the pressure off, it may even slow the pace of reform.

However, in my view, this is not a big deal. Like the Asian Development Bank, the Inter-American Development Bank and the Chiang Mai Initiative, the NDB and the CRA will play a complementary role vis-à-vis the IMF and the World Bank. None of these institutions is a substitute for the other.