AIIB Relocating India and China in the Neighbourhood

 The 100-billiondollar China-led multilateral lender, Asian Infrastructure Investment Bank (AIIB) set up in December 2015 with 57 member countries, is the second major Asian initiative (after the Asian Development Bank in 1966) that would primarily invest in energy, transportation, urban construction and logistics besides education and healthcare.

Though India has adopted a wait and watch approach to China’s Belt and Road Initiative, there were four critical incentives for India to join AIIB as the second largest shareholder with 7.5 percent as against China’s 26.06 percent, Russia’s 5.93 percent and Germany’s 4.15 per cent of voting shares. India’s keenness and seriousness are reflected in its commitment of US$ 8 billion to the AIIB reservoir, its inclusion in the Board of Directors and its appointment as a Vice President (Chief Investment Officer).

Firstly, ‘daunting infrastructure’ has been the core issue in India’s reformsled development process. Both the ‘cascading tradeinvestment- income’ effect and ‘constrainingjeopardizing development’ impact of infrastructure are widely accepted. It is estimated that India requires at least US$ 1 trillion (US$ 750 billion of this as debt financing) for a critical minimum infrastructure – as against today’s ranking of 87th out of 144 countries – that could transform the economy into a high-growth regime of 9 percent as announced by Prime Minister Narendra Modi. Demonstration effect as to how the ‘flying geese’ countries in East Asia, Japan and China have catapulted themselves to a position of global competition has had a telling impact on Indian development planners in the last two decades. The AIIB partially meets India’s humongous hunger for finance.

Though India launched ‘India Infrastructure Finance’ way back in 2006, only in the budget for 2016-17, has Finance Minister Arun Jaitley declared infrastructure and investment as the fifth support pillar to ‘Transform India,’ and made a ‘decisive departure’ by allocating an unprecedented Rs. 2,21,246 crore (US$ 33 billion) for two types of critical infrastructure, namely, roads and railways. He announced 10,000 kilometres of national highways in 2016-17. Another venture is the US$100billion Delhi-Mumbai Industrial Corridor project.

Secondly, India’s robust economy can develop sustainable resilience only if it gets further integrated with the neighbouring regions including South Asian partners, ASEAN and East Asian countries. In fact, these theatres of growth in Asia themselves are hungry for US$ 8 trillion worth of infrastructure projects for 2010-20 that would generate income of US$ 13 trillion as stated in ADB-ADBI’s study Infrastructure for Seamless Asia (Tokyo, 2009, p.4). Perhaps, it’s going to be the ‘new source of global growth’ (G20 Meeting in Brisbane, 2014).

The objective of India’s Act East policy can be realized only with some reliable physical, virtual and soft-facilitating connectivity. Besides the World Bank and the Asian Development Bank (ADB), engagement of various other agencies like sovereign wealth funds, and Japan’s JICA and Germany’s KfW handing over of projects to known private actors like GMR (and others from abroad) show that India is ready to engage multiple partners for playing a crucial role in ADB’s Pan-Asian Infrastructure Forum (PAIF). Along with the recently- launched New Development Bank (NDB) of BRICS, AIIB now provides a significant degree of flexibility to India whose total external debt was over US$ 480 billion by the end of 2015.

India unambiguously admits China to be a pivot in global financing. “Today, China has de facto become one of the lenders of last resort to governments experiencing financial troubles. It has also become one of the bigger providers of development assistance both bilaterally and plurilaterally. China, in its own heterodox and multiple ways, is assuming the roles of both an International Monetary Fund (IMF) and a World Bank as a result of its reserves.” (Economic Survey, Government of India, 2014-15, Vol. I, p. 18).

Thirdly, the ‘Chinese encirclement’ with its ongoing infrastructure projects around India in the region, like China-Pakistan Economic Corridor, Greater Mekong Sub-region, CAREC and ASEAN, has made India rethink its neighbourhood policy. Despite a crucially pivotal role, India has not been able to provide meaningful and effective leadership to the eightmember SAARC process. A free trade agreement has been signed (SAFTA, 2006); SAARC Development Fund is in place (SDF, 2008), a series of conventions and agreements have been concluded; several regional institutions have been long established; and, core areas of cooperation have been identified under the Integrated Programme of Action since SAARC was established in 1985. However, intra-regional trade remains very low at five percent of South Asia’s global trade, and not a single regional project of consequence has been carried out; which shows that the SAARC model itself has failed. More critically, three regional connectivity related reports – the Transport Infrastructure and Transit Facilities in the SAARC Region (Independent Agency, 1993); the Forging Subregional Links in Transportation and Logistics in South Asia (World Bank 2001) and the SAARC Regional Multimodal Transport Study (ADB, 2007) – launched with much fanfare remain literally untouched.

There are supply chain barriers, tariff and non-tariff barriers and, of course, huge politico-strategic apprehensions in South Asia. However, in its interconnections with Southeast and Central Asia, the most conspicuous stumbling block is physical – air, water and land – connectivity. Myanmar may be a few hundred kilometres from India’s northeastern province of Manipur, yet it takes almost a day via Bangkok to reach Yangon, and that, too, with cumbersome visa processes. AIIB could trigger a variety of production networks, make subregionalism based interactions proliferate and inter-regional integration promising.

With six of SAARC’s eight members as signatories to AIIB and China’s Belt and Road Initiative scheme that literally garlands South Asia with connectivity projects, India has a narrow but farreachingchoice: Between its conventional ‘change’ based on bottom-up approach in the region or transformation-led market-expanding and demand-inducing approach. India understands that if it does not participate to the fullest extent, it will be far behind China’s effective entry, penetrative practices and durable presence in the geographies, societies and economies of this region.

This could inject new types of vulnerabilities in India’s neighbourhood. India’s Minister of State for External Affairs V. K. Singh was referring to this when he said that “the growing competition to set global standards and to determine the direction of trade and investment links through such arrangements can have significant implications for the region, especially in terms of establishing frameworks where security interests align closely with economic ones.” (Raisina Dialogue in New Delhi, March 3, 2016)

It could change entire matrices of India’s bilateral relations with neighbouring countries and could trigger a ‘new regionalism’ exclusively based on connectivity and communication, and related openness of geographies and people. This could even render a regional organization like SAARC ineffective. Indian economy’s identity and exclusivity could be jeopardized and sub-merged in the conundrum of hugely connected geographies and emerging socio-economic complexities. This will happen when neighbouring countries permit penetrations to China to reach India’s own crucial peripheries and borderlands. India “cannot be impervious to the reality that others may see connectivity as an exercise in hard-wiring that influences choices. This should be discouraged, because particularly in the absence of agreed security architecture in Asia, it could give rise to unnecessary competitiveness. Connectivity should diffuse national rivalries, not add to regional tensions.” (Foreign Secretary S. Jaishankar in Raisina Dialogue, New Delhi, March 2, 2016)

And finally, India’s partnership in AIIB provides it an unparalleled opportunity to jointly renegotiate the global financial order and create grounds for steadily reducing ‘diplomatic skirmishes’ and ‘governance deadlock’ with China in multilateral institutions including in ADB. Moreover, India could deploy what Suman Berry, a noted economist, calls its ‘deep pool of tacit expertise on the nuts and bolts of development banking’ in AIIB. India’s national sensitivities are also taken care of where ‘if anything falls into areas where more than one country has claims, it should not be done without both countries agreeing,’ a senior Indian official said. (Ananth Krishnan, India Today, Beijing, January 16, 2016).

As the U.S. effectively remains outside the vortex of this new bank, AIIB repositions India and China in the global discourse on renegotiated financial architecture and international political economy that could drive towards an ‘Asian Century’ – an altogether different partnership away from the protracted bilateral disputes of last half a century. The very fact that Sino- Indian bilateral trade figures have reached a new high of over US$ 72 billion could be sustainably complemented by infrastructure-centric investment. This could even inject democracy, instill efficiency and trigger large scale reforms in Bretton Woods institutions like IBRD, IFC and IDA within the World Bank, and the IMF that have a strong North bias as reflected (and deliberated) in reports such as the Pearson Commission (1969), Brandt Commission (1980) and Zedillo Commission on the World Bank (2009).

Unlike these institutions, AIIB may detach itself from non-economic issues, political influence and other invisible control. How AIIB could offset the compartmentalizing objectives of the U.S.-led Trans-Pacific Partnership (TPP) and China-led Free Trade Area of Asia-Pacific (FTAAP) and Regional Comprehensive Economic Partnership (RCEP) primarily focusing on Southeast and East Asian countries will be clear within next decade or so.

There could be a series of investments in a range of national, cross-border and regional projects requiring much deeper reforms both at the federal and provincial levels in various member countries. The U.S. apprehends that the newborn AIIB could even lead to dilution of environmental clearance norms and dislocation of socio-economic equity principles. At the same time, India’s first plea for financing solar power projects worth US$500 million (15-year loan at a likely interest rate of 2-2.5 percent linked to LIBOR), may be peanuts for a projected 100-gigawatt solar installed capacity in India by 2022 (Country Statement, India made by Nirmala Sitharaman, Commerce and Industry Minister, 71st UNESCAP Commission Session, Bangkok, May 28, 2015). Yet it could trigger other similar clean energy projects in South Asia and CLMV countries in Southeast Asia.

India is also preparing to seek loans for the Prime Minister’s agricultural irrigation scheme (PMKSY), rural housing program and railway projects. Under its Act East Policy, it would be connecting with ASEAN members through modern infrastructure, including the India-Myanmar-Thailand highway. Similarly, the seaport projects in Bangladesh and Sri Lanka, and land ports and hydel power projects in Nepal and Bhutan would require a huge investment by India. “We are working to invest in the Chahbahar port, join the Ashgabat Agreement and participate in the International North-South Transport Corridor. Combined with other ambitious bilateral initiatives, they could be game changers in Central Asia – a part of the world that historically and culturally has strong affinity with India.” (Foreign Secretary S. Jaishankar in Raisina Dialogue, New Delhi, March 2, 2016)

At the cross-border and regional level, one expects AIIB funding for the Bangladesh-China-India- Myanmar (BCIM) Economic Corridor, to which both Modi and President Xi Jinping have committed themselves. “The two sides welcomed the progress made in promoting cooperation under the framework of the BCIM Economic Corridor. Both sides recalled the second meeting of the Joint Study Group of BCIM Economic Corridor, and agreed to continue their respective efforts to implement understandings reached at the meeting” (Joint statement by India and China during Modi’s visit to China, Beijing, May 15, 2015). This will ‘promote regional connectivity and economic integration.’ The Master Plan on ASEAN Connectivity (MPAC) launched in 2010 also expects to borrow big from AIIB.

Though there is visible consternation among established multilateral institutions, ADB President Takehiko Nakao committed ‘to share with AIIB its long experience and expertise in the region, including support for regional cooperation and integration, sustainable and inclusive development, and climate change adaptation and mitigation.’ Given the complexity and difficulties of mobilizing funds for regional infrastructural projects, it was ADB which suggested launching of Asia Infrastructure Fund (AIF) (Infrastructure for Seamless Asia, 2009, p. 10).

U.S. concerns that the AIIB would ‘fail to meet environmental standards, procurement requirements and other safeguards adopted by the World Bank and the ADB, including protection intended to prevent the forced removal of vulnerable populations from their lands’ have to be tackled forthrightly as such concerns are widespread in all the borrowing countries. This is also reflected in the backlash China faces over such projects in Africa, Myanmar and Sri Lanka. That may well be one solid reason for the multilateral character of AIIB. In this gigantic and sensitive cross-regional initiative, China has grasped the nettle and expanded the membership bringing on board every country that matters in the region. Thus, AIIB is inclusive and, in a way, ensured elimination of political hurdles to crossborder connectivity in the pursuit of its flagship Belt and Road Initiative.

The author, a noted development economist, is a professor of South Asian Economies at Jawaharlal Nehru University, New Delhi and former member of National Security Advisory Board, Government of India. Currently, he is a member of the Eminent Persons Group set up by the Prime Ministers of Nepal and India on Nepal-India Relations. He is widely recognized as the architect of the reopening of the Nathu la Trade route between Sikkim in India and the Tibet Autonomous Region in China after 44 years in 2006.