Fathoming the Depth of China-India Relations

April 26, 2022
About the author:

Li Li, Senior Research Professor and Deputy Director at the Institute of International Relations of Tsinghua University, China; Nonresident Senior Fellow at the Institute of South Asian Studies, National University of Singapore.

China and India constitute the two largest emerging economies in the world today whose rise will pose significant consequences for the future of the global international order. However, as the geopolitical environment has significantly deteriorated with numerous crises such as the COVID-19 pandemic and the Ukraine crisis, can the two countries ultimately put aside their differences, continue to develop, and usher in a transition to a multipolar world?


TIO: How does India see China in terms of short-, medium-, and long-term economic challenges and opportunities?


Li: India’s economic emergence originated from its economic liberalization in 1991. The country’s economic achievements are demonstrated by its fast growth rate, the IT boom, a growing middle class, significant improvement in poverty alleviation, etc. The success of the economic growth of China and India, the dual leading emerging economies in the world, can be mainly attributed to three factors: a peaceful global and regional environment, economic globalization, and their respective domestic reforms. If the first factor has been a shared dividend, the latter two factors provide answers to economic bottlenecks facing India in recent years. 


(Source:  e360.yale.edu)


In terms of economic reforms and opening up to the outside world, India’s pace has been more cautious and slower. Due to the difficulties of maintaining consistent policies in the face of changing governments and the necessity of responding to voter concerns, India’s policies toward foreign products and investment are still characterized by protectionism. For example, foreign multi-brand retailers such as Walmart, Tesco, and Carrefour have found a lot of difficulties in entering the Indian market. Although the central government of India has relaxed its restrictions on FDI (Foreign Direct Investment) in multi-brand retail sectors, the local governments still have the final say to adopt or reject this policy. India’s refusal to sign the Regional Comprehensive Economic Partnership (RCEP) has much to do with such protectionism. Little substantial progress in land acquisition reforms has blocked infrastructure development and mega industrial projects, for example, POSCO’s failed investment in a proposed steel plant, worth 12 billion US dollars, in Odisha. In addition, complex and strict labor regulations are another major constraint holding back potential foreign direct investment in India.


In terms of the dividends of economic globalization, China concentrated on building its manufacturing capacity, while India advanced its service sector, especially in the IT field. It is against this backdrop that China has become “the world’s factory” and India “the world’s back office.” However, India is a developing country with the second largest population in the world. The knowledge-intensive service sector is open only to educated people, and its contribution to employment is also very limited. Thus, the less educated or uneducated rural labor force, the majority of India’s labor force, has been largely left out of “India Shining,” a slogan used by the Vajpayee-led Bharatiya Janata Party (BJP) government in the 2004 general election. The failure of BJP in that election reflected the structural problem of India’s growth model. After the BJP came back to power in 2014, Indian Prime Minister Narendra Modi put forward the initiative of “Made in India” and attached great significance to infrastructure development. Obviously, the Indian political elites believe that India can catch up, join the global value chain, and advance its manufacturing capacity. 


Under the current circumstances, whether India can become another China in terms of economic growth will continue to depend on the three issues mentioned above. While there is still a long way for India to go in deepening its economic reforms and improving its domestic conditions, particularly in terms of the “ease of doing business,” the first two factors have changed, due to the latest geopolitical dynamics. 


The American shift of its strategic focus to great-power competition has created uncertainties in the world’s political, economic, and security configurations and order. China and India have been incorporated into the American Indo-Pacific strategy, where China is the target and India the partner, in part exacerbated by the China-India border situation.


The Ukraine crisis may mark the end of the post-Cold War era in which stability and predictability dominate major power relations. Even though India enjoys a privileged position, having good relations with both Western and non-Western countries, a divided world may not be able to ensure the peaceful international and regional environment that India’s economic growth needs. 


Furthermore, the COVID-19 pandemic and the Ukraine crisis have reinforced the trend of de-globalization that started back in the 2008 global financial crisis. A wave of economic nationalism, localization, or regionalism is replacing globalization. As major economies endeavor to shorten their own supply chains and pursue self-sufficiency in critical sectors, India’s aspiration to become a global hub of the manufacturing industry is challenged by this de-globalization as well as peer competitors, such as Vietnam and Indonesia.


TIO: Has the Russian-Ukraine crisis accelerated the process of transition from unipolarity to multipolarity?


Li: I am not surprised at India’s stand on the Ukraine crisis. If we carefully examine India’s foreign policy in general, and its relations with Russia and the United States, in particular, we find that New Delhi has been hedging its relationship with both. From the last decade, we can find the logic and consistency of India’s policy toward Russia. Back in 2014, India did not join the West in condemning Russia’s annexation of Crimea and opposed the imposition of Western sanctions on Russia. More recently, India has defied the US threat of imposing sanctions under the CAATSA (Countering America’s Adversaries Through Sanctions Act) and insisted on purchasing S-400 missile defense systems from Russia.


(Source: www.aljazeera.com)


India’s independent position on the current Ukraine crisis can be attributed to a number of factors. 


First, India has traditional and close ties with Russia, dating back to the Cold War. India is still very much dependent on Russia for arms supply, even though it has dramatically increased defense imports from the U.S. recently. In many ways, India trusts Russia more than the U.S., which goes back to times when it was the U.S. and Pakistan versus India and Russia. 


Second, India’s hybrid identity requires it to pursue a policy of issue-based coalitions. Recently designated by the West as the largest democracy in the world, India has endeavored to take the opportunity to upgrade its international status and obtain political and defense support from the West, especially the U.S., using America’s desire to compete with China in Asia. However, as an emerging economy, India shares more interests with Russia and China in terms of global governance. It is against this backdrop that while joining the Quad and attending the Summit for Democracy, India is still committed to the BRICS cooperation and the RIC trilateral mechanism between Russia, India, and China. 


Last but not least, aspiring to be a global power, India will maintain its strategic autonomy. It is impossible to imagine India has no desire to be a junior partner in any U.S.-led alliances. So, even though India had picked the side of the United States on Indo-Pacific issues, its response to the Ukrainian situation has demonstrated the boundaries of its security cooperation with the U.S.


As to the direction of international configuration and order, there have been plenty of discussions and debates. Up till now, the consensus is that the unipolarity is fading, and the debates are about whether it will be replaced by bipolarity or multipolarity. Major powers hold different expectations. The United States is committed to restoring its global leadership, safeguarding its global hegemony, and sustaining the “unipolar moment.” Others including the European Union (EU), Russia, India, and China seem to prefer a multipolar world. Bipolarity seems to be favored by nobody. However, in reality, bipolarity and multipolarity are the most possible two scenarios in the foreseeable future. Under either process of transition, middle powers, especially India and the EU can respectively, play a defining role.


Since the U.S. is determined to focus on great power competition and designate China as a major strategic rival, the room for China to improve its relations with the U.S. and influence the direction of the world order has dramatically shrunk. The current Ukraine crisis narrows the opportunities even more. Some American scholars have indicated that the U.S. is in two Cold Wars, one in Europe against Russia and the other in the Indo-Pacific against China. While the Biden administration has argued that “the Russian invasion of Ukraine would not divert the U.S. from its Indo-Pacific goals,” the U.S. will continue to isolate Russia even after the end of the crisis, so long as Putin is in power. Regardless of how one looks at it though, the reality is, as acknowledged by many US scholars, that the U.S. is pushing Russia and China to be closer together. 


At the moment, if both the EU and India join the U.S. in the two theaters, in my opinion, a bipolar confrontation will be inevitable. If the EU and India can uphold their respective autonomy, they will play a bigger role in international affairs, and the world will be highly likely to transform into a multipolar reality, as a result. Therefore, India’s refusal to join the West in condemning Russia on the Ukraine crisis definitely contributes to this multi-polarization, but it is not enough to ensure world peace. India can also play a constructive role in the Indo-Pacific and prevent the region from being divided into two confrontational blocs. Meanwhile, the EU, along with the U.S., can negotiate with Russia and construct a new European security architecture in favor of lasting peace and stability.


(Source: www.thequint.com)


TIO: International trade and diplomacy require some sense of predictability, but right now, what we have is a situation where predictability is in short supply. Do you think countries have a responsibility and the need, in terms of creating this kind of predictability to balance their needs with the needs of the global community, has it come down to “me and my country first”? And what do you think would create a stable basis for economic relations between India and China?


Li: In an anarchic international system, national interest is always the starting point for a state to formulate its foreign policy. Countries cooperate when their interests are aligned, and compete, sometimes even confront, when their interests are in conflict. Since the end of the Cold War, and as globalization gained momentum, global challenges such as terrorism, the global financial crisis, climate change, and nuclear proliferation were prioritized by many countries as major threats to their own national interests. Major-power cooperation provided constructive and fruitful solutions. Unfortunately, as great power competition started to dominate world politics, coordinated efforts among major powers have become very difficult, even when countries are faced with global crises, such as the COVID-19 pandemic. The point here is that good policy derives from proper identification and prioritization of one’s national interests. For example, it deserves to think whether focusing on great-power competition will better serve one’s national interests. As far as the world order is concerned, the only certainty is uncertainty. This is, and will be, the major challenge facing the international community including China and India, in the foreseeable future.


Then comes the question: in such a world full of such uncertainties, how can China and India stabilize, and increase their economic ties? 


In my opinion, the key to the answer is to find where their interests align with each other. First of all, as previously mentioned, the fast and sustained economic growth of either China or India depends on a peaceful periphery. As the two most populous countries in the world, both China and India are constrained by domestic issues and agendas. For example, each of them has to provide enough jobs for those roughly 12 million youth entering the workforce every year. Sustainable peace, both in their border areas and in their shared neighborhoods, is a fundamental guarantee for each to have a predictable and promising economic future. Heavy military deployment just diverts each side’s resources from investing in crucial economic areas. Instead, each side should continue to explore and take advantage of the economic dividends and opportunities provided by the other side.


Second, China-India economic engagement is a complementary win-win situation, despite the trade imbalance. Although India has imposed varied restrictions on Chinese investment and products since the 2020 border standoffs, the two-way trade in 2021 reached 125 billion US dollars, crossing the 100 billion US dollars mark for the first time. It demonstrates the economic interdependency of China and India. Apart from finished goods and raw materials, intermediate products are playing a bigger role in bilateral trade. For example, India’s robust pharma industry heavily relies on imports of Active Pharmaceutical Ingredients (APIs) from China. Some may treat it as a concern about the resilience of India’s supply chain, but China’s decision not to engage in any tit-for-tat retaliation on the economic front reflects its appreciation of the potential of the Indian market. There are examples that point to more fruitful cooperation, like the Chinese investment, in recent years, which has made a significant contribution to turning India into the second largest smartphone manufacturing country in the world. On the regional level, the potential for a China-India plus cooperation is large, especially under the context of the de-globalization trend. The RCEP is still open to India as a founding member. Initiatives for regional and subregional economic integration, such as the Bangladesh-China-India-Myanmar Economic Corridor (BCIM-EC), have been explored for decades, but have been in stasis, due to geopolitical issues.


Third, as the dual leading emerging economies, China and India have shared interests in improving global governance. For example, both of them attach great significance to the BRICS cooperation. With other BRICS member states, they have made joint efforts to promote the reform of international financial institutions (in particular the IMF and the World Bank) to increase the representation of the emerging economies and developing countries. The BRICS also established two new multilateral financial mechanisms, the New Development Bank and the Contingent Reserve Arrangement. China and India are also cooperating in the Asian Infrastructure Investment Bank (AIIB). In the unfolding digital age, China and India have similar positions on issues such as transborder data flows and the protection of privacy. To shape a digital order in favor of emerging economies and developing countries, close cooperation between China and India—the two nations who enjoy natural privileges in data, which is the strategic assets in a digital age—is required.


Of course, the current border standoffs especially the bloody Galwan conflict have largely damaged mutual trust. The geopolitics in the Indo-Pacific region and the great-power competition are pressing China and India into a security dilemma. It is not easy for China-India relations to return to business as usual. 


Politics and geopolitics are the main obstacles to what should be a natural and mutually beneficial growth in China-India economic ties. It may be time for China and India to respectively re-evaluate the cost and gains of the current state of their bilateral relations. They should also re-examine their common grounds and interests in an era of great-power competition, as well as de-globalization. No matter how hard it is, it is in their interests to break the deadlock, reset the bilateral relations, and strengthen cooperation in areas where their interests are aligned.


This interview was conducted by Kang Yingyue, International Communications Officer of Taihe Institute.


This article is from the April issue of TI Observer (TIO), which is a monthly publication devoted to bringing China and the rest of the world closer together by facilitating mutual understanding and promoting exchanges of views. If you are interested in knowing more about the April issue, please click here:
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