Monday, July 28, 2014
India courts Chinese with Maiden Budget
If Prime Minister Narendra Modi were a cricketer his favorite stroke would have been a glance. It is a delicate shot involving a flick of the wrists which deflects the ball towards the boundary. It does not require much energy, creates a strong impact and looks classy.
When Modi invited Pakistan's Nawaz Sharif to his swearing-in ceremony he scored the first boundary of his new political journey by employing this stroke. It was an unforeseen step that took the world by surprise and covered a long distance in launching Modi's outreach towards India's neighbors. As the dust settles down after Modi's maiden Union budget, which was announced on July 10, it appears as though the prime minister has scored yet another boundary using the same stroke, at least insofar as business relations with China are concerned.
In the past decade, when participation of Chinese firms was sought in crucial sectors such as telecom and power, the government of the day in India faced stiff political headwinds. Much fuss was made in the media about the possible adverse impact on India's security interests if "Made in China" equipment was linked to the national grids. This only served to delay the inevitable market entry of Chinese firms. Today, electrical-equipment giant Huawei's turnover from India is likely to touch US$2 billion and Chinese equipment makers have captured around one-third of the Indian power market.
Modi has made several bold promises in his election campaign and his budget which might require strong participation from Chinese companies. The 100 new smart cities, 65 million affordable houses, 8,500 kilometers of national highways, 16 new ports, 1,620 km of inland waterways, 15,000 km of gas pipelines and large solar power projects in five states are some prominent examples. Any significant obstacle to the involvement of Chinese firms in these projects could seriously impede their realization. Being fully aware of this risk, Modi has already begun to mold public opinion to pave the path for meaningful Chinese participation in these headline projects.
Instead of waiting for opposition to emerge against Chinese participation in these projects, Modi has pre-empted his critics by announcing a string of measures to counter the China "threat".
In February during an election speech in Arunachal Pradesh, he urged China to drop its expansionist mindset. After coming to power, he fast-tracked the construction of roads in India's north-east region as a response to perceived Chinese aggression on the other side of the border. It should come as a relief to Chinese companies that Modi has already expended his political capital and used his budget to help prepare the ground for Chinese participation in India's infrastructure sector.
When Chinese companies seek to bag roles as engineering, procurement and construction contractors or financiers in Indian infrastructure projects that will be rolled out in the coming months, nobody will be able to accuse Modi of soft-pedaling any threat from China. Modi's opponents will also find it difficult to oppose Chinese participation in populist projects such as affordable housing that will benefit the poorest segments of Indian society.
Another measure that will indirectly ease the path for Chinese companies in India is the creation of the BRICS development bank announced at the summit of Brazil, Russia, India, China and South Africa earlier this month in Brazil. Instead of Chinese development banks directly financing infrastructure projects in India, a portion of the funding, especially in sensitive projects, could be routed through the BRICS bank. Since China is the biggest contributor to the BRICS bank, it will achieve a substantially similar result while mitigating the risk of political opposition.
Despite Modi's foresight and diligence, there is one major risk that might still unhinge the plans of Chinese infrastructure and construction companies in India. That is the quality of their execution.
China is still synonymous with cheap and low quality in India. When Chinese companies benefit from the largesse of the Indian state they will be expected to deliver world-class quality infrastructure projects despite India's difficult regulatory landscape in relation to labor laws, environmental clearances and pollution norms. Any lapse in quality of construction will draw disproportionate amount of media attention and public anger.
Chinese companies have amassed a wealth of experience in completing low-cost infrastructure projects in record times both within China and overseas. However, their soft skills in managing relationships with stakeholders are spotty at best. It might come as a rude surprise to them when they find out that their business success in India will depend more on their public relations expertise than on their engineering skills.
Santosh Pai is an Indian lawyer based in Beijing