Can Economics Overcome Years of Political Suspicion Between India and China?

The relationship between China and India will be one of the most important of this century. Their ability to cooperate will be crucial on international issues ranging from climate change to multilateral trade negotiations. Yet for all of its future significance, the relationship remains shallow, unbalanced and stuck in the past. As Narendra Modi visits Beijing this week, there are signs of change but progress will likely be slow, piecemeal and pragmatic.

The relationship between China and India will be one of the most important of this century. Their ability to cooperate will be crucial on international issues ranging from climate change to multilateral trade negotiations. Yet for all of its future significance, the relationship remains shallow, unbalanced and stuck in the past. As Narendra Modi visits Beijing this week, there are signs of change but progress will likely be slow, piecemeal and pragmatic.

Gradually and from a low base, India is creeping up Beijing’s list of diplomatic priorities. Li Keqiang’s first foreign visit after becoming premier in 2013 was to India and Modi’s trip to China this week follows a highly-publicised India trip undertaken by Xi Jinping in September 2014.

India’s increasingly prominent global role — especially through the BRICS group and the G20 — has given it a more serious spot on Beijing’s geopolitical map. In addition, the countries have found common ground in a weariness of Western-dominated international institutions, with India featuring prominently in China’s efforts to build alternatives, such as the Asian Infrastructure Investment Bank, the BRICS Bank, and the Shanghai Cooperation Organization.

More than politics, it is the prospect of making money that is nudging Sino–Indian relations in a positive direction. Annual trade has ballooned to US$66 billion from just US$3 billion in 2000. Chinese companies, such as the high-tech firms Huawei and Xiaomi, are beginning to think big about India. And India, in turn, is optimistic for its software and pharmaceutical companies in China. In a way that would have seemed implausible even a few years ago, Chinese and Indian businesspeople are dreaming in rupees and renminbi.

However, there is still a long way to go before China considers India a peer. Since its victory in the countries’ brief 1962 border war and with the mindful of its economic heft, China has often treated India dismissively. As Zhu Feng, a leading Chinese commentator and professor at Nanjing University, puts it, ‘we don’t consider India a very successful contender and I don’t think Modi can change that’. India, for its part, has viewed its neighbour with suspicion, fixating on the ongoing border dispute to the exclusion of closer economic or social ties. These attitudes are deeply entrenched among the political and bureaucratic elites of both countries; they will take a long time to change.

Turning economic enthusiasm into political goodwill is also no easy task — not least because the economic relationship remains deeply unbalanced. India runs a US$37.8 billion trade deficit with China and its exports to the country are overwhelmingly composed of raw materials rather than finished goods, a fact that accentuates Indian insecurities about China’s economic success.

The shallowness of China and India’s investment relationship accentuates these trade imbalances. Despite its decade-long overseas spending spree, China’s investment in India totals just US$500 million, less than Malaysia, Canada and Poland have invested in the country. Indian investment in China is also relatively feeble at around US$470 million. Without strong investment ties, the relationship is deprived of an important lobby with a vested interest in strong bilateral relations: investing in overseas firms involves businesspeople putting down roots in foreign countries, making investors vulnerable to downturns in bilateral ties.

Much of this reflects the way that Chinese and Indian firms struggle to succeed in each other’s markets. The Indian bureaucracy’s fears of over-dependence on China or of espionage ensnare Chinese companies in India. Indian firms in China struggle to gain market access in information technology and pharmaceuticals. They also deal with deep-seated perceptions that they have little to offer. When companies run into trouble, they have few organisations or experienced compatriots to turn to for help. Indian firms in China, for instance, must rely on an embassy with just 30 diplomats, nominal representation by Indian industry associations, and a small Indian diaspora that lacks any political influence.

Put simply, economic ties are not yet deep or substantive enough to overcome decades of political suspicion.

But perhaps the largest obstacles to a burgeoning relationship are the Chinese and Indian people themselves. The Chinese and Indian publics do not know each other well — and what they do know is coloured by historical baggage. This, combined with strong nationalist strands in both countries, makes it difficult for the political relationship to progress.

According to a July 2014 Pew Global poll, just 30 per cent of Chinese hold a favourable view of India and a mere 31 per cent of Indians hold a favourable view of China. This is partly because there is little interaction between the two populations. Of the 100 million Chinese who travelled overseas in 2013, just 160,000 ended up in India. By contrast, 1.4 million visited France. Of the 270,000 Indian students studying abroad in 2013, just 9200 were in China; at the same time, only 2000 Chinese students were studying in India. On top of this, the visa process is cumbersome and direct flights are limited: only one airline, Air China, covers the Beijing–Delhi route and no direct flight links the commercial hubs of Shanghai and Mumbai.

Narendra Modi and Xi Jinping clearly understand the potential of the Sino–Indian relationship. They have emphasised the countries’ shared history of trade along the ancient Silk Road, their shared ties of Buddhism and the nations’ past economic glories. They will no doubt reemphasise them this week. Nevertheless, to move forward the leaders need to deal with history that is more recent. This means encouraging creative thinking to alleviate the border dispute, eliminating bureaucratic hurdles to the bilateral business relationship and, above all, working to improve attitudes on both sides through academic exchange and people-to-people contact. The obstacles may be formidable, but the outcomes will be critical to regional — and global — geopolitics.

How to heat up lukewarm India–China relations is republished with permission from East Asia Forum