The economics of CPEC: What are the options for India?

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Source : SIFY By : Sumit Walia Last Updated: Sat, Nov 05, 2016 

We 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 six such economic corridor projects in Asia under its 'One Belt, One Road' initiate. Under the CPEC project, a deep sea port will be developed in Gwadar (Balochistan), a network of rail/roads will be built from Gwadar to Kashgar in China's North Western autonomous region of Xinjiang and China will set up power projects in Pakistan to overcome the latter’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. It was even declared on Pakistani 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 security along with other defence related matters. 

The Pakistani 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 - Two security personnel for every Chinese worker. Gen Raheel Sharif has said many times that the 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 of over 3 Billion people of the area! By 3 billion, they refer to an entire population of India, China, Pakistan & Bangladesh. In a nut-shell, the hype is at an all-time high. Everyone in Pakistan – media, military, politicians, non-state actors (Hafiz Sayeed) – is in love with CPEC.

But a few sane minds are raising their voice in Pakistan about its economic viability. The CPEC project has been 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) CPEC is not a 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, the Chinese government 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. The 46 billion USD project has two major parts – (i) USD 35 billion investment in power sector, where Chinese companies will lay gas pipelines and set up coal, wind, solar and Hydropower plants and (ii) USD 11 billion investment in Infrastructure project i.e. building a road corridor from Gwadar to Kashgar. Pakistan will have to invest its share in different projects. Pakistan’s share in energy projects is approximately 20 per cent and Pakistan’s share in infrastructure projects is 50-60 per cent. In total, Pakistan will have to manage around 15-20 billion USD. Considering the current condition of the Pakistani economy where `Debt to GDP` ratio is touching 65% and total foreign debt touching approximately 70 billion USD, it will be difficult to arrange an additional loan for CPEC projects. 

Project Total cost China’s Share Pakistan’s Share China’s return to investment Infrastructure $11 Billion 40-50% 50-60% Not known Energy $35 Billion 80% 20% 27.2% 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 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-Kashgar, Xinjiang road: - Most analysts think that road from Gwadar is being built for two main reasons – (I) To save on transportation cost (due to short distance between Gwadar and Xinjiang and all Chinese exports will go this route instead of longer sea route) (II) 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 the entire world imports Chinese goods. The 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. 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 – most likely European or African countries. × 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 Pakistani money (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 two 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 two fronts but such encirclement by Chinese troops will make it even more difficult. India will have to deal with the enemy all the way from Arunachal Pradesh, Ladakh, Kashmir, Punjab, Rajasthan and Gujarat. Pakistan will definitely join the Chinese bandwagon. The 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. Pakistan’s 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 two major pillars or Pakistani economy – Remittances from Pakistanis working overseas and loans. Pakistan 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 a report in Pakistan Today, Pakistani remittances have already dropped by 36%. '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), 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 14th 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. Now, the cost of living in China has increased many folds – taking a toll on production cost. Labour is not as cheap as it used to be in 1992-93. China has already started feeling the heat. As per Global Times (a Chinese Government 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 labour 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. The last option to kill CPEC and to avoid any Uri-like attack in future is covert or overt military action. This is the best time to take back POK. If we accept CPEC passing through POK, 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, world opinion is mostly with India and against Pakistan. India’s huge 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. The 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 December 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 we are able to take POK back or if Baluchistan manages to break away, CPEC will die its natural death and Pakistan’s last lifeline is gone. CPEC is Pakistan’s only life line and not China’s. Sumit Walia is an IT Specialist, based in Germany . He is also a military history buff who continues to explore & research various facets of the Indian Military history in his spare time.

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