The India-Japan Partnership

The end of the Cold War, a complicated security environment to India’s north-west that inhibited the development of India’s historic relations with Central Asia and beyond, and a domestic balance of payments crisis provided the context and opportunity for Prime Minister Narasimha Rao to overcome Cold War differences with the ASEAN and effect a strategic and economic turn in India’s external relations towards an economically rising South East Asia with the announcement of India’s ‘Look East’ policy in 1991. In the 25 years since India became a Sectoral Dialogue Partner in 1992, India’s relationship with ASEAN and South East Asia, has become one of it’s most defining external relationships marked not only by the steady elevation of its formal status to Full Dialogue Partnership in 1996, Summit level partner in 2002 and Strategic Partnership in 2012; Free Trade Agreements in 2003, 2009 (in goods) & 2014 (in services and investments); and participation in 30 dialogue mechanisms including the ASEAN Regional Forum (ARF) and other security related fora, but also a robust people to people relationship grounded in history, culture, trade, investments, the Indian diaspora, travel, tourism, entertainment, and growing economic integration. For the ASEAN too, a rising India is seen as a stabilizing factor in the emerging Indo-Pacific region challenged by a powerful and assertive China and doubts about US leadership in the 21st century.

Prime Minister Modi’s initiative to invite all ASEAN Heads of State to the upcoming Republic Day for a Commemorative Summit marking the 50th Anniversary of ASEAN and 25th anniversary of our formal relationship could therefore have not taken place at a more propitious time when the world is in flux, the strategic underpinnings of ASEAN are being called into question, and new alignments are developing in the Indo-Pacific in response to the rise of China. It could mark a watershed in our relationship with a political, economic and cultural grouping that grew around a post World War II economic and political order in Asia anchored by the US, but as the Cold War came to a close and China emerged as an economic powerhouse, drew in its communist and military-led neighbours into its fold to create a very heterogeneous grouping molded by a culture of consultation and consensus, and established progressively stronger economic ties with China. In the absence of an obvious strategic adversary after the Cold War, it did not feel the need to, nor perhaps would it have had the capacity to, provide for its own collective security. Its strategic underpinning was implicitly provided by the US.

Today, that situation has changed. The remarkable rise of China over the last 30 years and more led by the Communist party of China, accompanied by its growing political, strategic and economic self confidence manifested in major diplomatic and charm offensives world wide; its shedding of inhibitions to project its political and economic models as examples for others to follow or benefit from; its calibrated military assertiveness and rapid and ambitious modernization; its strategic economic projection through the Belt and Road Initiative, the Asian Infrastructure and Investment Bank (AIIB) and other initiatives; and the unrivalled position of President Xi Jing Ping and his policies enshrined at the 19th Communist Party Congress recently, have changed the equilibrium, and equations, in the region that countries are still trying to grapple with. Just when there is a need for a steady and firm US hand in Asia, questions about its current leadership and decision-making have left a region a little nervous and looking for stabilizers.

Little wonder then that new alignments and hedging strategies are shaping up as countries from Japan to India try to safeguard their own security and strategic interests. It has catalyzed voices in Japan to review its defence and nuclear postures (possibly causing some nervousness in some quarters on account of their World War II experiences, though the context today is very different and such a scenario unlikely). Australia, Japan, the US and India have come together, albeit still tentatively, in a democratic ‘Quadrilateral’ unwelcome to China. Regional powers have accelerated naval and military exercises to deal with imaginable challenges and threats.

ASEAN itself is in a bit of a disarray on how to deal with China, the US, and contested claims in the South China Sea testing its unity and the limits of diplomacy in dealing with unilateralism and force in the matter of territorial claims and freedom of navigation as enshrined in the UN Convention on the Law of the Sea. The Indo-Pacific has emerged as a new theatre of maritime competition.

Faced with concerns about China’s intentions and possible future trajectory and US unpredictability and inconsistency, the Special Japan-India Strategic and Global Partnership for peace and prosperity in the Indo-Pacific and the world forged by Prime Ministers Narendra Modi and Shinzo Abe through their annual summits, most lately in September 2017, provides an opportunity for an alternative strategy to deal with the destabilizing aspects of China’s rise through an enhanced economic partnership with ASEAN countries that relies on competition rather than confrontation and could form a part of the 25th anniversary of India-ASEAN relations and the 5th anniversary of their Strategic Partnership. Its key elements follow.

First, most current approaches to dealing with the hard aspects of China’s rise are primarily security-driven and geo-political in nature. However, a purely military-political strategy without economic content would be brittle and tend towards confrontation.

The rise of China and its global projection (through the BRI, AIIB, BRICS etc,) has been built on its economic rise, and on huge infrastructure and connectivity projects intended to power its economy and project its strategic influence worldwide. The India-ASEAN response too should be economic, but not imitative, and capitalize on their strengths. It should focus on manufacturing and services, value adding, employment generation, developing value chains, and people-centered development utilizing existing and planned infrastructure, ASEAN, Chinese, Indian and others. It should also always keep environmental protection, sustainability and impact on climate change at the forefront.

Second, such a response should address the diversity of South East Asia by crafting separate but complimentary strategies for continental or terrestrial, and maritime, peninsular or littoral South East Asia. Its littoral dimension would be suitable for large corporate-driven investment in manufacturing, services, infrastructure and the blue economy in maritime South East Asia from Philippines to Malaysia, as part of the regional and global value chains stretching from East to India, Africa, Europe and the Atlantic.

Its terrestrial and continental dimension would however require a priority towards much more bottom-up approaches building on local resources and products. The two approaches are of course not mutually exclusive. They could compliment each other and integrate as the latter grows.

Third, while acknowledging that connectivity is an imperative for economic growth, it should, particularly in its terrestrial dimension, rebalance the current mantra of connectivity with a better balance between connectivity and productivity, and between large, medium and small investments, including through cooperatives (modeled on the highly successful dairy cooperative movement of India), micro-credit and self help strategies.

It should accord priority to building on the existing rural economy of those who live off the land, water and forests (who still constitute the majority of people in the region) through environmentally sustainable development of agriculture, livestock, fisheries, forests, education, health, physical and digital connectivity and a multitude of other small projects on a large scale over large, top-down, corporate or state driven projects prioritizing large power and transport infrastructure projects that are usually environmentally and socially disruptive.

Such an approach would develop a much broader ownership and employment base benefiting a much wider cross-section of people at the base of the economy, and bring political dividends for host countries and partners. It would slightly alter the relationship between connectivity and productivity. It would use existing transport infrastructure to start with the ‘first mile’, improving and getting the local product to wider markets, with infrastructure growing organically with markets rather than starting big and worrying about the ‘last mile’ later.

Fourth, Japan could be a key partner with the Special Japan-India Strategic and Global Partnership and the proposed Africa-Asia Growth Partnership linked through ASEAN and India as its pillars. This does not mean others are excluded but that the Japanese partnership could provide the spine for the strategy, and enlarge choices for ASEAN and other countries.

Fifth, US political, diplomatic and economic support for Japan and ASEAN would remain critical, but the strategy would not be US-centric or US driven; it would be regionally driven.

Sixth, such an economic strategy should not be seen as anti-China; rather it should be seen as an alternative to China. It would be competitive, not confrontational.

As we know, competing on its own, Japan has been losing ground to China economically, globally and in Asia. India too cannot yet compete strongly with China in South East Asia and elsewhere in infrastructure building or manufacturing and exporting goods out of India taking into account cost of production, tariffs and transaction costs. But India can compete with China on the combination of cost, quality, technology, reliability and service with a suitable branding, if it invests in ASEAN, taking advantage of the ASEAN Economic Community (AEC) and local factors of production in the Cambodia, Laos, Myanmar, Vietnam (CLMV) in particular.

A well-crafted India-Japanese economic partnership can complement each other capitalizing on their respective strengths, and revitalize and enhance Indian and Japanese competitiveness across a range of industries from small to big, agro-based and light industries, machine tools and infrastructure, generating local employment, adding value of natural resources and primary products, raising economic productivity and lifting up the industrial and technological base of the economy in general. With its diverse economic base, ASEAN could be an integral partner.

Seventh, such a strategy will require some revamping of our investment and official development partnership policies. So far, the primary instruments of our external economic policies have been on trade and more recently, development partnership including Government-to-Government Lines of Credit. The focus of our investment policy has been almost entirely on attracting inward investment. There is not much policy support for outward investment.

Perhaps this is because we tend to think of outward Indian investment as a net outflow of capital. This is an outdated view. In a globalized economy, capital flows are circular and can be ploughed back one way or another. Virtually every other major country in the world, be it Japan or China, or the US, or Germany, looks at foreign investment in terms of global economies of scale, comparative advantages, and value chains, and in strategic terms. Unlike trade which is almost by definition transactional, foreign investment conveys a long-term stake in the country and creates an economic interdependence from which both investing and host nation benefit. We need to adopt foreign investment in our extended neighborhood including ASEAN as an arm of our foreign policy.

This also means that we need to compliment the concept of Make in India with the idea of ‘Make in Partnership with India’ in our near abroad wherever possible through joint ventures with host country partners taking advantage of tariff advantages offered by the ASEAN Economic Community and local factors of production to invest in South East Asia, especially in the least developed economies of the CLMV.

Likewise, in our development partnership, virtually all our investments have been government investments in development projects and Government-to-Government Lines of Credit. This is true for our various funds to the ASEAN as well. While this is important from the point of building bilateral relations in general, we need to facilitate cheaper, commercial, buyers and sellers Lines of Credit to stimulate private sector trade and investment between India and Southeast Asia, and direct at least some of our Lines of Credit away from large, long gestation G2G credit lines to more innovative projects with more direct social impacts on the grassroots. While this may involve greater outlays on cheaper credits and risk insurance, the overall burden on the government budget should be much less.

Eighth, we need to give a special place in our investment and development policy to small and medium enterprises especially in employment intensive and livelihood based sectors like agriculture and agro-industries, but also light industries like textiles, consumer goods, pharmaceuticals, electronics and machinery; social development sectors education, health, IT, skills development etc.; and environment friendly techniques, industries and technologies.

A suitable financing facility for SMEs is of particular importance. Typically, it is much easier to find financing for large companies investing in big projects that are frequently socially and environmentally disruptive even as the dominant development narrative marketed by international and bilateral financial and development institutions is high on the jargon of ‘inclusive, equitable and sustainable’ growth. In reality, it is quite the opposite. Some handholding would also be required in the form of consultancies, entrepreneurship development, management training, and skills development. The Government of India has made a welcome beginning in this direction with a Special Purpose Vehicle of the Eximbank of India for such investments in the CLMV countries. This can be expanded much further.

Ninth, no doubt the India-Japan economic partnership has a strategic dimension, but participating in it is not an either-or choice. Rather, it will enhance ASEAN’s and member countries’ choices.

Lastly, this economic and strategic partnership does not preclude a security or political dimension or other partnerships. Ideally, this should take place through existing ASEAN fora such as the ARF, ADMM+ and EAMF, but diplomacy may have its limits against brute power and alternatives such as bilateral cooperation and collective security strategies may also need to be explored. The recent meeting of the ‘Quad’ could be a message in this direction or a hedging strategy. The ‘Quad’ also needs to find a way to include ASEAN in its dialogue on freedom of navigation and security in the Indo-Pacific which it straddles, affects it closely, and upholds.

These principles could be translated or implemented in many ways. One way, proposed here could be through the development of economic corridors for continental and maritime South East Asia.

In continental South East Asia or the GMS, we can build upon PM Modi’s idea of a North East India-Myanmar Industrial Corridor, the Trilateral Highway, and the East West Corridors of the Master Plan for ASEAN Connectivity (MPAC) to build upon a number of terrestrial economic and investment corridors from the North East of India through the Greater Mekong Sub-region up to Vietnam. These could be called the India-Greater Mekong Sub-region land corridors. Such corridors should integrate as a priority the North East of India and the CLMV countries that suffer a development deficit. The latter also enjoy some measure of protection and a grace period to harmonize their tariffs and fully integrate into the ASEAN Economic Community.

These corridors would consist of a series of agro-processing, light industrial, and services hubs based on local resources, produce and human resources utilizing existing connectivity infrastructure and building upwards and outwards to newer and bigger markets, somewhat inverting the current emphasis on connectivity first and the rest later.

To start with, it would survey the productive potential of the regions that could be serviced along these routes based on natural resources, primary produce and availability of labour; identify possible industrial hubs and zones; fill in missing links in connectivity; find energy (preferably renewable), funding and capacity-building solutions; and summon the political will to develop these east-west corridors. These corridors should be based on the development of local agriculture (rice, beans and pulses, oilseeds, horticulture, vegetables, plantation crops like rubber, cashew, tea, coffee etc.) and agri-based and traditional industries such as bamboo, cane and other local sustainable forest based products, light industries, value-adding to some extractive industries mindful of environmental and climate change impacts and implications, and the required social infrastructure. Joint ventures, consortia and other partnerships involving Indian, ASEAN, Japanese and other East Asian or Australasian companies could enable comprehensive solutions for energy, training, financing and logistics, enhance scale, and cushion risk.

Such a processing and manufacturing based strategy should avoid the Chinese model of investment in extractive industries and development of arteries of import of raw material and export of manufactured goods. If anything, it should add value to natural resources and primary produce. Indeed, competition from cheap manufactured goods from China has arguably had the effect of throttling the development of manufacturing industries in the CLMV.

Leaving aside possible rail networks for the moment and concentrating on the highways in the GMS that are part of the ASEAN Highway Network, the first of these corridors would be the Trilateral Highway connecting the North East of India at Moreh-Tamu on the India-Myanmar border southeast-ward up via several cities and crossroads to Myawaddy-Mae Sot on the Myanmar-Thailand border described as the Western Corridor in the MPAC.

The second is the East-West Economic Corridor from Mawlamyine through Thailand and Laos to Da Nang, Vietnam1. India has offered extensions of this highway northeastwards through Laos and eastwards through Cambodia which can be developed.

The third is the Southern Corridor from Dawei (Myanmar) via two routes: Bangkok–Phnom Penh–Bavet (Cambodia)–Ho Chi Minh City–Vung Tau (Viet Nam), or Bangkok–Siem Reap–Sung Treng (Cambodia)–Quy Nhon (Viet Nam).

While the first two corridors would be connected through the Asian Highway 1 from points in Northeastern India via Mandalay, the third would connect from the eastern seaboard of India by sea to Dawei on the Andamans sea coast of Myanmar, and then follow a new road to the Thai border land and routes through Thailand thereafter.

There is also a relatively neglected northern corridor starting from the AH1 at Meiktila via via Taunggyi on the Shan plateau across the Salween (Thanlyn in Myanmar) to Kyaingtong on the eastern Shan, and south to Tachilek on the Thai-Laos border to Laos and Vietnam.

A new variation to this corridor can also be developed from Kyaingtong via the newly opened Laos-Myanmar Friendship bridge over the Mekong at Xien Kok through Laos via Luang Namtha, to northern Vietnam at Pang Hoc near Dien Bien Phu and on to Hanoi and Haiphong. Apart from some stretches in NE India and Myanmar which are in the process being upgraded by 2020 and are common to all east-west routes touching India, and a short stretch from Tale to Xien Kok on the Laos border that needs up-gradation, the rest of the route is already motorable, though there are also insurgency affected areas on the India-Myanmar border and Shan plateau that will need to be addressed.

This will be the shortest and most direct route between India and Vietnam. If this cannot be incorporated into the MAPC, it could be taken up as an India-Myanmar-Laos-Vietnam corridor with Myanmar and Vietnam as investment partners.

Each of these planned and possible corridors would ultimately connect India to the Vietnamese cities and ports of Hanoi, Haiphong, Da Nang, Ho Chi Minh City, Nam Cam, Vung Tau and Quy Nhon through Myanmar, Laos, Cambodia and/or Thailand linking the fertile Brahmaputra, Chindwin, Ayeyawady, Mekong and Da and Red river valleys and the Shan plateau and unlocking the untapped agricultural, natural, industrial, tourism and other productive potential from the Northeast of India through Shan state and the Mekong up to Vietnam.

The second arm of this strategy would be the maritime-littoral corridor. This would link the eastern seaboard of India, the Bay of Bengal and the Andaman Sea, through Malaysia, Singapore and Indonesia, Brunei, Thailand Vietnam and the Philippines to the East Asian economies. This would in some ways retrace ancient trade routes linking the Kalingas, Pallavas and Cholas to Southeast Asia, but link them with special, industrial and trade zones in the region to form part of a regional and global value chain linking Japan, Korea, China, Taiwan, Vietnam, Brunei, the Philippines, Thailand, Indonesia and Malaysia to India and eventually as part of the Asia-Africa Growth Corridor, to Africa, the Gulf and Europe. This artery is already receiving the attention of think tanks, industry bodies and policy makers across the region. Indo-Japanese partnership along this corridor could add synergy to it. This could be called the Asia-Africa Maritime Route. One link that could be explored on this route for industries and shipping is a Chennai-Medan corridor touching also the Andaman and Nicobar islands of India.

The third arm would use Myanmar as a springboard for a mixed corridor starting with the Kaladan Multimodal Transit Transport Project, but also the Bay of Bengal, the eastern seaboard of India and the Special Economic Zones of Kyaukphyu, Tillawa and Dawei through the East West Corridors of the Master Plan for ASEAN Connectivity to ports of Vietnam and beyond. These would involve transshipments at some points, of which Dawei could be the shortest and most important. The potential of this has hardly been explored, and should be examined urgently. This could be called the BIMSTEC-GMS corridor. Both this and the maritime corridor would be suitable for the sustainable development of the Blue Economy.

These corridors may also necessitate a revision of the regional and sub-regional cooperation architecture involving India and the Greater Mekong Sub-region like the BIMSTEC, MGC and CLMV countries. It may well be desirable to enlarge BIMSTEC to include the CLMV countries as observers and/or members in the greater BIMSTEC-GMS cooperation forum within the ASEAN.

Some of these corridors and ideas may at first sight appear unorthodox, unrealistic and contrary to current economic thinking from both a conceptual and funding point of view. In fact, funding requirements for manufacturing industries as this strategy emphasizes, are much less than for mega connectivity and infrastructure projects and can be addressed through existing initiatives with only a little additionality focusing mainly on commercial credit lines, risk coverage and technical assistance for the private sector in general and SME sector in particular.

A number of Indian initiatives like the Trilateral Highway and its proposed extensions, the Kaladan project, the US$ 1 bn Line of Credit for physical and digital connectivity in the ASEAN, the Duty Free Trade Preference (DFTP) Scheme of the Ministry of Commerce of India, ongoing bilateral Indian Lines of Credit to the CLMV countries, and the Eximbank fund for SMEs in the CLMV could be leveraged to advance the process. Initiatives under the BIMSTEC, MGC, and those oriented towards the CLMV could also be subsumed under it. Regional and international development banks like the ADB, New Development Bank (NDB), World Bank and IFC, Asian and international investors, and the international community at large too could be attracted to the idea. Indeed many of them are already advocating and working in this direction. The India-Japan strategic and economic partnership and incipient Asia Africa Growth Corridor too could be leveraged.

In the final analysis, whether or not such a strategy could work is more a question of political and economic philosophy, persuasion, strategic vision, political will and husbanding resources than funding per se.

1  Khon Kaen-Mukdahan (Thailand)-Savannakhet (Lao PDR)-Dong Ha-Da Nang (Vietnam)

 

(Shri Gautam Mukhopadhaya is a former diplomat who served as the Ambassador of India to Syria, Afghanistan and Myanmar. He has also worked in the UN Headquarters in New York as a Consultant on Social Development and has been a visiting scholar at the Carnegie Endowment for International Peace.         This article has been adapted from a lecture at the National Institute of Advanced Studies, Indian Institute of Science, Bengaluru, organized jointly with the South East Asia Research Group on December 8, 2017.)

 

(This article is carried in the print edition of January-February 2018 issue of India Foundation Journal.)

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