India’s ‘One Belt, One Road’ Dilemma

By Amar Diwakar

Indian Prime Minister Narendra Modi in Xi'an, Shaanxi Province, on a state visit to China. May 14, 2015. Narendra Modi/Flickr CC BY-SA 2.0

By reconfiguring trade patterns with its One Belt, One Road (OBOR) initiative, China is trying to redraw the economic map of Asia. With 70 countries participating, OBOR is set to become the most powerful locomotive of the global economy. In 2021, the IMF estimates the OBOR region will account for close to half of world economic growth and almost one-third of world GDP. China’s ambitions might be clear but India’s role in these shifting economic seas is not.

China has created several investment vehicles to fund its OBOR ambitions, such as the New Development Bank (NDB), the Asian Infrastructure Investment Bank (AIIB), and the New Silk Road Fund. If proven viable, these institutions could challenge the dominance of the World Bank and IMF, which were built on a top-down, North-South donor model with a governance structure centred on conditionality.

China’s model is focused on win-win co-operation, as long as all economic roads lead to Beijing. Ajay Chhibber, a visiting scholar at the Institute for International Economics at George Washington University, argues a “new development paradigm is emerging in the New South in which a handshake will replace a handout”. Are regional powerhouses such as India ready for such a handshake with China?

Opportunities abound

While it is a member of the AIIB and NDB, India has been reticent to fully embrace OBOR due to concerns over the China-Pakistan Economic Corridor – which involves territorial claims to Kashmir – and the Maritime Silk Road (MSR). OBOR encompasses all of South Asia except India and Bhutan, enhancing China’s strategic heft in countries where India also has connectivity initiatives and infrastructure projects.

As a result, India is attempting to counter Chinese dominance in the Indian Ocean through twin strategic maritime initiatives: Project Mausam and the Spice Route. These projects position India at the centre of the Indian Ocean, stretching from Africa to South-east Asia. Similar to MSR, Project Mausam would boost India’s regional and cultural linkages.

Yet India does not have China’s economic power. For example, It still lags China in infrastructure investment and faces a different set of fiscal constraints. India invests 5% of GDP in infrastructure, compared to China’s 17%. The Reserve Bank of India has turned to the private sector to finance a $1.5trn deficit over the next ten years. This is where AIIB and NDB can offer India new sources of capital. Although India and China are geopolitical rivals, co-operation on economic trade remains positive.

Additionally, there are signs New Delhi’s recalcitrance towards OBOR has not prevented its participation in Chinese-led financial architecture. In May, AIIB approved a $160m loan to India, which will be used to strengthen the power transmission and distribution system in the state of Andhra Pradesh. These alternative financial apparatuses are indispensable for India because of the country’s reliance on coal. In 2013, former US President Barack Obama announced the US government would restrict subsidies for coal-fired electricity generation abroad. India, home to the world’s fifth-largest coal reserves, now desperately needs a capacity upgrade. The country’s commitment to AIIB is tied to its financing needs for coal-fired electricity.

Some Indian analysts have called on Delhi to identify the vast geostrategic opportunities OBOR presents – such as gaining reliable access to inner Asia – and harness regional connectivity towards the country’s transformation. Just as US economic order supported the rise of China, Chinese railways, highways, and ports might eventually serve as platforms for robust economic growth in India

The reticent elephant

Could India’s apprehension over OBOR stem from the belief that it will soon match China’s economic output? Using data from the UN Conference on Trade and Development, Raymond Zhong shows in the Wall Street Journal that India is following a similar path of growth, investment, and exports as China – taking into account India began its liberalisation drive 13 years after China. Whether Delhi can match Beijing’s impressive three-decade development run will depend on its ability to accelerate more rigorous domestic reforms.

India’s ability to attract global investment is dependent on its ability to address challenges such as overcapacity in some industrial sectors, infrastructure bottlenecks, as well as the operational, legal and bureaucratic difficulties involved in shifting resources to higher-productivity manufacturing.

Source: Wall Street Journal, 2014

Indian Prime Minister Narendra Modi has a mixed track record on reforms. While the bankruptcy law overhaul is praiseworthy, a nationwide goods and services tax remains bureaucratic and inefficient due to industry fragmentation. The demonetisation drive last year was counterproductive. Rigid labour laws require simplification, and lending to industry is contracting for the first time in two decades, necessitating a recapitalisation of state-owned banks to get loans to flow again.

Delhi would do well to heed calls from China to collaborate, rather than isolate. If Chinese financial institutions take off, they could create billions of dollars for infrastructure development throughout the region, ostensibly without all the regulatory hurdles from Western donors. OBOR and its financial institutions such as NDB, AIIB, and the Silk Road Fund could facilitate a reduction in Western institutional dominance over emerging economies. India must engage with OBOR for the benefit of its economy or risk being left behind in its own backyard.

India’s formal absence from OBOR, evident during the recent Beijing summit, does not stonewall the initiative. Nevertheless, its presence would be valuable and strengthen the opportunities for South-South economic prosperity. With the rates of return on several projects still uncertain, however, it is possible Chinese financial institutions might become increasingly risk adverse, especially if countries such as India maintain an arm’s distance from the project. Ultimately, however, India has far more to gain from embracing OBOR than it stands to lose.

Amar Diwakar is a writer and research consultant, and holds a MSc in international politics from SOAS, University of London.