Asia Times | Nov 8, 2006

Delhi divided over Chinese ’threat’

By Siddharth Srivastava

NEW DELHI — Ahead of Chinese President Hu Jintao’s visit to New Delhi this month, security concerns about firms from his country investing in India is turning into a touchy issue.

It has resulted in a clear division within the Indian government, with the Ministry of Finance, Ministry of Commerce, Ministry of Home Affairs and the Prime Minister’s Office (but not the prime minister) taking different sides on the matter. Crucially, key coalition partners, the leftist parties, are keen to see the controversy resolved before Hu’s visit.

India’s perhaps overcautious approach is in contrast to Beijing’s eagerness to take economic engagement with New Delhi to new levels. China has urged India to consider signing a free-trade agreement (FTA) between the two countries, which means granting "market economy" status to China, a move that has not been endorsed by most developed countries. The issue is likely to be discussed during Hu’s visit to India, which begins on November 20.

"Following the reopening of the trade post on the Indian-Chinese border [at Nathu La in Sikkim], our government is considering FTA talks with India," Chinese assistant minister of commerce Fu Ziying said at a recent meeting of the 2007 China Industrial Development Forum in Beijing.

Sino-Indian trade has expanded rapidly in recent years. Bilateral trade surged 37.5% to reach US$18.73 billion in 2005 and is expected to hit $20 billion this year. As a symbol of closer trade ties, India and China reopened cross-border trade at the Himalayan Nathu La Pass in July, 44 years after trade ended in the wake of a short border war.

However, Indian misgivings over giving Chinese firms a freer rein in the country remain. The differences arise over the formulation of a comprehensive law that will seek to label all Chinese firms a potential threat to national security. The legislation will require every investment proposal to be scrutinized.

The Ministry of Finance and Ministry of Commerce (led by P Chidambaram and Kamal Nath respectively) oppose any obstacle to investment from any particular nation and insist that individual scrutiny of investment proposals should ensure that they do not pose a security threat.

Both Nath and Chidambaram, who are pro-reform and in favor of foreign direct investment (FDI), are against the singling out of any country as a security threat. Currently, only Bangladesh and Pakistan are categorized as "security risk" countries.

Recently, the Securities and Exchange Board of India, which reports to the Ministry of Finance, signed a "landmark" memorandum of understanding with the China Securities Regulatory Commission on the enhancement of regulatory coordination between the securities watchdogs of the two Asian giants.

However, National Security Adviser M K Narayanan, who reports directly to the prime minister and is considered by many to be responsible for all internal security matters, is in favor of full scrutiny of all FDI proposals on the basis of origin. The Ministry of Home Affairs has also been lobbying hard to introduce such measures.

An extension of this debate has been the issue of worker visas. Recently, Reliance Industries Ltd chairman Mukesh Ambani called on Home Affairs Minister Shivraj Patil to request that visa and immigration clearance be accelerated for nearly 2,000 Chinese technical executives whom the company had hired for a gas-pipeline project.

Because of the minister’s intervention, doubts about the Chinese presence in telecoms have extended to ports, which has derailed the India expansion plans of Hong Kong-based Hutchison Port Holdings, a unit of Hutchison Whampoa. In the past, Chinese telecom firms Huawei Technologies and its rival ZTE Corp have been refused permission by the Foreign Investment Promotion Board to invest in India.

India has rejected a bid by China Harbor Engineering Co for the Vizhinjam port near Thiruvananthapuram as the company in question is also developing Pakistan’s Gwadar port, which opens the possibility of a Chinese naval presence next to Indian borders.

The issue of security concerns relating to FDI first arose after the presence of Egypt’s Orascom Telecom in Hutchison-Essar came under severe criticism from the national security adviser in his review of potential threats to national security from FDI.

Prime Minister Manmohan Singh has so far not put a lid on the debate, though he does not appear to be in favor of imposing obstacles to foreign investment and wants Indian policymakers to wake up to new challenges. Manmohan said recently, "The world is large enough to accommodate the growth aspirations of India and China."

He said that in a rapidly changing global environment, Indian policymakers have to act fast to seize opportunities. "I do believe that there are today no binding external constraints on India’s economic growth. Most constraints we face are inherently internal," he said.

While at one level India welcomes economic ties with China, in many spheres the two countries are fierce competitors for markets and resources, including energy. India will be hit worst among other Asian countries if China makes a preemptive entry into the Association of Southeast Asian Nations (ASEAN) because of trade diversion, a study by the Indian Council for Research on International Economic Relations recently stated.

According to the report, it is therefore very important that India work to speed up India-ASEAN FTA negotiations. China is bound to enter the ASEAN grouping - considering that the Early Harvest Program is already in effect and the FTA would be the first to be implemented, the study said.

Chidambaram, unlike the more diplomatic Manmohan, however, has been more forthcoming with his views. The finance minister recently said he would never allow the reforms process, economic growth and more foreign investments to be derailed.

Indeed, the statements by Chidambaram and Manmohan are being seen as attempts to set the right tone before Hu’s visit. However, it is also true that there exist deep-seated suspicions in the bureaucracy about China that go back to the 1962 Sino-Indian War, which are reinforced by Beijing’s perceived clandestine support of Pakistan’s defense program.

However, there are still large numbers of people on both sides of the border who want to engage in business.

In this context, some observers have talked about location and sector-specific restrictions - instead of country-linked curbs - to address any perceived threat to national security arising from Chinese investment.

On a more positive note, Beijing has expressed happiness over its upgraded strategic ties with New Delhi and has said there has been "progress" on the boundary issue. "Boundary negotiations have made progress and border areas have remained peaceful and tranquil," the Chinese Foreign Ministry said in its latest issue of China’s Foreign Affairs 2006. "Frequent high-level interactions and deepening mutual trust underscored the good momentum of political relations," the report said.

India is likely to use the Hu visit to urge China to step back from its demand for Tawang in Arunachal Pradesh as part of the boundary settlement. China has sought a new border trading post to be opened at Bumla, which may be approved during Hu’s visit. India had also proposed opening another border post in Indian Kashmir, but there has been no response from China yet.

Siddharth Srivastava is a New Delhi-based journalist.