Indian Defence Review

We all have heard enough of US$ 46 billion Chinese investment project in Pakistan – CPEC (China-Pakistan Economic Corridor). It is the biggest foreign investment committed by China. China has undertaken 6 such economic corridor projects in Asia under its `One Belt, One Road` initiate. Under the CPEC project, (i) a deep sea port will be developed in Gwadar, Balochistan, (ii) a network of rail/roads will be built from Gwadar to China’s North Western autonomous region of Xinjiang and (iii) China will setup power projects in Pakistan to overcome later’s energy shortage.

CPEC – Pakistan’s National Project

CPEC has been projected in Pakistan as a magic wand to resolve all the issues in that country as it would bring much needed foreign investment, business and prosperity. Over 30 news channels of Pakistan have been assuring their audience that a golden age is just around the corner. They all have been projecting that India is deeply worried about the immense benefits Pakistan will enjoy from this project. Even it was declared on Pak news channels that India’s premiere spy agency R&AW has created a special desk with millions of dollars’ budget to destroy the CPEC project!

General Raheel Sharif (Chief of Army Staff, Pak Army) has taken a special interest in the project. He has made several trips to China where he discussed CPEC, its progress and its security along with other defence related matters. Pak Army has raised a `Special Security Division` headed by a Major General. It is a force of around 15000 soldiers (9 composite infantry battalions (9,000 personnel) and six civilian armed forces (CAFs) wings (6,000 personnel)). There are around 7000 Chinese working on CPEC in Pakistan, so two security personnel for every Chinese worker. Gen Raheel Sharif has stated a number of times that Pak Army will ensure that CPEC gets completed on time and without any hindrance. Here is what he said recently “hostile intelligence agencies averse to this grand project, especially Indian intelligence agency RAW … [are] blatantly involved in destabilising Pakistan”, and that “we are totally aware of all campaigns against the corridor and I vow that the security forces are ready to pay any price to turn this long cherished dream into reality.”

Pakistani federal ministers have been saying that this `Game Changer` project will not only change the destiny of Pakistani but over 3 Billion people of the area! By 3 billion, they refer to entire population of India, China, Pakistan & Bangladesh. In nut-shell, `CPEC and bright future of Pakistan` hype is all time high.

In short, everyone in Pakistan – media, military, politicians, non-state actors (hafiz Sayeed) are in love with CPEC.

But few sane minds are raising their voice in Pakistan about the economic viability of CPEC. CPEC project stayed shrouded in secrecy since its beginning. The government of Pakistan did not share detailed information with media or public. Anything linked to CPEC project (even the Orange Line Metro Train Project) has been declared as a matter of national security and its details can only be shared with Chairman, Senate.

Economic Aspects of CPEC

It is important to understand that (a) it is not complete USD 46 billion investment. $46 billion is the total cost of the project and Pakistan will have to invest its share in the project. (b) Chinese investment is not a direct investment of Chinese government but it is private Chinese investment funded by Chinese Government. To do so, Chinese govt has instituted banks and funds to provide loans to Chinese companies who will in turn invest the loaned amount in different projects. This ensures that Chinese government gets its targeted return on the investment.

46 billion USD project has two major parts – (i) USD 35 billion investment in power sector, where Chinese companies will lay gas pipelines and setup Coal, Wind, Solar and Hydropower plants and (ii) USD 11 billion investment in Infrastructure project i.e. building road corridor from Gwadar to Xinjiang.

Pakistan will have to invest its share in different projects. Pakistan’s share in energy projects is approximately 20% and in infrastructure projects, Pakistan’s share is 50-60%. In total Pakistan will have to manage around 15-20 billion USD. Considering the current condition of Pak economy where `Debt to GDP` ratio is touching 65% and total foreign debt touching approx. 70 billion USD, it will be difficult to arrange an additional loan for CPEC projects.

Moreover, China will build coal-based energy plants worth USD 6 billion in Sindh, Punjab and Baluchistan. It is important to note that China is decommissioning such coal-based power plants in China and will not use existing ones beyond 2020. Pakistan is also signatory to the Paris Climate Agreement and the issue of eco-dumping and increased carbon footprint will make it difficult for Pakistan to take a loan from western countries or institutions.

Even if funds are obtained from somewhere, invested money must generate enough revenue to allow the state to pay interest as well as the principal amount. Federal Finance Minister, Ishaq Dar has already informed the Senate that in loans taken for CPEC will pose a serious challenge to Pakistan economy.

Why so?

Economic viability of Energy projects

China has played the game in its best interest. For the money invested in Energy sector, China has asked Pakistan for (and got confirmed) 27.2% return on the invested money. Both countries have already decided how much electricity will be purchased by the state of Pakistan and for how long. 27.2% return on invested money means the end-user (Pakistani people) will have to pay more for the electricity. Pakistan has already imposed an additional CPEC security tax of 1% in all electricity bills. Sounds strange but this CPEC project will take another 10-15 years to complete and the public has been made to pay Security tax now.

Already Pakistan has highest electricity rates in South-East Asia. And that is directly impacting its industry, especially exports which are down by 20% as per Pakistan State Bank’s July 2016 figures. Energy produced from CPEC power plants will be all the way costlier. Because Pakistan is bound by agreement to buy electricity, it won’t have any choice. This will eventually increase its external/internal loans and circular debt.

Economic viability of Gwadar-Xinjiang road:  Most analysts think that road from Gwadar is being built for two main reasons –

• To save on transportation cost (due to short distance between Gwadar and Xinjiang and all Chinese exports will go through this route instead of longer sea route)
• To have an alternate route to long sea route that passes through Malacca Strait (that can be blocked by Indian or US navy during crisis time).

Currently, China is the manufacturing hub of the world and almost entire world imports Chinese made goods. Only major commodity that China imports is crude oil from gulf countries. If this road is being considered as the main route of import or export by China (because of its short distance in comparison with longer sea route) then it will not make much economic sense. Because China’s industrial hubs are in Eastern China from where goods will have to be transported in truck/train all the way to Xinjiang and then turn south towards Gwadar. From Gwadar, goods would be loaded onto ships and off to their final destination. This land/sea transportation mode would be a costly proposition when compared with direct transportation of goods through sea lanes. Shipping goods directly from Eastern Chinese sea ports in ships will be 8 to 10 times cheaper.

Once the project is near completed, China might consider transferring some of its polluting industries to Pakistan. China would do so reduce its carbon footprint. If it actually happens, Pakistan can again be cornered using Paris Climate Agreement.

Gwadar-Xinjiang road appears to have been envisaged as an alternate route to the Malacca Strait sea lanes, which are being used for Chinese import-export. In the case of any hostility, US or Indian Navy can block the Malacca Strait in no time causing considerable damage to the People’s Republic of China. Perhaps this explains China’s less allocation to infrastructure project (USD 11 Billion) and a higher share of Pakistan (50-80%) in this project. China’s share in Energy related projects (USD 35 Billion), where 27.2% returns have been given sovereign guarantee by Pakistan Government, is approximately 80%.

This road may also be used to trade with Central Asian countries. Road from Kashgar to Gwadar has 2 routes – Eastern and Western. Western route (that passes through the entire length of Baluchistan) can be utilized later to connect to Central Asian countries. China wants to exploit energy reserves of Central Asian Countries to meet its energy needs and will build oil and pipe gas lines from these countries all the way to China through POK. It will run along the CPEC.

But time will prove the economic viability of usage of the rail/road network for trade with Central Asian countries or ship the manufactured goods to European/African countries through Gwadar port.

Options for India

When CPEC was getting signed in 2014, India registered its official objection because the proposed road passes through Pak Occupied Kashmir – a territory that belongs to India and illegally captured by Pakistan in 1947. This objection was ignored and work started on the project.

India’s strategic concerns over CPEC can’t be ignored. There are already reports of Chinese troops in Gilgit-Baltistan. Once the project is complete, one can’t rule out the possibility of Chinese encirclement of India during any hostility. So far we have been discussing India’s capability to fight on 2 fronts but such encirclement by Chinese troops will make it even more difficult 2+ front situation. India will have to deal with the enemy all the way from Arunachal Pradesh, Ladakh, Kashmir Punjab, Rajasthan and Gujrat. Pakistan will definitely join Chinese bandwagon.

Current government’s policy of isolating Pakistan in the world community is correct and is paying dividends. We should hit them where it hurts them the most – economically. Pak economy is its weakest point. There is no American aid and Chinese investment has come with an agreement of great returns. If there is no industrial growth in Pakistan, payment of loans and Chinese investment return will break the backbone of its economy.  We must work aggressively to keep Pakistan isolated diplomatically and economically, making it more difficult for Pakistan to secure loans. Usage of carbon footprint (due to coal-based power plants to be set up by China) and Paris Climate Control agreement have already been discussed.

Apart from declining exports, there are 2 major pillars or Pakistani economy – Remittances from Pakistanis working overseas and loans. Pak has stopped getting aid in the name of Kashmir cause. Its diplomatic isolation from its traditional donors like UAE and Saudi Arabia has dried up that tap as well (it is important to note that when Nawaz Sharif came to power in 2014, Saudi Arabia gifted USD 1.5 billion to Pakistan). Thousands of Pakistani workers have been thrown out from Saudi Arabia. As per report in Pakistan Today1, Pakistani remittances have already dropped by 36%. We could try to exploit this aspect little bit more.

`Make in India` initiative can help making CPEC economically worthless. If we improve our rail/road/port infrastructure, resolve power supply issues and remove bureaucratic hurdles to make the environment more investment/business friendly, we can successfully move manufacturing from China to India. In 2016 Global Retail Development Index (GRDI)2 that ranks top 30 developing countries for retail investment worldwide, India has already secured second place on ease of doing business. China had topped the list. In 2015, we were at 14^th place.  We must continue land, tax and bureaucratic reforms.

It is already becoming difficult for China to control its production cost. Because when the production moved to China in the early 1990s, labour and infrastructure were available at throw away prices and now cost of living in China has increased many folds – taking a toll on production cost. Labour is not as cheap there as it used to be in 1992-93. 

China has already started feeling the heat. As per Global Times2 (a Chinese Govt mouth-piece)“ The increasing competition from India raises a tough question for China’s manufacturing sector of how to keep its competitive edge at a time when the nation’s labor cost advantage is shrinking rapidly. Now it is time for China to map out concrete measures to reduce production costs for manufacturers,” Global Times’ article said.”Despite India being more attractive to manufacturers than ever, it will be difficult for the country to build a complete industrial chain overnight. ”

It will definitely take time, but moving manufacturing to India will kill any faint possibility of using Gwadar-Xinjiang road for export-import.

Last option to kill CPEC and to avoid any Uri like the attack in future is the covert or overt military action. This is best and most important time to take back POK. If we accept CPEC passing through POK, then it will increase the complexity of already complex J&K equation. China will have its own stake in J&K and using CPEC as an excuse, it will stand by Pakistan against India. At present, more or less world opinion is with India and against Pakistan. India’s market and economic benefits play a major role in it. The only diplomatic mistake we have made so far is moving away from Russia. We should strengthen our historical diplomatic and economic ties with Russia. This will rule out any possible support Pakistan is expecting from Russia.

Recently signed multi-billion defence agreements signed in Goa during BRICS summit are not sufficient. This will lead both countries to a weapons buyer-seller or weapons co-developer kind of business. The strategic partnership is much more than just that. In Dec 2014 both countries agreed to increase the bilateral trade to USD 30 billion.  But in 2015 annual trade between both countries was just USD 7.83 billion, which showed a stark decline of 17.74% in comparison with the previous year. This is where we must work to reignite decades-old strategic partnership.

If Pakistan loses POK or Baluchistan, CPEC will die its natural death and Pak’s last lifeline is gone. CPEC is Pakistan’s only life line and not China’s.

Reference:

1. http://www.pakistantoday.com.pk/2016/08/11/business/countrys-remittances-down-by-36-to-1-32bn-in-july-2016/
2. http://economictimes.indiatimes.com/news/economy/indicators/india-ranks-second-on-grd-index-on-ease-of-doing-business-study/articleshow/52618265.cms
3. http://timesofindia.indiatimes.com/india/China-admits-its-feeling-pressure-from-India-in-manufacturing-sector/articleshow/54425308.cms