The Agenda: The Decisions that Will Shape India-China Relations

It is telling that newly installed Chinese Premier Li Keqiang’s first international trip this past month started with a visit to India. The world’s two largest countries by population have a complex and multi-faceted relationship that is becoming increasingly important to both countries and others in the region as well as internationally as they develop economically and expand from purely regional to more global players. Although the trip was overshadowed by the recent flare up in India and China’s on-going border dispute, the list of issues for both countries to consider and jointly discuss is long, including bilateral trade imbalances, regional defence and energy security. In the November 2012 edition of the Sign of the Times, at the time of the US elections and the 18th Communist Party Congress, we outlined in the “Presidents’ Agenda” the top ten bilateral issues for Presidents Obama and Xi to tackle that would shape the nature of their countries relationship in the next decade and beyond. Given the significance of India as the destination of Premier Li’s first international mission and President Obama’s strategy to “Pivot” to Asia, it is fitting to look at the top ten bilateral issues between India and China in the same light.

It is relevant to the world at large how well issues are addressed by the leaders of the most populous countries in the world, both nuclear powers, both neighbours in the region that is now widely expected to be a key driver of global growth, with a history of border conflict and a steadily rising global political and economic presence. The current context within which their issues will unfold is of course important too. China, following a decade of GDP growth of 10% or more is facing a sustained slow-down to below 8% annual growth as well as the need for structural reforms to its economy that may well depress growth even further. Further, the calls for systemic reform to reshape political institutions are getting louder, whilst the government thus far has not provided a clear roadmap for change. India is also feeling the weight of an economy in need of significant structural reforms, having dropped from nearly double digit growth to under 5% for the fiscal year ending March 2013. However, with a general election scheduled within the next 12 months, the political consensus required to implement any major reforms appears to be elusive. Following the dramatic fall of the US economy during the Great Financial Crisis of 2008, both countries expected, and still do expect, to play enhanced roles in the global political order and as the US economy pulls out of crisis and America’s foreign policy “Pivots” to Asia, both countries find themselves in the region that is the focus of global attention: one as a strategic competitor and one as a potential key ally. This makes the India-China relationship one of the defining ones for the geopolitics of the 21st Century. As Premier Li Keqiang acknowledged on the eve of his visit, “An Asian century that people expect would not come if China and India, the two most populous countries in the world, failed to live in harmony and achieve common development.”

The Top Bilateral Issues

    1. The Foreign Policy Issues

The Crux of the Issue: The recent foray of Chinese border troops beyond the Actual Line of Control in the contested region of Aksai Chin has refocused attention on the two countries’ long standing border disputes. With nearly 130,000 square km, the two major contested areas (Aksai Chin and part of Arunachal Pradesh) represent the second largest territorial dispute in the world today between two sovereign nations, and one which pre-dates the founding of both the Republic of India and the People’s Republic of China.

The Status Quo: To date, neither a brief war fought in 1962 nor 15 rounds of talks have been able to settle this long-standing dispute. If both countries continue to build-out their presence in the contested area without a settlement, not only will the potential for low-level conflict potentially increase, the issue will also continue to taint the execution of any other bilateral initiatives between the two countries, as well as the broader relationship.

For the Leadership Agenda: The current status quo represents a significant security risk in the absence of a clear de-escalation and engagement protocol to manage events like April’s troop movement. More positively, a more permanent resolution of the border question would significantly strengthen ties between the two countries as well as increase China’s international standing in terms of its management of territorial disputes. Since settling the Sino-Soviet border dispute in 2004, China has become increasingly assertive in pressing its claims in nearly a dozen live territorial disputes raising tension with almost every neighbouring country in the Pacific Rim. Resolving its dispute with India could deliver a trust dividend to China without necessarily impacting any of its Pacific claims.

The Crux of the Issue: India’s greatest thorn in the side, Pakistan, is the closest partner China has in the South and Central Asian region. Indeed, Li Keqiang’s second visit on his inaugural trip was to Pakistan, which is increasingly dependent on China for military and economic support. Some have spoken of China pursuing a balance of power strategy to counter India’s growing influence in the region, supporting Pakistan as a military competitor and utilising it as an overland trade and energy corridor. However, Pakistan is consistently identified as one of the world’s top dozen “Failed States” and especially as the hide-out of Osama Bin Laden has achieved a level of notoriety unmatched in its history. China’s support of Pakistan, while having military and sea-access benefits for China, naturally precludes a trusting relationship with India and leaves America unrivalled as India’s ally. In addition, given the fact the India-Pakistan relationship involves two nuclear actors with an estimated 200 warheads between them and a 60 year history of conflict that includes four wars, China’s support of Pakistan is a major factor in regional insecurity.

The Status Quo: There is no evidence that the India-Pakistan relationship is set to become a non-issue or that their Kashmir differences are set to be resolved. [Ours is an] all-weather partnership higher than the Himalayas and deeper than the Indian Ocean. President Hu Jintao5

“Hindi-Chini bhai-bhai” Nehru, 1950s before the 1962 Sino-India
War (which in Hindi means Indians
and Chinese are brothers)
So, the speeches about long-term partnership given by India and China at the recent summit are carefully worded to hide a deep sore. There is little to suggest that China is prepared to reorganise its commitments to Pakistan in favour of India. Indeed, China has actually recently expanded nuclear and missile cooperation with Pakistan, is developing a 1,000 megawatt hydropower project in a Pakistan controlled area of Kashmir, is building a multi-billion deep-water port in Gwadar, Pakistan, and China and Pakistan are currently completing an upgrade of the Karakoram Highway connecting China's Xinjiang province with Kashmir. Pakistan clearly understands its strategic location between China, India and Afghanistan.

For the Leadership Agenda: For China, supporting Pakistan may well seem like the cheapest way to balance India’s growing power and influence in the region. However, while an off-balance India might be in China’s best interest for the time being there are a number of factors that are set to put this into question. The regional instability in China’s Islamic western border and the evidence that suggests that Pakistani groups have been host to a number of terrorist groups of Islamic origins may well pose a question on this relationship at some point. Further, the lessons from a century and a half of foreign policy history in Afghanistan-Pakistan have shown that foreign countries have failed to achieve their goals, particularly when following a narrow set of objectives, and indeed have managed to attract repercussions in their own countries. China benefits from two countries being strategic rivals, not enemies at war. All of this points to the logic of China actively engaging with Pakistan to broker a reasonable form of rapprochement with India, if only to secure its own economic interests in the region.

The Crux of the Issue: China has been increasingly asserting its naval influence over the Indian Ocean region, which it sees as critical because almost 85% of crude oil passes through the ocean on its way to the Straits of Malacca. India has long perceived itself as the guarantor of security in the ocean with its relatively strong navy. China has also begun to build a series of relationships with the other Indian Ocean nations. This strategy called, China’s “String of Pearls”, involves China constructing port facilities which India fears are not just for merchant purposes but are tomorrow’s Chinese naval bases and are part of a concerted strategy to encircle India since they include facilities in Bangladesh, Sri Lanka and Myanmar as well as the port of Gwadar in Pakistan.

The Status Quo: China is rapidly expanding its naval capabilities with 45 submarines (vs. India’s 15) and giving its officers a mandate to patrol well beyond China’s territorial waters. This looks and feels like China is focused on jockeying for control of the highly sensitive sea lanes in the Indian Ocean. With a rapidly growing demand for energy, China argues that it is effectively protecting its economic interests in the region in a manner similar to the US in the Middle East. India is also expanding to protect its interests but is well behind the US and China in its ability to exert naval influence beyond its territorial waters.

For the Leadership Agenda: Naval control of the Indian Ocean has become a major issue ripe with conflict potential. The real question is why is China is building a navy? Is there a threat of piracy or blockade today or in the future to its shipping interests in the Indian Ocean? If the credible answer is not, then the naval build up is for some other reason and India and others may well perceive that this is the preparation for a future naval conflict. If China is guarding against some future unforeseen threat there are precedents for this but it will need to do so while avoiding the prospect of a stand-off with either the US or Indian navies of course. As India is outstripped by China’s navy, its natural ally in the Indian Ocean becomes America. India, potentially with US support, and China will either enter into a naval race to build attack-and-defence capacity or they will agree the protocol that enables shared security. In the absence of trust, escalation seems inevitable.

The Crux of the Issue: The BRICS concept, which famously started as an economic forecast by an investment bank, has translated into a powerful geopolitical idea which has allowed the group to position as effective “leaders” of the developing world in multilateral forums, particularly where their interests are aligned as in areas of trade and regional integration. Nevertheless, the countries have vastly differing economies and are at very different stages in their development (see chart). They are also of course competitors in many areas. There is no real plan in place that demonstrates that the BRICS will exploit the synergies between them to create a powerful economic or political bloc.

The Status Quo: China has been the principal trading entity of the BRICS for almost ten years and so is the principal driver of the so-called “south-south” trade. As China is slowing down and shifting from an export model to a consumer one, the BRICS will need to determine what is the nature of the synergy between them? The BRICS nations have held several summits in order to formulate a shared agenda. However, to date, this has translated only into sporadic efforts to collectively lobby for their shared interests in multilateral trade and climate discussions as well as increased bi-lateral cooperation amongst the countries. The BRICS have not had a systematic and comprehensive agenda like the G7 or NATO and therefore, the impact of the countries as a collective bloc has been limited.

For the Leadership Agenda: Coming to a common political and economic agenda would be a powerful way for the BRICS nations to increase their global clout and positioning in multilateral negotiations. Furthermore, the size of the BRICS economies, their importance to global economic growth, and their position as the effective economic leaders in the developing world provides a potentially larger opportunity to facilitate stronger ‘South-South’ integration and cooperation. At different stages in their development, the BRICS countries have a lot to offer to each other’s economies – India can learn from China’s development of heavy industry, manufacturing, and execution of infrastructure projects, while commodity- intensive Brazil and Russia can play an important role in addressing the energy and resource appetites of China and India.

  • The Economic Issues

The Crux of the Issue: China is currently India’s largest trading partner with US$57 billion of exports to India and US$18 billion of imports from India in 2012. India is a large market for China but it is still only its seventh largest trading partner overall. After strong growth starting in the 1990s, trade has slowed significantly – even declining by 10.1% to US$66.5 billion last year. While the proximity and size of these two markets provides the potential for the countries to emerge as strategic trading partners, mutual distrust, a variety of trade barriers and a significant trade imbalance are all inhibiting the growth of the India-China trade corridor. India’s trade deficit with China reached over $40bn in 2012, representing approximately one fifth of India’s total trade deficit. Without addressing these issues, the jointly announced bilateral trade goal of US$100bn by 2015 is set to remain elusive.

The Status Quo: Currently, the trade channel is fairly one-sided with India importing significant amounts of capital equipment (in particular for power plants), other machinery, and manufactured goods and exporting to China largely “primary goods” including ores, minerals, as well as cotton and organic chemicals. India, in this sense, is more dependent on China than the other way around: China imports primary goods from a wide range of countries while being the primary source of higher value technology required for India’s industrial development. Both countries have made piecemeal efforts to open their markets. However, on more significant opportunities such as automotive, auto-components, pharmaceuticals and IT both countries have thus far failed to make the breakthroughs that would help each other. In the March 2012 edition of the Sign (“The India-China Link – Cross Border Opportunities”) we identified the key sectors of mutual complementarity between India and China, including technology, pharmaceuticals, automotive, all of which are still languishing with regards to India-China trade and collaboration.

For the Leadership Agenda: The opportunity of India-China trade is far greater than any of the potential risks it could conceivably pose to either country’s economic ambitions and hence it is in both countries’ interest to build a strategic trading relationship which lets each leverage their competitive advantages. Rather than building new protective trade barriers, such as India’s new security and domestic content norms for telecom and other high tech equipment, both countries should seek to reduce inhibitors to trade to maximise value creation as strategic trade partners, potentially in a bilateral framework. The alternative remains a status quo in which India will not be able to afford the higher value Chinese imports in the not too distant future.

The Crux of the Issue: For the past two decades, China has consciously oriented its foreign policy around securing its energy interests – through a combination of state-level discussions with key energy supplying nations such as Iran and Russia, and through a strategy to acquire overseas energy assets through the state-owned oil and gas companies – particularly in gas-rich Central Asia and Africa. India has also started to adapt its foreign policy to encourage its private and state-run oil firms to both acquire assets abroad and to develop India’s own energy resources such as its offshore hydrocarbon basins. Both countries have also been engaged in pipeline diplomacy; China has recently commissioned a pipeline and inked a gas supply agreement with Russian gas export monopoly Gazprom, while India has withdrawn from the proposed Iran-Pakistan-India gas pipeline over objections from the US.

The Status Quo: China has been far more successful in securing its energy interests than India has over the last several years. In addition to the Russia-China pipeline which will go through 15 provinces, it has made significant acquisitions and struck long term supply contracts worldwide as well as taking the first small steps in exploring the country’s vast shale gas reserves with Shell drilling the first exploration well in Sichuan province. China’s shale gas potential, according to the US Geological Survey, is even larger than that of the US, although reports suggest it is currently much more difficult to exploit. India seems to be taking a less ambitious and strategic international path coupled with a domestic focus. Since shelving the Iran pipeline in 2011, it has pursued small scale overseas acquisitions largely through its state-run oil and gas firms. In addition, India has been actively developing its own onshore and offshore oil and gas fields and the recent large strategic investment by BP into Reliance, India’s largest private sector oil and gas firm, could lead to development of some of India’s shale gas assets in the coming years.

For the Leadership Agenda: In order to continue to drive high levels of GDP growth, both China and India need to continue to prioritise their energy interests for many years to come and the foreign policies (particularly in India’s case) will need to move from being ideologically driven (e.g. the non-alignment movement) to a more realpolitik view of the global energy chessboard. Both countries will continue to compete for overseas acquisitions and in securing gas supplies from Central Asia and Russia. However, in relentlessly competing for these resources without adequate strategies for the development of alternatives they are unlikely to match the massive gas supply that is set to drive an Industrial Renaissance in the US and are set to become relatively less economically attractive nations. India and China have the opportunity to collaborate on a grander level in order to help secure a stable global ecosystem for both the countries to access sources of energy. This role will gain even more prominence as the US focus on the Middle East diminishes over time with the country gradually reducing it dependency on Saudi Arabian oil.

The Crux of the Issue: Both countries are the future dominant regional political and military powers. To varying degrees both risk being defined by their conflicts rather than their contribution in the region. China’s relationships with Japan and South Korea are complex and troubled at times, and its border conflicts with its Asia-Pacific neighbours are becoming increasingly strained over economic and sovereignty issues. India does not face the same level of tension with others in the region Pakistan aside, but has not managed to build the depth of relationship given its size and potential. However, while India has been at pains not to align itself too closely with China’s neighbours for the sake of the bilateral relationship, China has been actively building economic and political links in the South Asian region. This may well be motivated by trade and security concerns but observers see this as creating the risk of economic encirclement and isolation for India.

The Status Quo: China’s strongest regional unconditional allies are Pakistan and North Korea, both considered to be dangerous and unstable states by the rest of the world. India’s closest regional ally is tiny Bhutan, a country that relies on the former for defence and effectively its foreign policy. In other words, neither of the countries’ regional alliances appear to be positive factors for their global positioning, wealth or security. However, China’s “String of Pearls” strategy has created a series of relationships that cover all major bases around India. In response, India, having previously assiduously avoided the perception of encircling China, has recently stepped up its engagement with Japan and Vietnam as well as showed renewed interest in building relationships with China’s neighbours.

For the Premiers Agenda: China’s strategy of extending its influence beyond its immediate neighbours is a sound one, and one in keeping with its growing power and weight in the world. India will seek to emulate this strategy given the potential economic benefits of closer relationships with East Asia as well as in retaliation for China’s apparent encirclement of India. The countries of the Pacific Rim are potential markets for India’s exports as well as sources of technology, investment and know-how to support the country’s ongoing development. Over the short-term, India has the potential to position itself as a counterweight to China in the Asia-Pacific region, much as China is doing today with India’s neighbours. However, history has shown that regional power blocs based on strategic rivalries, while stable, are not value maximising. To avoid unnecessary conflicts, over the long-term, both countries will need to include each other in their respective regional engagements if they are to create a stable and secure network of profitable relationships across the continent and avoid being played off by regional and international players.

The Crux of the Issue: Despite their many similarities and shared development requirements, the skill-sets and competitive advantages that the two countries have built up over the past few decades are very different. China, having followed an investment heavy development model, has industrialized rapidly and built a competitive advantage in scaled manufacturing and infrastructure, areas where India has traditionally underinvested and is currently trying to catch up. India, on the other hand, has developed globally competitive companies in services and intellectual property-related sectors such as pharmaceuticals, leveraging the strength of its entrepreneurial talent. These sectors are ones that China, conversely, is looking to build as it seeks to rebalance and transition into a fully developed economy.

The Status Quo: China has already positioned as one of the leading international infrastructure developers and financers to developing countries, although investment in India to date has been limited. Key projects that have been initiated between China and India including highway urban transportation projects in Delhi and Uttar Pradesh have been severely delayed due to red tape, ranging from outstanding approvals to visa quotas for Chinese workers. In a world where Chinese investors and developers have choices, the lack of trust between the two countries has stalled India from attracting China’s contribution towards the US$1 trillion investment it needs to build out its infrastructure. Indian IT and pharma companies on the other hand continue to experience official and unofficial barriers to developing the Chinese market. Pharma companies for example face significant challenges with drug registrations by the SFDA, despite representing over 40% of approvals in the US, which has as strict or stricter regulatory requirements. Visa restrictions and unfavorable taxation rules further complicate doing business in China for Indian companies.

For the Leadership Agenda: A partnership or set of partnerships to transfer technology and investments in these areas would benefit both countries, accelerating the growth of their respective sectors for development as well as strengthening the international positioning of their domestic champions and core capabilities.

        1. Domestic Bilateral Issues

The Crux of the Issue: Besides the narrower question of sovereignty over the Indian province of Arunachal Pradesh, which China claims as “South Tibet”, there is the broader issue of engagement between the countries over the question of Tibet and Dalai Lama, which India has hosted for the past 60 years, along with almost 200,000 of his fellow Tibetans. To date India has recognized Chinese sovereignty over Tibet (at least over the parts not debatably in Arunachal Pradesh) but has not naturalized any of the Tibetans within its borders or granted official recognition to the Dalai Lama himself, all of which has benefitted China. India has avoided stating its policy on the Tibetan question that clearly outlines what it is and is not prepared to do and what it expects from China in return.

The Status Quo: Despite the historic dissimilarities between the Tibet and Kashmir issues, Tibet to China remains a core fundamental concern, just as Kashmir remains one for India. However, while India has historically consistently reaffirmed the “One China” policy confirming Chinese ownership of Tibet, China is actively investing in infrastructure in Pakistan occupied Kashmir and has had a part of the territory actually ceded to it. India is now starting to link the two issues, most recently during the May 2013 summit, where references to Tibet were excluded from the joint statement issued after talks between Prime Minister Singh and Premier Li Keqiang, reportedly on the basis that it Kashmir was also excluded.

For the Leadership Agenda: Linking the two issues may well allow India and China to avoid confronting each other on these issues and over time perhaps even de-escalate and finally resolve these issues. Alternatively, the avoidance may well not result in China stopping its developments in China-occupied Kashmir and this may well lead to India retaliating by developing its interests in Arunachal Pradesh and stepping up its recognition of the claims of Tibetans abroad. This path of escalation is laden with dangerous conflicts but may well be the necessary middle step towards de-escalation on both sides as a prelude to a sustained avoidance or a resolution. In this long game of chess, both India and China will need to think more deeply about the fundamental purpose of Tibet; is it just another natural resource pool in a region of China or as a generation of Americans and Europeans, in particular, have come to believe the final bastion of a more peaceful and non-materialistic way of life.

The Crux of the Issue: Significantly, both India and China are facing pressing domestic challenges, both economic as well as political. Indian economic growth has slowed to below 5%, revealing the country’s underlying structural weaknesses, including an unfavourable business environment, poor governance, and inadequate infrastructure. In China, economic growth has slowed from the double digit highs enjoyed for the previous decade with GDP growth below 8% and the country’s economic development model appears to have reached the limits of its potential without significant reform (see last month’s Sign “The Planning and Development Model of China, The Challenge to the Model is Becoming Clearer”) . Additionally, China faces massive environmental pollution challenges as well as the need to improve governance and, as President Xi has said, government corruption.

The Status Quo: In India, GDP growth remains weak, and while inflation appears to be down somewhat (see this month’s TEST, without significant structural reform the drivers of a sustained recovery are waiting on the tipping point of confidence. Although the government has taken a series of well-received Sooner or later, India will need to deliver on the democracy dividend and China will need to deliver democracy.measures and reforms to drive confidence, including the opening of the retail sector, the size of the political effort required to pass said measures indicates that the current model of governance in India is not sustainable without reform or electoral change. Campaigning for the general elections next year is in full swing, making any structural reform unlikely over the short-term. In China, the incoming leadership has repeatedly announced its intentions to enact far-ranging economic reform, and many observers expect a significant package of reforms may be announced during the Third Plenary Session of the 18th Party Congress later this year. In the meantime, the central government has started a very public crackdown on corruption, primarily at the local and regional level, although the prospects for further systematic political reform remain as unclear as ever. Sooner or later, India will need to deliver on the democracy dividend and China will need to deliver democracy.

For the Leadership Agenda: In the October 2012 edition of the Sign, “India: – The “Hindu Rate” or a Pause Before the Next Lap?” , we argued for the need for structural reform in India and laid out the key elements we believed it would need to encompass, given the widening cracks in the system. These included governance and accountability (both are required to manage effective reform and to regain the loss of public confidence in India’s institutions), the opening of entrepreneurial bottlenecks, including further economic and industry liberalisation, and a significant build-out of infrastructure. In China, as we laid out in the September 2012 edition of the Sign, “China’s Miracle Ends and China’s Growth Continues?” , the economic slowdown is a function of the transitions from investment to consumer led growth, from government to private driven investment and from external to internal demand growth. China’s leaders’ are increasingly focused on income growth, continued employment and social security as the critical elements required to successfully manage these transitions. Additionally, China will need to engage in longer-term political reform, the need for which will clearly become more urgent the more successful it is in managing the economic transition and creating wealthier and better educated citizens. Doing so will require a strong consensus amongst the various factions within the leadership in Beijing. Both countries ability to successfully carry out the required reforms will be a pre-requisite to their capacity and willingness to engage with one another on broader bilateral risks and opportunities. Both countries’ agendas are hurt by escalating tensions, conflicts and trade disputes. The truism holds that increasing interdependence will give them both greater success and increasing success requires interdependence.

Overall Conclusion

The current state of affairs on the critical issues facing India and China is set to take them to a grim and long drawn-out stand-off leading to a damaging set of conflicts. Carefully crafted speeches and resolutions that avoid the issues fail to address the issues that we all know exist. Apparently, systematic avoidance of the issue is a well-recognized condition when exhibited by individuals. It is called “Avoidant personality disorder” in the Diagnostic and Statistical Manual of Mental Disorders handbook and may well be part of a more generalized social phobia. It is characterized by a pervasive pattern of social inhibition, feelings of inadequacy, extreme sensitivity to negative evaluation, and avoidance of social interaction. Two of the great nations of ancient history with the potential to create a new world order cannot be struck with this condition and keep the respect of the world let along function as global powers.

The agenda we have outlined for India’s and China’s leadership demonstrates the deepening interconnectedness and inter-dependence between the two countries. This provides the opportunity to rethink the path ahead or to create an escalation of tensions which will spill-over to their neighbours in the region and ultimately provide the forum for international games to be played in the region too. We see three parts to the building of the strategic relationship (or the progression of conflict), as follows:

        1. Addressing the core trust issue. The history of conflict on territorial matters creates the most fundamental gap, one of trust, and this spills over into all facets of their relationship. The opportunity is clearly so substantial that the incentive to clear the issues is one that should be the main objective. Inevitably, the fear associated with a lack of trust leads to an avoidance of the core issue and a trading of “gives” for “takes”. If the leadership wanted to make the strongest statement about where they want to take their relationship, they would tackle the most difficult task first, namely their long-standing border dispute. The two countries’ mutual border is the problem and also the answer to unlocking the value of all the other initiatives in what could be one of the world’s most important relationships.
        2. Addressing the key issues. If the platform is one of trust (built on resolving the core territorial issue), both countries have a chance of addressing their naval, bilateral trade and economic issues. In the absence of this they are set to gradually escalate their issues to tensions; we can expect naval blockades, rising trade barriers and fierce economic rivalry.
        3. Unlocking the opportunities. The leveraging of each other’s capital, markets and intellectual property becomes easy if it is built on trust and agreements on the biggest of their issues. In the absence of this, the two are set for sub-optimal exchange.

The successful execution of any of the above issues will also likely require long-term commitment by both nations, which raises the question of continuity. In China the current senior leadership by all expectations will be in power for another decade, providing a high degree of continuity and stability in policy The India-China relationship is set to be one of the defining geopolitical relationships of the century and with America form one of the most important axes of the games that will determine peace, prosperity and freedom in our times.and outlook. In India, a general election in under 12 months will determine who will lead the country for next five years and by most accounts it is far too early to call the election. An incoming BJP led government could significantly shift the emphasis of India’s engagement with China, being more hawkish on defense and security on the one hand while perhaps being more pro-business and open to Chinese investment and economic ties. A Congress government, likely with a new leadership team, will no doubt wish to reassert itself on multiple fronts and set a new agenda. Given the nature of Indian politics and the large coalitions that typically make up government, policy consistency even within a single electoral term is not guaranteed. An incoming Prime Minister will either need to build a strong consensus within his own coalition or have the audacity to act and take partners along to ensure the breath of support required to engage in a long-term strategic partnership or conflict with China.

Finally, although the key relationship in the engagement to solve any of the issues above will be between China and India, both countries will need to consider the role of the US, whose political, military and economic strengths and interests will allow it to influence the outcome of any India-China engagement. The US in many ways is the third leg of the trilateral relationship (see the May 2012 edition of The Sign, “Why China and India Need the US”, that will determine how Asia will be shaped. Both India and China are clearly the two most important agents, allies or rivals, to help the US achieve its goals in the region. Independently and together, India and China will need to determine how best to engage with the US on not only their relationship with the US but on their issues with each other. The India-China relationship is set to be one of the defining geopolitical relationships of the century and with America form one of the most important axes of the games that will determine peace, prosperity and freedom in our times.


1.    Li Keqiang, May 20, 2013, Printed in The Hindu

2.    also known as the MacCartney-MacDonald Line, recognised by both parties in Sino-Indian agreements in 1993 and 1996

3.    Failed States Index, published by Foreign Policy and the Fund for Peace – Pakistan currently ranks 13th down from 10th place in 2010

4.    Hu Jintao, “Address at Islamabad Convention Center: “Carry on Traditional Friendship and Deepen All-Round Cooperation’,” website of the Ministry of Foreign Affairs of the People’s Republic of China.

5.    “Pakistani president Asif Zardari admits creating terrorist groups” (reported in the Telegraph 8/7/09) and the Pakistani national intelligence agency ISI is believed to support terrorist organisations including Al-Qaeda and Jaish-e-Mohammed

6.    Britain in the 19th and 20th century fought three wars seeking to pacify the northwest border and extend its sphere of influence in the region, suffering its largest military defeat of the 19th century in the process. The USSR invaded Afghanistan for similar reasons in 1979, and was tied down into a costly ten year war that ultimately hastened the Soviet Union’s demise

7.    Coined in “Building Better Global Economic BRICs”, a 2001 paper by Jim O’Neill, the head of economic research at Goldman Sachs


9.    Now named the Iran-Pakistan Pipeline, following India’s withdrawal from the project due to US pressure promoting the Turkmenistan-Afghanistan-Pakistan-India pipeline as an alternative that exclude Iran from Asian energy markets

10.    For example, the division of Europe in the Cold War order provided the region with the longest period of peace in its history, but effectively shut down regional trade flows across the Iron Curtain, depressing economic opportunities. GDP per capita in Poland, for example, increased fourfold in the 20 years following the end of the Cold War.

11.    Indian finance minister P Chidambaram at the annual World Bank meeting, April 2013, reported by World Bank President Jim Yong Kim: “I just met with the Finance Minister of India this morning, and he told me that, in India, they have a USD 1 trillion infrastructure deficit just for the next five years.”