international analysis and commentary

India and the changing Asian balance of power

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September marked only the fourth month since Narendra Modi became the Prime Minister of India. However, it was a month dominated by foreign policy.

He began September by returning from a major state visit to Japan as a guest of Prime Minister Shinzo Abe. Within a few days, he hosted Australia’s Tony Abbott who, was in turn, followed by the Chinese leader Xi Jinping. The last week of September was marked by the United States tour, first speaking at the United Nations General Assembly and then being hosted in Washington for two days by US President Barack Obama.

The alacrity with which Modi has taken to foreign policy has come as a surprise to many Indians who had heard his overtly domestic-focused electoral campaign. But there are two underlying reasons that Modi is taking his foreign policy seriously.

A Made in India vision
Modi does not lack for vision. He symbolically violated India’s caste structure just after his inauguration by holding an ancient Hindu ritual traditionally reserved only for Brahmins, despite coming from a middle-lower caste himself. He has spoken of modernizing India in many ways, networking the entire country through a national digital plan and so on.

On the economic front, he has spoken repeatedly of providing India with a globally competitive manufacturing sector and, as a prerequisite for that, building some world class infrastructure to support such a manufacturing base. “I want foreign firms to ‘make in India’ not just invest in India,” he declared during his Independence Day speech to the nation last month.

This was why his visit to Japan will probably be the highlight of his foreign policy for at least the first year of his term. Prime Minister Abe has pressed the accelerator on germinating Japanese plans to build massive industrial corridors in India and then begin transferring Japanese factories out of China and Thailand to India. This is partly economic, reflecting rising labor costs in China, and partly strategic – Tokyo sees an economically powerful India as a necessary geopolitical ballast to an increasingly assertive Beijing. Abe has pledged $35 billion in capital flows to India over the next five years –and Japanese officials say this figure could double if India does more to improve its business environment.

Modi had sought a similar pledge from President Xi when he visited India. The Chinese Consul-General in Mumbai had publicly spoken airily of $100 billion in investments from China over the next several years. Even a fraction of this would have been remarkable: China’s accumulated direct investment in India barely tops $ 900 million.

While the business firms that came with Xi did sign memoranda of understanding worth $20 billion, the visit was marred by confrontations between Indian and Chinese troops on their disputed border. New Delhi refused to endorse Xi’s pet project of a Chinese-built and financed Maritime Silk Route that would economically link the Pacific and Indian Oceans. There was no joint declaration between the two leaders and the joint statement notably dropped the normal reference to a “one China” policy. Modi had granted Chinese firms a degree of market access to the Indian economy but kept it limited to his special interests in infrastructure building and manufacturing.

Both Japan and China have strong economic incentives to expand their investment footprints in India. Both countries have oversized business sectors, especially in railways and energy, that were developed by the East Asian model of growth through capital investment. China has now joined Japan in experiencing slowing growth in domestic investment.

As one London private equity analyst explained, “Some estimates have it that 50% of the world’s next round of infrastructure development will take place in South Asia. If they can get a chunk of that, their economies will boom for another a few decades.”

Abe and Xi are also gambling on the possibility that in Modi they have an Indian Prime Minister who will actually be able to implement the kind of policies that would allow such infrastructure to be built. This, in turn, is based on the Prime Minister’s successes in this field when he ran the state of Gujarat for three successive terms.

Strategic balance
While the economic logic of this is evident, if somewhat far off in the future, there is a strong strategic element in the interests of both Japan and China.

The last several years have seen Beijing take a more aggressive stance on its long-standing territorial dispute with Japan over the Senkaku/Daiyu islands. This has now led to repeated maritime confrontations and an expansion of Japan’s naval capacities – some of it hidden in the country’s coast guard. China, in effect, has created a new territorial dispute by claiming the lion’s share of the South China Sea for which it has little or no historical claim.

This has been accompanied by a wavering US commitment to its traditional security arrangements in the western Pacific – at least, as perceived by Asian nations. Many Asian analysts argue that China’s territorial ambitions have grown because of a sense of US loss of will if not actual strength. The Obama administration thus began with a so-called “G-2” policy of seeking an accommodation with China and then shifted to a declared policy of “pivoting to Asia” to counter Beijing. At present, however, it has failed to actually implement the pivot and is seen as being largely adrift when it comes to a security policy for the Asia-Pacific. This has only strengthened the sense of countries like Japan, Australia and some Southeast Asian states that more military ballast is needed to balance China’s preponderance.

Japan has been at the forefront of the “build up India” policy. Over the past decade it has shifted its aid policy from assisting China, originally the largest recipient of its aid, to helping India. It has also targeted infrastructure rather than the more traditional poverty alleviation. It began rolling out ever larger infrastructure projects, starting with building a rail transit system for New Delhi and then proposing a $150 billion, 1,400 kilometer-long industrial corridor designed to provide a home for thousands of manufacturing sites. At present, four such corridors are under consideration, spanning literally every corner of India.

While the more pacifist Democratic Party of Japan preferred to position this as a purely economic investment, the more nationalistic Liberal Democratic Party has seen this increasingly as being about a broader policy of responding to China. Abe has been the strongest proponent of the India policy: even before he became Prime Minister a second time he would come to India and argue for the adoption of an “Indo-Pacific” strategic concept that would tie Tokyo and Beijing together.

Abe also wants India to legitimize his own plans to slowly re-militarize Japan. Thus India will probably be the first destination of arms exports from Japan since World War II. India and Japan will hold bilateral naval exercises in the Indian Ocean this year. But just as important are talks about the idea of setting up a Japanese military-industrial complex on Indian soil. While the US has supported a close relationship between India and Japan, it has been a relatively passive partner when it comes to the strategic side. Australia has also sought to bind its military closer to that of India’s: the two will also be holding their maiden naval exercises this year.

It would be too much to say that Beijing is nervous about these developments. Only the US has the firepower and diplomatic wherewithal to contain China in any effective manner. India cannot come to the assistance of Japan in a time of crisis for simple reasons of geography, let alone capacity. However, China is wary of the idea of a resurgent Japan and naturally prefers that a concert of powers concerned about Beijing, however weak, does not arise in Asia. For a number of reasons, Xi has decided to pursue China’s claims on the South China Sea and the Senkaku islands but seek better relations with India. One reason is he sees an economic potential in India. But this probably also reflects the fact that there is no historical animosity between India and China – unlike what exists between China and Japan and, say, Vietnam.

Asia’s geopolitical dance is often but erroneously compared to that of 19th century European powers. There are some clear differences. Wars of conquest, as opposed to acts of political humiliation, are almost certain not to happen. Many Asian countries are nuclear armed or have nuclear weapons capacity. The rising power, China, remains economically fragile in many crucial ways: it lacks a full technology cycle, is dependent on external fuel supplies and has a poor demographic future. Its military is large but highly bureaucratized and corrupt. Finally, many Asian countries like Singapore or Malaysia are not opposed to a Chinese hegemony in Asia and are fence-sitting to see which direction the wind blows – and there are elements even in Australia and Japan who hold to this view. Asia is a slow motion balance of power struggle, but one filled with so many variables that there are almost an infinite number of possible future outcomes.