India and the AIIB: having your cake, and not eating it too

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The new Indian Prime Minister is from the western Indian state of Gujarat, which is famed for churning out the country’s sharpest businessmen. Banking is something Narendra Modi instinctively understands. But in March, when his government presented its first full year budget, there was a missing entry.

India budgeted $9.3 billion as its contribution to the BRICS New Development Bank (NDB) - the emerging nations’ counter to the World Bank and the IMF – but nothing for the China-led Asian Infrastructure Investment Bank (AIIB).

India needs a trillion dollars to pour into building infrastructure in the next decade. At the moment, most estimates suggest it can spend up to 1% of GDP a year – barely $200 billion. Modi’s Make in India dream to convert India into a manufacturing superpower (like China) for the benefit of companies and consumers at home and abroad is heavily dependent on rolling out Beijing-style roads, railways, ports, airports and electricity.  This needs to happen in a country where even the financial capital Mumbai has failed to build all-weather roads in the 67 years since independence.

But that’s not the only reason why India needs more and new avenues of financing its ambitions. Right after the budget, the junior Minister for Finance, Jayant Sinha, said the country needed cash for national and ‘cross border’ infrastructure projects. This is both a diplomatic and security necessity, and an old nationalist dream.

India wants to be recognized as an increasingly assertive global power, one that, as Modi’s government proudly points out on the basis of IMF and World Bank predictions, is likely to grow faster than China this year and the next. This requires bankrolling the neighborhood, as international powers always have. In India’s case this also means trying to match, dollar for dollar, China’s influence in countries from Myanmar to the Maldives. Additionally, as it faces the rising threat of Islamic extremism from Dhaka to Male, India knows thatsupporting friendly governments is also part of the solution to that problem.

Already, financial dole and a major water treaty have been offered by Delhi to the Bangladeshi government in an effort to incentivize Dhakato take on Islamist militants in a blood soaked near-civil war.

Back at home, the ideological parent of India’s ruling Bharatiya Janata Party (BJP), the Rashtriya Shyamsevak Sangh (RSS), has long dreamt of a South Asia dominated by India (instead of China). Since India’s defeat in the 1962 war, the RSS has been very wary of China. That Maoist rebels in central India openly wear the mantle of (who else?) Mao, does not help. And it hasn’t helped that of all of Modi’s numerous diplomatic overtures in recent months, the frostiest has been the visit last autumn of the Chinese Premier Xi Jinpingto India.

All this to say that India needs the money but is extremely cautious about taking it from or giving it to an organization which will clearly be led by the Chinese – since they will be picking up 50% of the tab of the AIIB. To make matters worse is the fact that the AIIB is a motley crew that includes Iran, Saudi Arabia and Israel and, as a result, does not inspire confidence among Indian hawks (or even doves). Modi has also built a personal friendship with Japan’s Shinzo Abe, who has committed billions to some of the Indian Prime Minister’s pet projects including the construction of smart cities. No doubt, Modi will be looking to see how Japan, which is not part of the AIIB yet, views the initiative in the months ahead.

Then there is the US angle. If there is one country that has been sulking about AIIB, it is the US. Worried that its allies are getting too close to China, it has already rebuked the UK for joining the bank. Modi’s relationship with Barack Obama, and his triumphant trip to America last September, has been one of the highlights of his foreign policy push. He would be reluctant to immediately disturb the fragility of that relationship, even with a lame duck president.

The Modi administration wants to play this out quietly and ensure no side gets antagonized. Both the Indians and the Chinese would be looking closely at Hillary Clinton's chances in the 2016 US presidential election. She is seen as a friend of neither. Modi fancies a second term in office starting in 2019. A Clinton presidency for half his first term and maybe even his second is not a thought Modi relishes. So how he responds to China (and indeed how China responds to him) will partly be dependent on Clinton’s rise or fall. If Clinton as President turns out to be acrimonious towards Modi – which would then be a sharp contrast from the Indian Prime Minister’s ties with Obama who recently wrote a profile of Modi in Time magazine – then expect Modi to make more of an effort with China. An enemy’s enemy is always a friend.

As a Gujarati, Modi is smart about money. He is an admirer of many things Chinese, including their hyper infrastructure building. He knows India cannot fund his infrastructure dream on its own. But as a former foreign secretary told me when I asked him about the AIIB and the BRICS bank: “The question is – in which does India lead, and in which does it have to follow?”