By Eric Vandenbroeck and co-workers

Himalayas Deal

In October, China and India reached an agreement on patrolling a stretch of their long-disputed shared border. The deal brought an end, for the time being, to a four-year standoff in the high mountains of the Himalayas that had severely strained ties between the two countries. It also allowed Indian Prime Minister Narendra Modi and Chinese President Xi Jinping to meet in Russia and hold talks for the first time in five years. In 2020, a bloody confrontation in the Galwan Valley left dozens of soldiers dead and led to a deep freeze in bilateral relations between the two Asian giants. The Indian public fumed at what it saw as Chinese aggression, and Modi’s government canceled direct flights between the countries and banned the social media app TikTok, among other measures meant to punish China. Now, many analysts see the possibility of a reset and a return to normal ties.

But China and India have no desirable “normal” status quo to return to. Challenges abound in the bilateral relationship, and China’s ambitions continue to circumscribe India’s ability to act at the regional and global levels. Many flash points remain along the border and could be reactivated at any time by Xi’s aggressive regime. Although Modi has tried harder than his predecessors to hold a strong line against Chinese expansionism, India’s economy remains hugely dependent on China. Even as India’s exports to China have dropped somewhat in the last five years, its imports from China have ballooned. India relies on China for sophisticated technology, such as personal computers, laptops, and the components used in making telecommunications equipment and mobile phones. When the Indian government moved in August 2023 to institute licensing controls on the import of laptops and personal computing devices in the hope of stemming the influx of Chinese technology, a swift backlash from Indian industry groups forced it to scrap its plans.

That deference to industry reveals a larger problem. Indian leaders, like many in other countries, have long separated matters of national security and economic growth. But they are inextricable from each other. India needs to reach a more comprehensive understanding of the threat China poses. It should, for instance, establish a ministry of economic security, tasked with assessing the scale and scope of Chinese economic involvement in India and finding ways to protect India from the risks of this engagement. In this way, India will finally act on the recognition that economic might bolster a country’s capacity to protect itself, and national security fosters a positive environment for growth. However, if Indian policymakers do not break the conceptual barrier between economics and security, India will remain vulnerable to China and its ambitions for hegemony in Asia.

 

From “Chindia” to “India First”

In 1962, China and India fought a hugely one-sided war in the Himalayas that resulted in India losing vast tracts of land; spats over the long, contested border are still ongoing. The two countries have never formally agreed on the exact line of their shared border, which snakes over 2,000 miles, largely through high, inhospitable terrain. The defeat in 1962 has haunted India’s political elite for decades. A thaw in relations in the 1980s allowed both countries to pursue closer cultural and economic engagement, but resolving the contentious border question was left to future generations. In the 1990s, the neighbors signed accords that emphasized the principle of not using military force to settle the border dispute, allowing India to believe it had won peace even though no conclusive agreement about the border had been reached. But in the years that followed, China strengthened its infrastructure along the border to better support troop deployments. India was not oblivious to these moves, but it opted not to develop corresponding infrastructure on its side out of fear that a Chinese invasion could be abetted by Indian-built roads.

Indian governments also hoped that conflict between the two countries was a thing of the past. Under Prime Minister Manmohan Singh, who ruled from 2004 to 2014, many officials and analysts assumed that China and India could rise together, invoking the somewhat cringeworthy term “Chindia.” Potential new ties with China led the Indian establishment of that era to be wary of active involvement in the Quad (Quadrilateral Security Dialogue)—the Indo-Pacific security partnership involving Australia, India, Japan, and the United States—and even to downplay China’s maneuvers to expand its influence in the Indian Ocean through its “string of pearls” strategy, which seeks to extend China’s maritime presence by building commercial and military facilities overseas.

Things began to change when Modi came to power in 2014—and as China grew more aggressive under Xi. China tried to adjust the status quo in the border region in violation of existing treaties and covenants by moving troops into sensitive areas and provoking confrontations with Indian soldiers, in the process transforming India’s security calculus. Moments of friction with China spurred India’s search for stronger partnerships. After a standoff between Indian and Chinese troops on the border in 2017, New Delhi moved to revive the Quad despite not showing much enthusiasm when the partnership was founded in 2007. The Quad held its first summit at the level of heads of state in 2021, in the aftermath of the 2020 clash between Indian and Chinese soldiers that left dozens dead. India and the United States expanded their partnership to include a greater focus on real-time intelligence sharing and building joint military capabilities in the wider Indo-Pacific. In 2022, they launched a joint initiative on critical and emerging technologies, which sought to encourage cooperation between defense industries, manufacture jet engines in India, and create semiconductor supply chains free of China, among other worthy proposals. During his formal state visit to the United States in June 2023, Modi stressed that he believed New Delhi’s partnership with Washington cemented India’s place in the international order.

Indian Foreign Minister Subrahmanyam Jaishankar describes India’s current approach as “India first,” a nod to the parlance of Donald Trump, the U.S. president-elect. In practice, India has adopted a more confrontational posture toward China that seeks to discourage Chinese adventurism. Indian officials have insisted that India will not let China’s growing influence in South Asia curtail its policy choices or limit its partnerships with regional and global powers.

Now in his third term, Modi is leaning into a more assertive posture with respect to Beijing. India’s government is seeking to forge closer ties with Taiwan, for instance, at a time when China is trying to isolate the island. Modi has asked Taiwanese President Lai Ching-te to deepen economic engagement with India through the joint development of semiconductor manufacturing facilities and through a labor-mobility agreement signed in February 2024 that will allow Indian workers to help Taiwan mitigate labor shortages in some sectors. India has also been courting the doyens of Taiwanese industry. The Foxconn chair, Young Liu, was given India’s third-highest civilian award in January 2024, and he met Modi in August 2024 to discuss investment plans. The Modi government also seems to be in sync with a Biden administration initiative to direct greater global attention toward the status of Tibet. In June 2024, India approved a U.S. congressional delegation’s meeting with the Dalai Lama, who lives in exile in India, and in July, U.S. President Joe Biden signed a law that strengthened government efforts and multilateral initiatives to help preserve Tibetan culture and religion. India also delivered BrahMos missiles to the Philippines this year, as the archipelago country remains locked in a dispute with China over maritime territorial claims in the South China Sea. Such a delivery was not just a demonstration of solidarity with another country dealing with Chinese aggression but also a reminder that the Modi government is willing to tread close to China’s redlines about its “core interests” in the South China Sea, Taiwan, and Tibet.

 

Blowing Hot and Cold

But India’s relatively tough line under Modi on security policy does not have a corollary when it comes to economic engagement with Beijing. India has swung back and forth on the extent to which it wants to pursue economic ties with China. Nearly a decade ago, when Xi unveiled the Belt and Road Initiative—a massive plan to build infrastructure in dozens of countries around the world—India opposed it on grounds that it would encourage China’s partners to take on unsustainable levels of debt. India also bristled at the way one plank of the initiative—the China-Pakistan Economic Corridor—moved through territory that New Delhi insists belongs to India and is illegally occupied by Pakistan. But even as it avoided the Belt and Road Initiative, New Delhi enthusiastically participated in the establishment of the Beijing-led Asian Infrastructure Investment Bank, serving as a founding member. India has been one of the largest beneficiaries of lending from the multilateral institution, receiving $4.4 billion, as of 2018, which has gone into projects related to electricity generation, road construction, and urban rail projects.

In 2014, Modi launched his ambitious Make-in-India plan to boost Indian manufacturing, opening up sectors such as railway infrastructure and defense to foreign investment. Chinese telecommunications companies and cell phone equipment manufacturers sought to make the most of this opportunity by investing in India. Indian policymakers remained wary. In 2019, India withdrew from the Regional Comprehensive Economic Partnership—a trade agreement between China and 14 other Asian countries—over concerns that reduced duties would have an adverse impact on domestic producers and increase the burgeoning trade deficit with Beijing. Yet in the same year, the agenda of the informal summit between Modi and Xi included talks on ways to improve trade and cooperation in manufacturing. Modi’s first government thus sought greater economic engagement with Beijing, believing that China’s manufacturing know-how could help India achieve its development aspirations and hoping that China would give Indian businesses reciprocal access to the Chinese market.

The coronavirus pandemic that originated in China shocked all economies. But through severe “zero COVID” lockdowns, Beijing was able to contain the domestic spread of the virus, at least in the beginning. Its early success contrasted with the chaos and high death tolls elsewhere and seemed to augur China’s coming of age as a major power. As stock markets tumbled, many observers in India and elsewhere worried that robust Chinese capital would sweep up distressed companies. These fears became more pronounced after China’s central bank raised its stake in HDFC, a major Indian bank, in April 2020, spurring government action to protect companies reeling from the COVID-19 shock. The Indian government issued new rules in 2020 that modified how foreign direct investments could flow into India, with the not-so-secret aim of limiting Chinese investment.

The military confrontation in Galwan in June 2020 led to calls from sections of Indian civil society to boycott Chinese goods. The government adhered to these exhortations by directing state and private telecommunications firms to prohibit dealings with Chinese companies and banning Chinese telecommunication firms from the Indian market. As a result, capital inflows from China to India were reduced to a trickle, accounting for a mere 0.43 percent ($2.45 billion) of total foreign direct investment received between April 2020 and December 2021. The Indian government also began to exercise greater caution in issuing visas to Chinese nationals.

But since the 2024 Indian general election, which returned Modi to the prime minister’s office, albeit with a reduced majority, influential voices—including from within the administration—have challenged the government’s resolve. In its latest annual analysis of the economy, India’s Ministry of Finance called for further Chinese investment in India and the broader resumption of economic engagement with Beijing. The government publicly rebuffed this suggestion, but it has still offered signs of softening its approach to China. It has launched a portal to expedite visas for Chinese professionals, as well as an interministerial committee to fast-track Chinese investment proposals. Civil aviation ministers from both countries met in September to discuss the resumption of direct passenger flights after they were suspended in 2020.

 

The Imperative of Economic Security

This willingness to see China as both a security threat and an economic boon will hurt India. It is the Achilles’ heel of India’s China policy. Dependence on China for critical components and equipment makes India vulnerable to price gouging, especially during emergencies. Giving leeway to China in the economic realm will have several other costs: it tarnishes India’s image as a rising power that can withstand Chinese coercion, undercuts the notion that India can serve as a bulwark against Beijing’s expansionism, and threatens initiatives that include India in the task of rebuilding supply chains outside China. And India’s forgiving economic policy toward China may encourage smaller regional countries such as Bhutan, which is a strategic buffer between the two powers, to seek accommodation with China—to India’s inevitable detriment.

Indian policymakers must reckon with the dissonance of the government’s tough line on the border and its more permissive approach to economic ties with China. Security and economics cannot be put in silos. The government has to settle a major policy debate on what should power the Indian economy, manufacturing or services. The prevailing wisdom has it that services will provide the growth India needs, but such orthodoxy has resulted in trade deficits, particularly with China. New Delhi’s dependence on China with respect to components or heavy equipment for industrial supply chains coupled with India’s weak manufacturing sector presents a vulnerability that China can exploit for geopolitical leverage. India will have to protect its market from Chinese goods and invest more in domestic manufacturing.

Facing the threat of Chinese expansionism in the long term will require India not only to manufacture better military equipment and engage in nimble diplomacy but also to embrace the concept of comprehensive economic security. In practice, this means reducing economic vulnerabilities that adversaries can weaponize and reconciling those constituencies that want growth and those that stress security. So far, Indian policymakers have divided national security from economics when it comes to China. But other countries offer models for better ways forward. India could learn, for instance, from the way in which Japan set up a ministry of economic security in the aftermath of the shock induced by the pandemic. Such an institution in India would draw from the expertise of professionals from the private sector with a deep understanding of trade flows, supply chains, and technology. This economic security ministry could undertake an audit of supply chains to pinpoint risks and seek alternative suppliers to diversify imports. Such diversification would make India less vulnerable to Chinese attempts to exert influence within its borders. In areas in which analysts insist that Chinese know-how and capacity are necessary—such as in the green transition—the economic security ministry could lay the groundwork for alternatives. It could help find foreign investment to better develop those sectors in India in which China has the lead, such as in green technology and electric vehicles. The Indian private sector must devote its energy to pursuing its own innovations in these technologies in the long run.

It will not be easy to establish India’s economic security in the shadow of its giant northern neighbor. But Modi can use his third term to make this shift. After ensuring that Beijing gets the message clearly that New Delhi will forcefully push back any Chinese aggression, he must find consistency in his China policy and break the silos of business and national security. If his government does not manage to do so, India’s desire to play a greater role in the international system will be confounded by China’s overweening presence, both at the border and within the country.

 

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