As India and China Compete, Smaller States Are Cashing In
Posted on January 25th, 2022

By , the director of research at the Observer Research Foundation, and , a research assistant at the Observer Research Foundation.

The Maldives and Sri Lanka show how they can bargain with bigger powers to their advantage.

JANUARY 24, 2022, 2:31 PM

This month, Chinese Foreign Minister Wang Yi visited Sri Lanka and the Maldives. On the surface, the trip was part of an effort by China to make further inroads into South Asia and cement its presence in the Indian Ocean. But it also reflects a new regional trend in which smaller South Asian states seek to maximize their political and economic gains as competition between India and China intensifies.

Wang signed multiple agreements with the Maldives during his visit, including new visa arrangements, aid grants, and infrastructure management pacts. These deals came despite the island state’s so-called India First” policy to reprioritize its ties with New Delhi and limit its dependence on Beijing. Wang’s visit was aptly timed: It came on the heels of a less successful year for China in the Maldives and coincided with former Maldivian President Abdulla Yameen’s India Out” campaign, which politicizes New Delhi’s role as a security provider.

Similarly, during Wang’s time in Colombo, Sri Lankan officials took the opportunity to request debt restructuring and new concessional trade schemes. The visit also came as Sri Lanka begins to play its India card against China. Last year, Sri Lanka banned fertilizer imports from China, and Beijing’s angry response led Colombo to seek emergency supplies from New Delhi. Sri Lanka also canceled Chinese energy projects in the Jaffna Peninsula and offered India a deal to modernize an oil terminal in Trincomalee.

These developments are part of a significant phenomenon among South Asia’s smaller states: playing China and India against each other as they vie for greater regional influence. Even Bangladesh and Nepal, traditionally closer to India, have begun to actively balance between the two Asian giants. Signs indicate that this trend will escalate in the coming years, for two reasons.

First, China has deep-rooted strategic interests in South Asia, which it approaches as a relatively untapped market to supplement its growth through trade and investments. Beijing also uses its presence in the region to curb New Delhi, the only Asian power that could challenge its status and military might. China’s investments in South Asia grant it access to the Indian Ocean to enable it to encircle India. Beijing is increasingly keen on expanding its influence there to deter chokepoint blockades and potential buildups of adversary troops, especially as India grows closer to the other members of the Quadrilateral Security Dialogue: Australia, Japan, and the United States.

On the other hand, India is committed to maintaining the status quo in South Asia, and it has gained experience with limiting China’s influence. New Delhi was initially unprepared to counter Beijing’s unprecedented strategic expansion in the region, but that is no longer the case. India saw Chinese infrastructure projects as hindering its influence by debt-trapping South Asian states, apprehensions exacerbated by Sri Lanka’s 99-year lease of its Hambantota port to China in 2017. This episode led India to embrace a new geoeconomic approach to the region, seeking to increase connectivity and infrastructure in vital strategic locations.

The deadly clash and subsequent standoff with China in eastern Ladakh in 2020—the first time shots were fired along the border for decades—provided another lesson for India. It intensified the trust deficit between the two countries, amplifying their rivalry and their battle for status in the region. Taking a more proactive approach, India has since begun to offer more economic incentives, space for private players, and new mega-infrastructure in its neighborhood. It has also undertaken tough bargains against Chinese investments in the region.

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India’s policies in Sri Lanka and the Maldives last year are a case in point for this proactive diplomacy. In Sri Lanka, India has consistently bargained to maintain its presence in the major Colombo port project and to cancel the Chinese energy projects in the Jaffna Peninsula. It has also continued offering currency swaps to Sri Lanka after withholding these requests for years. Colombo just received new currency swaps and $1.5 billion in financial assistance from New Delhi. In the Maldives, India was working on more 45 major development projects by mid-2021.

As the confrontation between India and China becomes part of the status quo in South Asia, smaller states have begun to exert their own leverage. India’s structural dominance in the region long fostered a sense of insecurity among these smaller states. The rise of China offered a new alternative to India’s position in the region. Sri Lanka and the Maldives have relatively quickly embraced a policy of strategic autonomy and diversification.

These smaller South Asian states have also learned to handle Chinese assertiveness and debt-trap diplomacy. The significant attention from the big powers has motivated them to pursue more active balancing and bargaining rather than becoming passive victims of structural competition. The smaller states have begun to reject or embrace Chinese investments based on their interests and welfare, providing them with more sustainable deals, aids, and grants.

This new regional order will be a long-term affair, as neither India nor China intends to back down from competing in and for South Asia. New Delhi and Beijing will keep providing more financial incentives and lending to smaller states, which will continue to play both countries against each other in the hope of finding more sustainable and beneficial investments. Ideally, this strategic competition will provide some escape from further debt-trap diplomacy and unsustainable borrowing.

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