Disengaging to re-engage

DIPLOMATS and those engaged in offering a running commentary on relations between nations are wont to pore over the details of the agreement reached between India and China on the border dispute. During their meeting in Kazan (Russia), Prime Minister Narendra Modi and President Xi Jinping looked at the big picture and signed on to a forward-looking statement. The devil may be in the details, but what bedevils the bilateral relationship is the gap between ground reality and historical claims. Bridging that gap will have to be left for another day. Another era, perhaps. For now, the two have agreed that their soldiers will disengage so that their countries may re-engage.

The final border settlement is not merely about a mutually agreed demarcation of territory on the ground. It will have to be about both countries coming to terms with a changed official and authorised map of their respective countries. Neither PM Modi nor President Xi is in a position at home to sell a new map of their country to their own people. Till dawn breaks on that day, peace and tranquillity have to be maintained.

Both countries have finessed their positions on the border issue to enable restoration of normal economic relations.

The 2020 incursion across the LAC by the Chinese People’s Liberation Army was the consequence of short-sightedness and hubris on the part of President Xi. It may also have been prompted by excessive posturing by PM Modi during the three summit meetings he held with with the Chinese leader between 2014-19. Hopefully, both have learnt their lessons. The meeting in Kazan suggests that there has been a greater injection of realism into the assessment both leaders have made about each other’s country. The two leaders have affirmed their commitment to stable, predictable and amicable relations and hope they would contribute to the building of a “multipolar Asia and a multipolar world”. They emphasised the need for a long-term and strategic perspective to the relationship, with a focus on development.

The world has changed dramatically in the five years since Modi and Xi met at Mahabalipuram. India would want a return to the relative stability of the pre-Xi era, but the clock cannot be fully turned back. The power equation that defined the famous Rajiv Gandhi-Deng Xiaoping understanding, and even the dialogue during PM Manmohan Singh’s tenure, on the management of the border issue, has been disrupted by China’s meteoric rise over the past two decades. Xi has sought to impress this on India and the world.

Indian political and strategic leadership has resisted coming to terms with this altered power equation and tried aligning with the United States in order to exert pressure on China. However, such Western support comes at a price that the Modi government seems not prepared to pay. Rather than risk an anti-China alliance, Modi has opted to improve relations with China and Russia while retaining a strong bond with the US and Europe. This is what multi-alignment is all about, in practice.

One form in which some sort of normalcy in the relationship can be projected would be to allow Chinese investment in India. China is a capital-surplus economy that is slowing down. India is a growing economy that needs a massive injection of capital, especially in manufacturing. Increased Chinese investment could also help rectify in part the trade imbalance that favours China. Earlier this year, in the Government of India’s annual Economic Survey, published by the Ministry of Finance, an important question was posed about the nature of economic interaction India should have with China, given the global and regional geopolitical and geo-economic context.

At a time when many developed economies are trying to ‘derisk’ from China, reduce their economic dependence on China and adopt new ‘China plus one’ strategies, what opportunities exist for India, the Survey asked. It correctly noted that most economies around the world were not decoupling from China but merely derisking.

“Will ‘China plus one’ result in a total movement of trading relations away from China,” the Survey asked. “This may not be the case. Take, for example, nations like Mexico, Vietnam, Taiwan and Korea, which were direct beneficiaries of the US trade diversion from China. Even while these nations increased their share of exports to the US, they also displayed a concomitant rise in Chinese FDI. Therefore, the world cannot completely look past China, even as it pursues ‘China plus one’.”

It is this assessment that defined the Survey’s further thinking. Is it possible to plug India into the global supply chain without plugging itself into the China supply chain, the Survey asked. What is the right balance between importing goods and importing capital from China? The Survey then suggested that “to boost Indian manufacturing and plug India into the global supply chain, it is inevitable that India plugs itself into China’s supply chain. Whether we do so by relying solely on imports or partially through Chinese investments is a choice that India has to make.”

The Survey’s own recommendation was that India ought to reduce imports from China by allowing Chinese investment in domestic manufacturing in India. “Choosing foreign direct investment as a strategy to benefit from the ‘China plus one’ approach appears more advantageous than relying on trade. This is because China is India’s top import partner, and the trade deficit with China has been growing. As the US and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them.”

This argument makes eminent sense and is based on Indian self-interest. This, then, raises the question as to how India and China could pursue normal economic relations at a time when political relations were no longer ‘normal’ and had been destabilised by China’s actions along the LAC. It is in this context that both countries have finessed their positions on the border issue to enable restoration of normal economic relations.