Starting Monday the India-China Strategic Economic Dialogue is being held. On the eve of the talks a glitch developed. Both governments are flexing their muscles. While issuing visas China has shown Arunachal Pradesh and Aksai Chin as part of China on maps accompanying passports. India has retaliated. While issuing visas it shows both territories as part of India. This may deceive Indian public opinion into thinking that the government is being tough. It is not. Such empty gestures made by New Delhi do not suffice. This will in no real way trouble Beijing.

When will India get a government prepared to act
and not just gesticulate?

Unless India starts to exercise its leverage against China, Beijing will not be restrained from hegemonic bullying. The appeasers who describe themselves as pragmatists will argue that India has no leverage against Beijing. China they say is too powerful militarily and advanced economically to be intimidated by New Delhi. These appeasers, which includes the entire policy making class belonging to the government as well as to the opposition, are wrong. I have outlined earlier how India can compel China to see reason. Briefly, a recapitulation of how New Delhi should address relations with China follows.

First, the minimum Indian demands related to China need recognition. India must insist upon Beijing stopping arms aid and providing sanctuary to separatists operating in India; it must stop arming India’s immediate neighbours with hostile intent against India; it must reverse its policy of giving missile and nuclear technology to Pakistan; it must honour its written agreement given in 2005 to the Indian government that while negotiating the boundary dispute it will not disturb settled populations and thereby withdraw its claims on Arunachal Pradesh. There are other subversive Chinese acts but for a start these broad demands provide a realistic basis.

To safeguard itself militarily in the very unlikely event that the People’s Liberation Army (PLA) will launch even a limited adventure across the border India must ensure that no Indian territory might be occupied by Chinese forces. This might require a sustained policy of settling ex-servicemen with suitable economic incentives on all the sensitive border areas. Also, India must ensure that its missile development and nuclear capability are sufficient to act as deterrent against China. This does not require matching China in either missiles or nuclear weapons. It requires merely sufficient capability to inflict such damage to China that the cost of defeating India militarily becomes too heavy. Both these requirements are achievable if these have not already been realized. Once the military threat has been addressed one may turn to the diplomatic measures that might be deployed to leverage against China.

India’s strength is that unlike most of the world the Indian people and the Indian government are thrifty. Both tend to live within their means. That is why the Indian economy is primarily dependent upon domestic savings. China on the other hand is critically dependent upon export earnings to sustain its economy. This is Beijing’s Achilles heel. And right now China is facing a problem. Exports have fallen to a six-month low because of persisting global slowdown and diminishing European demand that is further compounded by increasing factory costs inside China. Mr. Zheng Yuesheng who heads Chinese General Administration of Customs (GAC), admitted: “It will be an arduous task to fulfill our foreign trade target, as external demand is weak.” Mr. Alistair Thornton of HIS Global Insight commented: “This isn't a 2008 collapse, but it's not worth testing how close the economy can get!”

It is in this context that India’s trade balance with China needs to be considered. Indian exports to China showed in July the biggest decline in Chinese imports from any major country that further widened India’s already record trade deficit with China. At the same time Chinese exports to India keep mounting to increase the trade deficit to 40 billion dollars in an overall 75 billion burgeoning trade relationship. That is not all. The disgraceful trade policies of this government have led to exporting Indian minerals and commodities to China while importing in large measure low tech consumer goods that have ruined the Indian manufacturing industry. There are alternative markets for Indian commodities elsewhere in the world even if the profit margins may be lower and costs may be higher. India would be inconvenienced but not crippled by diverting its exports away from China. By stopping Chinese imports of cheap products Indian consumers would be inconvenienced but not crippled. Indian businessmen may suffer but they too would survive. But what would happen to China if India reduced and then entirely cut off all imports from China?

Currently China’s corporate debt has risen from 108 percent of the entire economy from last year to 122 percent in 2012, its highest level in 15 years. That makes China’s corporate sector one of the biggest debtors in the world. “Companies have seen their business slowing down and revenues were not what they had expected. They have bridged the gap by taking on more debt,” pointed out GK Dragonomics Research Director Andrew Batson.

To appreciate the political significance of this it should be recalled that 60 percent of China’s urban population is employed by China’s State Owned Enterprises (SOE) which are all running at huge loss. These SOEs are kept afloat only through bad loans which are never repaid advanced by government-owned banks in China. The banks can keep advancing these bad loans from the earnings that the government acquires from its exports. That makes export earning for China almost a life and death issue. Already corruption and forcible land acquisition have created up to 80,000 clashes each year between the police and citizens in China. These are mostly in rural China. If Chinese exports dwindle to a trickle how will banks advance more bad loans to SOEs? If SOEs close down what will happen to stability in urban China?

Recall how President Reagan destabilized USSR by crippling its economy after launching the economically prohibitive Star Wars campaign. America and Europe are saturated and diminishing export markets for China. India is the biggest future potential export market. That is India’s leverage. New Delhi should exercise it. It should not fear temporary hardship. The nation will survive and thrive. Let Beijing consider how it will meet this threat. Trade wars need as much grit and will as do military engagements. It is time that New Delhi summons some courage. Will Mr. Montek Singh Ahluwalia who leads the Indian team at the India-China Dialogue do some plain speaking?