Indian knickers, Chinese twist

China, Arunachal Pradesh and the politics of an ADB loan

And now it is at the Asian Development Bank (ADB). A few days ago Financial Times reported that China had used procedure to delay the approval of ADB’s new multi-year financing plan for India. Because a small part of it, around $60 million, is for “flood management, water supply and sanitation” in Arunachal Pradesh (read ‘disputed territory of South Tibet’ in Chinese). This twisted the usual knickers: some commentators pointing out that China’s upstream damming of the waters of the Brahmaputra is one reason contributing to Arunachal Pradesh’s need for the water management project. Thanks to the elections, the politicians’ knickers remain untwisted. But what should you make of it?

First, it’s important to recognise that China’s actions are both pro forma and theatre. It is to be expected that China will signal the existence of the territorial dispute at every opportunity. At the ADB while it postponed a board meeting that was to have approved the financing package for India, it is highly unlikely that it will go to the extent of completely sabotaging it (expect the plan to be approved at the next meeting). To wreck it would be too direct, too brazen a signal that it puts politics before economics at multilateral fora. It can’t afford that at a time when the G-8 is making way for the G-20 and increasing China’s clout in global economic governance.

It is unclear if China’s neurotic reaction to the word Arunachal Pradesh was due to its ADB delegation playing safe, or indeed a well-considered position approved by the higher authorities in Beijing. If it is the latter, then it stands to reason that India, and the rest of the world, must recognise—and respond—to the politicisation of multilateral institutions like the ADB.

Second, for its part, the ADB must realise that it is, in the end, a bank. And a bank that bases its lending policy on the basis on non-prudential considerations—not least with its largest and best customer—is asking for trouble. This is something that the ADB’s governors must keep in mind at their future meetings.

Finally, there is the question why the Indian government needs the ADB to borrow $3 billion for development projects? One explanation is that borrowing comes at relatively easier terms. Fair enough: but to the extent that such terms act as crutches, weaken or rule out market discipline and crowd the private sector out, such financing is a curse in the longer term. Herein lies the tragedy—the UPA government not only frittered away five years of unprecedented opportunity, but actually crippled India’s public finances. If it had not done so, India would be less reliant on multilateral loans…and better resist unfriendly actions like the one by China.

4 thoughts on “Indian knickers, Chinese twist”

  1. I was surprised too why we should beg ADB for this loan for developing Arunachal. Is ADB the only source of funds?

  2. Am happy to see Beijing reveal its claws.

    The more Dilli sees Beijing for what it is, hopefully the fewer nasty surprises will await us down the line.

    Beijing’s investment in Pakistan is increasingly looking bust. Its assets in Nepal will have to be dealt with before anyone in South Block can really breathe easy, IMHO.

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