Author: Andrew F. Cooper and Asif B. Farooq
A serious test of the cooperation between China and India relates to the internal dynamics of the BRICS association, particularly with regard to the BRICS bank. On the one hand, the BRICS institutions serve as the mediative "voice" that strives to challenge a superpower's [the United States'] ability to "waive the rules in order to rule the waves" (Prantle 2014: 481). Indeed, Leksyutina (2014) argues that consolidation of the BRICS initiative is a means for China to pave a way to global economic governance. Similarly, Abdenur writes, "From a geopolitical point of view, the BRICS helps China to counter US hegemony without direct confrontation" (2014: 92). On the other hand, BRICS is also transformative in the sense that it acts as an exit option in remedying distributive conflicts of power. That being said, scepticism was high at the initial stage about whether the BRICS association would sustain or would ultimately turn out to be "BRICS without mortar" (Stephens 2011). Since the idea of the NDB was introduced, pessimism surrounding the bank's viability was further escalated due to the project's ambitiousness (Warner 2012; Yardley 2012). Even Takehiko Nakao, president of the Asian Development Bank, pointed to the BRICS capacity challenge in establishing the bank, saying, Setting up banking business is not easy as it involves finding new projects, financing them and then monitoring the use of these funds and repayments. (The Economic Times 2013)
However, the BRICS nations were able to translate an ideational concept into delivery at the 2014 Fortaleza summit in Brazil with the creation of an initial USD 50 billion fund with equal stakes for each of the BRICS members. Furthermore, the BRICS economies also agreed to establish the Contingent Reserve Agreement (CRA), amounting to USD 100 billion to deal with any future financial crisis.
The BRICS alliance's ability to deliver a tangible result, however, did not come about without highlighting the sensitivity of the China– India relationship. What was salient about this initiative was not only that it repositioned the defensive response of the two countries to the ascendancy of new informal (with a self-selected membership and no charter or physical site) in the wake of the global financial crisis, but also that it made prominent the differences, as well as the similarities, between China and India's approaches in a summit process in which they were both members.
As with the G20, India's initial response to the original fournation BRIC framework was caution. In the early stage of club development, the Indian foreign minister played down the implications of the forum, saying, These four countries are not arranged against any other countries or any other group of countries. It is not even an effort to flex muscles. We are trying to learn from each other. (RT.com 2009)
Even when the BRIC grouping was elevated to a leaders' level summit at Yekaterinburg in June 2009, Prime Minister Manmohan Singh took a low-key approach, a stance that could be contrasted with the high-profile championing of the alliance by Brazil's president Luiz Inácio Lula da Silva.
By 2011–2012, however, this cautious approach had subsided. Departing from the wary ambivalence it had displayed toward the G20, India took on the role of host nation for the fourth BRICS summit in New Delhi. Moreover, Prime Minister Singh pointed to a BRICS relationship that had moved beyond the function of a grouping to monitor the progress of the G20 to a forum with an autonomous agenda of its own. He said, The relevance of BRICS to the international order has increased over time […]. The agenda of BRICS has gone beyond the purely economic to include issues such as international terrorism, climate change and food and energy security. (Ministry of External Affairs 2011)
In terms of its repositioning from a largely defensive approach, India's shift in institutional targeting came to the fore most dramatically through its ambitious form of entrepreneurial and technical leadership with respect to its proposal for a "South–South" or development bank in March 2012. In contrast to the established pattern where India stood back while other countries did the running on an initiative and its initial scepticism that the BRICS grouping could be a problem-solving body, in this case India jumped out to the front.
The initiative, however, showcased the need for serious bargaining within BRICS. It was clear from an early stage that Indian and Chinese interests were at odds. Xu Qinghong, section chief of the banking supervision department at the China Banking Regulatory Commission noted:
There are vast differences between us […]. Looking at the history of other multilateral institutions, I think such a feasibility study will take a long time and it may test our patience. Since the Delhi Summit, so far in China there have been a lot of doubts about a proposal. (Krishnan 2012)
Despite these complications, Indian officials persisted with the initiative. Up until the 2013 Durban summit, they pursued a plan whereby there would be an initial capital of USD 50 billion to launch the fund with each BRICS country making an equal contribution of USD 10 billion. China, however, pushed for an alternative model bolstered by its advantage of holding massive international monetary reserves of well beyond USD 3 trillion. Its model encouraged contributions based on each country's financial capacity and planned for an overall capital base of USD 100 billion. This model would provide China with an opportunity to contribute more to the bank's capital base and thus, would give it an asymmetric power advantage within the NDB's founding members (Sahu 2013).
To complicate the situation further, before the 2012 Tokyo meeting of BRICS finance ministers, Xu Qinghong worried that "non-economic factors" might hinder the NDB's establishment. Indeed, non-economic factors became the major driving forces during the intensive bargaining between China and India in delineating the bank's development. In response to China's stance on the details of the bank, India was often wary of its unequal power relation with China and played defensive moves in response. For instance, there was speculation that China was willing to pay part of other BRICS members' share of the bank's starting capital to resolve initial funding problems. This action could potentially allow China to take a leading role in advancing its own political agenda. From an Indian perspective, such a move would further exacerbate India's competitive relations with China. India's legitimate concern was that China's leading role would eventually make the bank more like other international financial institutions (IFI) where big members' voting rights overshadow those of smaller members. To counterbalance China, India even contemplated the idea of opening up the bank's membership to include advanced economies, whereby they would receive a minority stake (between 40 per cent and 45 per cent) as contributors. Such a strategy would effectively prevent China from using its financial power to play the dominant role.
A second contentious issue emerged when the BRICS members wanted to decide where the bank's headquarters would be located. While not a major source of debate at the outset, the issue amplified as the initiative slowly took shape. China, India, and South Africa all wanted to host the institution. The physical location of the bank had the potential to give a symbolic, if not tangible, advantage to the host nation in relation to the bank. In its efforts to headquarter the bank, India maintained the impression that it remained the inspirational force behind the institution. Indian Prime Minister Singh reinforced this view in his statement at the Durban summit in 2013. He said,
The ideas that we first discussed at New Delhi, that of instituting a mechanism to recycle surplus savings into infrastructure investments in developing countries, has been given a concrete shape. (The Economic Times 2013)
However, India's ideational inspiration did not easily translate into its physical ownership of the bank's headquarters. While India wanted the headquarters for itself, China took the stand that the bank headquarters should be located in Shanghai. This position was championed in turn by China's key think tanks. After the New Delhi summit, the Financial Research Center at Fudan University argued that "China should strive to become the headquarters of the BRICS bank" (Shanghai Forum 2013).
Contestations about control later spilled over into the issue of which currency would be the bank's functional currency. The memorandum of agreement signed at the New Delhi summit in 2012 opened the way for BRICS member development banks to extend loans in their respective currency denomination. The process of moving away from the US dollar opened up speculation about Chinese control through the internationalised CNY, especially as China benefitted from advocating the use of its own currency to offset currency risks in development finance. Indian finance ministry officials were reported to express the view that the bank's goal had become a means of "legitimising" the use of Chinese currency overseas (The Times of India 2012).
In spite of the tensions between China and India outlined above, the bargaining process, which ultimately led to the finalisation of the New Development Bank with its headquarters in Shanghai and its first president an Indian national, appeared to consolidate the club culture among the BRICS members. Thus, the NDB, to echo Cheng's argument (Cheng 2015: 364), is not only an example of institution building for the purpose of containing bilateral conflicts, but is also a means of enhancing their collective international influence.
Moreover, the partnership extended under founding membership of the AIIB, as well as economic cooperation under BRICS, brought India and China a step closer due to their overlapping interests in national financial security. India had endured an acute balance of payment crisis in 1990/1991 due to a combination of domestic factors and external shocks. Among the many lessons that India learned from that crisis – and from its Asian peers, including China, after the Asian Financial Crisis of 1997 – was the need to develop a large foreign reserve in order to weather a future financial crisis. However, domestic electoral politics based on populist agendas allowed India little room to maintain a healthy balance of payment. Indeed, avoiding another balance of payment crisis remained a constant headache for the new governor of the Reserve Bank of India, Raghuram Rajan. While the International Monetary fund (IMF) was India's last-minute rescuer during its financial crisis in 1991, in return for which, India had to adopt neoliberal reforms, it was in India's interests to have an alternative "safety net" in the form of the currency reserve for any future financial crises. Furthermore, a cash-starved India has been in acute need of infrastructure investment to enable broader economic development and security. Meanwhile, China needed to diversify its massive foreign reserve away from its investment in US Treasury bonds. Financing the NDB and the AIIB projects provided China with an alternative investment avenue that ultimately killed two birds with one stone: firstly, it helped to diversify China's foreign reserve investment and further supplemented its foreign policy objectives; and secondly, the BRICS reserve currency pool of USD 100 billion furthered India and China's cooperation on common financial interests.
Perhaps then, it was no wonder that India's prime minister, Narendra Modi, hailed the NDB as a new chapter of cooperation between the BRICS members and further noted that it demonstrated "our capacity to set up institutions" (Zee News 2014; The Times of India 2014). The bank also showcased China's ability to craft an initiative that furthered its own ambitions. However, aside from common interests the level of cooperation witnessed between China and India in establishing the NDB was either not evident or was mixed at best on the issue of global financial governance in other multilateral fora. This raises questions about the possible spillover effect of cooperation "within the BRICS" to coordination "outside the BRICS framework."