Chinese Premier Wen Jiabao’s visit to India provides a much-needed opportunity for both sides to take stock of bilateral ties. In particular, they should look to reinforce the fundamental understanding underpinning their relationship. Since Rajiv Gandhi’s visit to China in 1988, Sino-Indian relations have been premised on the understanding that the boundary dispute should not hold back ties in other areas, especially economic relations. The dispute would be addressed by incremental measures, while economic engagement would deepen and create real inter-dependence. The rapid economic growth of China and India, and the resultant increase in their military and diplomatic clout have introduced additional considerations.
In the language of financial markets, both countries continue to bet that the fundamental understanding would work, but also hedge against the possibility that it doesn’t and so seek to minimise their exposure to risk. India hopes that increasing economic cooperation would ensure that withdrawal from a policy of engagement would prove too costly for China. But it also needs to ensure that if the dramatic rise of China turns dangerous it has options at hand. These include suitable modernisation of its military forces and infrastructure, and the cultivation of ties with the US and other major Asian players. China, in turn, hopes that close economic relations would ensure that India does not sign up to any countervailing coalition against it. But if India does so, it should have options to check India’s strategic influence: primarily by continuing to prop up Pakistan and by creating a footprint in the Indian Ocean region. The challenge for both countries now is to ensure both that basic understanding pays off and that the hedge does not undermine the bet.
Economic issues will be the major area of focus during the visit. Bilateral trade has grown tremendously over the last two decades from a mere $340 million in 1992 to an estimated $60 billion this year. Yet given the size and potential of both the economies, Sino-Indian trade remains low. The pattern of trade too is a matter for concern. This year India has already registered a trade deficit of $19.2 billion. Nearly 60 per cent of Indian exports are raw materials, principally iron ore. India is unable to leverage its strengths in information technology and pharmaceuticals because of non-tariff barriers in China. Beijing must address these problems.
Then again, India must see the trade deficit with China in context. The fact is that India runs an overall trade deficit. Unless fundamental problems, such as weak infrastructure, are addressed we cannot expect to bridge this deficit. Indeed, imports from China — power equipment, for instance — will go some way in tackling these problems. In the short-term, the best way to rectify trade imbalances may be to expand Chinese investment in India. Both sides have expressed their willingness to move in this direction. Emulating China’s practice with Western companies, India should push for Chinese firms to set up joint ventures here. India requires investment in infrastructure to the tune of $1 trillion in the coming decade. Given China’s desire to diversify its vast international reserves, India could well become an attractive opportunity. But here India will need to reform and strengthen its regulatory framework for investment.
Progress on the other part — of the basic understanding in resolving the boundary dispute — has been halting. The 2005 agreement on “political parameters and guiding principles” held out the prospect of an agreement in the not-too-distant future. But subsequent negotiations have not made much headway owing to several factors: China’s insistence on claiming Tawang; domestic politics and public opinion in both countries; the shadow cast by the Tibet problem. If an agreement is not in the offing, India need not be unduly concerned. Excessive eagerness on our part for a settlement might itself lead the Chinese to toughen their negotiating stance.
But New Delhi does need to manage public perception on the boundary question. Indian officials concede that the boundary stabilisation mechanisms have actually worked well. But sections of our media periodically go into a fit over Chinese “encroachments”. To be sure, the government cannot control or gag the media. Yet it can do more to educate the public on this sensitive matter. The Chinese ambassador was spot on when he put his finger on this issue. But the problem is equally on the Chinese side where state-owned media and analysts have acted less than responsibly in their coverage and commentary.
Even as the two sides address these issues, they need to calibrate their hedging strategies. China’s policy on visas for Indian Kashmiris may be aimed at bolstering its ties with Pakistan, but it has created serious misgivings in India. New Delhi was forced to point out to Beijing that its interests in Kashmir were akin to China’s interests in Taiwan and Tibet. China appears to have realised that it overplayed its hand and is revisiting its policy. Similarly, China’s continuing opaque nuclear relationship with Pakistan is generating concerns in India. Beijing would do well to address these instead of sweeping them aside with bland pronouncements.
India, for its part, should examine its evolving relationship with the US and its Asian allies. There is a view in the Indian establishment that China has been most accommodating to India when the latter’s ties with the US have strengthened. This may be true of specific instances. But relying on such an approach will yield diminishing returns. At some point, China may well conclude that India has cast its lot with the US. And then the bets are off. The challenge for India is to fashion a hedging strategy that does not accentuate China’s deep-seated concerns about US-led “encirclement”. Historically, the combination of great power and great insecurity has proved dangerously destabilising.
There is nothing inevitable about Sino-Indian rivalry. The two countries have already demonstrated their ability and willingness to work together on a number of pressing international issues: climate change, trade, food security. It is in their mutual interest to bracket their differences and embed them in a web of overlapping equities. Very simply, the India-China relationship is too big and too important to fail.

Srinath Raghavan is a Senior Fellow at the Centre for Policy Research, New Delhi