India Has Chosen Prosperity Over Confrontation

The recently concluded BRICS leaders’ summit was notable for several reasons. The list of world leaders in attendance (which included the head of a NATO state and the UN Secretary General) proved Russia is no pariah. A new blockchain based payment system was unveiled, a category of new ‘partner’ countries was announced, and an ambitious joint communique was agreed.

However, the most significant outcome from the summit may have been the rapprochement between India and China. As the two biggest economies in BRICS and the two most populous countries in the world, co-operation between these states could have a profound impact on global governance and the future of the world economy. 

The UN Secretary General’s attendance sent a strong signal about the important role BRICS can play in helping the UN achieve its sustainable development goals. Meanwhile, the participation of Türkiye’s President Erdogan further underscored the impossibility of isolating Russia and the importance of beginning negotiations to resolve the conflict in Ukraine.

The launch of the blockchain based BRICS Pay system, although simply symbolic at this point, illustrates BRICS has the technical capacity to develop alternative payment systems, and gives confidence to those who would like to believe that a more equitable global financial system will be developed over the coming decades.

Expanding the association to include ‘partner’ countries will also help BRICS implement their plans to make use of national currencies in bilateral trade as higher trade volumes reduce the financial and political risks associated with this endeavour. The partner country model cleverly offers interested states the benefits of association without any obligations as BRICS continues to deepen integration between its official members.

Nevertheless, above and beyond all the interesting developments outlined above, the biggest story from the BRICS summit may have been the landmark peace agreement reached between India and China in which the parties committed to troop reductions on their Himalayan border. Following the announcement, Modi and Xi conducted their first bilateral meeting since 2019.

Chinese Investments

During his re-election campaign, Modi took a hard line on China which resonated with voters. New Delhi imposed strict rules on Chinese investments in India, banned hundreds of Chinese apps, and slowed down visa approvals for Chinese nationals. Indian businesses, who would prefer to embrace Chinese investment, subsequently spoke out in favour of mending ties.  

This led to some friction within India’s ruling BJP party. When the government’s top economic adviser suggested that India should become better integrated with Chinese supply chains to grow its’ manufacturing sector, the idea was immediately shot down by the Trade Minister who expressed concerns about how BJP voters might react.  

India’s Finance Minister then joined those calling for more Chinese investment and it appears the economists ultimately won the debate. Chinese investment will help grow India’s economy, especially its’ manufacturing base, and is reminiscent of how US investments enabled China to develop its own manufacturing base following the reproachment between Nixon and Mao.   

Contrary to what one might expect considering the country’s stunning growth potential, foreign direct investment into India reached a 20-year quarterly low this year with total FDI declining for the second consecutive year. Despite high-profile achievements, like the opening of new iPhone factories, manufacturing as a share of India’s GDP has actually been decreasing. An increase in Chinese investments in India could help reverse these trends.   

Amidst the growing rivalry between China and the United States, India, which has surpassed China as the world’s most populous nation, has sought to taken advantage of this ‘de-risking’. Success in this respect would be a huge boost to India considering manufacturing is a labour intensive industry in which the country still lags its neighbour. India’s young population needs employment opportunities and can only benefit from increased investment in the sector.    

Stronger Together

As it turns out, Chinese investment could be the key to India’s aspirations. Beijing has spent decades developing highly efficient supply chains and China’s competitive advantages have proven relatively difficult and expensive to replicate elsewhere. That is why instead of seeing rivals emerge, it has been Chinese firms setting up shop in third countries, like Mexico and Vietnam, that have replaced many of the goods the US once imported directly from China.   

As a result, major Indian businesses have spoken out in favour of working with China. Indian firms would prefer to become integrated within Chinese supply chains and many prominent economists have been calling for more Chinese investment in India’s manufacturing sector.

The Indian electronics industry, in particular, has been significantly impacted by protectionist restrictions limiting the participation of Chinese firms in the Indian economy. Industry leaders claim restrictions have resulted in billions in lost revenue. The Adani Group, a major industrial conglomerate with close government ties, joined calls for a new approach earlier this year. 

The economic reality is that there is little benefit in turning down lucrative trade and investment opportunities, especially with your biggest trade partner. BYD, a major Chinese electric vehicle manufacturer, was blocked from undertaking a joint venture with an Indian firm last year and ended up withdrawing its proposal for a $1 billion investment in the Indian automotive sector. Considering the issues India faces with respect to air pollution, Modi has wisely shifted gears.  

China will benefit too. India is a great investment opportunity for Chinese businesses looking to diversify their own economic relationships at a time when Chinese exporters face the threat of American and European tariffs and sanctions. India is a fast-growing consumer market which offer synergies for Chinese manufacturers looking to bypass heightened trade restrictions.

Improved ties between Beijing and New Delhi will benefit both parties, the BRICS grouping which facilitated the detente, and the entire global community. When India bought sanctioned Russian crude, this brought down the price of oil, which benefitted everyone, including the US. Similarly, if India and China work together, the whole world stands to benefit from higher levels of global economic growth and increased prosperity.