How's the China-India economic relationship changed 2 years on from the deadly Galwan Valley border clash?

·7 min read

China and India's relationship has long tread the line between competition and cooperation, but following the deadly Galwan Valley border clash in June 2020 which left 24 soldiers dead, observers said the latter is increasingly waning.

Beijing is keen for the border issue not to affect other aspects of its relationship with New Delhi, but for India, normal ties cannot be resumed until a solution is found.

Amid heightened security concerns, India has carried out a strategy dubbed by some as so-called economic coercion.

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It has kept Huawei Technologies Co. out of 5G trials, outlawed more than 270 Chinese apps, causing technology companies to withdraw from the country, and a report in March 2021 said that India had denied clearance to investments worth US$1.63 billion from China.

India also joined the US-led Indo Pacific Economic Framework (IPEF), which aims to counter China's influence in the region.

Trade may be seen as an arena untouched by the strained bilateral relationship, but it reveals deep wounds in the power balance, which tilts increasingly towards China at a time of significant distrust between the two countries.

In the first quarter of 2022, China's exports to India grew to US$27.1 billion, while India's exports to China stood at US$4.87 billion, according to India's Ministry of External Affairs. This marked a 15.3 per cent year on year increase in bilateral trade, which in 2021, had reached a record US$125 billion.

This has only increased India's concerns regarding its ballooning trade deficit with China, which increased to US$64.5 billion last year compared to US$51.2 billion in 2019. The trade deficit in the first three months of 2021 sat at US$22.23 billion, according to the Ministry of External Affairs.

"The perceived mutual benefits between India and China are asymmetric in character", said Aravind Yelery, an adjunct fellow at the Institute of Chinese Studies in New Delhi.

India has long expressed concerns that while China subsidies domestic production and is able to push vast quantities of comparatively cheaper goods in the Indian market, Indian exports in various sectors are subject to crippling restrictions.

Yelery added that China is careful to limit its imports from India, highlighted by it choosing not to buy generic pharmaceutical drugs from India, which is the largest provider, despite it being the second largest market.

India is also the world's largest exporter of rice, but China, which has been the largest importer, only bought rice from India for the first time in 30 years in 2020.

"It is not pure economics at work over here", said Yelery. "China doesn't want its vulnerability being exploited by a competitive neighbour that has a boundary problem with it."

However, the imbalance can also be attributed to the nature of the products both countries export to each other, according to Lou Chunhao, an assistant research professor at the China Institutes of Contemporary International Relations in Beijing.

India's exports to China in 2020 consisted mainly of primary goods, such as iron ore, refined petroleum and cyclic hydrocarbons, while China's exports to India involved higher-value manufactured goods, such as computers, telephones and broadcasting equipment.

In December, China's top exports to India included telephones, computers, semiconductor devices and integrated circuits, while China imported predominantly diamonds, raw alimunium, crustaceans and non-retail pure cotton yarn.

Lou denied that China limits imports from India due to strategic concerns about dependency.

China proposed to set up a High Level Economic and Trade Dialogue during the second informal summit between President Xi Jinping and Indian Prime Minster Narendra Modi in October 2019 to tackle the trade deficit, however, progress stalled after the border clash.

Given the current impasse, arguments have become louder for India to decouple from China as fears grow that a hostile relationship will allow China to leverage its economic power over India.

According to data from 2019, 70 per cent of India's active pharmaceutical ingredients, 34 per cent of its electrical machinery and 18 per cent of its nuclear reactors were imported from China.

Some of the largest Indian companies are also seen to benefit tremendously from having access to the vast Chinese market.

"Decoupling is not going to happen because nobody really is as large a manufacturing entity as China is," said Madhu Bhalla, a professor in Chinese studies at the Department of East Asian Studies at Delhi University.

"Diversifying and reducing dependency - perhaps."

To boost manufacturing and enhance its own export capacity, in November 2020, India launched the Production Linked Incentive scheme.

It is designed to encourage local manufacturing in 10 key areas, including automobiles, pharmaceuticals and electronics, with both domestic and foreign companies paid for meeting output targets.

Diversification is not merely a concern for India as the coronavirus pandemic has exposed multiple countries' vulnerabilities to supply chain risks and over-reliance on China, with the Ukraine war only further accelerating the process, according to analysts.

"[China's worry is that] with the rising trend of de-Sinicization across the world, the existing 'US, West plus China industrial model' will get replaced by the 'US, West plus India industrial model' in the future", said Antara Ghosal Singh, a fellow with the Strategic Studies Programme at Observer Research Foundation in New Delhi.

While it is a possibility, given the United States and European Union are managing their so-called China Plus One strategy which seeks to avoid investing only in China, Bhalla said that India "needs to liberalise its economy even further" for that to happen.

Other than the Production Linked Incentive scheme, Bhalla said that the government needs to provide manufacturing skills to a large number of younger people to combat unemployment and revitalise the industry.

The government also needs to introduce policies that allow entrepreneurs to be "less risk-averse", she added.

"None of that is happening effectively enough at the moment. We are listening to the government talking about making these changes, but we do not have the statistics that indicate it," Bhalla said.

"China is wise enough to understand that it's not very good to have an antagonistic neighbour on the border who can always, even if it's weaker, create trouble for you", said Bhalla, adding that reconciliation is unlikely if China thinks India is strategically important enough.

Maintaining cordial relations with India is indeed of strategic importance for China, in part due to the Belt and Road Initiative - Beijing's development plan that involves connecting more than 70 countries in Asia, Europe and Africa via a series of rail, road and sea infrastructure projects.

Some of China's mega-connectivity initiatives in South Asia, such as the China-Nepal-India Trans-Himalayan Corridor, the Bangladesh-China-India-Myanmar Economic Corridor and the 21st Century Maritime Silk Road, include India.

The concerted effort by China, according to Ghosal Singh, to de-link the border crisis from the rest of the relationship stems from the anxiety that India may cause it to lose certain key positions in the global supply chain, if China's economic relations with both the US and India continue to worsen.

Maintaining a stable relationship with New Delhi would be in Beijing's best interests, added Ghosal Singh, at a time when its relationship with the US is already strained.

But the chief concern for New Delhi remains the border crisis and bilateral efforts to solve the problem, meaning without progress, reconciliation of any other kind is unlikely, said a Ministry and External Affairs statement in March recapping a meeting with Chinese foreign minister Wang Yi.

Lou said that although cooperation is indeed the best course of action, for China, it is "extremely alarming" that India is turning to the US to help address the border crisis.

"India should be reminded of not being used by the US to target China" said Lou.

"It should play the role of bridging differences instead of choosing sides."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.

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