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Recalibrating strategic ties with China

China continues to be India’s biggest trading partner. India’s import dependency in key areas like pharmaceutical intermediaries, capital goods, electronics and telecom equipment can’t be eliminated overnight. But the long-term strategy calls for lesser economic dependency and stronger diplomatic & geopolitical coalitions with like-minded democracies.

Recalibrating strategic ties with China

NEEDED: India must move towards becoming an alternative centre of the global supply chain. PTI

Ganesh Natarajan & Ajit Ranade

Strategic Affairs Experts

For almost 50 years, the bilateral relationship between India and China was able to keep the thorny issues of border settlement and of deeper economic engagement separate. Bilateral trade grew at 20 per cent per annum during the first 15 years of this century. India went from being number 19 to six in Beijing’s list of export destinations.

Both were enthusiastic supporters of the BRICS grouping which has led to the formation of a development bank and an annual summit, of which the thirteenth one will be held in Delhi next month. Over the years, the frequent meetings between President Xi Jinping and Prime Minister Narendra Modi have created an expectation that this could truly be the hallmark of an Asian century when the two countries could work as partners and friends.

But the events of the summer of 2020 and the Galwan conflict have irreversibly changed the equilibrium. With this military conflict, which follows the long standoff in Doklam in 2017, China has unilaterally dismantled the status quo, and has signalled a more hostile stance towards India. This has raised important questions for policymakers in India. How should India navigate this new landscape in which the relationship is evolving? The immediate response to the Galwan incident was correctly to mobilise our troops and the Indian Army gave a fitting reply to the aggressors. This was combined with economic sanctions like the banning of Chinese apps, restrictions on capital flows and emotional boycott of Chinese goods. What of the medium-to-long term? What should be the strategy?

This calls for seeing the challenge on a larger scale of time, space and force. What are the forces shaping Chinese behaviour? What is their path of evolution in the coming decades? What is the best path for India in the short term and the long term? How can diplomacy and economic policy work in an intertwined fashion, to best further India’s interests?

These questions have been addressed in a recent comprehensive policy paper authored by six people (including the present two authors) associated with the Pune International Centre. It is ironic that the recalibration is happening when China continues to be India’s biggest trading partner. India’s import dependency in key areas like pharmaceutical intermediaries, capital goods, electronics and telecom equipment cannot be eliminated overnight. But we believe that the long-term strategy calls for lesser economic dependency, stronger diplomatic and geopolitical coalitions with likeminded democracies, and a stance of calm confrontation of Chinese aggression.

We argue that in the short run, India will have to build balancing coalitions with likeminded countries, as, indeed, we are doing through Quad with the United States, Japan and Australia. We envisage three groups of countries that we can engage with in such coalitions: major democracies of the world, countries bordering China, and India’s own neighbours, all of whom have a lot to gain in preventing the rise of China as a malevolent and autocratic superpower. We need to go beyond treaties and agreements and engage deeply with these 20 countries, encouraging frequent exchanges at multiple levels: diplomats, economists, scientists, academics, innovators and entrepreneurs.

There have been many discussions and debates about protectionist measures to keep Chinese imports and Chinese firms from playing any role in the growth of the Indian economy. We believe that a significant proportion of such moves will be self-defeating because they can hurt India’s productivity and exports. There is certainly a case for three groups of restrictions: limit companies controlled by the Chinese State from controlling stakes in a number of sensitive infrastructure assets, including 5G and telecom, steer clear of China-controlled technology standards and block any surveillance of Indian persons.

A selective retreat from economic engagement with China and increased emphasis on the global market would be an ideal approach to take in the next two decades, which can result in starting with ‘less China’ and eventually approaching a near-‘China-less’ state of our nation.

This represents a call to action, which the military demonstrated so admirably and which now must be heeded by political parties, diplomats, policy planners, bureaucrats, industrialists, indeed, all citizens. And the starting point of the new race is less than equal, which is only to be expected. Whether we look at the size of the economy, state capacity, capabilities of the best firms, extent of internationalisation, mastery of science and technology or the pace of filing of patents, China is significantly ahead of India. China’s economy is five times bigger, and the bilateral trade balance is heavily skewed in its favour.

The trade imbalance can be partly corrected by a focused approach. India has recently launched the productivity-linked incentives (PLI) and chosen sectors for deep investments and creating ‘global champions’. Investments of over $28 billion from India and abroad have been announced. Iconic companies like Apple are the early beneficiaries of this PLI opportunity. We did an assessment of the global opportunities and the relative status of India and China to identify and advocate industry-specific strategies in the following three broad categories of the industry sectors:

1. Huge asymmetry areas where India must progressively reduce dependence. Rare Earths are a classic example.

2. Opportunities to focus on atmanirbharta and meet all domestic demand. Telecom is an immediate imperative.

3. Global industry-building opportunities. These exist in chemicals, pharmaceuticals — where we have made a good start with vaccine manufacturing — automotive, particularly with autonomous connected and electric vehicles and hydrogen as an alternative fuel source, hardware, consumer electronics and even agriculture — where a resolution of the current standoff can become the beginning of a practical domestic and exports policy that would help millions of farmers in the country.

In the medium-to-long term, China has its own vulnerabilities. Its demography is ageing and workforce declining. Its growth will surely slow down. It has an uneasy geopolitical relationship with several countries. It has adopted an adversarial relationship with large private sector companies like Alibaba.

It is possible that China may grow at four per cent while India can grow at close to eight per cent for the foreseeable future. This changes the skewed ratio of economic size from 5:1 to just about 2:1. To achieve this high and sustained growth, India has a domestic economic reforms agenda to pursue.

As a nation, we can and must move towards being an alternative centre of the global supply chain and join the race for being a major global manufacturing hub. This needs strategic patience and has the potential to create additional employment for 200 million people. The atmanirbharta strategy has to be combined with reforms which can make India globally competitive and give it atmavishwas or self-confidence. 

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