The script is almost predictable. Right before meetings of Indian and Chinese heads of state, something happens on the border to remind everyone that sentiment between the two countries is not exactly neighbourly. Last year it was a standoff in Daulat Beg Oldi about infiltration by the Chinese army. This year, with everyone excited at China’s promise to pump $100 billion into India, there's another incursion by the Chinese into Demchok in Ladhak.

Chinese President Xi Jinping arrives in India today and will visit Ahmedabad on Prime Minister Narendra Modi’s birthday. But Chinese troops have also been reported to have moved 500 meters into Indian territory.

Beijing’s approach seems to be sweet-talking – this time taking the form of foreign direct investment – coupled with regular pinpricks that remind India that they have the stronger position on the border.

But could the proposed investment be as much of a threat to India as the border dispute?

Trading places

India’s total trade with China was around $65 billion in 2013-'14. Of that, only $14 billion were Indian exports heading into China, leaving India with a trade deficit of $36 billion. If oil imports are included, Chinese imports are responsible for nearly half of India’s overall trade deficit. This is a great many Indian eggs in one Chinese basket.

For many economists, this isn’t a problem. It’s simply the way efficient markets ought to function, with India buying the goods it needs from the most competitive seller. “The more competitive the trading partner, the more India should buy from it, and the bigger should be the bilateral trade deficit,” wrote commentator Swaminathan Aiyar last year. “China is the most competitive exporter of all, so India should run its biggest trade deficit with this country.”

Yet India does feel the need to reduce the trade deficit with China. Answering a question in the Lok Sabha earlier this year, minister of state for commerce Nirmala Sitharaman admitted that the balance of trade was heavily in China’s favour and that India was taking steps to address this.

“With a view to reducing the trade deficit with China, efforts are being made to diversify the export basket,” Sitharaman said.

Economic borders

But trade isn’t pure economics. It is a key weapon in a nation’s geo-strategic arsenal as well.

“Beijing’s diplomacy… will in most cases involve attempts to leverage China’s growing economic power and influence in order to strengthen and expand cooperative interactions, create an integrated web of mutually beneficial economic, social and political ties, and ultimately lower distrust and enhance a sense of common security,” writes China expert Michael D Swaine in a recent paper.
“As a way of handling these disputes at the broadest and indirect level some analysts point to the above-outlined Chinese intent to create across the periphery a web of economic and political interests favoring China. According to such sources, these developments will reduce the incentives of other countries to continue to “make trouble for China over sensitive issues such as disputed territory.”

China’s economic outreach to India, including the rather doubtful claim it will invest up to $100 billion over the next five years appears to be part of a geo-strategic plan.

The more India is dependent on China economically, in this reading, the less New Delhi will attempt to rake up border issues. This is, in fact, a policy that some Indian business people hoped New Delhi would use with Islamabad.

Trade barriers

It’s also not quite true that the skewed balance in trade between the two countries is simply because India is sourcing its goods from the cheapest seller. India lacks China’s extensive manufacturing base, but the Chinese also actively keep out Indian goods that would be competitive.

Sitharaman’s statement to the Lok Sabha emphasised that China restricts India's access to its markets, in particular with barriers of entry against India’s globally competitive information technology companies.

“There’s too much hype with their investment,” said Kanwal Sibal, a former foreign secretary. “We’re making the mistake of getting terribly excited by Chinese promises, excited that they’ll build high-speed trains and airports. This is not investment. You are feeling proud that we are giving money and profits to China. One can argue that they’re doing things cheaper than others, but you are also giving them openings into your market, when they are restricting the entry of your internationally competitive organisations.”

India needs to take Chinese promises with more than a pinch of salt. The problem is that China’s political structure makes it much easier for its foreign policy wing to coordinate with commerce. But India's Ministry of External Affairs is frequently overruled by the commerce ministry and even the Prime Minister’s Office, Sibal said. These entities, he noted, are primarily influenced by a business community that is unconcerned about geostrategic imperatives.

“The MEA beyond a certain point cannot influence decision on the economic side,” Sibal said. “I have seen from my experience that the economic argument is essentially pushed by the PMO. It’s not that they are not cognisant of the security issue, but the feeling is that they don’t think out of the box on this.”