China’s debt-trap diplomacy in the region, and how it impacts India

China’s debt-trap diplomacy in the region, and how it impacts India

India’s immediate neighbours – Sri Lanka, Pakistan and Nepal – have either plunged into an economic crisis or are showing signs of economic distress.

China's debt-trap diplomacy China's debt-trap diplomacy

Sri Lanka is in the throes of a deep economic crisis, with sky-rocketing inflation and depleting foreign reserves. Pakistan too, in the middle of a political crisis, is facing an economic one. Nepal, likewise, is foreseeing an economic crisis and has banned the import of vehicles and other luxury items, due to declining foreign exchange reserves. Nepal Rastra Bank, the country’s central bank, said that they have been seeing symptoms that there may be some kind of crisis in the economy, mainly because of growing imports.

Apart from economic distress, one thing running common between these countries is that they are all part of China’s Belt and Road Initiative (BRI). The BRI is a global infrastructure development strategy developed by the Chinese to invest in nearly 70 countries. The Chinese government, through BRI, invests in building ports, roads, bridges, dams, power stations, railroads, etc. China is known to have BRI deals with all three countries.

And Americans have a term for this – debt-trap diplomacy.

What is debt-trap diplomacy?

The US sees China’s lending practices as debt-trap diplomacy, a term made popular by the Trump administration. Debt-trap diplomacy is when a richer country lends to poorer countries – that are resource-rich or strategically placed – overwhelming them with debts that are not sustainable. This leads the poorer countries to give up their strategic assets or give in to political leverage.

Prime Minister Narendra Modi had also brought up China’s debt-trap diplomacy during a virtual event in 2020. “History has taught us that in the name of development partnerships, nations were forced into dependence partnerships. It gave rise to colonial and imperial rule. It gave rise to global power blocks,” he had said while virtually inaugurating the new Supreme Court building of Mauritius at Port Louis.

President of the think tank Center of Political and Foreign Affairs, Fabien Baussart, wrote in the Times of Israel that the BRI caused the Sri Lankan government to collapse. As per reports, China has refused any concession in debt repayment. Total debt to China stands at $8 billion, one-sixth of Sri Lanka’s external debt. Its foreign reserves are dwindling as its construction projects with Chinese loans are not making money. China has refused to reschedule its debts. Sri Lanka’s borrowing to finance unprofitable infrastructure projects also contributed to its crisis.

As for Pakistan, the China Pakistan Economic Corridor played a significant role. Its BRI aid also stands at $27.3 billion.

Around 40 countries that felt the benevolence of China have the rug pulled from under their feet. Among these are Laos, Zambia and Kyrgyzstan too. Moreover, according to an international development research lab based at the College of William and Mary in Virginia, AidData, BRI has left multiple lower and middle-income countries with ‘hidden debts’ totalling $385 billion. The report analysed over 13,000 aid and debt-financed projects worth $843 billion in 165 countries.

However, not a single BRI project in Nepal has taken off due to various constraints and the finalisation of project implementation. The Himalayan country asserted that it will not accept any project that comes with strings attached. The Prime Minister’s publicity affairs chief stated that Nepal is not looking for a loan right now but is seeking projects under grant assistance. Kathmandu had stated that the projects should be selected based on a joint mechanism. They said that they prefer grants but even if a loan is required then it should not have more than a 2 per cent interest rate. The repayment time too should be as per international standards or as per the interest rate imposed by the World Bank, the Asian Development Bank and others. Beijing has been trying to push some projects under BRI, after the ratification of the Millennium Challenge Corporation (MCC), a $500 million American grant.

But there has also been a reduction in exports from Nepal to China in the past three years. According to the Trade and Export Promotion Centre, exports in the last fiscal year 2020-21 fell by 14.7 per cent from 2019-20. Imports have, however, ramped up. Moreover, Beijing recently imposed an ‘undeclared blockade’ against Nepal. Traders say that China has imposed a blockade against Nepalese traders under the guise of COVID preventive measures. They said that around 300 trucks have been stranded at Kerung and Tatopani border points for the last 16 months.

Western anxieties?

The notion of debt-trap diplomacy could also be part of wider Western anxieties about China’s growing influence, not only in its neighbourhood but also in Africa and globally. China has made investments in infrastructure projects in Africa, along with its neighbouring countries. While the US and the Western countries invested majorly in Africa; in the pre-60s, its focus was always in the form of aid and social service. China, swept in, treated them as equals and offered business deals, which the African countries seemed to prefer. The Western countries then ramped up their infrastructure investments too.

Sri Lanka and Pakistan, through the BRI, have seen heavy investments from China. China has also given loans to Nepal. Notably, India too has investments in Sri Lanka and Nepal. In fact, during the aforementioned 2020 virtual event, PM Modi, countering the perception of China’s debt-trap diplomacy, had said that India has a ‘mainly human-centric’ approach to development. “India is making development partnerships that are marked by respect, diversity, care for the future, and sustainable development,” he said, adding that India’s fundamental principle in development cooperation is respecting its partners. He said that India’s development cooperation does not come with any conditions.

On top of that, former Sri Lankan Prime Minister Ranil Wickremesinghe also thanked India on Sunday for its ‘maximum support’ during the crisis. He also said that no Chinese investment is coming to the country under this government.

Impact on India

With the growing influence of China, India is looking to strengthen its walls with its 'human-centric development' approach. India has offered a credit line of $2.5 billion to Sri Lanka. It also extended a $400-million currency swap and a $500-million credit line for fuel purchases to Sri Lanka. It has sent consignments of diesel to mitigate power cuts in Sri Lanka. The country also has investments in areas of tourism, real estate, manufacturing, communications, petroleum retail etc in Sri Lanka. It is also one of the neighbouring country’s biggest sources of foreign direct investment (FDI). India is likely to try and continue its influence on Sri Lanka.

But Sri Lanka has also asked China for a $2.5 billion credit line.

Additionally, India and Nepal have also committed to fix their ties. Nepalese Prime Minister Sher Bahadur Deuba recently met PM Modi and inaugurated the broad gauge Jaynagar-Kurtha rail link that will establish rail connectivity to Janakpur, Nepal. India launched the RuPay card facility in Nepal. India and Nepal also agreed on power sector cooperation. The 90-km 132 KVDC Solu Corridor Transmission line and substation, built through India’s credit line, was also inaugurated.

India is looking to maintain its influence in the region and counter the growing debt-trap initiatives of its eastern neighbour China via cooperative strategies and humanitarian aid, a move aimed to ringfence its strategic interests in the region and also keep the shadow of China away from its other borders.

Also read: How Sri Lanka, Pakistan crises affect India

Also read: What’s happening in Sri Lanka? All you need to know about its economic crisis

Published on: Apr 11, 2022, 1:28 PM IST
Posted by: anwesha madhukalya, Apr 11, 2022, 1:19 PM IST