The new silk road

News that China is pressing ahead with the construction of yet another port in the Indian Ocean – this time in Sri Lanka – has led to alarm in India that the strategic 'string of pearls' China is building along the lucrative trade routes from Africa to Asia could become an expensive choker on the Indian economy. But India is not taking the move lying down.

While China moves to take advantage of the shipping lanes between the Middle East and China, India is charging ahead with a partnership with Japan to build a freight corridor that will link Mumbai to Delhi to Kolkata with tributary rail links to industrial cities skirting the borders of Pakistan and Nepal. In simple terms, India and Japan are building a new 'silk road' which will eventually generate lucrative returns.

India is focusing on its greatest advantage over China in terms of trade, its geographical position, to develop a network that will thread the products made in industrial cities across the northern half of the country through to ports on its west and east coasts and on to markets in Europe, China, the rest of Asia and the Pacific. The corridor will also provide a safer and faster way of transporting oil and commodities from the Middle East and Africa, across the country, to ports in the India Ocean.

The freight link is expected to provide a superior trade route to that of China's 'string of pearls' – its new ports in Chittigong in Bangladesh, Gwadar, Pakistan and Sittwe, Burma, and Hambantota – and one that is not exposed to piracy.

The India partnership is equally important for Japan, which along with Korea was previously the port-maker of choice for many nations around the world, and in recent years has seen its position as the key trading partner to a large number of nations supplanted by China. The freight link is part of the Japanese government's plan to drastically bump up its annual investment in India to nearly $6 billion by 2011 – a considerable increase on 2006 when Japan invested a little over $500 million in the second fastest-growing economy in the world.

The project is the first of many expected under the 'Strategic and Global Partnership' established between Japan and India in 2006 that seeks to promote the shared democratic values of the Indian and Japanese governments – specifically at the expense of China.

The dedicated freight corridor, on which construction started in January last year, will span a total length of about 3200 km and has been designed to relieve India's already-bursting-at-the-seems rail network commonly referred to as the 'Golden Quadrilateral'. Running alongside the freight corridor will be a series of industrial parks dedicated to particular industries, new ports and airports.

Japan has agreed to provide a $4 billion loan to cover two thirds of the western arm's construction cost with the Indian government picking up the rest of the tab. The Asian Development Bank and the World Bank along with Indian agencies will fund the eastern corridor. In early February, the Dedicated Freight Corridor Corporation (DFCC) said it was close to announcing the $1.8 billion of funding from the World Bank. The government is also seeking a further $500-$600 million from the World Bank.

For the burgeoning economic super power, the dedicated freight corridor comes at a significant time. With free trade agreements already signed between India and Japan and between India and ASEAN nations and two further agreements in the works, this time with Australia and New Zealand, ensuring Indian products can get to market more quickly and cheaply than the goods of their economic rivals China is essential. India will also be able take advantage of Japan's bilateral trade agreements with other nations to use Japan as a conduit market for its products.

It's not just a one-way relationship. According to analysts, the easier flow of products from industrial towns in the landlocked parts of India to ports will also allow Japan to increase its business presence in India.

But both countries have some way to go in developing their relationship to the stage where they begin to see the fruits of their labour. According to a report from Indian Council for Research on International Economic Relations, while two-way trade between India and Japan rose to $10 billion in 2007/08, the value of trade has a very long way to go to match China-Japan trade ($237 billion) and India-China trade ($38 billion).

And the project has not been without its problems. Cost blow-out and delays due to land acquisition problems have plagued the project. However, the Indian government has been quick to realign the corridor to reduce these problems and Japan's interest in the project is undiminished.

With exports from India to Japan touching $3.85 billion in 2007/08 and Japan's exports to India jumping to $6.32 billion in the same period, the freight corridor and its associated industrial parks promise to be a trade super highway to prevent them being overshadowed by a dominant China.