This is a simulation of a planned 7km long bridge in the Maldives that will link it’s capital Malé with the islands to it’s west. It will cost over 500mn Dollars to build, and will be funded by India. However, on the other side of the capital you can find the just finished 2km long ‘China Maldives Friendship bridge’ that had been funded by China.
And, this is no coincidence. In fact, it seems to be part of a trend where India is basically trying to drive Chinese money out of Southern Asia by providing its own money as an alternative.
For example, while Chinese loans famously helped build mega projects all over Sri-Lanka, when it’s economy crashed last year, India provided over 4bn Dollars in loans to Sri-Lanka while China only provided 1.2bn Dollars. Furthermore, while Bangladesh, just a few years ago was one of the key recipients of Chinese money to build new rail lines and bridges, it’s finance minister recently warned other nations against borrowing too much from China. And now, these latest rail infrastructure projects between Bangladesh and India, are funded by India, as part as it’s 2022, 8bn Dollar funding package.
So, what is going on? How does India plan to drive Chinese money out of South Asia? And, does it have any chance to succeed? Well to answer these questions, we need to ask ourselves, why did India draft this plan in the first place?
In other words, what is
India’s Problem With Chinese Money in South Asia
Well, that has everything to do with a history of political rivalry between these two Asian superpowers.
A key component is that China’s rapid growth has been quite threatening to India. You see, while both economies used to be similarly sized in the early 90s, China has since overtaken India to become Asia’s biggest economy by far. This allowed it to embark on a massive lending spree, under the name of the Belt-and-Road initiative. Under this name, China has been lending billions of Dollars to the nations that you see here on this map. Notably, this includes many of India’s direct neighbors such as Bangladesh, Sri-Lanka, the Maldives, Nepal, as well as it’s rival Pakistan.
But, why?
Well, according to professor Andreas Fuchs, head of the Kiel Institute’s China initiative,
China’s motives for providing these funds to recipient countries are both selfish and self-less. First, it uses the funds as a foreign policy tool, to incentivize countries to support it on the global stage. Second, it uses them to promote trade links with China. And, finally, given that it does give more to poorer nations, it does also seem to, quite selflessly, want to reduce global poverty.
And, let’s be honest, while it is less transparent about its loans, China’s motive are not all that different from the motives of the Western countries that traditionally occupy this space.
However, Chinese money is especially threatening to India given the history of violent rivalry between the two countries. The main culprit is the border between the two countries, also known as the world’s longest disputed border. And while the conflict seemed to have stabilized after a border war in 1962, recently, violent skirmishes have once again occurred between both armies.
So, with that context, of course it was quite threatening to India when lot’s of Chinese money started to flow into neighboring countries. After all, countries receiving Chinese money suddenly stopped criticizing the country. What’s more, some of these countries started appearing on top of several lists for potential candidates for future Chinese military bases.
But, luckily for India, China’s economy has recently started slowing down and India, well India is more and more seen as the neighborhoods upcoming giant. The country is soon to overtake China as Asia’s most populous nation. And, while it is much poorer, the IMF predicts that India’s economy will grow quite a bit faster than that of China in the upcoming years.
And that gave India the financial means to draft the
plan to drive Chinese Money out of South Asia
Now, this plan doesn’t have a catchy name like China’s Belt-and-Road initiative. What it does have though, is money. Lot’s of money. In total development lending was scaled up from $55bn since 1947 to $107bn since 2014.
And, while India’s government officially tries to play down that this is a reaction to the 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. What’s more, this dynamic was even stronger where China had made “public opinion gains relative to India”.
And, sure, total Indian aid isn’t that much if we compare it to China’s belt and road initiative, which was around 838bn. However, China’s belt and road money is spread over a much larger area. So, for countries in South Asia such as Sri-Lanka, recent Indian money flows are now already making more of a difference than recent Chinese money flows. And this is already benefitting India politically. Not only has Sri-Lanka’s government recently announced a host of new projects that will benefit trade with India, public opinion in the country has also shifted somewhat in favor of India and against China.
However, China’s large pool of outstanding loans to Sri-Lanka still mean that Sri-Lanka continues to have a large interest in keeping China happy as well. What’s more, during their recent crises, China has extended more and more emergency loans to India’s troubled south Asian neighbors.
And, this got me wondering,
Does India’s Plan Actually Stand a Chance?
Well, I think it extremely unlikely that India can actually drive Chinese money out of South Asia completely for three main reasons. First, India’s economy is still much smaller than China’s, and even if it is projected to grow faster, it will take quite some time to catch up.
Second, given that India has a substantial trade deficit, it needs to attract foreign funding to finance it’s imports. Now, this does not mean that it cannot provide a lot of funding. After all, current account deficit countries like the U.S. and U.K. are among the biggest contributors when it comes to development finance. Still, it does mean that India needs to borrow itself to do so, and that means that it has a higher risk of getting into financial trouble itself than China which could motivate it to be more careful with foreign loans than China.
The third reason that Indian money is unlikely to drive Chinese money out completely is that we shouldn’t forget that India’s neighbors have a voice in all of this. I mean many of them might actually welcome a competition between two powers about who can get the privilege of funding them. After all, this might mean that they can get loans on more favorable terms. What’s more some neighbors, like Pakistan, have their own border disputes with India, meaning that they vastly prefer Chinese money to prop-up their troubled economy.
That being said, there are also three reasons that India’s plan might succeed in the long run. The first reason is that, with a lingering financial crisis at home and with many current international projects already in trouble, China is already scaling back its ambitions for the belt-and-road project.
The second reason is that India found a way around it’s limited official resources by convincing some of its extremely wealthy private sector tycoons to finance India’s interests abroad.
The final, and third reason is that, if the projections are right that India’s economy will grow quite a bit faster than that of China for the foreseeable future, then, I think it is likely that Indian development finance will at least start balancing out Chinese money in South Asia.
But, yeah, that is my assessment, what do you think? Does India’s plan stand a chance? Let me know in the comment section, or consider joining my Patreon to support my independent analyses and gain access to an exclusive discord server where we can discuss this in more depth.
Finally, if you want a refresher on Sri-Lanka’s crisis, check out this video over here. Or if you are interested in why international finance by Western private companies can also be quite dangerous, check out this video over here.