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FEATURE STORY: China and India, A significant shift in relations?
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China and India

A significant shift in relations?

By Craig Leckie

BT 201507 51 Feature story 001Indian Prime Minister Narendra Modi completed his three-day visit to China in May. He was seeking to upgrade India-China relations on a variety of issues following years of mistrust between the two nations. The trip was a follow-up from Chinese President Xi Jinping's visit to India in September 2014.

Despite Modi's optimistic declaration that cooperation between the two Asian giants not only benefits the two countries, but also sends a positive signal to the world, the visit raised the question: Will India's relations with China really take a different, more positive direction in the future?

Analysts in both countries believe that bilateral relations have huge potential and even Indian media reports described Modi's visit in surprisingly glowing terms. Chinese news agency, Xinhua, suggested that, "relations between China and India, boosted by Modi's visit to China, would take on a new look through substantial and new bilateral cooperation in wide-ranging fields in future." But that has not stopped some analysts from offering a more skeptical view.

Some have jumped on the fact that Modi twice referred to the inability of the two countries to fulfil their potential because of mistrust. They point out that as long as divisive political and security issues remain – including the border dispute, Tibet and the Dalai Lama- deep barriers to a mutually beneficial partnership will remain. But the simple fact is that Sino-Indian relations are now far too important to be allowed to be affected in this way any longer.

As Liu Xiaoxue, an associate researcher at the Asia-Pacific and Global Strategy Institute of Chinese Academy of Social Sciences, asserts, historical differences between the two economic powerhouses should now be put aside or at least controlled, "so that attention can be drawn towards the areas that need development in both countries, at a time when both sides feel they are faced with rare opportunities of development."

However, despite the obvious political issues, there has been some forward movement in economic ties between the two countries. Modi's first state visit to China also clearly reflects a new-found approach toward China's political sensitivities and his understanding of India's need to partner with a rising China.

BT 201507 54 Feature story HLBuilding bridges
It should be noted that Chinese President Xi Jinping received Modi in his hometown Xi'an. The unusual but personal greeting was a clear sign that both countries are eager to bridge previous differences and strengthen relations. During Modi's visit, Xi called on the two countries to look at their ties from a long-term perspective to help, "steer the world order to develop in a fairer direction." Looking past the rhetoric, Modi's visit gave China and India the chance to prioritize economic and trade relations, while putting aside political differences.

Although the two countries are considered rivals, there have been some significant recent developments in relations. In October 2013, China and India signed the Border Defence Cooperation Agreement, which acknowledged "the need to continue to maintain peace, stability and tranquility along the line of actual control in the India-China border areas and to continue implementing confidence building measures in the military field along the line of actual control." A year later, India was among 21 Asian countries to sign on to the new China-led investment bank - the Asian Infrastructure Investment Bank - which is set to compete with the World Bank. An Indian official has even been tapped to lead the bank, which will be based in Shanghai with starting capital of 50 billion USD. Chinese officials say that while China will be the largest shareholder in the newly floated AIIB, it will be followed by India and Russia. So while some political mistrust may inevitably remain, work is clearly being done to relegate such differences for the economic benefit of both countries.

Huge economic potential
The need to boost economic ties is something China and India both readily agree on. But as some analysts have pointed out, while the potential for mutual benefit may be huge, it has yet to be fully realized. Trade between the two powers has been growing recently, but the goal of raising bilateral trade to 100 billion USD by 2015 has yet to be reached. Last year, bilateral trade only accounted for 71 billion USD, considerably less than the level of trade between China and other, much smaller, regional partners.

The fact the level of trade lags behind previous projections is nothing new and should not be used as an indicator of how relations will develop in the future - the potential is still there. The important point is that the global economic realities demand that both India and China realize that they need each other to maximize their own economic potential.

Modi won a landslide victory in India's elections on the back of a promise to rejuvenate India's economy. But for that he needs access to China's market and investment. Meanwhile, China, faced with a slowing economy, low domestic demand and depressed Western markets, sees India as a significant and viable alternative. China also needs India's cooperation if its "Silk Road" projects to open up trade with Europe, the Middle East and Africa through land and maritime routes are ever to be successful.

There are plenty of business opportunities for India and China to explore and open up further, including sectors such as agriculture, food processing, asset management, construction, infrastructure, pharmaceuticals, information technology, transport and logistics. India is a potential market for agricultural imports like fertilizers and processed chemicals, while the Chinese market is ripe for Indian firms that focus on processed foods and dairy products. The pharmaceutical sector in particular seems to have huge and mutually beneficial business potential for both countries. India is a large importer of pharmaceutical ingredients from China, while Indian firms specialize in formulations development and finished dosages.

So there clearly isn't a lack of potential areas for economic collaboration where China and India can enjoy mutual benefits. Indeed, as some analysts point out, if the two countries can just remove more market barriers and improve transportation links they will be able to significantly increase bilateral investment and help build closer economic relations.

Trade imbalance and shift in relations
Another problem some analysts cite when discussing India-China relations are growing economic inequities, especially in terms of a trade imbalance that is markedly in China's favour. After all, China's economy of 9.2 trillion USD was almost five times larger than India's in 2013. And while China is India's biggest trade partner, India is outside China's top ten – a fact that helped create a trade deficit to India of 38 billion USD in 2014.

But there are also signs that this trend may be shifting more than some people think. India's emergence as an investment hub saw its average net inflow increase to 13.6 billion USD between 2006 and 2011, up from an average of 3.8 billion the previous five years. And, on the back of rising demand and fresh initiatives introduced by Modi's government, the average net inflow could rise to 22 billion USD by the end of this year. In addition, while China attracted foreign direct investment that was 15 times greater than that directed at India between 2001 and 2005, the gap between FDI in China and India is expected to narrow to about 82 billion USD between 2011 and 2015, a significant decrease from the 108 billion between 2006 and 2010.

India's economy, though smaller, is also expected to grow faster than China from next year. According to International Monetary Fund forecasts, India will grow at a rate of 6.5% compared to China's 6.3%. India's finance minister has even optimistically claimed India is on track for annual expansion of more than 8%.

As some analysts have pointed out, such growth figures, if realized, together with the demographic advantage that India will enjoy well into the middle of the 21st century, explain why China is taking India more seriously than it has in the past.

BT 201507 52 Feature story 002Putting differences aside
Ahead of Modi's visit, the prime minister's office in India reportedly instructed the president of the country's ruling Bharatiya Janata Party to cancel a meeting with the Dalai Lama that was scheduled to take place during his visit to the headquarters of the Tibetan "government-in-exile" in May. The move was seen as an act of public humiliation by India towards the Dalai Lama and showed a significant shift in the attitude of Modi's government in terms of appeasing Chinese leaders and respecting China's political interests. This shift was further evidenced when, before Modi's visit, India's defence minister and army chief visited border areas and Chinese and Indian field commanders held three meetings along the border between the two countries. These steps all helped ensure that there was never going to be a repeat of the border standoffs that overshadowed the final day of Xi Jinping's visit to India last September.

With this in mind, one could say that Modi's visit in May was an attempt to begin a gradual shift from a China-India relationship built on the fragile base of mistrust to one built on the more stable foundation of coordination and partnership. The visit could also be seen as representing a pragmatic shift in policy for both countries, with economic cooperation finally taking its rightful place on centre stage. With a bit of luck, strengthening economic ties between China and India will prove to be a prudent way of rebuilding trust and developing interdependencies that may well deter future conflict and competition between the two powers. At any rate, the May summit should mark an important, but first step in China and India's long journey together into building, not just theirs, but Asia's future.


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