China is looking for other potential markets, and India is an ideal partner

China has emerged as India’s largest trading partner after it replaced the United States in March 2008. When India initiated its comprehensive reforms in 1991, the level of bilateral trade between the two countries was insignificant as the trade basket was restricted to a limited number of products.

However within a short period, China has become India’s single most important trading partner even though India itself has reached at an unsustainable bilateral trade deficit of US$ 39.1 billion in 2012 (IMF, 2013b). Bilateral trade between China and India reached $95.54 billion in 2018, with the trade deficit at $53 billion in China's favor, the biggest India has with any country.

Policy makers will have to find ways to manage this huge deficit given that India can neither afford to limit its economic engagement with China nor continue with such a huge bilateral trade asymmetry for a long period of time. China has been on a high growth trajectory for more than three decades, and even maintained a sustainable rate of growth .

Since July 2018, the United States has imposed duties on $250 billion worth of Chinese goods and China has retaliated by imposing tariffs on U.S. products worth $110 billion.5 Although a temporary truce was achieved after the Group of Twenty (G-20) Summit in Buenos Aires on December 1, 2018, it turned out to be ineffective.

The United States and China have been unable to arrive at a solution, inflicting damage on both economies. In this scenario, China is looking for other potential markets and India, owing to its proximity and huge market, is an ideal partner. This trade war has given other countries an opportunity to reevaluate their trade networks and enforce pending free trade agreements (FTAs).

China and India too, by participating in tariff relaxations, are in favor of making their economic relations more robust and diversified. However, three questions emerge in the overall context of their bilateral relations—first, how can Indian imports from China be diversified without increasing the trade imbalance; second, which sectors should be targeted if exports to China are to be increased while avoiding Chinese retaliatory trade measures; and third, what are the platforms for diversifying production in India to shrink the “Made in China” label.

While India’s challenges are to transform its market for foreign investors, liberalize its tariffs, and boost its FTAs, the challenge for China lies in shifting its global trade away from the United States. Although the growth rate of India-China trade experiences momentary surges, various stresses remain, such as the huge trade deficit India is incurring.

While U.S.-China trade tension does not have any direct repercussions on the Indian market, it increases the risk of China diverting excessive goods. Undoubtedly, China will suffer a huge loss if it loses its grip on the Indian market. Reducing trade tariffs on products like rice and amending the Double Taxation Avoidance Agreement (DTAA) are crucial. To address the increasingly uneven trade relationship, China has reportedly agreed to import two million tons of sugar.

However, the problem is that the Chinese sugar industry is also facing oversupply. So, India’s trade volume may not end up making much difference to their trade statistics. Addressing this trade deficit will, for the time being, keep India-China relations bristling.

An understanding of how developments in the Indian Ocean are putting India and China at loggerheads is important not just to ensure national and maritime security, but also to sustain their geopolitical interests. The growing power asymmetry, military projection and perception in the maritime domain have driven their relationship into an intensely competitive zone.

The perception of threat has left both powers scrambling for legitimacy. For India, China seeks to reinforce its offshore defense capabilities by entering into military and semi-military alliances with partner countries, building ports, posting noncombat troops, and supplying arms to selected partners. Indeed, the Chinese presence is most strongly felt in the Djibouti naval base in the Horn of Africa, on Sri Lanka’s Hambantota port, and in the Gwadar Port of Pakistan.

China is upgrading another deep sea port in Myanmar’s port of Kyaukpyu. There is speculation that this is leading to another Hambantota-like situation, strengthening China’s foothold in the IOR. In the case of Pakistan, as well.

China is actively engaged in massive sales of military equipment. This strategy of providing military assistance to the littoral countries is not well-received by India, which has a rather proprietary stance toward the IOR.

New Delhi is enhancing its maritime connectivity networks based on “Security and Growth for All in the Region” (SAGAR). While the stress is on a safe, secure, stable, and shared maritime space, challenging Chinese growth and building durable capacity is the principal concern. One advantage that India has in the IOR is that China has not yet declared a coherent Indian Ocean security strategy, although it is highly interested in acquiring ports, for instance the Hambantota in Sri Lanka, Gwadar in Pakistan, Kyaukpyu in Myanmar, Payra and Chittagong in Bangladesh, Dolareh in Djibouti, and a few others on the African continent.

Moreover, the BRI can now be considered as the de-facto Chinese grand strategy to inscribe its footprint across oceans and continents. Such beguiling multimodal connectivity spans the IOR as well. Consequently, overseeing the presence of other countries’ maritime forces in the IOR is of utmost importance to India. China’s growing maritime understanding with Pakistan and India’s other neighbors most strongly triggers much suspicion.

This stems from three factors—China’s support to Pakistan, the Maritime Silk Road coupled with the Silk Road Economic Belt strategy, and the fact that the China-Pakistan Economic Corridor, i.e. land based Chinese military presence, will have consequences for China-Pakistan military strategy.

India has realized that, on its own, it has limited resource capacity to match China’s assertiveness, making its outreach beyond the Pacific extremely important. With an increasing focus on developing a strong strategic deterrence against China, the Indian leadership is seeking to have an extended maritime neighborhood power-projection, with an emphasis on Act East Policy.

Currently, India cannot rival the extravagant Chinese investment packages, but it does redeem itself by offering something China does not—mutually favorable deals that are based more on partnership than on exploitative lending, such as the India-Myanmar-Thailand Trilateral Highway and the Kaladan Multimodal Project. However, the problem for India in effectively challenging China lies in its decision-making process—India might not lack ambition but it certainly lacks the cohesiveness and the resolve to outcompete a country like China.

Prof (Dr.) Kanayalal Raina advocates in spiritual teaching besides providing management consultancy services. His strategic plans are being used for obtaining funding to run various programs conducted by NFP nonprofit and business organizations. He strengthens NFP and business organizations through education, empowerment of leadership and mentoring, personal growth and strategic counselling. Areas of expertise are Govt. funding and preparation of Business Plans, Strategic Plans, Marketing plans, Sales and Pricing Plans, Balanced Scorecard, and Business Performance Management.