Modi more open to China after US and Japan disappoint

Want China Times, Staff Reporter 2015-05-17

Over 30 people were killed and around 150 others injured when the
 Dehradun-Varanasi Janata Express derailed near the Bachhrawan railway station
 on March 20, 2015 in Rae Bareli, India. Investment is sorely needed to overhaul
India's outdated rail network and China may provide the answer. (Photo/CFP)

The China strategy of India's prime minister, Narendra Modi, has undergone a clear change, according to Duowei News, a media outlet run by overseas Chinese.

Modi eschewed visiting China after he first came into office, only visiting the US and Japan, and even refusing investment worth US$100 billion from China, according to the website. Now, however, Modi has revised his "Indian Century" plan into the "Asian Century" being pushed by China's top leader Xi Jinping, has opened an account on Weibo, China's version of Twitter, has rearranged his itinerary to make China a priority, has declined to meet the Dalai Lama and seems to have made a U-turn on his reservations regarding China's proposed New Silk Road Economic Belt and 21st Century Maritime Silk Road when he met with Xi on May 15. What happened to effect such a change in Modi's attitude to China? asks Duowei.

Disappointment in US, Japan

After Modi was elected in 2014, he announced that he would revitalize his country's economy and transform India into a modern, efficient and just country, an ideal that former administrations have failed to realize. In his former post as chief minister of Gujarat, he turned the western state into India's factory, achieving what has been lauded as an economic miracle there, according to Duowei. On becoming prime minister, Modi said he would reproduce this miracle nationwide. But however brilliant his blueprint for this may be, it will be impossible to implement without financial assistance from elsewhere. Modi has therefore been seeking a patron nation to fund his ambitious plans. His successive visits to the US and Japan were attempts to secure funding but the two nations offered him little in return.

When Modi went to Japan, he was only able to secure a promise of funding of US$35 billion for the next five years and secured no agreements on nuclear cooperation or high-speed railways. Japan's offer of infrastructure investment fell well below Modi's hopes and expectations. On his trip to the US, although the prime minister manages to improve diplomatic relations in the course of his hectic itinerary, he didn't manage to secure much in the way of concrete investment. It was not just the US government who responded in a disappointing manner; investment from US businesses and Indian Americans, whom Modi hoped to lobby on his visit, have gradually decreased in recent years. The apparent reason for this is the lack of transparency and the amount of red tape in India, which has led several companies to pull out. Not only did Modi not secure the investment he sought from the Obama administration, but he was pressured to sign a weapons deal which would see India hand over money in the other direction.

In between these trips, a potential patron reached out that would mean reaching a political compromise. President Xi Jinping of China visited India before Modi's US trip. Before Xi's trip to India, the Chinese side is said to have deliberately leaked to the media that Xi was planning to offer Modi US$100 billion in investment, three times the sum secured on Modi's Japan visit. Xi in the end announced investment of just US$20 billion.

China Rebuffed

Given that China holds almost US$4 trillion in foreign exchange reserves, investing US$100 billion in India is not an issue for the country. The leaked investment proposal would have seen China invest US$50 billion on industrial parks and overhauling the country's rail network. The other US$50 billion would have been invested on improving infrastructure and river and port facilities in line with China's plans for India's inclusion in its Belt and Road initiative. Given that the source of the leaked proposal was likely the government itself, it is probable that the reason the final announcement put investment at only US$20 billion is due to a decision in New Delhi, according to Duowei. This poses the question of why India, as a BRICS country, would refuse this kind of investment, given its sore need for infrastructure investment.

On his visit to the US, Modi announced that the 21st Century would be "India's Century," clearly an attempt to rival Xi's idea of an "Asian Century" and his efforts to establish a cooperative institution based on a community of destiny among Asian nations. China and India previously appeared to be on different pages in this respect, with Modi actively pursuing improved relations with the US and Japan while taking a more passive stance on China.

Modi was likely concerned that a rising East Asia would undermine Indian growth and the Belt and Road initiative would undercut control of the Indian Ocean. Japan and the US would be a lot less likely to assert influence in the region, due to their physical distance.

There are also ongoing border disputes between China and India and the issue of the Tibetan government in exile, based in India since 1959. Another issue is India's unease with China's close relationship with Pakistan. The characters of both of the leaders of the two countries also poses a challenge for cooperation, as both are seen as hard-headed individuals compared to their predecessors, pledging not to cede their country's core interests and to resolve all disputes within their term in office.

Modi is shrewd enough to adjust his foreign policy to the increasingly polarized opposition that throws the US and its ally Japan into confrontation with China and Russia, and to play each side off against the other while being sure not to clearly align himself clearly with one or the other. Given India's vast population and strategic value, Modi is aware that the country is a vital chess piece in the struggle between the two sides. This is likely the reason why Modi felt the need to refuse Xi's US$100 billion investment offer, gambling on the offer being bested on his US trip.

Strategic U-turn

In the financial year of 2014-2015 that ran up to March, Indian exports to China dropped almost 20% to US$11.9 billion, and imports rose by 18% to US$60.3 billion, with the trade deficit with China rising almost 30% to US$48 billion, making up almost a third of India's total trade deficit. Modi only managed to secure a promise of US$4 billion in investment from Obama, crushing his high hopes for his US visit.

If political tensions between India and China continue to get in the way of economic cooperation, the trade deficit would likely continue to expand given that China is India's biggest trade partner, threatening to collapse the country's economy. According to a piece by C Raja Mohan, consulting editor on foreign affairs for the Indian Express and a distinguished fellow at the Observer Research Foundation in New Delhi, "Modi is abandoning the old approaches to China [...] Modi has recognised that India can't construct a serious business relationship with China — the world's second largest economy and a major exporter of capital — by giving the security establishment a veto over economic policy."

India and Russia are key players in China's Belt and Road project, with Russia necessary to ensure the success of the northern route of the belt and India key to the southern route and the maritime route. President Vladimir Putin of Russia has already softened on the initiative, which may leave India isolated if it refuses to budge on the issue. According to a previous Duowei report, Xi's US$46 billion investment in Belt and Road infrastructure in Pakistan was an attempt to put pressure on India. It appears that this strategy may have been effective in turning India round on participating in the venture after efforts by Xi in Pakistan to depoliticize the initiative.

If India does agree to get on board and set aside political baggage, it could bring huge economic benefits to the country. It may also result in China helping India construct cross-border high-speed rail links, as it did previously for Thailand and Pakistan.

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