PM Modi’s “Dollar Diplomacy” has sent China in a State of Shock

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As both India and China refuse to cede ground in Doklam , raising the possibility of a conflict between the two countries, India has tried to checkmate China by putting China’s domination under threat.

Line of Credit(LoC) are soft loans sanctioned by one country to another with low interest rates to fund infrastructure, agricultural, education projects and enhance co-operation between the two countries i. e. LoCs are soft loans to foreign countries to execute projects of their choice. China is the leader in providing LoCs to under developed and developing countries. But China by no means provides LoCs at low interest rates often sending countries into debt traps. Countries like Sri Lanka, Laos and Myanmar are debt trapped by China. In return China uses its leverage for favourable decisions. LoCs are bound to create jobs in the locality but China in some cases even ships its own construction workers on foreign shores, creating little local jobs. Several of the projects that have been completed are now bleeding money. For example, Sri Lanka’s Mattala Rajapaksa International Airport, which opened in 2013 near Hambantota, has been dubbed the world’s emptiest.

Mattala Rajapaksa International Airport: The check-in desks are staffed, even though barely no one uses them. Picture: Wikimedia Commons/Anuradha Dullewe Wijeyeratne Source:Supplied

Likewise, Hambantota’s Magampura Mahinda Rajapaksa Port remains largely idle, as does the multibillion-dollar Gwadar port in Pakistan. For China, however, these projects are operating exactly as needed: Chinese attack submarines have twice docked at Sri Lankan ports, and two Chinese warships were recently pressed into service for Gwadar port security. During PM Modi’s visit to Sri Lanka, China requested for its submarines to dock in Sri Lanka, in a bid to leave the PM Modi red faced but Sri Lanka refused to allow its submarines leaving a sulking China to turn to Pakistan.

In a sense, it is even better for China that the projects don’t do well. After all, the heavier the debt burden on smaller countries, the greater China’s own leverage becomes. Already, China has used its clout to push Cambodia, Laos, Myanmar, and Thailand to block a united ASEAN stand against China’s aggressive pursuit of its territorial claims in the South China Sea. With a LoC of P167 billion, Philippines is the latest entrant to become a debt slave of China.

While China has acted shrewdly on its part and established its dominance while India was a laggard in this case until 2014 and is now fast catching up to China in a bid to end its supremacy. The UPA government sanctioned approximately 10 billion USD to its partners as part of LoC. The figure has now touched 24. 2 billion USD since the Narendra Modi government took over. 52 LoCs worth 14. 2 billion has been granted by the government and many more are in the pipeline as King of Jordan and President of Belarus are scheduled to visit India this year.

During Sheikh Hasina’s visit to New Delhi this year, PM Modi announced $5 billion LoC the highest offered by it to any country so far. The bulk of the funds are expected to be used for connectivity projects – railway projects, road construction and maintenance – as India eyes transit to the northeast and Southeast Asia via Bangladesh.

While China has granted similar loan to Bangladesh, the Indian loan differs from China in terms of interest rate. The loan has a 20-year repayment term, including a grace period of five years and a 1% annual interest rate along with a 0. 5% commitment fee which is among the lowest interest rates for any loan extended by one country to the another anywhere in the world. China meanwhile has sanctioned $24 billion dollars for development aid to Bangladesh but officials in Dhaka view India as a special friend and China as just a partner. In the case of China, the project is identified first and then the money is given. But India offers a line of credit first and then identifies the projects.

Africa has been the biggest beneficiary of India’s endeavours with LoC that are sanctioned through the EXIM bank (export-import bank of India). At the annual African Development Bank (AfDB) summit held in India, PM Modi announced that India has extended 152 LoCs worth $8 billion dollars to as many as 44 African countries. India also committed $10 billion for development projects in Africa over a five-year period. Similarly, China is planning a $60 billion-dollar investment in the continent. Indian exports to Africa, jumped to $23 billion in 2016-17, against $14 billion in 2007-08. Similarly, India’s imports from Africa rose to $28 billion in 2016-17 from $20 billion in 2007-08. Presidential office in Ghana (symbol of Indo-Ghana friendship) and National Assembly building complex in Gambia are two such examples of India’s endeavours in the continent. Ethiopia and Tanzania were the two countries that received the largest share of the $8 billion LoC. Nepal and Mongolia too have got a $1 billion LoC from India.

 The significance of LoCs are that they create tremendous export opportunities apart from better relations between the two countries. At a time when the exports aren’t booming, LoC with Bangladesh will breathe new life into manufacturing exports. Yaduvendra Mathur, Chairman of Exim Bank estimated that around 50, 000 jobs will be created directly and indirectly. The reason for the amount of jobs being created because exports have a higher multiplier effect. The multiplier is seven times more than a local sale.

Without making a political statement, the bigger LoCs will help kickstart manufacturing exports particularly when there are concerns of slowing growth. China is said to be very angry with India on various issues and understandably so.

India is aiming to end China’s supremacy and cut its dominance. Many countries that have been caught in a debt trap with China are increasingly looking towards India to bail them out as the Chinese economy too is caught in debt leading to the devaluation of its currency yuan. China’s refusal to allow India into NSG might be down to the reason that the dragon fears India will completely end its dominance in Asia and emerge as the most attractive destination in Asia. Amid the constant war mongering by the state sponsored Chinese media, the dragon it seems is no longer breathing fire and it’s the elephant who is making all the noises.