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On July 1, in its first post-war effort to attract investment from Asia, Sri Lanka allowed Hong Kong-registered conglomerate China Huicheng Investment Holdings Limited to develop a 161-acre special economic zone in Mirigama.
Although Huicheng’s initial investment of US$28 million is hardly an amount to talk about, the creation of the Mirigama Special Economic Zone is a significant development in the South Asian region for several reasons. One, it is a zone dedicated to Chinese investment, which with Huicheng’s influence could bring millions of dollars of private Chinese funds to Sri Lanka. Two, China is the first country to be granted an exclusive economic zone by Sri Lanka.
But more importantly, as India – Sri Lanka’s long-time ally and a significant power in the region – finds itself sidelined in Sri Lanka’s post-war rebuilding efforts, China is aggressively cultivating ties with South Asian countries in a bid to strengthen its strategic position in the region. While India is entangled in a series of political and diplomatic issues with its neighbors China, with its growing economic and strategic influence, is quietly extending its reach into South Asia.
From a few million dollars four years ago, China’s aid to Sri Lanka jumped multifold last year with the construction of the US$1 billion port at Hambantota on Sri Lanka's southeastern coast. Experts say for China the port is not only a commercial venture but also a vital asset due to its strategic location in the Indian Ocean.
China has been assisting the socioeconomic development of small and relatively weak South Asian countries with gusto. For instance, it has pumped over US$830 million into Nepal’s infrastructure since 1994. To Myanmar – which offers China passage to South Asia from its southern Yunnan province and important access to the Indian Ocean – China provided a US$856 million package last year to boost its mining sector. Going against global pressure to contain Myanmar’s military junta, China is instead helping the military-ruled country with oil pipelines, roads, institutions and hospitals.
But the big discomfort for India is China’s wooing of Pakistan. According to Tarique Niazi, an assistant professor at the University of Wisconsin who specializes in resource-based conflict, China is currently promoting over 100 projects in Pakistan worth a combined investment of US$20 billion. In 2007, China’s investments in Pakistan were comparatively meager at US$4 billion.
“Despite being the region’s economic powerhouse, India’s influence over South Asia has been waning over the last few years,” said Ram Upendra Das, senior fellow at the Research and Information System for Developing Countries, an autonomous research institution established with financial support from the Indian Government.
“India has displayed a very strong political commitment to the region, which is already well known, but when it comes to business interests, India’s commitment is lacking,” he said.
This nonchalance about developing deeper economic relationships with its neighbors is already costing the country dear. Traditionally, India has been the largest trading partner for its South Asian neighbors – Bangladesh, Nepal, Pakistan and Sri Lanka. But since 2002, China has taken a distinct lead in terms of importance in the region.
According to the Indian Council for Research on International Economic Relations, a New Delhi-based economic think tank, India and China had almost equal share in total trade with their South Asian neighbors in 2002. But in the following five years, the difference widened considerably. China’s trade with the region in 2007 was US$12.1 billion while that of India was US$8.9 billion.
Significantly however, although India’s South Asian neighbors have often complained about the large trade imbalance with India – their imports have been much higher than their exports to India – they tolerate a much higher trade imbalance with China.
In 2002, South Asian partner countries’ trade balance ratio with China was 64 percent, whereas that with India was 69 percent. But by 2007 the ratio with China had increased to 79 percent, while with India it declined marginally to 68 percent.
“The point that needs to be highlighted is that the South Asian countries do not complain about the unfavorable trade balance with China but it has been a burning emotive issue with India,” said Nisha Taneja, a professor with ICRIER. “Perhaps India needs to understand what China does right and learn lessons from China.”
So, what could those lessons be? “It appears that India takes a keener interest in participating in its neighbors’ political and ethnic problems rather than focusing more on developing a robust economic relationship,” said Taneja. “We need to be more economically active in the region.”
It would be unfair however, to assume that India does not try to forge economic relationships with its neighbors. According to Anil Bhardwaj, general secretary of the Federation of Indian Micro and Small and Medium Enterprises, India’s “scorching economic growth” over the last decade or so has given rise to a sense of awe and fear among its neighbors.
“India has already opened its markets wide to neighbors, particularly to Pakistan and Bangladesh, in the past five years, but none have reciprocated,” said Bhardwaj. “Compared to India’s size, others are much smaller economies and they fear that if they open up too much for India, their markets could be swamped with Indian imports.”
In fact, it may be India’s might that makes smaller South Asian nations more tolerant toward China. “China is used as a hedge by the smaller South Asian nations. Their strategy to allow concessions to China is to play the China card against India if ever India becomes a threat,” said K. Vyome, an expert at the New Delhi-based think-tank Observer Research Foundation.
Strategically though, South Asia may be more important to China than to India. China's Achilles heel is the reliance of its voracious economy on imported resources, much of which travel through the Indian Ocean, the Strait of Malacca and the South China Sea.
According to Peter Hodge, an Australia-based international and strategic affairs analyst, this poses a security problem for Beijing. If China went to war, say with India, the Indian navy in the Indian Ocean could prevent the flow of resources. Similarly, a war with Japan could make China-bound ships in the Strait of Malacca extremely vulnerable.
To safeguard its shipping, China needs to be capable of projecting power in the Indian Ocean, the Middle East and Africa. This explains China’s billion-dollar investments not only in South Asian ports, roads, airfields and pipelines, but also in the Middle East and Africa.
Nevertheless, while it is imperative for India to gain a strategic foothold in its own backyard, “it is not necessary for India to copy China,” said Bhardwaj.
In fact, according to Bhardwaj, India can court its neighbors with as much fervor as China does by spending a lot less. While China goes for big-bang investments in arms and infrastructure, India could invest in relationships like building textiles and garments parks, food-processing facilities, and other industrial ventures including information technology.
“India could be selective and play an important role by entering in areas where China has not, and in the process, gain as much goodwill as China does,” said Bhardwaj.
