Indian Prime Minister Narendra Modi’s attempts to normalise relations with China have become more important as the economic interdependence between the two Asian giants continues to grow.

Prime Minister Narendra Modi recently made a three-day visit to China, during a three-nation tour including Mongolia and South Korea, to boost India’s presence through the ‘Act East’ policy in the region. Modi met Chinese President Xi Jinping and Premier Li Keqiang, reviewed the progress made since Chinese President’s visit to India in September 2014, and signed 24 agreements.

Amidst unsettled longstanding border disputes, a mounting trade deficit and the geo-strategic competition in the Asia-Pacific region, Indian and Chinese leadership re-emphasised their historical and civilisation links, and agreed on building closer economic and developmental partnership. This second summit level meeting within a year is significant, as both the nations are poised to play a defining role in the 21st century in Asia and eventually, globally.

A Closer Development and Economic Partnership:

Modi’s visit sealed $22 billion worth of agreements encompassing a wide area, including renewable energy, railways, the financial sector, ports, education and scientific research. Since 2008, when China emerged as India’s largest trading partner, the two-way trade and investment inflow stands at around $70 billion, and is expected to reach $100 billion by the end of 2015. But a mounting trade deficit, expected to cross $40 billion this year, is a concern. India has been demanding the opening of the Chinese market to Indian companies in pharmaceuticals, information and technology, and manufactured goods. Iron ore constitutes half of India’s exports, which not only deprives India of value adding by exporting manufactured goods, but also contributes to China’s build-up as a major power. Booming bilateral trade has yet to move to expansion in mutual investments. A task force has been established to look into this, but a breakthrough has yet to be achieved.

Cultural, People-to-People Exchanges and New Areas of Cooperation

Both nations have agreed to organise events related to International Yoga Day on 21 June 2015, signed an expanded Educational Exchange Programme, and outlined the new areas of cooperation, such as vocational training and skill development, development of smart cities, peaceful uses of outer space and nuclear energy, public health, medical education and traditional medicine. Clearly, these are non-controversial issues on which both can collaborate.

Border Disputes and Strategic Concerns

Nevertheless, the bitterness caused since the 1962 Sino-India border war continues even today. Despite the steps taken in the late 1980s, progress made under “normalisation of relationship” in 1990s, and steps taken by previous governments, the India-China relationship remains stuck in a classic case of ‘security dilemma’, and marred with suspicion and mistrust.

On this front, the joint statement outlined steps to strengthen political dialogue and strategic coordination communication. This includes frequent exchanges and dialogue mechanisms at the leadership level, annual exchanges of military personnel, and counter terrorism cooperation to build mutual trust and confidence.

The India-China border is witnessing the steady establishment of heavy military infrastructure. India is concerned about the “all weather friendship” between China and Pakistan, and frequent Chinese military incursions further escalate tension. What worries India most is the prospect of its two rivals uniting to form a hostile nuclear and defence partnership. This isn’t just scaremongering: 54% of Chinese arms exports already go to Pakistan. Chinese support to Pakistan is a key aspect of Beijing’s perceived policy of “encirclement” of India as a means of preventing or delaying New Delhi’s ability to challenge Beijing’s region-wide influence. The recent Chinese plan of $46 billion in investments in an economic corridor through Pakistan and a portion of the disputed Kashmir complicate the relationship further. On the other hand, China is concerned about India’s deepening strategic partnership with the United States and Japan, India’s growing military and economic activities in the disputed South China Sea and growing relationship with countries in the region that are wary of China.

Both nations are vying for regional influence and are fierce competitors on many issues. China and India are competing in the Indian Ocean region by enhancing their strategic presence in the island nations. To progress in a mutually supportive manner and avoid conflict, Indian and Chinese leadership have echoed an early settlement of the boundary problems in a reasonable and mutually acceptable way.

Recognising India: A Positive Gesture from China

However, China’s recognition of India’s aspiration to play a greater role in the United Nations, including in the Security Council, its support of the openness of Asia Pacific Economic Cooperation (APEC), welcoming India’s desire to strengthen its link with APEC, Nuclear Suppliers Group and India’s full membership application for the Shanghai Cooperation Organisation are notable. In the past China tried to restrict India’s membership to many international organisations.

Significance for Australia and the Asia Pacific region

Today, the progress in China and India’s international influence and their growing economic bonhomie go beyond the bilateral level, with a significant bearing on the issues related to the Asia-Pacific region and globally.

After engaging in the Asia Pacific region for decades, particularly the East Asian economic giants of Japan and South Korea and more recently China, Australia is looking forward to entering into a comprehensive relationship with India. India’s appetite for resources and investment, and its growth rate, which is projected to surpass China’s next year, will make it an important trade partner and export destination for Australia. Recently, Prime Ministers Tony Abbott and Narendra Modi signed a civilian nuclear agreement, decided to seal a free trade agreement within a year, and made the Australia-India relationship one of their top foreign policy priorities.

Australia has been supportive of India’s inclusion in APEC and the Chinese stand on India’s recognition is important. Australia has been a leading member of APEC, a forum that advances regional economic integration and promotes regional economic growth and prosperity in the Asia-Pacific region. The improved Indo-Chinese economic ties will facilitate greater regional cooperation and collaboration on common global issues. These include counter-terrorism, nuclear non-proliferation, arms control, climate change, safety of the sea-lanes of communication as well as disaster management and human crises.

However, on strategic issues, Australia and India are aligned closer to the US grand strategy in the Asia-Pacific region and the strategic arrangements such as ‘quadrilateral initiatives’, which also include Japan. Though the strategic arrangements between these maritime democracies to thwart Chinese domination in the region will continue to exist, the improved economic interdependence can ease the tension.

The simultaneous re-emergence of these two ancient civilisation powers and the two fastest growing major economies offers opportunities for cooperation and competition as well. That the India-China summit level meeting occurred within a year is significant for a positive relationship based on economic partnership. Expectantly, the economic interdependence will transcend to easing the border and security concerns, and the two Asian giants of the 21st century can collaborate on bilateral, multilateral and global issues, and strengthen the global system.

Dr. Ashok Sharma is a Research Fellow in Australia-India Institute, The University of Melbourne and Deputy Chair of New Zealand Institute of International Affairs, Auckland Branch. This article can be republished with attribution under a Creative Commons Licence.