India’s anti-China electricity trade guidelines could backfire in South Asia

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It is no secret that India’s guidelines on cross-border trade of electricity aim to discourage Chinese investment in power projects in the Bangladesh-Bhutan-India-Nepal (BBIN) corridor. By securitising electricity, these guidelines are likely to shape the upcoming tripartite power trade pact between Bangladesh, India and Nepal and also influence Beijing’s economic overtures to Bhutan.

Therefore, a critical analysis of the guidelines at this juncture is called for. I argue that they do little to advance India’s geopolitical heft in the region. Challenges with hydropower construction, feeble gains to local populations and pseudo-monopolistic behaviour are key problems that undermine any potential geopolitical or energy security gains from this policy.

Political differences – most notably between India and Pakistan – have hampered the growth of a South Asia-wide cross-border electricity trade platform. However, in the BBIN region, recent developments showcase the will to move ahead with power trading projects. The region includes two states with significant potential for generating surplus energy from hydropower in Bhutan and Nepal.

The other two constituents, India and Bangladesh, are power-hungry nations which have faced energy shortages in recent times and are transitioning towards greener energy sources. Apart from this, these countries also have high seasonal complementarities in their energy demands which make cross-border electricity trade an appealing policy choice.

India’s electricity trade guidelines have emerged in tandem with the emerging cross-border electricity trade between BBIN countries. Through masterful legalese, the approval procedures under this policy prohibit the trade of electricity via the Indian electrical grid with projects that are linked to investments or involvement from China.

The fact that India is centrally located in the BBIN region and no two other countries from this group share a border means the policy has significant potential to shape the future of cross-border electricity trade in the region. The effects of this shift are already evident in Nepal, where Chinese developers have been removed from six hydropower projects and four contracts have been awarded to Indian companies. Interestingly, two of these four projects were initially given to Chinese firms. Last year, Nepal’s former prime minister Sher Bahadur Deuba said, “India won’t buy electricity from the West Seti hydro project if it’s built by Chinese companies, so I am going to give it to India.”

Similarly, with hydropower being a crucial pillar of Bhutan’s gross domestic product and India being its primary power export market, the guidelines demarcate a no-entry zone for Chinese investors should Bhutan and China establish diplomatic and economic relations in the future.

The policy shift from New Delhi seems to be constraining the options for the Himalayan nations as they look to further develop their hydropower potential into an exportable resource. The question that needs asking is whether this policy is leading to outcomes that provide significant geopolitical gains. I believe that is not the case.

First, by creating a disincentive for the entry of Chinese investment in the hydropower sectors in Nepal and Bhutan, it places the burden of development of such projects on Indian power companies. With local banks having insufficient debt-financing capabilities, most of the project funding for such capital-intensive projects is going to have to be borne by the Indian side.

Similar trends will also be seen in the construction sector. Additionally, given the fragile geology of the southern Himalayan foothills, infrastructure accidents and natural disasters are highly likely, making projects prone to delays.
recent disaster involving a dam in Sikkim has also raised concerns over the quality of Indian construction capabilities. Even if projects are successfully completed, building transmission infrastructure can prove to be a slow and challenging task, as the case of Nepal has shown.

Second, since many of the power projects being built in Nepal and Bhutan are for export and not internal consumption, there are few gains for local populations. These same people suffer disproportionately as the construction of these infrastructure projects can cause mass displacement.

If geopolitics is the objective of this policy choice, then the soft power gains from hydropower construction are minimal. New Delhi would be better off supporting mega-projects that improve the lives of local populations and help build its public credibility.

Third, India’s policy approach unilaterally weighs on its smaller neighbours’ trade balances and undermines their agency without offering reciprocal benefits. Thus, New Delhi’s utilisation of its central geographical location to monopolise this sector for its own gains is more likely to stir concerns about a bully mentality that have pushed smaller South Asian states to invite greater cooperation from China. Even if the policy choice was prompted by concerns about energy security, India has more to lose from monopolising the power market in the BBIN corridor than it has to gain from allowing a liberal and competitive cross-border electricity trade framework to develop.

In conclusion, India’s policy choice to restrict Chinese involvement in power projects in the BBIN region seems ambiguous in its objectives. It appears that the policy attempts to hit geopolitics and energy security with one stone but has missed the mark on both.

Hydropower projects that are capital-intensive, slow-moving, accident-prone, stir local opposition and provide limited benefits to local populations are not a prudent use of resources for bolstering geopolitical clout. Likewise, undermining the development of a liberal market for cross-border electricity trade in the region limits gains towards energy security. New Delhi must carefully reflect on this policy to prevent it from being a geopolitical misstep.

Source: SCMP