India believes that the China-Pakistan Economic Corridor (CPEC) is a major threat to its national security. Not only will China’s military power appear simultaneously in its east, north and west flanks, but Pakistan will also be able to completely cut off India from Iran. The Arabian Sea and Central Asia provide access to oil and gas energy sources, increasingly under China’s control. It is a high stakes game but India’s strategy to deal with Pakistan is not limited to a destructive one.

In late May 2016, Indian Prime Minister Narendra Modi visited Iran. As the most important outcome of this trip, India will invest $500 million to build Chabahar port in the province of Sistan and Baluchistan in the south-east of Iran, a direct rival and competitor to China’s flagship project in Gwadar. The port allows India to bypass Pakistan and reach land-locked Afghanistan and Central Asia. India, Iran and Afghanistan have signed an agreement to grant preferential treatment and tariff reductions at Chabahar to Indian goods headed toward Central Asia and Afghanistan and the first consignment of wheat from India to Afghanistan was sent via Chabahar in October 2017.

Border standoff

In June 2017 Chinese troops were spotted extending a road through a strip of land disputed between China and Bhutan. India perceived this as an unacceptable change to the status quo and crossed its own border to block those works. The Doklam plateau slopes down to the Siliguri Corridor, a narrow strip of Indian territory dividing the Indian mainland from its north-eastern states. Were China able to block off the corridor it would isolate India’s north-eastern region from the rest of the country, a devastating scenario in the event of war.

The Doklam standoff ended with a choreographed disengagement on 28 August. By agreeing to discontinue construction works on the road, China seems to have met India more than half way, but it also used the occasion to state that it would exercise its sovereign rights in the future. More than a resolution of the crisis, the negotiation was meant to avert the risk of an accidental conflict. Troops from both countries remain in the area, but are now separated by a few hundred metres.

India’s rejection of the Belt and Road Initiative (BRI) may have triggered the confrontation that developed later in the summer. One month before the Doklam standoff, China had gathered about thirty national leaders at its first summit devoted to provide guidance for the BRI. India announced just one day before the event that it would not be participating, explaining that in its current form the BRI will create unsustainable burdens of debt, while one of its segments, the economic corridor linking China and Pakistan, goes through the disputed areas of Gilgit and Baltistan in Pakistan-occupied Kashmir (PoK) and therefore ignores Indian core concerns on sovereignty and territorial integrity.

“China would never force any country to participate in the BRI if it was too sceptical and nervous to do so," an article in the Chinese state-run Global Times quickly responded. “It is regrettable but not a problem that India still maintains its strong opposition to the BRI, even though China has repeatedly said its position on the Kashmir dispute would not change because of the CPEC."

The truth of the matter is that the BRI poses a number of seemingly intractable challenges for India. Most obviously, it threatens to turn Pakistan’s occupation of part of Kashmir into a fait accompli.

If the area becomes an important economic corridor for China, the conflict is no longer capable of being resolved within the limited sphere of relations between Pakistan and its much larger neighbour.

Economically, the challenge is, if anything, even graver. As a major economy hoping to remain on a trajectory of fast economic growth, India needs to develop deep international links and supply chains, most immediately in its neighbourhood, but the BRI may well force it into new forms of economic isolation, this time involuntary, as opposed to the years of Indian economic autarchy. New Delhi may even see in the BRI a form of rewriting history by rebuilding trade and economic links between Europe and Asia while ignoring the Indian subcontinent, historically a meeting point for such trade and cultural networks.

China’s miscalculation

At first, the Chinese authorities seem to have made the calculation that, once Russia had joined the initiative and many of the countries in South and South-east Asia were fully committed to it, India would have no choice but to follow suit, leaving China in a position to dictate the terms. The gambit proved to be misguided.

India felt it was being cornered and reacted by turning explicitly against the initiative. Public opinion in the country became familiar with the BRI, but its views are overwhelmingly negative. What is worse, Delhi was able to influence other countries, most notably the US, and bring them closer to its views.

For China to continue ignoring or dismissing India’s interests and positions might turn out to be a gross miscalculation. As counter-terrorism researcher Raffaello Pantucci argues, India is in a position to create insurmountable difficulties for China as it strives to implement the BRI in its more ambitious version.

In the competition for global markets, Indian consumers offer a decisive prize for Chinese companies as they try to overcome their American and European rivals. Stability in Pakistan is of course impossible without a measure of cooperation from Delhi, so Beijing may end up regretting it if India and Pakistan continue on their downward spiral of mutual hostility. Nepal and Bangladesh will always find themselves tied to India thanks to cultural, ethnic, and historical affinities. The same is true of Sri Lanka and the Maldives.

The swing state in the great contest between different integration projects is, of course, India. As expert on Russian affairs Andrey Kortunov puts it, “without the participation of Delhi, or even more with resistance from the Indian leadership, neither the American nor the Chinese vision can be fully brought to fruition". Without India, the US might be able to preserve its pattern of alliances in Asia, but its ability to compete on the scale of the BRI would collapse.

As for China, it can hardly claim that its “community of shared destiny" represents the image of the future world order if India were aligned with an alternative vision. And thus we are led to the current situation, where India, aware if its central importance, is in no hurry to make its choice.

If the initial calculus had been wrong, China was nonetheless able quickly to correct course. In February 2018, in a move that surprised analysts, it stayed neutral as Pakistan was put back on an international terrorism financing grey list, three years after it was removed from it. In April, just ahead of Indian external affairs minister Sushma Swaraj’s visit to China, Beijing proposed the building of an economic corridor between China, Nepal and India that would cover ports, railways, roads, aviation, electricity and communication. India has yet to offer any kind of formal support for the BRI, but seems mollified in its approach.

Any talk of working with the US to establish a Belt and Road alternative has been downplayed. An April 2018 summit between Modi and Chinese President Xi Jinping aimed to reset the relationship between the two countries and discussed the possibility of joint infrastructure development cooperation in Afghanistan, albeit likely outside of the Belt and Road framework.

Problems in Pakistan

Even in Pakistan—the crown jewel of the initiative—the authorities have fallen behind on payments for electricity from new Chinese power projects because of longstanding problems getting Pakistanis to pay their bills. The BRI has certainly contributed to the balance of payments crisis. Raw materials are required to construct buildings, bridges and roads, and Pakistan has to bring in all of them from abroad. The same applies to heavy machinery, where Pakistan’s imports are set to top $27 billion by 2021.

Pakistan can pay for Chinese machinery with Chinese loans, but unfortunately these loans are due before the economic gains that will be used to pay for them are accrued. A bailout from the International Monetary Fund (IMF) seems inevitable—and Pakistan has received an IMF bailout twelve times since 1988—but it would create a number of renewed difficulties for the CPEC, including strict restrictions on borrowing and spending and transparency requirements for existing Chinese loans and projects.

Finally, in case of a bailout, the US, the largest contributor to the IMF, would acquire a significant measure of influence over China’s plans in Pakistan. Beijing does have enough sway to ensure that Pakistani authorities reject an international bailout programme, but in that case China would have to shoulder the financial costs all by itself and essentially double down on its high-risk Pakistan bet.

The Chinese embassy in Islamabad responded to reports about a connection between the BRI and the debt crisis in Pakistan with a statement published on 23 July 2018. There it was argued that 42% of Pakistan’s foreign debt is owed to multilateral financial institutions, with Chinese preferential loans accounting for only 10% of the total. “Even if there is a debt trap," the statement concluded, “the initiator is not China." Adding to the complexity, the US quickly started to have doubts about whether an IMF bailout was such a good idea after all.

In April 2018 the IMF’s managing director, Christine Lagarde summed up these concerns when she warned Chinese policymakers in a conference in Beijing to beware of financing unneeded and unsustainable projects in countries with heavy debt burdens.

In an otherwise supportive speech on the BRI, she noted the initiative’s “ventures can also lead to a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payments challenges."

China’s search for finances

As the BRI gains speed, China is increasingly finding that it cannot provide the required financial resources all on its own. To attempt to fill these needs at home—using Chinese banks—at a time when its economy is slowing down and its banks are saddled with bad loans would expose the financial system to unmanageable risks. Therefore, it is essential for China to gain access to global financial markets to complement its domestic resources. World financial hubs such as Dubai, Singapore, Zurich or even London could play a role.

It is very likely—perhaps even inevitable—that the BRI will grow more decentralized—less Sinocentric—over time. But this, after all, is not that different from the structure of the existing America-led world order, where the US insists on being recognized as the state at the apex of the international power hierarchy. Its pre-eminent role is fully compatible with the preservation of large spheres of autonomy for secondary states, some of which have been admitted to a kind of inner circle where important decisions are made and where their voices are heard. The preferred understanding is that of American leadership rather than domination.

Similarly, the BRI may evolve into a complex system where countries occupy different levels in its hierarchy and some may even acquire managing rights in the initiative.

Edited excerpt from Belt and Road: A Chinese World Order by Bruno Maçães.

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