THE BLOG
11/06/2014 12:28 pm ET Updated Jan 06, 2015

China and India's Next Rivalry: Energy

With two of the fastest growing economies in the world, India and China are racing towards securing resources they need to sustain their economic growth. The two countries are expected to account for the largest demand of energy resources between now and 2035, according to a report by BP, and have been working diligently to secure new sources of energy -- India has held discussions with Saudi Arabia over increased cooperation in the oil sector, and China recently signed a major energy agreement with Russia.

China's energy security also relies on independent exploration of new sources, often in regions that are disputed. This past summer, China National Petroleum Company (CNPC) moved an oil rig into waters near Paracel Islands, which are claimed by both the Chinese and Vietnam. Having fought a bloody war over the islands in 1974, this was seen by Hanoi as hostile, raising tensions in the region and catalyzing anti-Chinese protests throughout Vietnam. CNPC finally moved its rig after the company announced that it had collected necessary data, which it would then assess.

But frictions for China have turned into opportunities for India. At the conclusion of meetings between Vietnamese Prime Minister Nguyen Tan Dung and Indian Prime Minister Narendra Modi last week, the two countries announced a slate of economic partnerships, including one that gives India the rights for exploration of energy sources in territory claimed by Vietnam in the South China Sea. India has also promised to sell Vietnam four patrol vessels, improving Vietnam's ability to defend itself from future Chinese incursions.

The Chinese, unsurprisingly, have responded with anger to the announcement. An editorial in the state-owned Global Times argued that, "Since Hanoi is fully aware that it has no chance to win in a face-to-face confrontation with China, it has to rely on the strength of other major powers," going on to argue that Hanoi needed India and the US to back it against the Chinese. The government also warned India against taking up Vietnam on the agreement to explore for energy in the disputed South China Sea.

By aligning themselves with India to balance against the Chinese, Vietnam has helped reinforce a rivalry with significant historical roots. The two nations fought a bloody war in 1962, have consistently been at odds over the Dalai Lama, and have remained in a constant state of tension over their shared border. More recently, both India and China mobilized troops along the border in one of the most confrontational standoffs in recent history. And just last week, Chinese troops pushed into Indian territory along the Pangong Lake, further heightening tensions. But as the two countries stake their claims as rising global powers and move to secure continued economic growth and development, rivalries that are centered on economics, instead of border disputes, will become more common.

Prime Minister Modi came to power in this year's election on a platform that was built around economics. Since coming to power, he has recognized the role of energy in contributing to growth, and has made difficult decisions in the process -- on October 18th, diesel-fuel prices became deregulated, while natural gas prices were raised. The elimination of fuel subsidies is expected to save the government between 0.3-0.4 percent of its GDP, improving India's overall fiscal outlook.

Modi has also been active in identifying and securing new sources of energy consumption for India. Since coming to office in May, the prime minister has been on a foreign policy frenzy, meeting with several dozen heads of state to bolster India's economic outlook. As a result, the Indian government has signed a number of strategic energy deals with countries around the world, including Japan, Australia and Finland. While its agreement with Vietnam may come as a nuisance to Beijing, it is consistent with the administration's larger economic ambitions.

Following the announcement of the agreement, Modi tweeted that the government had "promptly & purposefully intensified engagement in Asia Pacific region, which is critical to India's future", making it clear that these ambitions will not subside soon. Consequently, China should expect heightened competition from India in the region going forward. Other countries may seek to take advantage of this layer of the Sino-Indian rivalry by partnering with India to balance against an increasingly assertive China, just as Vietnam has. How the Chinese will respond, considering their ambitions in the region and their own need for resources will shape the future dynamics of Asia. Nonetheless, it is clear that the rivalry between India and China, once centered on border issues, has moved towards a new phase -- one driven by an insatiable appetite for energy and resources.