India is resigned to a new status quo with China

by Mihir Sharma

It’s still mid-winter in the high Himalayas, along the disputed border between India and China. But in New Delhi and Beijing spring has come. Relations, which had been since 20 Indian soldiers were killed in clashes in 2020, have begun to. Bilateral diplomatic visits have resumed and the two militaries have begun meeting again.

Most importantly, however, India has begun to re-evaluate China’s role as an economic partner. It was once the country of investment and trade with its giant rival; Chinese companies were from strategic sectors well before that became the norm elsewhere, and investment was completely prohibited in 2020.

It appears those norms will now be relaxed. Capital will begin to cross the border again — and Chinese companies even be allowed to bid for government contracts, no small thing in a country where the state sector drives much investment activity.

This isn’t because China has retreated on the border issue. Far from it; if anything, it is India that has itself to a new status quo, one in which it has lost several strategic advantages. Indian officials increasingly agree with their businesses that without access to Chinese inputs, capital and know-how, the economy will never be competitive globally.

Of course, President Donald Trump’s chaotic trade policies are also weighing heavily on New Delhi. The US continues to single out India with the highest tariff that it has applied on anyone. Its goods, like Brazil’s, face a 50% rate; and Trump periodically to increase that further. As a consequence, exports to the US have begun to decline, and it has been replaced as India’s largest trading partner. That spot is now taken by China. Exports there shot up in December alone, though that’s still far from making a dent in the vast bilateral trade deficit.

Indian companies’ immediate need for China, however, is not as a destination for their products but as a supply-chain partner. Clothing manufacturers, for example, that they can’t produce the cloth they want because they can’t get the necessary equipment and chemicals. Similar complaints have been voiced by other sectors, including engineering and electronics, which are increasingly important export earners.

Not all the issues these producers face have been caused by New Delhi. Officials in Beijing only curbs on rare earths and magnets, for example, after Prime Minister Narendra Modi agreed to meet President Xi Jinping in China last August.

Meanwhile, officials in charge of overseeing India’s vast state sector — including the extensive infrastructure build-out paid for by public funds — have been struggling with cost and time overruns. They think that re-allowing cheaper and more efficient Chinese companies to bid in the $700 billion procurement market would make their job easier.

Not everyone will be happy. Heavy engineering companies have been prospering without competition from the world’s most experienced builders. And national security strategists in New Delhi are scrambling to reframe their arguments against a growth-first lobby that appears to be in the ascendant for the first time in years.

But that might be a losing battle at the moment. Countries from Canada to are re-examining China’s importance to their economies. The US is less reliable, the West is fracturing — and many want to believe, as Prime Minister Mark Carney said on a recent visit to China, that Beijing is than it was. At Davos, French President Emmanuel Macron called for more Chinese foreign direct investment in Europe in growth-creating sectors.

The hawks will have an even harder task if investment curbs are truly relaxed — because there’s bound to be some sort of a peace dividend in India. Many Chinese companies, particularly in new energy sectors, have been eyeing that market. Investment funds, some managed by large state-owned enterprises, are planning to apply for licenses to operate in their southern neighbor.

This is a fragile spring, however. A renewed flare-up on the border would bring winter back. And there are limits, as well, on how deep integration can possibly go while the Indian private sector sees China only as a source of inputs and not a destination for their goods.

In Davos, Vice Premier He Lifeng that China was willing to be the “world’s market.” India may be willing, for now, to be China’s market again, but will never be easy in that role unless Beijing becomes its market in turn.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH)