India must capitalise on transnational economic corridors

The recent turmoil in the financial markets has not dampened Chinese government’s enthusiasm for building infrastructure projects across Asia. For instance, after international sanctions were removed recently, Chinese President Xi Jinping was the first head of the state to visit Iran, where he promised to build a high-speed train network and termed Iran as a ‘natural partner’ in implementing the One Belt, One Road (OBOR) initiative.

The OBOR is an ambitious connectivity project, which seeks to leverage Chinese core-competency in infrastructure-building and also address the problem of domestic industrial overcapacity in sectors such as steel and cement. The OBOR has both continental and maritime components. The maritime route will connect important ports in China, the South China Sea, and the Indian Ocean, with the European ports in the Mediterranean Sea. The continental route will link-up western China with Central Asia and Europe.

An arm of the continental route, the China-Pakistan Economic Corridor (CPEC), will start from Kashgar in China, traverse through Pakistan and reach the Gwadar Port on the Arabian Sea. The CPEC will cost about $46 billion, and the bulk of this expenditure will be on energy and infrastructure projects. China has repeatedly demonstrated its capacity to operationalise massive infrastructural projects, and the CPEC will not be an exception.

Enhanced connectivity networks and economic interactions need not always result in positive outcomes for all the stakeholders. Increased connectivity between China and Myanmar has led to an easy flow of natural resources from Myanmar to China. There is a concern in Myanmar that Chinese investments have been substantially in the extractive sector, and they did not result in sustainable employment generation. Therefore, countries on the Chinese periphery are keenly observing the approaches that Pakistan will deploy in its economic engagement with China to ensure mutually-beneficial outcomes.

The initial results of enhanced economic interactions with China have been less than satisfactory for Pakistan. The China-Pakistan Free Trade Agreement (FTA), signed in 2006, did not bring anticipated benefits to Pakistan. In the first phase of the FTA, both countries had agreed to bring approximately 35% of tariff lines to zero duty. However, after the implementation of the first phase, while there has been an increase in the bilateral trade, much of it was a consequence of the increase in Chinese exports to Pakistan. For instance, in 2006, Chinese exports to Pakistan amounted to $4,664.81 million and Pakistani exports to China were at $915.61 million. However, by 2014, Chinese exports to Pakistan scaled up to $14,573 million and Pakistan’s exports to China increased marginally to $2,509.44 million. There is a concern in Pakistan that the FTA is hurting its economy and, as a consequence, the modalities for implementing the second phase of the FTA are still being negotiated. The implementation of the CPEC may further skew trade relations between the two countries, as much of the equipment that gets deployed in the infrastructure and energy projects may be procured from China.

Given these numbers, Pakistan will have to do a detailed study on the implications for its trade balance, if India accepts the invitation of Chinese policy-makers to join OBOR projects and specifically the CPEC. At the moment, apart from expressing “concerns to China about their activities in Pakistan Occupied Kashmir (POK),” India has not clearly articulated its stance on various Chinese connectivity projects in the subcontinent.

It should be noted that China and Pakistan have diametrically opposite views on economic engagement with India. In spite of persistent differences on boundary dispute, China and India have robust economic interactions. In 2014, the India-China bilateral trade stood at $71.53 billion and India-Pakistan trade was around $2.7 billion. While India and China accorded each other Most Favoured Nation (MFN) status in 1984, Pakistan is yet to reciprocate MFN status given by India in 1996. China is eager to have connectivity networks across the Himalayas, dense forests in Myanmar and across oceans, as part of the maritime silk route. Pakistan, on the other hand, is reluctant to develop connectivity networks across the plains of Punjab and refuses to give India access to Afghanistan and Central Asia.

If India has to be part of the CPEC, then it would require a tectonic shift in Pakistan’s policy towards India. Pakistan should not only be willing to trade with India, but also give the country access to its market and beyond. If the CPEC succeeds with a significant presence of Chinese companies in Pakistan, then these companies will be eager to access the Indian market as well. Lahore, an important hub on the CPEC, may become the staging ground for such an enterprise, as it is just 54-km away from Amritsar in India. The question is, can Chinese business persons and Chinese government push Pakistan to change its strategic posture vis-a-vis India? Importantly, can China compel Pakistan to think and act like China, viz. engaging in robust economic interactions while continuing to have boundary disputes?

In addition to the CPEC, Chinese government officials are inviting India to participate in the Bangladesh, China, India and Myanmar (BCIM) corridor. China has also proposed trilateral economic corridor involving India and Nepal (CNI). Understandably, India’s response has been lukewarm, as there is an apprehension that the trade balance will get further skewed in favour of China. Moreover, there is a pattern in Chinese connectivity networks concerning India. All these corridors envisage connectivity to India through a third country. Interestingly, China, in the recent past, has refrained from proposing direct connectivity corridors to India. If it is pure economics, compared to Pakistan, India is a vastly bigger market, and a direct corridor would have made a better business proposal for China. Then what explains $46 billion dollar investment in Pakistan—a country which is experiencing political instability and armed violence?

A direct economic corridor between India and China requires that the Line of Actual Control (LAC) should be delineated at least in some sectors. Such delineation will enable the creation of customs centres and other paraphernalia required for cross-border trade. It appears China does not foresee the possibility of delineating the LAC in the coming decade. China is exploring the possibilities of accessing Indian market through third countries. If India concedes and agrees to participate in any one of the three corridors—the CPEC, the BCIM and the CNI—then China would have achieved its objective of accessing Indian markets without even delineating the LAC.

If not the resolution of the boundary dispute, India should push with greater vigour for the delineation of the LAC. Further, India has to come up with alternative connectivity networks. The challenge is, India does not command the financial resources on the same scale as China. Therefore, it becomes necessary to collaborate with other initiatives such as Japan’s Partnership for Quality Infrastructure and the US’s Indo-Pacific Economic Corridor. India-Japan-US Trilateral, which has been recently upgraded to a ministerial dialogue, is an appropriate platform for developing a common vision on connectivity networks and associated implementation strategies.