It's the trust deficit, stupid

A lot is at stake, and a lot can be achieved.

Chinese Premier Wen Jiabao's trip to India, starting Wednesday, lacks the hype and the glamour that accompanied the recent visits by US President Barack Obama and his French counterpart Nicholas Sarkozy.

But Wen's three-day visit, coinciding with the 60th anniversary of the establishment of diplomatic ties between India and China, can potentially deliver far higher strategic and economic dividends.

From billions of dollars in investible capital for infrastructure to supporting India's claim to a permanent membership on the UN Security Council, China has a lot to offer, and also a lot to gain from India.

However, the prospects of collaboration and cooperation between the world's two fastest-growing major economies have been overshadowed by new strains in their decades-old mutually suspicious relationship.

"China-India relations are very fragile, easy to damage and difficult to repair. Therefore it needs special care," said Zhang Yan, China's ambassador to India.

The damage has been much of China's doing, though.

And "this is true of China's relationship with not only India, but several other Asian countries," said Anil Gupta, professor of strategy at the Singapore centre of Insead business school.

Earlier this year, India suspended military exchanges with China after the latter refused a visa to a senior army officer from Jammu and Kashmir. Months later, Beijing decided to issue stapled visas to Kashmiris, a move that India saw as a violation of its sovereignty. Growing concerns over the damming of the Brahmaputra River by the Chinese and their increased involvement in building infrastructure for Pakistan-occupied Kashmir further precipitated the reversal in India-China relations.

Wen's challenge — some would say the onus is on him — is to remove these strains and overcome the characteristic mistrust in India-China relations.

For India, "China is a reality that it has to deal with — a reality that has both opportunity and challenges," said Kenneth Lieberthal, director of the China Center at Washington-based Brookings Institution. "India has to take an eyes-open approach to China. Look for the opportunities where it can take advantage, but have a very pragmatic approach to security and diplomatic challenges."

Boosting economic ties

When Wen visited India first in 2005, he and Prime Minister Manmohan Singh succeeded in infusing a momentum to relations between the Asian neighbours.

That helped China become India's largest trading partner as two-way trade grew almost 50% every year until the world economy plunged into a crisis in 2008; Beijing and New Delhi came together to rally developing countries at multilateral bodies such as the World Trade Organisation and Climate Change Summit; Mandarin began making its way to university curriculum while Indian cuisine travelled to Shanghai and Beijing.

Five years on, the economic momentum continues despite new tensions. It actually offers the much-needed common ground both sides need to repair their relations.

Two-way trade between India and China grew 18-fold in the past 10 years - from $2.3 billion in 2001-02 to $42.4 billion in 2009-10. To put it in perspective, trade between India and the US tripled during the same period — from $12.4 billion to about $38 billion.

From palm-sized iPods and glitzy wristwatches to multimillion dollar worth equipment for power plants, Chinese consignments now account for more than 10% of India's imports. The share would only grow as India eases rules to allow Chinese firms bid for tenders from state-run companies. Already private sector companies have begun placing big orders. Earlier this year, Chinese telecom gear maker ZTE won contracts worth $1.2 billion, Reliance Power said it would buy $8.3 billion worth equipment and service from Shanghai Electric Co.

The flipside is that much of the trade has gone in China's favour, leaving India with a deficit of $19.2 billion last year. It is therefore necessary that Beijing pays attention to India's demand for improved market access, especially in areas such as pharmaceuticals, information technology and auto components.

That said, India should not worry much about its trade deficit with China. "Low-cost machinery from China can be a massive help to India in accelerating its infrastructure and manufacturing growth," said Gupta at Insead. Moreover, if bothsides work to get more Chinese investment into infrastructure projects in India, the capital flows will help offset a part of the trade deficit, said Ram Upendra Das, a New Delhi-based trade analyst.

That said, there are limits to what economic exchanges can do if the larger political environment doesn't change for the better.

Get pragmatic

India and China will have to revive talks to resolve their border dispute that pushed them to war in 1962. China claims 90,000 sq km of Indian territory in Arunachal Pradesh and occupies around 38,000 sq km in Jammu and Kashmir, which New Delhi claims is its territory. There is another 5,200 sq km in Pakistan-occupied Kashmir that Pakistan ceded to China in a 1963 pact.

During Prime Minister Atal Bihari Vajpayee's tenure, both sides initiated high-level talks that had raised hopes of a resolution to the festering border dispute. But in recent years, the talks have gone slow, largely because of China.

The other major concern relates to China's relations with Pakistan, which Beijing pursues as part of its larger plan to secure good relations with countries in the Gulf and thus secure its energy needs for the future. However, in the process, its exchanges with Pakistan have become a major irritant for India. In the same manner, India's increasingly warm relations with the US, Japan and Asean countries are often seen by Beijing as an attempt to contain China.

Leaders from both sides will have to find a way overcome these concerns.

"The statements coming out of Beijing suggest there is a possibility of Wen Jiabao trying to help find a way out," said Gupta. "Of course there are limits what he can commit to, given the impending change in China's political leadership. But I am beginning to be optimistic."

If there is one thing that Wen can do to put India-China relations back on track, it's about India's claim to a permanent member's seat on the UN Security Council.

China is the only P5 country not to have shown support for India's candidature though it acknowledges New Delhi's aspirations and says it is ready to hold consultations with India over the issue. Wen would do well to go a step further.

Potential vs Pain Points

With inputs from Kamayani Singh