By: Sashank Rajaram

Abstract- The recent development lending undertaken by the Indian government has sparked a conversation around the India-China relationship and whether such lending is retaliation to counter the aggressive Chinese lending in South Asia. This article aims to provide the geopolitical implications of such acts and examine the threats and opportunities that it entails.

Introduction

Have a look at the images here.

The one on the left is a 7km long bridge in the Maldives that will link its capital Male with the island to its west. The infrastructure project will cost over $500 billion and be funded by India. However, what makes this case particularly interesting is that just on the other side of the capital, one could find the 2km long ‘China Maldives Friendship’ bridge that had been funded by China.

This is not a mere coincidence. For example, while Chinese loans famously helped build mega projects all over Sri Lanka when its economy crashed last year, India provided over $4 billion in loans to the debt-ridden island nation, while China provided only $1.2 billion. Similarly, in Bangladesh, which was a recipient of Chinese loans to build new railway lines and bridges that connect its interiors, the Bangladeshi Finance Minister recently warned other nations against borrowing too much from China. Even now, various railway line infrastructure projects between India and Bangladesh are in full swing under the Indian government’s $8 billion funding package.

The above instances are part of a larger trend that is becoming increasingly noticeable where India is trying to divest Chinese money out of Southern Asia by providing its own money as a better alternative. But why does India – whose economy is six times smaller than China’s – desire the defenestration of Chinese money?

The Chinese Threat

To understand the geopolitics at play, one needs to examine the political rivalry between India and China. While both countries were similarly sized up until the 1990s, China’s explosive growth has made it the world’s second-largest economy, just behind the USA. Consequently, the rapid economic expansion allowed China to embark on a massive lending spree under the ‘Belt and Road’ initiative, where China has been lending billions of dollars to countries all over the world, including India’s direct neighbours such as Bangladesh, Sri Lanka, Maldives, Nepal, and Pakistan. The motivation to provide these funds, according to Professor Andreas Fuchs of Kiel Institute’s China initiative, is both selfish and selfless. First, China uses the funds as a foreign policy tool to incentivise countries to support it on the global stage. Furthermore, China also uses massive funds to promote trade links with countries. Given that the recipient of Chinese loans is primarily under-developed and developing countries, China also appears to want to contribute to the reduction of global poverty. If one analyses these motives more closely, one finds they are not entirely different from the Western countries and institutions that traditionally occupy that space.

However, Chinese loans given to South East Asian countries are perceived as threatening to India, given the history of violent rivalry between the two countries. The border disputes between India and China have never really stabilised, leading to violent skirmishes between both armies time and again. Moreover, countries receiving huge Chinese investments stopped criticising China, as evidenced by the UN Council’s rejection of the humanitarian crimes committed against Uyghur Muslims. The debtors of Chinese loans were also increasingly used as military bases, which posed a security risk to India. 

Up for Grabs

Yet, as the Chinese economy faces a slowdown and as per projections, India is set on a path of high growth, it gives the nation the financial means to attempt to draft out Chinese loans. This suggests that India may now be able to take a more assertive approach to counter the aggressive manoeuvres of China without worrying about economic repercussions. For example, total development lending has risen from $55 billion to $107 billion since 2014. And while the Indian government officially tries to play down that its recent lending initiatives are a reaction to China’s Belt and Road initiative, economists have discovered that India’s state-owned bank, ExIm, was “significantly more likely” to finance projects in a country if the Chinese government had provided finance there within the previous year. Interestingly, this dynamic was even stronger when China made public opinion gains relative to India.

And even though China’s aid is way higher than India’s at a whopping $838 billion, the money is spread over a much larger area. So, countries in South Asia, such as Sri Lanka, and current Indian money flows are already making significant inroads that benefit India on the political spectrum. For example, not only has the Sri Lankan government recently announced a host of upcoming projects that would benefit trade with India. In addition, public opinion in the country has shifted in favour of India and against China.

Yet, China’s large pool of outstanding loans to Sri Lanka means that the island country continues to have a large interest in keeping the Dragon happy as well. This begs the question of whether India’s plan to drive Chinese money stands a chance.

In all likelihood, it is extremely unlikely that India can drive Chinese money out of South Asia for two reasons. First, India’s economy is still much smaller than that of China, and even if it is projected to grow faster, it will take quite some time to reach the economic leverage that China enjoys. Second, given that India has a substantial trade deficit, it needs to attract foreign funding to support its imports. While this does not mean that India cannot provide external funding (as leading contributors like the USA and UK also suffer deficits), it still means that India has a higher risk of getting into financial woes itself than China. As a result, it could be more careful with foreign lending than its bigger neighbour. Nevertheless, while being ambitious in its goal, India might succeed in the long run.

With a lingering financial crisis at home and with many current international projects already in trouble, China is scaling back its ambitions for the belt and road initiative. Called “project of a century” by President Xi Jinping, the present overhaul forced him to re-evaluate the project. Referred to as the “project of a century” by President Xi Jinping, the present overhaul forced him to re-evaluate the project. In November 2022, at the Party’s meeting, he accepted that the current environment for the Belt and Road initiative was becoming “increasingly complex” and stressed the need to strengthen risk controls and expand cooperation, according to state media reports of the meeting. Chinese banks have already sharply reduced lending for investment projects in low-income countries as they focus on cleaning up their existing loan portfolios. Nearly 60% of China’s overseas loans are now held by countries considered to be in financial distress, compared with 5% in 2010, according to economists. Subsequently, China has begun working with other creditors to resolve current debt quagmires. To do so, Beijing has had to abandon its longstanding resistance to working with international institutions like the Paris Club, an association of large sovereign creditors including the US, Japan, and France.

Also, India has found a way around its limited official resources by convincing some of its wealthy private-sector tycoons to finance the country’s interests abroad. Finally, if the projections are right about India’s growth for the next decade or so, then it is possible that the finances will start balancing out China in South Asia.

Conclusion

Chinese lending has often been criticised as ‘debt-trap diplomacy’ as many of China’s debtors end up being unable to repay their loans and, consequently, give up their rights to exercise the infrastructural project to China. To that extent, any development lending by developed economies to their underdeveloped counterparts has been viewed with suspicion. Now, with India entering the bullring, it clearly reflects the Indian government’s outlook on the world order. In light of this recent shift in policy, this could reopen further opportunities not only to improve bilateral relations with other countries but also to position the entire project as a better alternative to both China and international lending institutions. But with the Belt and Road initiative biting back at China, is India’s plan sustainable in the long run so that it doesn’t hamper its economic growth? One can only wait and watch.

About the Author:- Sashank Rajaram is a second-year student at Ashoka University, pursuing  Economics and Finance.