The Balancing of Asia: Modi holds the cards?

India must decide. The familiar or the bold, Japan or China.

With conflicting interests that have lasted decades, can there be a winner in Asia? Source: The Diplomat

Narendra Modi inherited an India drowned in pessimism and devoid of all hope. Mr. Modi portrayed himself as an idealist and a common man. He showed the people the light at the end of the tunnel. He made them his people. His real achievement lies in striking a balance between wooing the rising middle class and at the same time appealing to the rural farmers. He had shown his political skill in India, now it remains to be seen what he can do on the world stage.

PM Modi followed up a visit to Japan, with a Chinese delegation in India . There is a general suspicious sentiment in China after Mr. Modi’s Tokyo visit and to top it all Premier Xi Jinping visited India a week  after the Dushanbe summit. The media has hyped it as a looming awkward moment between the two.

The question that needs to be answered now is that will Mr. Modi be able to appease both these parties.

Art credit - Shweta Dey.

Art credit – Shweta Dey.

Each of the two has their upsides and downsides. We shall analyse them based on the areas in which there is collaboration, the status quo between India and the countries and finally the potential each holds for the country.

With respect to trade between India and Japan we have seen collaboration in a number of sectors. The Metro service in the Indian capital has been a product of Japanese investment. A port improvement project has been planned in the city of Chennai, with Japanese technical assistance to improve sea route connectivity. The Chennai Bangalore industrial corridor is another example of Sino-Japanese Collaboration. The Japan international Cooperation Agency, has also conducted a survey for infrastructural development in India. Urban development, agricultural research, and institutional investment in the automobile and pharmaceutical sectors are some of the other issues being considered in this regard. These all have been slated as the plausible sectors, not all have been exploited.

Sino-Indian trade has had a tumultuous ride so far with relations between the countries going from good to bad to worse. Total trade between the two countries reached an all-time high of $73.9 Billion dollars in 2011. Since then it has slowly declined but has shown signs of flattening out. Collaboration between India and China has mainly been in the sectors of trade and climate change. They have also collaborated over issues of energy consumption in the cases of Sudan, Syria, Iran and Colombia. Even so, this collaboration has been more competitive than cooperative, and China has had the upper hand owing to its larger economic resources. Border connectivity which had been an important agenda has now taken the back seat over security issues between the two countries.

The current level of bilateral trade between China and India is at $65.47 Billion. Of which India is in a deficit of approximately $31 Billion. Looking at the graph for the trade balance for India, we can see that the figures are nothing short of frightening. The trade deficit is increasing, so is its percentage of the total. More so, what should be noted is that the total trade between the two countries has been extremely erratic. This is the real cause of concern. If India is going to only increase its deficit over the years then policy must be rethought.

Both the countries began at an almost equal level but have travelled along different paths. The differential rate of growth of the two countries is part of the problem of the trade deficit.  China has a much different outlook towards trade where the markets have been opened to foreign companies. This is in contrast to the gradual opening up of the Indian economy with partial protectionism still being practised.

We could do a similar analysis for India Japan Trade.  The drop in FY 2013-14 is mainly due to decrease in Japanese Exports, even though there was a rise in Indian Exports. We could say that the figures are a little less uncertain, but that doesn’t give the whole picture. Comparing the volume of trade India has with the two countries, we see that Chinese trading volume is approximately 400% that of total Japanese trade. Statistically we see erratic patterns for both these nations.

The third aspect of this argument is the most critical of the three. Potential for bilateral collaboration is what needs to be analysed while developing foreign policy related to these countries. In my opinion, here we are dealing with a rather precarious situation where both the countries stand at an almost equal footing after considering their pros and cons.

While considering Japan, we see a larger diaspora of sectors where partnership is possible. India doesn’t have a history of conflicts with Japan, and as a result defence becomes a viable area of collaboration. Japanese hardware is of world renown. Its high quality standards and high levels of efficiency make it an ideal manufacturing hub in terms of production processes. This combined with inexpensive Indian labour provides an ideal source of economic growth. Political goodwill is at an all-time high with the leaders being all praises for each other.

 In addition to this, we believe that the countries feel a need for mutual cooperation.  Japan needs workforce to replace its ageing population and India needs a revamp of its infrastructure. The question remains, as to the volume of investment and commitment that Japan can promise in the future. Looking at the historic levels of investment, we can estimate an investment of approximately US$100 Billion per annum in the next 30 years optimistically. This is just about twice of the current Chinese trade levels. Thus, Japan though important, cannot be kept on the frontline while making foreign policy decisions when other countries provide much higher potential for growth. Comparing Chinese and Japanese economies we see that the former is roughly twice of the latter and while relating average growth rates, we see that there is a large gap between the two.

Whilst looking at China we can consider a smaller number of sectors. This is mainly due to the competition established between the two nations. China and India share a constant insecurity, which they have been euphemising after jewellery made of pearls and diamonds. Due to the border security concerns, and the other border disputes (Tibet), defence deals seem unlikely in the near future.  China poses large gains in terms of cost and infrastructure development especially with the stout import demand in India.

In recent events, Xi Jinping has promised a pragmatic outlook towards economic ties with India. Hopefully, this will speed up the collaboration processes, in the sense that comprehensive deals with a greater degree of commitment might be reached. A Sino-Indian nuclear deal also doesn’t seem plausible. The setting up of Chinese military bases around the Indian subcontinent is only fuelling the tensions. In addition the increasing collaboration of China with Pakistan has been a cause of a widespread of insecurity and distrust towards the Chinese. The Indo-US nuclear deal has not been received warmly by the Chinese, though now their stance is thawing somewhat. The rate of Chinese militarization has put a scare into Indian policymakers. Inspite of this, the export and import of goods and services remains the mainstay of Sino-Indian trade.

The decision makers. Source: One India

In the current scenario, consumerism in India is not as developed as in other economies. Per capita daily spending is as low as US$1.46 according to new estimates. In such a situation, the sentiment is inclined towards the consumption of inexpensive goods, irrespective of quality. Here, the Chinese model suits India’s needs better than the Japanese model. At the same time, Mr. Modi has promised to cater to the rising middle class which paradoxically marks a partial shift towards the Japanese model.

Upon careful analysis of this state of affairs, we can see the dilemma Mr. Modi will be in. Any sort of preference given to one of the countries will be perceived wrongly by the other. And with both sides there are huge costs to be invited if the negotiations fall through. Mr. Modi too is not free of his own biases. He has long been critical of Chinese expansionist policy in the South China Sea as well as Tibet. At the same time, there is a growing friendship between him and his Japanese counterpart. These also need to be factored in while considering various strategies. Mr. Modi has brought a bolder style of diplomacy to India and it is all in good time. He must ensure that the World War II rhetoric of ‘Appeasement’ is practiced to the fullest. If India indeed wants to have a larger participation in the world stage then it needs to interact actively with global forums. India must get out of its non-committal outlook and learn to bear consequences of its choices if it expects larger degrees of commitment from the either of the States.

Shriraj Patil

Shriraj Patil

Intern at InPRA
is an economics undergraduate from the city of Mumbai. He has secured several academic awards and also been awarded by the Commonwealth for his writing skills. Certified by the National Stock Exchange and the Bombay Stock Exchange, he actively studies the impact of the financial sector on the economy. He has recently started analyzing economic and political policy questions and research concerns.Wanting to now engage with an IR Master’s degree and the desire to hone the skills required to do so has compelled him to join InPRA. He hopes to learn and grow with the initiative.
Shriraj Patil

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