AIIB: An Opportunity for India to Assert Itself

As India joins China-led initiative, the AIIB, what does it mean for Modi’s “Act East” policy, writes Deep Pal.

It is not a coincidence that the beginning of Narendra Modi’s term as Prime Minister corresponded with one of the most active periods in economic diplomacy for India. If the rest of India’s notoriously languid bureaucracy has been pushed into an overdrive, the effort has certainly been led by the South Block. It is as part of this ‘reaching out’ that India moved with remarkable alacrity in formalizing its association with the China-led and promoted Asian Infrastructure Investment Bank (AIIB) that culminated in a signing ceremony in Beijing last month.

For China, the force behind putting together the AIIB, the numbers are far more contrasting. The second largest economy in the world has a voting share of a meagre 5.5 percent in the ADB (Asian Development Bank) where the United States, with 12.6 percent and Japan, with 12.8 percent wield control. Similarly, in the World Bank, China has a voting share of 4.8 percent, far behind the 16.2 percent of the U.S. China, projecting itself as the challenger to the U.S. led existing world order, finds this arrangement blatantly discriminatory. It also likely believes that the promises of the U.S and its friends to bring about a more equitable environment are mere platitudes. It is backed by the frustration of developing nations that have long objected to the one sided terms that these institutions offer.

With the AIIB, China does not aim to replace the existing Bretton Woods institutions, but find a bona-fide way to be an actor of consequence. China’s seriousness is visible in its acquiescence in foregoing veto power to win over key European economies as members. This is an extension of the strategy that saw the establishment of the USD 50 billion New Development Bank or the USD 40 billion Silk Road Fund in the last year.

New World Order

China also plans to utilise the AIIB to fund President Xi’s dream projects — the Silk Road Economic Belt and 21st Century Maritime Silk Road (often called the “one belt, one road,” together), that will connect Asia and Europe with China at the center. For China, these projects are far more than mere rail roads and sea lanes — it is a pathway to the new world order that China envisages for itself in the 21st century.

A fair question then is, while this aids China’s long-term vision in the region and allows it to find better returns for its USD 4 trillion foreign-exchange reserves, how does this association benefit India?

For one, the primary stated objective of the bank is funding infrastructure projects in Asia, and the current five year plan estimates India’s infrastructure investment needs between 2012 and 2017 alone to be to the tune of USD 1 trillion; undeniably, the AIIB can be a valuable resource for a share of these funds. There are already noises within the government to move away from the new Global Infrastructure Facility of the World Bank and go with AIIB instead. One sector that can benefit immediately is that of coal power generation —which has fallen foul of other west-backed institutions like the World Bank over environmental concerns.

Aligning itself with new multilateral initiatives as a leader, is in sync with the foreign policy that Narendra Modi has been drawing up for India. Such a role bolsters the much flaunted “Act East” policy that puts a premium on all-round engagement with the Asia-Pacific. This shift should work in favour of India as it moves from being “non-aligned” to “multi-aligned”.

However, associating with the China-led bank will come with own set of challenges. India might have to contend with projects that will be inimical to India’s interests. For example, the Silk Road Fund is slated to finance part of the China-Pakistan Economic Corridor (CPEC) that passes through Pakistan-occupied-Kashmir. It is likely that Pakistan, as a founding member of the AIIB will approach it for financing the CPEC. Similarly, India is unlikely to have any of the projects that China finds prickly, such as infrastructure projects in Arunachal Pradesh, funded by the AIIB.

China’s No-veto Promise

Though there is little to suggest so far that China plans to use the AIIB as an instrument of this approach to foreign policy, it has been quite adamant on certain points. For example, it has refused to consider suggestions that the bank be based outside China for it to be truly multilateral and neutral, or that it have a non-Chinese president. It is possible that China is using the playbook written by others — ADB (Asian Development Bank), for instance has always had a Japanese president, while managing directors to the International Monetary Fund have always been European.

Being based in China means that the AIIB will be staffed by a large number of Chinese diplomats and economists with a distinctly Chinese outlook on the world. The rules seem to favour China too — while on one hand, it has promised not to use veto, existing rules require 75 percent “super-majority” for key decisions like appointing the president and allocation of funds outside the region. Clearly, that can’t happen without express Chinese approval.

As the second largest player in the new body, therefore, India must be cautious and draw a line in the sand between standing with China on developing an alternative international financial mechanism and allowing the use of such an organization to merely push a partisan agenda. China has been accused of economic coercion in the past — in 2010, following a dispute over the arrest of a Chinese fishing boat captain by Japan, China reportedly halted export of rare earth elements paralysing the Japanese electronics industry. In 2012, fruit exported by the Philippines was quarantined by Chinese customs as the two fought on jurisdiction over Scarborough Shoal in the South China Sea. Use of the AIIB for such a narrow, parochial purposes will not only tarnish the institution, but also India’s image.

For India this is an opportunity to use its experience as a longtime participant in multilateral organizations to help establish AIIB as a fair and impartial lender. Simultaneously, it must continue to reach out and build relationships with countries in the region and beyond. This will likely open avenues for financing projects that multilateral organizations have been reluctant to back – like the projects in Arunachal Pradesh that have found funders in Japan. It must also nurture its relationships with the United States, and find ways of synergising the Asian rebalance with its Look East policy. The economic centre of the world is shifting eastwards. Here is an opening for India to make itself a part of the order that builds it. It must make the most of this opportunity to elevate the AIIB as well as its own standing.

(Deep Pal is a foreign affairs analyst focusing on Sino-Indian relations, and works with The National Bureau of Asian Research in Washington, D.C. His work has appeared in various publications, including Foreign Policy, The Diplomat, China Brief and U.S.-China Focus. The views expressed here are his own. He can be followed on Twitter @DeepPal_)