India can’t cut the cord from China

Foreign Policy says India has become one of the main buyers of Russian crude oil as the latter's invasion of Ukraine is continuing. Caliber.Az reprints the article.  

In the wake of Russia’s invasion of Ukraine and despite Western sanctions, India became one of the main buyers of Russian crude oil. Indian refiners have bought more than half of the oil exported by Russia in the current fiscal year. Europe and the United States have largely chosen to look away, but in May, the European Union objected to a direct shipment from Russia’s Rosneft Oil Company destined for India’s biggest state-owned refiner. As a result, the Reserve Bank of India refused to allow payment to Moscow in either euros or U.S. dollars. The state-owned refiner went to another bank, and ended up paying for the Russian crude in Chinese yuan. This gave a boost to Beijing’s efforts to internationalize its currency.

India’s stridently nationalist government was likely left embarrassed by the incident. In the summer of 2020, 20 Indian soldiers and four Chinese soldiers were killed in a skirmish on the disputed border in Ladakh after the Chinese People’s Liberation Army moved into areas controlled by India. Since the faceoff, the Indian government, headed by Prime Minister Narendra Modi, has repeatedly said that New Delhi cannot maintain normal ties with Beijing because the border situation is not normal. It has further tried to assuage anti-China sentiment by hyping its ban of TikTok, Shein, and hundreds of other Chinese-owned apps. Meanwhile, though, Indian companies continue to use yuan to pay for 10 percent of the country’s Russian oil supplies—and New Delhi remains silent on the issue.

The yuan payments show how India’s dependence on China has only grown in the past three years, despite the fraught situation on the border. Bilateral trade has increased, and the trade balance has tipped further in China’s favor. Breaking previous vows, Indian ministers solicit Chinese investments. New Delhi is conceding to demands from electronics manufacturers to make it easier for Chinese engineers to get visas. India is the biggest recipient of financing from China-based multilateral banks, and Modi and his ministers are enthusiastic participants in both the BRICS group (Brazil, Russia, India, China, and South Africa) and the Shanghai Cooperation Organization (SCO), two groupings dominated by China.

There has been substantive diplomatic engagement between the two sides through these multilateral forums, but when it comes to the border dispute, Beijing has refused to make concessions. China has put additional diplomatic pressure on India, including by failing to post an ambassador to New Delhi since last October. Last week, positive language in a joint statement that followed border talks raised expectations that Modi and Chinese President Xi Jinping are likely to meet bilaterally in Johannesburg, South Africa, at this week’s BRICS summit. It would be their first structured meeting since 2019. But whatever the outcome of those talks, the task for India is to build its strength—democratic, economic, and military—so that it is prepared to confront the Chinese challenge going forward.

India, in recent months, seems to be reversing some of the steps it initiated against China at the time of the Ladakh border crisis in 2020. Around then, New Delhi amended its policy on foreign investments from countries it shares a land border with, requiring additional government approval for proposals; it was a thinly veiled policy to stall and block Chinese activity. Indian ministers have at least verbally changed their tune this summer, suggesting that completely cutting off China is not a sustainable strategy. In July, a reporter asked Rajeev Chandrasekhar, the minister of state for electronics and information technology, if India is open to doing business with Chinese companies. “Of course we are,” Chandrasekhar said.

That softening is in part because India needs Chinese investments in electronics, batteries, and electric vehicles. In January, New Delhi asked Apple to identify Chinese suppliers of parts who would be prepared to set up a joint venture with an Indian partner. The Indian government gave 12 Chinese companies clearance to apply to start such businesses, but many of them initially seemed unenthusiastic, since New Delhi had unleashed harsh measures against Chinese mobile phone producers for violations of tax and foreign exchange laws in 2020. However, a slowdown in tech funding in India in the past year means that the Modi government can no longer afford to be so strict about Chinese investment: Shutting the taps entirely had put India in a tough spot, with an economy that remained stagnant despite Modi’s much-hyped “Make in India” plan.

Such is India’s dependence on Chinese electronics manufacturing know-how that in July it agreed to open faster visa processing for Chinese experts in installation, expansion, and repair work, especially for those workers employed by companies approved under New Delhi’s so-called production-linked incentive scheme, a flagship program to boost Indian manufacturing. The Indian government has pushed Chinese cell phone manufacturers to rope in Indian partners for local production, but that has not delivered results. As a result, the Indian government’s long-running unofficial policy of denying visas for Chinese citizens and making things difficult for Chinese companies in India is falling at the altar of its plans to increase manufacturing.

India’s heavy reliance on Chinese imports, including smartphones, semiconductors, solar cells, and pharmaceuticals, is another challenge. Of the $117 billion worth of goods traded between the two countries last year, 87 per cent were Chinese exports. India’s $50 billion pharmaceutical industry is dependent on bulk drugs and intermediate goods from China—essential raw materials to manufacture finished products for domestic consumption and export. Despite its efforts in the past three years, India has not found alternative sources to China for these materials. So critical are these links that Modi has no way of reducing New Delhi’s reliance on Beijing—and thus runs a risks of serious economic disruption in a crisis.

India is also a major beneficiary of support from multilateral development banks based in China. New Delhi is the largest borrower from the Beijing-based Asian Infrastructure Investment Bank, with $9.8 billion committed to projects since 2016, spanning energy, transport, and public health. India is also a founding member of New Development Bank, the erstwhile BRICS bank that is based in China. With 20 approved projects and seven proposals under review, at $7.5 billion, New Delhi is the second-largest recipient of the New Development Bank’s financial support after Beijing.

India’s association with these development banks stems from its membership in two groups dominated by China: BRICS and the SCO. New Delhi’s involvement with these groups predates its involvement with the Quadrilateral Security Dialogue (known as the Quad) alongside Australia, Japan, and the United States. While New Delhi sees its membership in BRICS and the SCO as part of its policy of multi-alignment, its active participation in the Quad was driven in part by India’s desire to externally balance China after the Ladakh border crisis. Senior Indian officials enthusiastically take part in BRICS and SCO meetings, and Modi has always been present at the summits—as he will in Johannesburg this week.

India’s involvement with BRICS and the SCO has ensured that a floor exists for its relationship with Beijing. Officials from both countries often hold bilateral discussions on the sidelines of meetings. Since 2020, most of these conversations have focused on the border crisis. The stalemate on this issue seems to be in China’s favor, with previous border management agreements now redundant. The differences between the two sides have only increased in recent months, with separate official statements after border talks. That trend was only broken this month after a 19th round of discussions between senior military commanders.

India was surprised by the Chinese on the border three summers ago, and it is now caught on the back foot in negotiations. China recently responded to India’s offer to create a buffer zone at the sensitive area of Depsang in Ladakh by instead proposing buffer zones 15 to 20 kilometers inside Indian territory, further cementing its ingress into the region. (India did not accept the Chinese proposal.) In five other areas where Chinese and Indian soldiers have stepped back from their positions by a few miles, Beijing has rejected any plans to move these soldiers back to their bases and has set about building significant military infrastructure in the meantime. New Delhi never publicly acknowledged the violations.

Differences in messaging between the two countries have caused some embarrassment for India. When Indian National Security Advisor Ajit Doval met top Chinese diplomat Wang Yi in South Africa in July, the Chinese readout referred to an “important consensus” reached between Modi and Xi at last year’s G-20 summit in Bali, Indonesia; India never mentioned such a consensus. Three days after Beijing’s July statement, New Delhi had to admit that Modi approached Xi in Bali not only to exchange pleasantries but also to discuss the need to stabilize bilateral relations. (The two leaders did not have a formal bilateral meeting in Bali.) This admission likely didn’t play well with Modi’s domestic audience because it drove home the starkness of India’s empty quiver when it comes to targeting China.