Should China's dominance in the Indian Ocean Region concern India?
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The Belt and Road Initiative (BRI) is a global infrastructure development strategy announced by Chinese President Xi Jinping in 2013, encompassing five undertakings: policy coordination, trade promotion, physical connectivity, renminbi internationalisation and people-to-people contacts. The Chinese government signed agreements with more than 100 countries to cooperate in the BRI projects. It has reached out to Eurasia, including a link via Myanmar to India, bounding trade and investment hubs to the north of China. 

China’s BRI is shoving nations into colossal debt. The BRI has placed scores of Lower and Middle-Income Countries (LMIC) lumbered with “hidden debts”, summating $385 billion. China allegedly uses debt rather than aid to establish a dominant position in the international development finance market. According to a recent study by an international development research lab, the AidData report shows that 42 countries have more than 10% of their GDP owed to China. 

Asia

China bagged seven of the ten busiest ports in the world and over 100 ports in approximately 63 countries. Around 80 per cent of China’s overseas port terminals are under the “big three” terminal operators: China Ocean Shipping Company (COSCO), China Merchants Group (CMG), and CK Hutchison Holdings. 

In the Indo-Pacific, significant examples of Chinese port expansion include a 99-year lease at the Hambantota port in Sri Lanka, a 40-year lease at the Gwadar port in Pakistan, and a $350 million investment in the port of Djibouti, the site of China’s first overseas military base, located near a critical strategic chokepoint between the Gulf of Aden and the Red Sea.

In 2018, the Chinese Harbor Engineering Company started construction on a port terminal at the Sokhna Port in Egypt near another major trade chokepoint, the Suez Canal. Policy analysts have described these developments as part of the “String of Pearls strategy.” Pakistan and Sri Lanka signed up for massive Chinese debt-funded infrastructure projects, slipped into an economic crisis, and now are in political turmoil. In a third country, Myanmar, the Chinese have moved back in after the military coup 14 months ago and are pushing projects for an economic corridor. In the Maldives, too, Chinese-funded projects and loans have risen and fallen with government changes.

The investments under the BRI are made mainly by state-owned enterprises and banks in China. Most of the contracts (93%) have also gone to state-owned enterprises in China, leaving the host countries or other companies hardly playing any role. 

Africa

By 2022, China had helped lay around 6,000 km of railway line across the African Continent. Since 2007, China has financed more African infrastructure than the next eight overseas lenders combined. In the form of loans African nations’ total borrowing from China since 2000 is almost $160 billion : Ethiopia – $13.7 billion, Nigeria – $7.2 billion, Kenya – $9 billion, Angola – $42.6 billion, Zambia – $9.9 billion.

With China as the major creditor, the economic and debt agreements favour the Chinese private sector for investing and generating profits through business ventures in Africa. By burdening Africa with unsustainable debt, it seeks to use indebtedness to further its geopolitical dominance over the continent and formulate a new kind of diplomatic relationship with Africa, whether in the form of economic concessions, political agreements, or a combination of both.

The opacity of loan negotiations between African governments and Chinese institutions adds to the perception that governments are enriching themselves while burdening their citizens with financial fallout.

Global

China, dubbed ‘The World’s Factory’ accounts for 28.7% of global manufacturing output. The lower manufacturing cost makes China the world’s manufacturing hub, dictating the global value chains. 

Manufacturing accounts for nearly 30% of the country’s economic output and is the second-largest economy in the world, with a global trade share of about 15%. With its recent lockdowns halted a wide range of economic activities, China further disrupts regional and global supply chains and affects Asian emerging economies through reduced trade and demand.

India

With China expanding its presence in the Indian OceanIndia has formulated a new maritime approach to retain its prominence in the region. The Indian Ocean Region is the high focus region. Currently, the Indo-Pacific accounts for 40% of global trade and 62% of the world’s GDP. About 80 per cent of the entire world’s maritime oil trade flows through just three narrow passages of the Indian Ocean.

The strategic location of Andaman and Nicobar Island makes it an essential part of the counter-strategy that India is planning against China’s Belt and Road Initiative. The Necklace of Diamonds strategy to counter China’s String of Pearls strategy. 

To counter China’s strategic placement at Gwadar and Djibouti, India has placed its base at Duqm port, Oman, where India’s essential crude imports flow from the Persian gulf overlooking the Arabian sea and the Indian ocean. 

Nicobar island is located at the throat of the Strait of Malacca, the most crucial choke point because it can choke China’s trade and cut its oil imports (70% of China’s oil and 60% of China’s trade), making China extremely vulnerable to Indian dominance. Recently, the Government of India has planned to invest 10,000 crores in developing Andaman & Nicobar Island into a transhipment hub of the world. 

The Indian economy is at a crossroads, with persisting inflationary pressure due to the Ukraine War and its accompanying sanctions and supply disruptions. The repercussions of the rise in global crude oil prices alongside the cut in excise duties on petrol and diesel by the government resulted in the increase in fiscal deficit and the widening current account deficit.

India’s merchandise trade deficit widened to $24.3 billion in May 2022, with the moderation in exports and surge in the value of imports. Merchandise imports rose to an all-time high of $ 63.2 billion in May against exports of $38.8 billion.

With the widening of the trade deficit, the rapidly depreciating exchange of the Indian rupee against the US dollar furthers the imported inflation (with exorbitant crude and food prices). It triggers large capital outflows(deterring investment), posing a downside risk to domestic growth.  

The annual inflation rate in India remained well above 6% upper tolerance level of RBI at 7%, making it detrimental to growth as it deterred investments. Therefore, with the evolving Inflation-growth dynamics and to mitigate the effects of adverse supply shocks and soaring inflation, the RBI reinforces commitments to price stability by hiking the repo rates consecutively by 40 bps and then 50 bps to 4.90%.

What are the concerns for India?

China strategically used Djibouti, Sri Lanka, Myanmar and Pakistan’s weak economic situation to surround India. The China-Pakistan Economic Corridor (CPEC) advances through Pakistan-occupied Kashmir (PoK) and Baluchistan, home to a long-running insurgency where it faces terrorism and security risks. CPEC would hamper India’s strategic interests in the South Asian region and aid Pakistan’s legitimacy in the Kashmir dispute.

Also, attempts to extend CPEC to Afghanistan may undermine India’s position as an economic, security and strategic partner of Afghanistan. China’s Strategic Rise in the Subcontinent: Along with China-Myanmar Economic Corridor CMEC and CPEC, China is also developing the China-Nepal Economic Corridor (CNEC), which will link Tibet to Nepal. The endpoints of the project will touch the boundaries of the Gangetic plain. Thus three corridors signify the economic as well as strategic rise of China in the Indian subcontinent. Therefore, destabilising India’s neighbourhood and having the potential to challenge India’s sovereignty.

What should India do?

India should work with its regional partners to offer alternative connectivity arrangements to its neighbours. Connectivity is growing as a tool for influencing foreign policy. India must step forward to strengthen connectivity, providing new ground for geopolitical competition with China and combat its BRI in the Indian Ocean Region and South Asia. 

India should seek assistance from partners like Japan in building and upgrading its infrastructure to create an alternative to the Chinese’ BRI since its ability to act alone in South Asia, and the Indian Ocean is limited.

Also, India should use countries like Australia, France, Germany, the UK and the US’ technical expertise to identify the precedence each of these nations can offer, and further leverage them into collaborating areas of common interest, and pursue its strategic connectivity goals. Moreover, India should leverage its Production Linked Incentive Scheme focusing on multiple sectors to promote export-oriented production and growth and develop its domestic manufacturing capabilities.

For India’s neighbours, the rise of China brought new opportunities, projects, and economic initiatives but threatened to undermine India’s strategic interests. To protect its interests, China has put in place a network of investments which has led to several low and middle-income countries in severe debt and procured strategic assets. 

Geopolitics has become front and centre of all investment decisions. There are ways to deal with it, but any individual country cannot go ahead and provide an alternative to BRI, but the larger and more robust economies can come together to find a way ahead. 

The geopolitical and geo-economic shifts from the west to the east raise new challenges in the Indian Ocean Region and international challenges. In the wake of a dramatically altered neighbourhood led by an increasing Chinese presence, shifts in India’s foreign policy approach, acknowledging the importance of the maritime domain in its foreign policy engagements. Therefore, the Indian Ocean is becoming a pivotal zone of strategic competition for India against China’s BRI.

Sangmuan Hangsing is a Delhi-based independent researcher. L Lian Muan Sang is pursuing MA in Economics from the University of Hyderabad.


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