Context: China has been using the financial tool of debt to gain influence across the world and grab considerable power in India’s neighboring countries.
About China’s debt-trap diplomacy
- In a push to gain rapid political and economic ascendency across the globe, China is dispensing billions of dollars in the form of concessional loans to developing countries, mostly for their large-scale infrastructure projects.
- Ultimately, developing nations are lured by China’s offer of cheap loans for transformative infra projects, which involve a substantial investment.
- However, as these developing nations are primarily low- or middle-income countries, they are unable to keep up with the repayments.
- And China gets a chance to demand concessions or advantages in exchange for debt relief.
- These loans are generally extended to low- and middle-income countries on terms that are significantly more generous than market loans.
- The ‘concessionality’ factor is achieved either by offering interest rates that are below the market rates or leniency in the grace period, and often with a combination of both.
- Also, these loans generally have a long grace period.
What concessions are demanded by China?
- There are many advantages or concessions that China asks for in exchange for debt relief.Few examples are as follows
- Sri Lanka:
- It was forced to hand over control of the Hambantota port project to China for 99 years after it found itself under massive debt owed to China.
- This ultimately allowed Beijing control over a key port positioned at the doorstep of its regional rival India, and a strategic foothold along a key commercial and military waterway.
- In exchange for relief, China constructed its first military base in Djibouti.
- Angola is repaying the multibillion-dollar debt to China with crude oil, creating major problems for its economy.
Has India been impacted by the debt trap diplomacy?
- India has not directly entered into any loan agreement with China.
- But, India has been the top borrower of Asian Infrastructure Investment Bank (AIIB)
- It is a multilateral bank wherein China is the largest shareholder (26.6% voting rights) and India the second (7.6% voting rights) among other countries.
- China’s vote share allows it to veto power over decisions requiring supermajority.
- Loans provided to Delhi could also pave the way for Chinese firms to enter and gain experience in the promising Indian infrastructure market.
How is the debt trap affecting India?
- Most of Delhi’s neighbors have fallen prey to China’s debt trap and ceded to China’s $8 tn project – One Belt One Road Initiative (OBOR)
- The initiative seeks to improve connectivity among countries in Asia, Africa, and Europe.
- China through OBOR can hence increase India’s political cost of dealing with its neighbors.
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