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Can India And China Manage Their Bilateral Issues On A Multilateral Platform Like The AIIB?

24/07/2015 8:31 AM IST | Updated 15/07/2016 8:25 AM IST
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JOHANNES EISELE via Getty Images
India's Prime Minister Narendra Modi applauds as he attends the opening ceremony for the Centre for Gandhian and Indian Studies at Fudan University in Shanghai on May 16, 2015. Modi is on a three-day visit to China. AFP PHOTO / JOHANNES EISELE (Photo credit should read JOHANNES EISELE/AFP/Getty Images)

China has set the stage for a new world order with its Asian Infrastructure Investment Bank (AIIB). Among the 57 founding members, India is the second largest shareholder in the bank after China with an 8% stake.

With infrastructure being one of the key facets of India's economic growth, New Delhi's entry into the AIIB is seen as a great feat. The Asian Development Bank (ADB) estimates that $800 billion a year needs to be invested towards infrastructure in Asia, with India's share of that being $200 billion a year.

Though the Modi government set aside an infrastructure budget of about $40 billion, apart from founding the National Investment and Infrastructure Fund with an additional $3.3 billion, that's not enough to fund the massive infrastructural needs of India. It must find additional sources of finance.

"[W]ill China keep bilateral issues as a prime mover in its multilateral engagements? If it does then how would Beijing treat its border dispute with India at the AIIB level?"

So as China with its massive current account surplus looks for investment opportunities abroad, it creates a win-win proposition for both the countries. Beijing's savings exceed its domestic investment needs, resulting in a total development finance at around $375 billion. The stock of overseas corporate investment is now estimated to be around $750 billion and is still growing.

With such disposable capital, China is likely to contribute $50 billion of the $100 billion of AIIB thus placing it in a position to address the huge infrastructure needs of India and its neighbourhood.

That said, a key question remains: how will India and China manage their bilateral issues on a multilateral platform like the AIIB?

China and multilateralism

Though multilateralism is central to China's foreign policy it is still secondary to its principle of sovereignty.

Take for instance Beijing's stance on resolving disputes with claimants in the South China Sea. Although the contending countries -- Taiwan, Philippines, Malaysia, Vietnam and Brunei -- are part of the ASEAN China still insists on bilateral negotiations to resolve the South China Sea, instead of any multilateral intervention.

Experts feel this bilateral mechanism gives China the edge for "greater manoeuvrability" in the negotiating process.

Political issues and the AIIB

So will China keep bilateral issues as a prime mover in its multilateral engagements? If it does then how would Beijing treat its border dispute with India at the AIIB level? At some point, the border question is sure to arise.

After all, one of the key parts of India's infrastructure development plan is stepping up infrastructure in its border regions, most notably in the northeastern state of Arunachal Pradesh which China claims as part of South Tibet. Will the AIIB agree to finance projects in this part of India? Some observers feel it is unlikely.

"China supports India on economic matters at multilateral forums like the WTO farm talks, while on political issues Beijing has proved a major roadblock for India."

Similarly, China has recently announced funding for the China-Pakistan Economic Corridor (CPEC) that passes through Pakistan-occupied Kashmir. If China gets AIIB to finance that project it will certainly create a sore point for India.

Also at multilateral levels while India's and China's interests converge on economic issues, they diverge considerably on political and strategic matters.

A case in point is how China supports India on economic matters at multilateral forums like the WTO farm talks, while on political issues Beijing has proved a major roadblock for India. Recently China blocked India's move in the UN to seek action against Pakistan for the release from jail of LeT commander Zakiur Rehman Lakhvi, the mastermind of the Mumbai attacks. And this is not the first time China has foiled India's moves in the UN Security Council.

Further, India needs to be particularly mindful of the fact that both Beijing and New Delhi are competitors in the Indian Ocean Region (IOR). In its bid to retain its dominance in the IOR India has made considerable commitments for infrastructural development in Mauritius and Seychelles and maritime infrastructure development in Sri Lanka. India might need to pull in resources from the AIIB. Question is how will China react? Will Beijing use India's dependence on the bank as a tool to twist its arm?

China as AIIB boss?

Finally, emerging nations like India wanted to break away from US-led western institutions like the World Bank or the IMF due to perceived unfairness in their management structure and control system. Consider this: the ratio of the US votes to India on the IMF executive board is 9 is to 1 while that at the World Bank is 6 is to 1.

Now while China's AIIB is looked at as an institution that will rival this dominance and may give a more powerful role to smaller nations, some of its structural details make experts wonder if the bank is using the same rulebook as these western institutions.

Beijing being the largest contributor to the AIIB's capitalisation with 30 % contribution has 26.06% of voting rights according to the articles of agreement. This would enable China to block major decisions that require 75% approval -- which in effect is as good as a veto power in the $100 billion bank.

Additionally, China also not only reportedly turned down Indonesia's offer to base the bank in Jakarta so as to underscore the true multilateral nature of AIIB, but also has nominated Jin Liqun -- former finance vice minister of China -- as the president-designate of the bank. In effect, China is following in the steps of the ADB which has always had a Japanese president, or the Bretton Woods institutions (IMF and World Bank) whose presidents have always been citizens from the West.

So there's perhaps some cause for India to introspect why ASEAN nations like the Philippines and Thailand have deferred formal membership to the AIIB. The Philippines apparently expressed doubts that the new lending body will be "truly multilateral in nature."

A strategy for India

India will have to be cautious about not getting overly dependent on China's AIIB for its infrastructure goals. A good way to do that would be to leverage its accessibility to world super powers and collaborate with them for its infrastructural needs too.

"India needs to use its current foreign policy posture of multiple alignments with nations not only to its advantage but also as a safety net against any kind of bullying by bigger powers."

Japan can be a good start. As the massive infrastructure development needs of Asia become the newest stage of competition for major powers, Japan is clearly anxious of losing its edge to China.

China has clearly stolen the show from Japan with its ambitious $40 billion Silk Road fund, laying a cross-continent infrastructure through Asia both by land and sea. While the land route would connect China to Europe via Central Asia, the sea way cuts across Southeast Asia and parts of South Asia.

Japan's announcement of a $110 billion fund for building infrastructure in Asia is clearly a response to this. A significant part of the funds would be allocated to projects that will be executed in collaboration with the ADB.

India should leverage this by collaborating with the ADB which interestingly announced an increase in lending to India by a third -- from nearly $3 billion a year to $4 billion -- during the three years ending 2018.

Observers feel India's strong repayment record and the bank's need to streamline its lending following the emergence of newer bodies such as the AIIB has prompted this move. Additionally Tokyo has also shown interest in developing infrastructure in India's northeastern region.

Some even believe that as the Bretton Woods institutions answer the growing demands for reform, India should leverage the opportunity to play a key role in this. If reports are to be believed the next IMF chief could be an Indian (most likely Raghuram Rajan, India's central bank chief, a former IMF chief economist and University of Chicago finance professor). With this India will not only help the IMF break the stereotype of having only Westerners at its helm but also successfully counter China's dominance in the AIIB.

In sum, India needs to use its current foreign policy posture of multiple alignments with nations not only to its advantage but also as a safety net against any kind of bullying by bigger powers.

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