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Prime Minister Narendra Modi’s visit to Japan, and Chinese President Xi Jinping’s visit to India have been portrayed as a challenge for India’s economic diplomacy. Strengthening relations with one is being seen as an alternative to the other. Some view this as an opportunity for India to pit two rivals against each other to its advantage. Others expect India to prioritize its relationships with one Asian partner over the other.
In my view, this is not an appropriate framework to pursue India’s economic diplomacy with these countries. To understand this we need to examine our relationships with these powers from a different vantage. The India-Japan bilateral relationship is strong and getting stronger. However, multilateral collaboration has been historically weak. Conversely, the India-China multilateral engagement within an emerging-economy collaborative framework is strong. However, India-China bilateral economic relations can be improved. Thus, there is an inherent complementarity in the focus of our economic discussions with the two countries that makes the either-or approach redundant to our economic diplomacy.
Japan was the big Asian development story of the mid-20th century. Cold War compulsions limited India’s economic engagement with Japan. Even so, trade, economic co-operation and development assistance flows were sizeable and significant. Several landmark projects, such as Maruti Suzuki and Kolkata Metro, were successfully executed in the 1980s.
In recent years the relationship has changed somewhat. India-Japan bilateral trade is now smaller than that between India and China. However, Japan is the largest foreign direct investor in India. India continues to be a significant destination for Japanese bilateral co-operation flows as the number of Indo-Japanese friendship bridges and the Delhi Metro attest. The cusp of this relationship to date has been the signing of the India-Japan economic partnership agreement, which will provide a significant boost to India’s exports to Japan and to Japanese foreign direct investment (FDI) inflows. Japan has also sought to address India’s stabilization concerns by expanding the currency swap arrangement with India, even raising the threshold below which involvement of the International Monetary Fund (IMF) is not necessary. During Modi’s recent visit, President Shinzo Abe repeatedly articulated his willingness to move from what was essentially an asymmetric giver-taker relationship in the 20th century to one in which bilateral economic relations are more equal. Where disagreements persist, such as civil nuclear co-operation, they are hostage to domestic politics and, therefore, not worth further investment of scarce diplomatic capital until that politics changes.
However, in the multilateral sphere, India-Japanese co-operation is limited. Japan is not a part of the G-77 where India has been traditionally active. The island nation has been no friend to India at the World Trade Organization. Japan has not been supportive of India’s efforts to change the governance architecture of the World Bank and IMF, or shown any willingness to push India as a major player in the Asian Development Bank, which is dominated by Japan and the US.
China presents a different story. For a decade now, bilateral economic relations have been marked by a huge asymmetry. India’s trade balance with China is highly skewed: 26.7% of India’s trade deficit is with China, but India accounts for less than 3% of Chinese exports to the world. The trading pattern is colonial, with India importing manufactured goods while exporting primary commodities. The appreciation of the yuan against the rupee has not resulted in any alleviation of this huge imbalance, chiefly due to non-tariff barriers on India’s capacity to export to China in areas of its comparative advantage, such as high-value services. Trade relations are fraught, with lots of attrition over anti-dumping and other issues. Transport links are underdeveloped and there are also geopolitical issues with the free movement of goods, services and factors of production across the border.
At the same time China and India have progressed considerably in the arena of multilateral co-operation. This has, to some extent, been thrust upon these countries by the Goldman Sachs inspired Brics (Brzail, Russia, India, China, South Africa) relationship. But both countries have opportunistically developed their collaboration in this framework. In 2009, Brics co-operation was about politics, institutions and culture. In 2014, Brics co-operation spans a range of economic areas, and China and India are closely aligned in making these new initiatives happen. In addition, China and India have also collaborated well on issues relating to climate change, trade negotiations and on aligning perspectives on reform of the Bretton Woods institutions. China has also invited India to join the Asian Infrastructure Investment Bank.
The conversation between Modi and Xi Jinping should thus be viewed as complementary to the India-Japan policy dialogue. With Japan, we should seek closer multilateral engagement while consolidating the success of our bilateral engagement. Conversely, with China, we should seek to consolidate the important multilateral collaboration that these mega-economies undertake, while seeking closer, more equal, bilateral engagement.
Rathin Roy is director, National Institute of Public Finance and Policy.
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