1
ISAS Special Report
23 November 2012
469A Bukit Timah Road
#07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239
Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg
SPECIAL ADDRESS BY DR S JAISHANKAR, INDIA’S AMBASSADOR TO CHINA, AT THE INSTITUTE OF SOUTH ASIAN STUDIES (ISAS) SYMPOSIUM ON INDIA-CHINA RELATIONS, HELD ON 23 NOVEMBER 2012, 10.00AM AT THE NATIONAL LIBRARY BUILDING
India and China: Fifty Years After
Dr S Jaishankar
India’s Ambassador to China
I am particularly pleased to see Ambassador Zhang Yan, who has been my counterpart [China’s Ambassador to India] for the last three years, who is also here today. I chose to speak on ‘India and China: Fifty Years After’ because, in many ways, the relationship is dominated by what happened 50 years ago. Now, even as many in India are immersed in dissecting the 1962 conflict, a few other developments are actually taking place in India-China relations. On Monday (26 November 2012), we will have perhaps the largest Chinese economic delegation ever in India, led by the Chairman of the National Development and Reform Council. That will be a delegation almost 200 economic policy makers and implementers. A day later, we would have China’s premier forum like Davos [Boao Forum] — its first-ever event in India where about 150 businessmen and corporate leaders will be meeting their Indian counterparts and discussing business. A few days before, a Chinese entry won the Best Film Award at the Kolkata International Film Festival and, in fact, in this month, which is exactly 50 years after the 1962 conflict we have had an Indian auto company with a British brand doing its groundbreaking ceremony in China, and a Chinese auto company with an American brand releasing its first passenger car in India. So, as you can see, the relationship has its paradoxes. This is perhaps symbolic, in many ways, of the state of relations 50 years after.
2. For a general observer, this relationship is more than a little confusing. Its orthodox understanding is of a rivalry, dominated by the border dispute and driven by political
2
competition. But that perception struggles to explain burgeoning trade between the two nations or their making common cause on climate change. The fact is that there are two narratives of the ties that coexist. One is centered around the 1962 conflict; the other reflects their more contemporary goals and the compulsions of gloabalisation. Both are equally real, even if believers of each tend to underplay the other. Reconciling them is the challenge that we grapple with daily in policymaking.
3. As many of you know, the 1962 conflict left unresolved issues. Among them is a boundary dispute that is the subject of prolonged negotiations. Recent years have also seen debates over sovereignty and jurisdiction. China has sought to influence the balance of power within the Indian subcontinent and this has consequences that continue to this day. There are deeper legacy issues, reflected in the levels of trust and limits of contacts. That makes it much harder to appreciate each other’s interests and aspirations. Fifty years later, we still struggle with a difficult inheritance and should reflect on its lessons.
4. After a decade or more of attempting normalization, it was left to Rajiv Gandhi in 1988 to take decisive steps that laid the basis for the more positive narrative. The impasse that served the interests of neither nation has since given way steadily to sustained political engagement, growing economic activity and active convergence on global issues. Nurtured assiduously by successive governments, it is reflected in frequent leadership meetings, new mechanisms of cooperation and more agreements. Prime Minister Manmohan Singh has probably met his Chinese counterparts as many times as all his predecessors combined. Of the 130 odd agreements between India and China, 60% date to the last decade alone. Similarly, we have 36 dialogues and mechanisms, the bulk of which were established in this period.
5. There is no question that the game changer in the relationship has been its economic aspects. Bilateral trade, less than USD 3 billion in 2000, mushroomed to USD 74 billion last year. India is also the largest destination for China’s project exports, with an estimated USD 55 billion worth currently under execution, mainly in the infrastructure sector. 19 Chinese state- owned enterprises have established 40 plus offices in India. Investment figures are harder to estimate, given their routing. But clearly, they are growing and rapidly so. Among the prominent Chinese companies already in India are Lenovo, Sany, Haier, Huawei, ZTE, Liu Gong, TBEA and Zoomlion. In China, the Indian footprint includes the Tatas, Mahindras, Infosys, Wipro, NIIT, Bharat Forge, Thermax, Sundram Fasteners, Binani Cement, Dr. Reddys, LMW and Birlas.
6. That the economic engagement has reached serious levels can be gauged from market shares. It is estimated that 30-35% of the power plants under construction in India under the 12th Five Year Plan are sourced from China. Their telecom companies are also estimated to have about 35% of the wireless infrastructure market in India. Lenovo leads the Indian PC market with 9% share. Sany has almost 20% of construction equipment while TBEA is a market leader with 27% in high voltage transmission. In China, Indian presence is more modest but making its mark. Mahindras have 9% of the tractor market, second only to John Deere as a foreign player.
Binani Cements manage a sizeable quarry to cement operation. NIIT operates 205 centers for its
3
IT education business. The Tatas, of course, are across the spectrum and Jaguar Land Rover just did its JV plant opening with Chery last week.
7. These developments have two drivers. One is the frugal Indian economy that welcomes competitive inputs, including from China. That displays a degree of pragmatism reminiscent of China itself during its economic opening. In many sectors, the availability of a Chinese option has compelled vendors of other nations to be more reasonable. The growth of India-China trade is a natural reflection of India’s quest for economic competitiveness. The other is the globalization of Indian companies and the relevance of China to their larger ambitions. It is both a market and a base for third country exports.
8. Another area of convergence worth noting is in global issues. As developing economies, India and China are both sensitive to food and energy security concerns. They work closely on the Doha Development Round. Their economies feel the impact of high commodity prices, as much as they do of market protectionism. Their cooperation on climate change is impelled by the need to protect their growth prospects. These are also the two nations that have strong sovereignty concerns. As a result, they work far more together than most observers assume in multilateral forums, including the United Nations. As rising powers, India and China naturally nurse hopes of playing a greater role in global deliberations. The international financial crisis has opened up possibilities and we see them cooperate at G-20 meetings as well. The changing world has new building blocks, among them the BRICS, of which both are key members. In some ways, all this is a throwback to the pre-1962 era, except this time around, it is driven more by interests than sentiment.
9. The duality of conflicting narratives is more complicated than one would imagine.
Contradictions apart, new issues sometimes inject fresh life into dormant distrust. Even progress can create its own difficulties. Let me explain. Controversies over visas revive arguments over sovereignty and territoriality. Defence exchanges were briefly affected by a desire for selective engagement. Trans-border river flows are a subject of sensitivity. Even if creative diplomacy prevails, it does remind us that embers of the past remain alive. Accommodating each other’s rise has not been an easy process either. Although both nations seek to expand the nuclear share of their energy mix, India’s global engagement in that regard does not seem to get adequate understanding. Nor has the Indian goal of occupying a permanent seat in the UN Security Council struck a chord, although there is ample history of Indian support for China’s cause.
Conversely, China’s growing presence and activities beyond its borders raise questions among some sections of Indian opinion.
10. There is, of course, no getting away from the border dispute so central to the first narrative. Special Representatives, who have been charged with finding a solution, have held 15 rounds of talks so far. We have reached an agreement on the political parameters and guiding principles of a settlement. However, it is difficult to disclose details of what is work in progress.
Since that constrains us from generating news, the focus shifts to transgressions across the line of control, real or perceived. In all of this, the achievement of maintaining peace and tranquility through agreements in 1993, 1996, 2005 and 2012 may not always be adequately appreciated.
4
Respect for that achievement should rise when we see other disputes where that has not been possible. This is also an appropriate juncture to draw attention to our expanding defense exchanges. Discussions during the recent visit of Defence Minister Liang Guanglie have added to their intensity. The engagement process is all the more important as modernization efforts are underway in both militaries.
11. The area where we perhaps have the most catching up to do is people-to-people relations.
The number of Indian students in China has grown appreciably, now estimated at more than 10,000. In contrast, Chinese students in India are still less than 1000. Cultural activities on the whole remain limited though we had some exceptional events in 2010 and 2011. Few of our films are shown in each other’s countries, in China’s case more due to quota restrictions than lack of public interest in Bollywood. Contacts between our media have, however, grown in recent years, assisted by support from the two Governments. Think-tank exchanges have flourished more readily, though they too have much room to develop.
12. Last year, about 700,000 people travelled between our two countries. While an improvement on the past, compare this with a figure of 4.64 million for China and Japan and 6.5 million with Republic of Korea. Air connectivity is also limited, a cause as much as a symptom.
The real distance is, however, an intellectual one. The history of India-China cultural interactions finds little recognition among the intelligentsia. Modern history writing has also been parsimonious in acknowledging our debt to the other. Even shared heritage has fallen victim to politics. Narrowing this distance is essential if we are to develop more empathy between our societies. It was that realization which prompted the Nalanda University initiative.
In the same spirit, we are preparing jointly an encyclopedia of India-China cultural contacts, an idea incidentally of George Yeo. We are publishing too a Chinese translation of P.C. Bagchi’s masterful work on the cultural impact of India and China on each other. A more long-term effort to start teaching Chinese as a foreign language in Indian middle and high schools is underway.
An agreement with Hanban was recently reached in that regard. If there is a silver lining to the cultural cloud, it is in awareness of what we are missing.
13. While overall, the economic story has been an encouraging one, it has created its own issues. Prominent among them is the growing trade deficit, $27 billion last year. Trade is rarely a subject of unanimity and that with China is perhaps more divisive than others. Some sectors in Indian industry have clearly benefited from Chinese technology, equipment, components and ingredients. Others have not, many of them SMEs. The bottom line is that the Indian economy has been extraordinarily open to Chinese goods and the numbers speak for themselves. The picture is somewhat different for Indian companies vis-à-vis China. Our trade basket is dominated by ores, cotton, yarn and some chemicals. Indian industry is not uncompetitive otherwise. Our problem is that we face market access challenges. The Chinese duty structure is hard on value-added engineering exports that are India’s forte. Registration processes are a deterrence to pharmaceutical exports. Local production requirements keep out an auto ancillary industry with impressive Deming certifications. Government contracts do not favor foreign companies. Our SPS negotiations have been painful, with only 3 out of 17 agro-items having been cleared over 11 years. Quotas and restraints hamper our entertainment industry. Trade and
5
services are often conditioned on investment. The bottom line is that trading without a local presence has serious limitations. These issues have created a situation that is not in the interests of either party. It remains to be seen if our joint search for solutions is serious and effective.
14. Greater investments can offer some solutions while also raising the economic engagement to a higher level. The nature of the market in both countries will push investors to localize. This should end up creating relationships that play back into home economies.
Investments can also help support and sustain more smoothly projects in India based on China sourcing. Better technologies, additional capacities and overall efficiency are, of course, the obvious benefits. Challenges faced in investment are very different in India and China. They bear examination because today, many companies are poised to make decisions. Weak demand in developed markets could push them in the right direction faster than we might expect.
15. It is important that Chinese investments feel welcome in India. That the relationship still carries some political baggage makes many companies more than a little hesitant. We are trying to address that concern through policy pronouncements and government signals. Next week, at the bilateral Strategic Economic Dialogue that will be taking place in New Delhi, we hope to be able to highlight a number of sectors for future cooperation. Publicizing progress on the ground is equally helpful. A promotional film on investment we have brought out recently has had a good impact. Success stories are being written about and hopefully will get more attention in coming days. As part of this strategy, the information gap is being addressed through an investors’ guide to India, specifically written for Chinese companies.
16. It must also be recognized that Chinese companies have a limited understanding of the Indian market. India may be China’s seventh largest export destination. But most of that business was delivered by Indians sourcing in China, rather than Chinese marketing in India.
The knowledge curve, therefore, lags considerably behind the numbers. Based on what happens in their own country, Chinese companies expect assistance from local governments. Similarly, they also hope for positive discrimination and carve outs. Chinese corporate planning finds problematic to adjust to a smaller scale more appropriate for the Indian situation. Assessments of skills availability and management of labor are more difficult than we might think. For certain categories of products, branding is also an issue. In the field of projects, Chinese companies have struggled to create a working model that is less reliant on the export of their own labor. Matching business cultures can be as challenging as operating under different rules and regulations.
17. Prospects for Indian companies in China are no more certain, though their problems are quite different. The IT industry and services in general should note the Chinese interest in expanding this sector. But they have to localize much more to overcome their current HR limitations. Areas like pharmaceuticals are promising as China’s health sector upgrades. But a more detailed understanding of the working of the Chinese market is required. Pressures to invest will remain strong, as will be the attraction of obtaining national treatment. Finding a reliable and long-term local partner can itself be an entry challenge. Given the mismatch of scales, even successful JVs feel the push for continuous expansion. Indian industry also needs to
6
appreciate the rapid pace of changes in China. With higher labor costs and better skills, China will move up the technology ladder and display more sensitivity to environmental costs. That China will provide a different set of opportunities for those willing to make commitments now.
18. The India-China economic connect is being facilitated by the creation of a more positive enabling environment. There has been some progress in the establishment of banking facilities, though Chinese licensing practices pose viability issues for Indian banks. The first Chinese bank branch opened last year in Mumbai and we await further developments. As part of a BRICS understanding, it has also been agreed that Indian companies in the infrastructure would be permitted RMB-denominated ECBs, subject to caps. The banking industry in China is expanding its familiarity with corporate India and we have seen the beginnings of project financing.
19. As a participant here pointed out recently, China’s neighbors are among its top trade partners. In contrast, India’s are not, because South Asia is both under-developed and under- integrated. The emergence of China as a significant neighboring trade partner is a new experience for India. China has experience in dealing with neighboring economies; India’s is relatively limited. Economic dependence with political differences - the challenge of reconciling the two narratives - has its legitimate worries. We should also note that China is a net importer vis-à-vis most of its neighbors: machinery from Japan, ROK and Taiwan; components and raw materials from ASEAN; energy and raw materials from Russia and Central Asia. The relationship with India is more export-driven and calls for greater understanding of a very different work culture.
20. How can Singapore come into this equation? To a degree, it already has, through ASEAN-led forums and its CECA with India. Much of what is taken for granted in Singapore can be rocket science for Chinese companies working on their India strategy. They grapple with entry issues like location and infrastructure. They do not understand that demand in India can be regionally differentiated. Nor have they developed adequate comfort with processes challenges.
As Chinese interest in investing in India grows, there are natural opportunities for a more experienced player who has been there and done that.
21. India and China have to come to terms with their past if they are to contemplate a better future. They cannot airbrush the difficult times from their history. But nor must they just live in it. There are complementarities and convergences waiting to be exploited, just as there is a trust deficit that needs to be addressed. At the 18th CPC Congress, President Hu Jintao called on countries to accommodate the legitimate concerns of others when pursuing their own interests.
Such a farsighted approach would surely help shift the balance in favor of the more positive narrative.
. . .
