Ambitions in South China Sea and India ASEAN trade ties

The first full moon after Diwali (Indian festival of lights) marks the beginning of a seven day long festival of Bali Jatra (Journey to Bali) in Cuttack (a city in Eastern state of Orissa). Small boats made of dried banana tree stump are sailed into lakes and rivers to commemorate the annual sailing season to Bali. Traders in ancient times would set sail to present day Indonesia with retreating monsoon winds and come back with advancing monsoon. Items like ivory, sandalwood, textile etc were exported and spices were imported. This perhaps was the first engagement of India with what now has become ASEAN (Association of South East Asian Nations, a trade bloc). The ships no longer sail to Bali from there and business and cultural contacts were virtually lost in post independence era. Things however have started to change since the last decade. 

Towards an integrated Asia

India is now a summit level partner with ASEAN and has already signed a free trade agreement (FTA) in goods. Bilateral trade has seen a sharp increase. Provisional data posted by ministry of commerce shows the trade between ASEAN and India at USD 79.2 billion (10% of total trade and an increase of 41% over the last year). This figure is expected to reach USD 100 billion in the next couple of years. On 20^th and 21^st December 2012 Delhi will hold the India – ASEAN Commemorative summit to mark twenty years of partnership. A FTA for services and investments is expected to be finalised with ASEAN during this summit. The FTA once signed (formal adoption around August 2013) will open up ASEAN for Indian companies to provide services in sectors like finance, accounting, law, medicine, media and communication, business process outsourcing, tourism etc. Inter regional investment will also get a boost as a result of the FTA.

There is a lot of potential for trade between India and ASEAN, especially due to a stable political environment and steady economic growth. These trade and service pact however have to be supplemented by a strong infrastructure network. Surface connectivity is absent between the two regions. With changes in Myanmar politics Trans ASEAN surface connectivity seems more likely than ever before. The intra ASEAN business and trade has made great progress in the past decades but connectivity is still a big issue. Crossing borders on land is a challenge and eats up a lot of time (not a good thing for people and goods waiting to cross over). Compared to the ease of crossing land borders in Europe ASEAN is still a long way to go. During his address, Prime Minister Singh spoke about the urgency to build the India – Myanmar – Thailand trilateral highway and further connect it to Cambodia and Vietnam in future. The urgency should now flow from the dais to pouring asphalt.

Apart from the business aspect of the summit there is a parallel strategic effort going on in the region. India has dispatched a sail training ship, INS Sudarshini on a commemorative expedition to the ASEAN countries. The ship is retracing the routes which the ships from Cuttack might have taken, along the Monsoon route. At the time of writing this blog the ship was anchored near Manila waiting for its next call at Da Nang in Vietnam. The journey would take it across the fiercely disputed South China Sea. Straits Times, a widely read newspaper in Singapore covered the summit under a headline, “Amid China tensions, South-East Asia looks to India”. This is in reference to the recent aggressive stance taken by China in the South China Sea, where it virtually claims all of it as its sovereign territory. India is obviously worried about the Chinese advances (an Indian ship while in Vietnam territory was allegedly warned to retreat from Chinese waters earlier this year). India has increased its military engagement with ASEAN countries in the recent past. It has conducted joint naval exercise with Singapore, Indonesia, Malaysia and The Philippines. India’s navy chief Admiral D. K. Joshi’s comment on India’s preparedness to intervene in South China Sea saw The Philippines welcome such a move. These steps might be seen as India’s willingness to play a greater role in the region.

The South China Sea is of strategic importance to not just China but to the larger Asia Pacific region too. Its proximity to the Strait of Malacca is the primary reason of concern in the immediate future. A quarter of world trade is carried out through the straits which is a busy shipping lane connecting the Indian Ocean to the Pacific. Chinese presences in the disputed waters will make it easy for it to control the trade routes. India’s involvement is seen as a counter balance to an aggressive China by the ASEAN and by US and Australia. The India – ASEAN summit has definitely proved to be of economic importance. Its strategic importance is yet to be seen.

   

                                                         

India and its oil policy

India’s foreign policy has ruffled a few feathers of late. Largely restrained and reactionary the Ministry of External Affairs has been working overtime to secure India’s energy interests. The global oil markets are going through a rough patch. Iran threatened to close the Strait of Hormuz; South Sudan stopped oil production in early January, loss of Syrian oil because of embargoes, drop in exports from Yemen due to strikes and closure of North Sea rigs due to repairs; all this has lead to a situation of panic in the global oil market. The Economist reported that all these disruptions have shaved off 1.25 million barrels a day of crude output globally. The situation might improve later in the year with most of the production resuming, however this is a clear signal to net oil importing economies that a small disruption in the supply chain can cause serious troubles at home.

India imports 80% of its fuel requirements and offers subsidies on diesel, kerosene and cooking gas. The provisions towards fuel subsidy in the budget of 2012-13 are Rs. 43,580 crores (USD 8.5 billion, at Rs 51.15 for a Dollar). Any increase in crude price will have a huge impact on India’s fuel bill. With a fast growing economy India cannot afford to be caught in a situation where its energy requirements are compromised with. At present India imports a lot of oil from the Middle East, Saudi Arabia being the largest exporter, followed by Iran. Together Saudi Arabia and Iran contribute one third of India’s imports, making India heavily dependent on these two countries. With uncertainty looming large over the region, India has rightly decided to revisit its global oil policy.

To diversify its oil basket India has started exploring other options. There are three instances where India has taken a stand contrary to its established foreign policy. The overseas arm of ONGC has engaged in off-shore exploration in South China Sea. China for long has claimed sovereignty over most of the South China Sea sighting historical evidences. In later 2011 and early 2012, China has raised concerns over Indian expeditions in the region. China also terms the Indian endeavours as provocative and urges restrain. So far the Chinese statements on this matter have been restrained and a direct reference to India is not made. On the other hand Chinese neighbours like Vietnam (which claims the oil reserves to be in its Exclusive Economic Zone), Taiwan, The Philippines, Malaysia, Indonesia, Cambodia and Thailand all have territorial disputes over the South China Sea. Some political commentators describe this region as the most dangerous point of conflict in the region. India’s attempt to seek commercial and strategic foothold in such a region is clearly unprecedented.

In early days of April 2012, India appointed as special envoy for Sudan and South Sudan, again a departure from India’s established foreign policy. For the first time India has categorically mentioned its oil needs as the prime reason for appointing a special envoy. Press statements quote ministry officials saying, "There were three main reasons to send a special envoy - ensure our oil interests are protected, communicate our support for the peace initiative between the two nations and strengthen our technical support to them." India is also challenging the Chinese claims of setting up an alternate pipeline through Kenya in less than two years time.

Lets talk crude

Of all attempts made by India to secure its energy needs the manoeuvres with Iran are the most interesting. International pressure on an Iranian oil embargo is such that it is impossible to pay for Iranian oil through conventional means of bank transfers. The US and EU have banned the payment mechanism in place in Dubai and have delisted all Iranian banks from the SWIFT facility (an electronic funds transfer facility). India as maintained that it will not stop its oil imports from Iran (so have China, Russia, South Korea and Japan). India is now exploring mechanisms to pay for Iranian oil in Rupees. There are technical difficulties in doing so (including many from the Iranian side), however India and Iran are trying to work together to find a solution. In the mean while government of India has announced tax breaks for exports to Iran done in Rupees. The Indian exports will be used to pay for Iranian oil.

These may be considered as bold steps by the Indian government, especially given the fact that they might annoy India’s two largest trade partners, the US and China. But these steps are also testimony to the fact that India is slowly but surely asserting itself in the global geopolitics. The far reaching implications of these actions are not clear as of now, however what is clear is the short term gain. India might get cheap oil from Iran, since less people are buying from it. This might prove to be a breather for a government which is unpopular with masses and high oil price is one of the reasons.  

Of encirclement and counter-encirclement

Look! the dragon is coming

In the past few years India has constantly expressed its deep concern for what is termed as the “string of pearls”. A term coined by the US defence department with reference to China’s active involvement in ports across the Indian maritime borders. China has engaged in developing ports in Sittwe in Myanmar, Chittagong in Bangladesh, Hambantota in Sri Lanka and Gwadar in Pakistan. This has given China access to India’s maritime boundaries and a future where China might have its naval bases at these ports. This is indeed alarming for India, especially when China is also building up its military capabilities with Intercontinental ballistic missiles and a refurbished aircraft carrier. China’s cosy relationship with Pakistan is another eye sore.

China is also becoming aggressive in the South China Sea with maritime disputes with all its neighbours (and in East China Sea with Japan). If all the disputes were to be resolved to China’s satisfaction it will virtually claim sovereignty over the entire South China Sea, hence controlling the shipping lanes vital for trade among South East Asian countries and between South East Asia, Far East and India.  Western countries including America have shown their concern over the increasing China presence in Asian region.

And look what the elephant was up to

This all looks extremely serious and at times worrying. But if seen from a neutral point of view, there is nothing alarming in the present situation. China is the second largest economy of the world (although a distant second to America), is a permanent member of the United Nations Security Council and has grown in the global pecking order in last few decades. It is only natural for an emerging country (and in some areas emerged) to expand its influence in its neighbourhood and near abroad. America has done this after the second world war, the UK did it till it came under sever financial strain after the two world wars and India is doing its bit post liberalisation.

Stop encircling me

While India’s concerns may sound valid, a deeper look reveals that most of this is self inflicted. India has played cold to the opportunities arising in its immediate neighbourhood. The state owned enterprises of India are inefficient and struggle to perform on the home front (barring a few like ONGC, an oil exploration firm). Expecting them perform abroad will be naïve. India after months of delay and going back and forth on a joint venture power plant in Northern Sri Lankan city of Trincomalee, has finally agreed on the terms and conditions of an agreement which it intends to sing later this month. The first power plant went to China.

Hambantota, the much talked about strategic foothold of China was initially offered to India. Lack of interest by India proved to be China’s gain and it is now developing an integrated project including a sea port, an airport, a city centre, a stadium and a convention centre. If every thing goes well Hambantota will welcome its first ship six months before the deadline. Meanwhile a USD 300 million project of Colombo port expansion has been awarded to another Chinese company (no Indian company bid for the project). Given all the inefficiencies the Indian system has and does little to eradicate, can China really be blamed for encircling India?

The counter circle

Across the border, China too has its own concerns about India trying to encircle it, especially in its strategic neighbourhood. The first and oldest issue is of Tibet. India has given refuge to Dalai Lama ever since he fled to India following the Chinese annexation of the kingdom. India has also allowed Dalai Lama to establish a Tibetan government in exile, which virtually undermines Chinese sovereignty (however India officially maintains one China policy). More recently India has become extremely active in Afghanistan by means of its non military aid to rebuild the country. This has upset Pakistan, which sees Indian presence as an attempt to encircle it. Deep running friendship between China and Pakistan has prompted China to share Pakistan’s vision on Indian involvement in Afghanistan.

In the past decade India has refreshed its Look East Policy and has forged closer relationships with its South East Asian neighbours. The most important regional force in the region is the Association of South East Asian Nations (ASEAN). India has rapidly risen to a summit level partner in 2002 from a sectoral dialogue partner in 1992. India’s bilateral trade with ASEAN has increased dramatically from a paltry USD 2.9 billion in 1993 to USD 40 billion in 2009 (ASEAN forecasts bilateral trade to cross USD 70 billion by 2012). India also entered into a free trade agreement with ASEAN in 2009, giving it greater economic access in the region.

In 2000 India along with five other South East Asian countries (Myanmar, Thailand, Laos and Vietnam) formed the Mekong Ganga Cooperation (MGC). MGC was formed as a group of six countries, focusing on tourism, culture, education and transportation. The bloc failed to take off and in 2003 was replaced by Thailand initiated Ayeyawady-Chao Phraya-Mekong Economic Cooperation Strategy or ACMECS, essentially the same countries as in MGC minus India. Not withstanding the fact, China might still see it as Indian entry into its backyard.

India has improved its bilateral relationships with Japan and South Korea in the past few years. India is increasing its naval footprint by conducting joint exercises with Japan, South Korea, Singapore, Vietnam, The Philippines, New Zealand, etc. It also carried out an exercise with America and Japan in the Pacific in 2007. In 2008, India and Japan signed an agreement on joint patrolling of the Asia – Pacific region.

Whose circle is it anyways?

The situation might look worrying when seen through the patriotic lenses; however both India and China seem to do their bit to secure their economic and strategic interest in the region. On 25^th August Times of India (http://timesofindia.indiatimes.com/india/India-develops-cold-feet-on-talks-with-Japan-US/opinions/9726482.cms) reported that India has developed cold feet on a planned joint naval exercise with Japan and America. Undisclosed officials in the establishment say that India does not want to antagonise China. However, China has not lodged a formal protest regarding the planned exercise. Such an approach by India can be interpreted as being intimidated by a superior military neighbour.

Pre empting a non existent crisis should be replaced by confidence building measures. Both India and china are a growing power in their own right and have significant interest in each other’s affairs. Imagining a conventional war between the two is far fetched, if not hysterical. Both countries are busy fighting domestic problems and expanding their business interests. A war will set both countries back by a few decades. India and China should shed some of their fears (more in case of India) and enter into closer relationship by more people to people contact. In 2010 a paltry 600,000 tourists were exchanged between India and China. It is a shame for neighbours whose combined population is above 2 billion.