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18 November 2021, Financial Express

Bay of Bengal connectivity

The Bay of Bengal is gaining relevance as a significant sub-region within the Indo-Pacific. Despite its importance to regional security, there is inadequate financial, physical, and energy connectivity. India must use its strategic and political pre-eminence and influence in the sub-region to pursue deeper connectivity with Bangladesh, Myanmar, Thailand, Nepal, and Sri Lanka and to block China's growing influence.

Fellow, Energy & Environment Studies Programme

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The Bay of Bengal (BoB) is gaining economic and strategic relevance as a significant sub-region within the Indo-Pacific. It increasingly matters in global strategic competition. Yet despite its importance to regional security and prosperity, there is inadequate financial, physical, and energy connectivity. India’s strategic and political pre-eminence and influence in the Bay of Bengal is diminished by its limited connectivity with Bangladesh, Myanmar, Thailand, Nepal, and Sri Lanka.

This is in sharp contrast to China, which, in recent years, has built a significant presence in the Bay of Bengal and its resident nations with connectivity projects and infrastructure finance.

India’s central position in the region means that without its participation, cross-border connectivity is a non-starter. India is, however, capital-deficient, relying on third partners to invest in large projects. This is unlikely to change in the medium term, particularly given the economic and humanitarian impacts of the Covid-19 pandemic. In contrast, China has become a regional player with multiple rail, ports, and power projects.

Building infrastructure in this region faces governance and operational challenges, including small-scale insurgencies, migration, environmental stress, and crime. Nevertheless, China has succeeded in this environment due to its willingness to fund otherwise unviable projects, often on opaque terms. Where transparency is lacking, local elites are open to capture, and sustainability standards are sidelined. India’s continuing inability to counter China’s cheque-book diplomacy has allowed the latter to assert its interests in the region, not always to the long-term economic and development benefit of those countries.

China is a clear winner in the physical connectivity stakes in the Bay of Bengal because of its strategic planning, large-scale investments, and an ambitious scope. Chinese projects connect to one another, from rail to the road to the port. An example is the proposed 2,800 km railway line connecting Kunming to Kolkata via Myanmar and Bangladesh. China also invests heavily in maritime infrastructure in the region—even if it is seen only for its own benefit. Projects like Sri Lanka’s Hambantota, Kyaukpyu in Myanmar, and the Kra Canal in Thailand are viewed as white elephants by some in those host countries. India, in contrast, has successful cross-border road and rail infrastructure projects with Nepal, Bangladesh, and Myanmar.

However, almost all of these are small in scale and scope—very often, an extension of an existing railway line or highway into Nepal or Bangladesh, but without the greater ambition of building direct rail connectivity between Nepal and Bangladesh projects in rail, ports and power. The focus on road and rail also demonstrates India’s terrestrial or subcontinental bias and focus on connectivity through its northeast into southeast Asia. India should be doing more to invest in the vast maritime potential of the Bay of Bengal, where it trails China in maritime infrastructure and has not maximised the potential of the critical Andaman and Nicobar Islands.

Several Bay of Bengal countries—especially Myanmar, Nepal, and Bhutan—are rich in hydropower but do not have the resources to build dams or have the electricity demand to justify the expense. Bangladesh and most of India are net energy importers with large populations and growing demand, providing a ready market to make projects viable. What would seem a natural match is unexplored. No projects in the region connect three or more countries—for instance, Nepal-India-Bangladesh. The lack of regional electricity trade has encouraged Bangladesh to consider thermal power projects funded by China.

Strong Bhutan-India hydropower ties, evident from the large concentration of hydropower projects in Bhutan and power transmission lines taking this power to India, offer a blueprint for the rest of the region. India has financed and built over half a dozen dams in Bhutan, owned by Bhutan’s state-owned Druk Green Power Corporation. The electricity therefrom is exported to India, and the incoming revenue is Bhutan’s largest export. However, India has not been able to replicate this in Nepal or Myanmar. In the absence of connectivity, Bangladesh is also unable to buy electricity from these two.

Multilateral institutions could provide initial support for these long-gestation and big-ticket investments in hydropower in Nepal and Myanmar, which India and Bangladesh would ultimately purchase power from.
Regional financial connectivity between the Bay of Bengal states is lacking or skewed, with some exceptions such as India-Thailand. India’s exports to Bangladesh, Nepal, and Sri Lanka are far higher than its imports from these states. The biggest export markets for countries of this region are elsewhere—so the intra-region trade is less important. FDI within the region is low except for Thailand-Myanmar.

Through its investments in infrastructure projects led by state-owned enterprises, China has a larger FDI footprint in the region. India’s FDI is far lower and is led by private sector firms, more focused on consumer-oriented sectors than on infrastructure.

India has a large and vibrant start-up economy, catalysed by its vast population and hence market size. It has been a magnet for global tech and e-commerce companies and venture funds. These foreign and even Indian tech investors rarely veer into the relatively smaller Bay of Bengal countries, which lack tech ecosystems, making it difficult for companies to scale up or be considered attractive for venture money. Successful tech entrepreneurs are big backers of new start-ups—this category of investors needs to be created. The tech sector is also less impacted by systemic inefficiencies that plague physical infrastructure.

The International Finance Corporation, and perhaps even the development assistance funds or EXIM Banks of the individual Quad or EU countries, can play a transformative role. China has not expanded its tech sector in the region yet and prefers monopolistic penetration in these markets. With multilateral funding, start-ups in fintech, healthcare, and agri-tech can provide tremendous benefits by helping develop a local ecosystem and better access to seed funding—and build strong ties with the Indian market.

India must help Nepal and Myanmar set up national hydropower companies to own and operate hydropower assets. Multilateral partners must enable easier financing by multilateral institutions for heavy-investment infrastructure projects to avoid unsustainable debt and the use of infrastructure finance as a tool for political influence. Multilateral venture-funding and private equity—patient and long-term capital—for agri/health/edu/fin- tech start-ups in the region (ex-India) can also be a key driver of connectivity.

Bay of Bengal nations, for their part, must set up an SPV to build a Bay of Bengal Power Grid with regional governments as shareholders. This can serve as a template for cooperation in other infrastructure projects. Apart from this, a Bay of Bengal Venture Fund with regional governments as an anchor (but not the majority) investor focused on regional tech start-ups is in order. This could be done under the BIMSTEC umbrella.

This excerpt of our report, ‘Unfinished Connectivity in the Bay of Bengal‘ was first published in the Financial Express.

Amit Bhandari is Fellow, Energy and Environment Studies Programme.