A new non-alignment: balancing between US and China

Just over a month ago Prime Minister Modi went to Wuhan for an informal bilateral two-day meeting with President Xi Jinping. This was supposedly at the invitation of the Chinese President. In fact Xi said to Modi, that in his five years he had moved out of the capital to meet a foreign leader only twice, and on both occasions it was to meet with the Indian Prime Minister. Many skeptical analysts wondered what the tangible achievements of the Wuhan summit were, although they overlooked the announcement of joint projects in Afghanistan and the initiative to have direct dialogue between military leaders of the two countries. Coming after the Doklam standoff the Wuhan visit is a distinct signal of not just thawing of relations, but of the intention for closer engagement. Later this month PM Modi is expected to participate in the multilateral meeting of the Shanghai Cooperation Organisation in Qingdao. That would be his fifth visit to China since he became PM.

In the interim between Wuhan and Qingdao, Modi became the first Indian Prime Minister to speak at the Shangri-La Dialogue, a premier defence summit hosted in Singapore by the London based International Institute for Strategic Studies (IISS). This summit brings together ministers, military chiefs, defence professionals and security analysts to discuss conflicts, risks and security issues in the Asia Pacific region (now also being referred to as the Indo-Pacific region). Modi’s talk was billed as a major highlight. Since the U.S. Secretary of Defence was also participating, and many speakers spoke about China’s increasing assertiveness (if not belligerence) in the oceans of the region, India too was expected to give tacit if not vocal support. To Modi’s credit his speech was a well-balanced acknowledgement of issues raised by the US led groups, and recognition of the importance of positive engagement with China.

Modi avoided the use of the word “Quad”, an informal grouping of India, U.S., Australia and Japan which seeks to be the force to counter China’s maritime muscle flexing.  He famously said “Asia and the world will have a better future when India and China work together in trust and confidence, sensitive to each other’s interests.”  At the same time he did not fail to mention the crucial concern of the “quad”  group and others in Asia, namely, an appeal for freedom to navigate the oceans, have unimpeded and peaceful commerce on the seaways and always aim for peaceful settlement of disputes. He also asked nations to be cautious about not loading unsustainable debt on their peoples, perhaps indirectly hinting at the generous loan offers behind many of the projects of the Belt and Road Initiative of China. 

Modi also did not fail to mention the threat of irrational protectionism as a significant risk. Was that a reference to recent U.S. actions? The speech was a strategic balance, walking the narrow straight path between the two super powers in the world today. This is not to be seen as a reiteration of the Nehruvian non-alignment idea (that was equidistance between US and Soviet camps, although India ended up closer to the Soviets). This is in accordance with India’s Look East and Act East stance. Closer engagement with the ASEAN region will enhance India’ national interest. But this does not mean blindly embracing the proposals of the Regional Comprehensive Economic Partnership (RCEP), a grouping of ASEAN’s ten plus six other nations.

India has been justifiably concerned that the free trade agreement should not simply end up giving unlimited access to harvest the country’s large domestic consumer market. The gains have to be on both sides. Free trade under RCEP does give India’s consumers access to cheap and quality products of Asia. But it should not end up in closing India’s factories. Of course full benefit to both consumers and producers will come not just with some safeguards under RCEP, but with deeper and effective economic reforms in India which will lead to increase in competitiveness of India’s industry.

It is in this context that greater engagement in trade, commerce and investment with China is in India’s interest. The large trade deficit with China can be offset with increased investment inflow into India’s infrastructure. Even one percent of China’s foreign exchange reserves, flowing in as annual equity inflow can go a long way. India must also take advantage of China’s large and growing domestic consumer market. China is consciously rebalancing its growth strategy, away from exports to more domestic consumption, away from industry more toward services, and away from investment more toward consumer goods. For the first time in history, China will host an import expo in November, showcasing opportunities to global exporters. Indian industry, especially the SME’s should actively participate in this expo. The government should facilitate this participation. China will import 8 trillion dollars of goods and services in the next five years, a commitment announced by President Xi himself. This is a fantastic opportunity for India’s entrepreneurs. India must also do more to woo more Chinese tourists here, and achieve a 100 percent growth at the very least. That would also help reduce the trade deficit with China.

Of course this focus and greater engagement with China does not mean India ignores its traditional export markets in US and Europe. Among all of India’s trading partners, the US remains the one with which we enjoy the highest trade surplus. Many Indian companies are enthusiastically investing in America too, capitalising on favourable tax and competitiveness conditions.

The twenty first century belongs to Asia, and China and India are destined to be the two largest economies. Their global share in the world economy will eventually match their population share. China is already well on its way toward that destiny. India is bound to get there. But in the meantime it must maintain a creative, imaginative, pragmatic and beneficial equidistance from the world’s two largest economic powers, while also engaged in strengthening regional as well as global multilateralism.

(The writer is an economist and Senior Fellow, Takshashila Institution)