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December 2016 Edition of Power Politics is updated.  Happy Diwali to all our subscribers and Distributors       December 2016 Edition of Power Politics is updated.   Happy Diwali to all our subscribers and Distributors       
Issue:December' 2016

SINO-INDIAN TIES

Modi's policy a riddle

Malladi Rama Rao

Urjit Patel Prime Minister Narendra Modi's policy on China has become a riddle wrapped in a mystery. On the one hand, he is holding a hand of friendship and is inviting its investment under his Made in India brand. And on the other, he is working overtime for military deals in what is no more than an effort to balance China's might, and is endorsing the Pivot to Asia doctrine that has made the Chinese to see red everywhere with its emphasis on creating multiple strong powers in Asia to limit turf (war) space for Beijing.
China's India policy is no less enigmatic. The Xi Jinping doctrine courts India while seeking to isolate it without yielding on issues of concern and interest to India whether it is declaring Masood Azhar as a global terrorist or a berth in the Nuclear Supplier Group (NSG).
Today China's footprint is more pronounced than ever before in the nations that India considers as its strategic backyard. From Nepal to Bangladesh, and from Afghanistan to Maldives and Sri Lanka every one of these Saarc countries are beneficiaries of President Xi's doles – grants and loans worth billions of dollars. Pakistan is getting special deal given its status as an all-weather friend.
The China Pakistan Economic Corridor (CPEC) cuts through occupied areas of Kashmir to provide China an alternative to the sea trade route through the Malacca Straits.A section of Pakistani political class, businessmen and economists fear that China may use CPEC to enhance trade with India and make Pakistan its colony but that is an issue for the GHQ Shura to grapple with.
The short point is the signals from the Dragon should make anyone in Delhi to search for a thinking cap. Yet, NITI Aayog Vice- Chairman Arvind Panagariya's advisory is old hat:don't mix politics and economics.
'India's bilateral engagement with China is independent of political issues' he said as Niti Aayoghosted the fourth India- China economic strategic dialogue meeting in New Delhi in mid- October.

The Xi Jinping doctrine courts India while seeking to isolate it without yielding on issues of concern and interest to India whether it is declaring Masood Azhar as a global terrorist or a berth in the Nuclear Supplier Group (NSG).

Arvind Panagariya Panagariya is a renowned economist; he lived long years in the land of the El Dorado and spent
long time with the global money lender – World Bank-IMF combine. At Niti Aayog he is a political appointee, and in that sense he can be said to enjoy the confidence of the political dispensation of the day.
But what is good economics is not always good politics in a country which goes to polls almost every day in one corner or the other. Also, no government can afford to go against public sentiment in these days when byte journalism and social media, which, in essence, is no more than spice media, have reduced public discourse to a T20 match to shape a myopic perception.
Panagriya's stand is in striking contrast with the boycott call of Chinese goods witnessed during the Diwali festival in particular. More such calls may be heard in the days ahead on the social media if the Dragon appears as duplicitous, frets and fumes over Dalai Lama, questions the visit of any foreign envoy to Arunachal Pradesh or some standoff takes place in the Ladakh sector between the Indian Army and the PLA.
Take it from me, Prime Minister Modi despite his 56 inch chest will find it difficult to go against the public tide. Hence the question mark on the Panagariya prescription. And by extension on Modi's China policy itself.

Egg-heads certificatex`

Surprisingly, American eggheads think that Modi's China policy is on the right track. They are invoking a 5th century Latin adage to give full marks to the Modi doctrine. "Si vis pacem, para bellum" (If you want peace, prepare for war), says John Garver, a leading American China expert, and addsIndian Prime Minister is justified in forming military deals to balance China's might while unreservedly courting the Chines investments..

John Garver Garver is Emeritus Professor at the Sam Nunn School of International Affairs, GeorgiaInstitute of Technology, Atlanta. A fluent Mandarin speaker, he is the author of eleven books on China and related matters. Like any blue blood American, he does not see anything wrong with the US foreign policy under President Obama, which has sought to encourage India to grow into a strong power vis-à-vis China.
"There is no secret about that (Obama policy)," Prof Garver told The Business Line. Unlike Japan which is more of a pacifist, India imagines itself to be a power and acts like one, he remarked noting that India's N-deal and military agreements ( for 12 amphibious aircraft worth $1.6 billion) with Japan also fits into the same framework.
India says these deals are not aimed at China, but Beijing doesn't believe so.

In other words, friction is inherent in the India-China relations in the prevailing geopolitical and geo-strategic equations. And India cannot leave its future predicted on China's good faith.

Achilles' heel

Beijing has used its prosperity to present itself as a world power, bullying and threatening those who question the Chinese conduct of their relations with foreign countries. India is not the only victim of Chinese arrogance. Most of its neighbours in south-east and far-east Asia feel the same.
It is as clear as daylight that as long as China demands that India redraw the country's map chances of good bilateral relations, based on mutual trust, are minimal. Crude and politically incorrect though it may sound, the only way in which a militarily strong country like China can compel India to accept its territorial demand is by use of force. That will be easier said than done.
China surely knows the harm it will bring to the country should it decide to attack the world's largest democracy for the sake of territorial gains. China also knows that despite all its tall claims, the Yuan is not glittering any longer. It reached a six-year low vis-à-vis the American dollar by the third week of October. Depreciation of currency anywhere translates into a surge in export. This has not happened to the dismay of China's economy managers.
Several domestic cross-border traders interviewed by the Global Times said that jump in their export volumes is almost "negligible". Reason? China's trade situation is mired in sluggishness, says Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology.

Compounding these concerns is rising costs for labour, financing, land and other factors of production, Xinhua reported quoting an official survey covering more than 6000 companies.

This September industrial profit growth decelerated to 7.7 percent compared to 19.5 per cent increase registered in August, according to the National Bureau of Statistics (NBS).

Slippery path

If there is no turnaround in the scene, the first victim will be China's most ambitious 'One Belt and One Road' (OBOR) initiative' that is designed to connect more than four billion people in 65 countries. It is the lynchpin of President Xi Jinping's plan to win new friends, and make China the new white knight in shining armour.

But with the exports in slump, and more countries resisting Chinese dumping, OBOR runs the risk of failure. It may become unsustainable in the short to medium term.

China has been forced to cut its overcapacity in steel and coal. The steel capacity will be down by 100 million to 150 million tons by 2020, including 45 million tons this year; the coal target will be cut to 250 million tons, also this year. Both these sectors have become a major drag on China's growth, and made Beijing face the charge of dumping.

Cold trap

China's relations with Japan, and South Korea have hit "a nadir" of late because of the "double cold" trap - cold politics and cold economics. Both countries are "irreplaceable economic and trade partners" for China in Asia, accounting for almost 14 percent of its foreign trade. The Sino-Japan trade

The Sino-Japan trade exceeded $300 billion in 2015 while China- South Korea bilateral trade peaked to $270 billion though Chinese trade with and investments in Japan and South Korea appear to have lost some momentum during the past five years. Moreover South Korea, even Japan for that matter, can always look for new market opportunities, a luxury that is deserting China slowly but steadily.

As He Jun, senior analyst with Anbound (Beijing-based strategic think- tank) says, China suffers from another big handicap.

China's transitional economy is less resilient to economic swings. It will be hurt badly if cold politics and consequent cold economics persist, say for another two years. Well, this is going to be "an unprecedented geopolitical deadlock" by all means.

Even Thailand is posing a problem. At Chiang Saen Port in northern Thailand, Chinese ships have been stuck for several months due to lack of business, Chinese online financial magazine, Caixin, reported in October.

After the Kunming-Bangkok Road was completed in December 2013, and linked China with countries in the Mekong River region, land transportation became the preferred mode for moving perishable goods. This added to the shipping depression

Prime Minister Modi and his Niti Aayog egg-heads are trying to cash in on the situation. Because India cannot for ever just be a market for Chinese crackers to pen cells and other low cost poor quality goods that have stunted India's manufacturing industry. The Made in India plank is designed therefore to make India the apple of eye of every MNC, the Chinese including with surplus moolah.

that already faces shrinking regional trade due to the economic slowdown.
Now water transport is in danger of further decline with the implementation of the China- Thailand railway cooperation, an important OBOR project, according to Global Times. All this will add to a spurt in unemployment at home. Close to 8000 people have applied early October for the post of a receptionist in Beijing!

Sri Lanka is a classic case of failure of Chinese OBOR, which led to regime change in Colombo in 2014. The Sirisena government, which succeeded Rajapaksa regime has not initiated any new OBOR projects in the past two years; it is struggling with financial woos of past projects.

Lose-lose situation

Put simply, all the Yuans going to Bangladesh, Philippines, Nepal, Sri Lanka and Pakistan may end up as bad debts, if China fails to push its exports to these countries. Instead of a win-win situation, China may see "lose-lose" situation.

This narrative brings up front India market's relevance to China. "Currently, India is on track to hold on to its spot as one of the world's fastest growing emerging countries", Ge Cheng wrote in Global Times on Oct 28 and declared "Chinese manufacturers are salivating over this fastgrowing consumer market".

His case is simple: Chinese investment can capitalize on India's growth. "The Chinese economy will likely gain momentum from the formation of a new cross-nation industry chain between the two neighbours."

Ge is an assistant research fellow at the National Institute of International Strategy of the Chinese Academy of Social Sciences. So he knows his onions. And he avers: "Considering the above factors, China's government is unlikely to deter India's effort to woo Chinese component companies, despite the possibility that this could cause job cuts in the manufacturing sector at home".

Panagariya prescription

Significantly, the government of President Xi has not stopped Chinese enterprises from going to India. A pragmatic decision it is; it is for nothing China has become the Bamboo Capitalist of the world. Now cut to Panagariya prescription. It makes sense – not fully but substantially though since China has surplus funds to invest and India needs money to put in place a world class infrastructure from roads to bridges and ports to power plants. Hence Beijing's interest to match or even go beyond Japan in becoming India's top partner in urban planning.There is no free lunch these days when globalisation has become a dirty word thanks to Donald Trump. Even then.

In a manner of speaking, India is at the stage that China had found itself when it opened its doors to American investors on the lookout for low cost manufacturing bases. That move helped China to emerge as the world's manufacturing hub and reap the benefits of becoming an export centric economy. Today that is history.

As Panagariya points out, "The cost advantage of producing quality goods in China is going down sharply. The four coastal manufacturing zones in China are experiencing saturation. This has dented the export competitiveness of China."

Prime Minister Modi and his Niti Aayog egg-heads are trying to cash in on the situation. Because India cannot for ever just be a market for Chinese crackers to pen cells and other low cost poor quality goods that have stunted India's manufacturing industry. The Made in India plank is designed therefore, to make India the apple of eye of every MNC, the Chinese including with surplus moolah.

Going by media reports, China has shared its keenness to 'mobilise funds on the lines of JICA (Japan International Cooperation Agency) to fund and execute semihigh speed and high speed rail projects in India. Beijing has also proposed that it will be taking up redevelopment of Bhubaneswar and Bengaluru railway stations on priority".

As a follow up to the October deliberations at the India – China Strategic Economic Dialogue, both sides are setting upsub-working groups on policy coordination, infrastructure, sophisticated high technology, resource conservation and environmental protection and energy.

Political football

When the Chinese MNCs migrate to India, they will help create more employment in the country. But will introduce a risk on the flipside. Most Chinese companies are known to prefer immigrant Chinese labourers in most of their key ops wherever they go. This has been the experience of Africa, and nearer home of Pakistan and Sri Lanka.

Chinese labour colonies have the potential to become an eye sore and end up as a political football since we, as a nation have a penchant to see demonson every tree.

How Panagariya's rejig of the Dove-Dragon economic interaction factors in these issues sets the stage for the China's Made in India particularly in labour intensive sectors like electronics and textiles.

Over the years, India has learnt to live with the negative attitudes of China on certain matters. Because it is 'no-loss situation' in the near to medium term. The Dragon, too, appears to be saying the same thing if we go by the spate commentaries in Global Times in the run-upto and after the Brics summit.

Well, a no-win situation syndrome it is and gives a broadbased economic orientation to the relations between the two countries that have shown to the world how not to allow a border dispute that has left behind deep scars to come in the way of civilized and mutually rewarding relations.

In today's world, the only political issue and diplomatic gridlock worth discussing is the economy.

"It's the economy, stupid," said Governor of Arkansas, Bill Clinton, in his race to the White House during the recession years of Bush Senior's Presidency. Any doubt ?