06/04/2014 05:08 pm ET Updated Aug 04, 2014

Why Modi's Success Depends on China


The crushing victory of the Bharatiya Janata Party and India's newly elected Prime Minister Narendra Modi has brought much hope to exasperated Indians and foreigners alike. With promises to revive a nation that 1.2 billion people call home, the so-called "Modi wave" has surged across India. Over the past few months, Indian equities have risen close to 20 percent. The rupee, which lost 13 percent against the dollar in 2013, has been one of the best performing emerging market currencies this year.

Modi, a three time chief minister of the state of Gujarat, has made much of his rise from a train station chaiwallah (tea seller) to a sarkar (government official). But if Modi is going to have as much impact on India's economy as his premiership march to Lutyens' Delhi has had on market sentiment, then he has to make peace with the dragons -- China.

For many years, China and India have tried to tango. It's a dance both countries have been trying to master, albeit awkwardly. When one tries to lead, often, the other fails to follow.

Economic cooperation between the two Asian giants is still hindered by unresolved disputes. India and China have yet to agree on sovereignty over an area along the shared eastern Himalayan border that India calls Arunachal Pradesh and China refers to as South Tibet. The dispute led to a brief war in 1962 and a three week standoff last May.

"Arunachal Pradesh is an integral part of India and will always remain so. No power can snatch it from us," Modi declared during an election rally this year. He urged China to shed its expansionist attitude and forge bilateral ties with India for peace and progress.

This is one side of Modi; the staunch, security-minded, Hindu nationalist who won voters with his "less government more governance" mantra. The other Modi is the economic-minded technocrat who knows the value of tapping into China's economic muscle.

In 2011, Modi traveled to China as Gujarat's chief minister and tried to draw Chinese companies to Gujarat. "Our job in the government is to create the right kind of environment for you to come and enjoy your creativity. Gujarat is known for its handholding approach for investors," Modi announced in a speech in Chengdu. It's this dichotomy Modi is trying to reconcile -- striking a balance between economic engagement and preparing for an increasingly assertive China.

China has become India's largest trading partner, with Sino-Indian trade reaching $49.5 billion during the first nine months of the current fiscal year. India mostly exports raw materials to China and is one of the largest iron ore exporters to China. Chinese firms are the largest suppliers of equipment to India's power producers. In addition to trade, investment and technology ties are growing, too. Following its acquisition of Land Rover and Jaguar, Tata Motors receives around $1 billion of its revenue from China. In turn, China's leading technology company, Huawei runs a 3,000 person research and development center in Bangalore -- its first and largest outside China.

Despite some positive developments, India's bilateral trade deficit of around $40 billion with China continues to be a prickly issue. One hedge against the trade imbalance is to seek Chinese investment in infrastructure projects across India. Economists estimate India needs $1 trillion in infrastructure investment over the next decade. If Modi is able to use his political thrust to secure China as a key stakeholder in this effort, the two countries can find an economic rhythm like never before.

Political commentators have mused that Modi's nationalist credentials will make it easier to assemble ties in Beijing. He's recently been touted as "India's Nixon" -- a reference to the hardline U.S. president's acceptance of Chinese communist revolutionary Mao Zedong.

With two nationalists in power, it would behoove Modi to not become captive to any extremist rhetoric of nationalism. The conversation must evolve to define what should be the most important partnership in the 21st century.

Modi's historic victory means the bar has been set exceptionally high. With the dreams of 1.2 billion people riding on his leadership, many Indians believe if there's anyone that can sell tea to the Chinese, it's the chaiwallah.