Mutually beneficial

India's new Prime Minister Narendra Modi has declared that establishing a better and mutually beneficial relationship with Beijing while resisting Chinese expansionism are major foreign policy goals for his administration. But after rolling out the red carpet for Chinese President Xi Jinping in his home state of Gujarat and in New Delhi, Modi hardly expected that his resolve would be tested so quickly. Just hours after Xi Jinping arrived in India, hundreds of Chinese troops allegedly entered what India regards to be its territory in the Ladakh region of Jammu and Kashmir state.

It was to be the most serious border incident in years. Modi had little choice but to demonstrate strength in front of his domestic supporters. As a consequence Xi's visit, the first one to India by a Chinese president in eight years, got off to the worst possible start.

To their credit neither Narendra Modi nor Xi Jinping was willing to allow the incident to scupper the talks. Rather, they quickly reached a face-saving agreement to search for ways to finally reach a binding demarcation agreement on their border, something which has evaded the two countries in the past. This is long overdue and will be a litmus test for improved ties.

It remains to be seen whether the incident was triggered by a local Chinese commander with his own agenda or by Chinese military leaders opposed to any relaxation of tensions in bilateral relations. Perhaps Xi Jinping himself even intended to send India a very clear signal at the start of their talks. That is however highly unlikely. We will probably never find out.

But the news on Friday morning that Chinese troops were withdrawing from the disputed area suggests that the border incident was not in Xi Jinping's interests at all. It would appear that the leaders of the two Asian giants have recognized that they have more to gain through improved ties and greater cooperation than they have from the frosty relations and tensions of the past.

With regard to China Modi's desire to improve business ties was enshrined in the final communiqué. India and China have agreed to improve economic growth and development in the region. The Indian Prime Minister, who has pledged to use the successful economic model, developed and finely tuned in his twelve years as Chief Minister in his home state of Gujarat, knows he needs improved business ties and Chinese investment to stimulate the Indian economy and to take 500 million Indians out of poverty.

The agreement to set up two Chinese industrial parks in India and for China to invest 20 billion dollars in India's failing infrastructure is a major step forward when compared with the modest sum of 400 million dollars that China has invested in India in the last fourteen years. And in return he is willing to give China access to India's market. Xi Jinping needs India's growing middle classes to buy Chinese products.

There was also a commitment to start discussions on cooperation in the field of civil nuclear energy, a move which will have raised some eyebrows in Washington for sure. In the same way, the decision of the two leaders to create an economic corridor linking Bangladesh, China, India and Myanmar could herald the start of a new era of cooperation in the region. All of this spells substantial progress between the two sides and has far-reaching consequences for the region.

But these interesting developments must not disguise the fact serious problems remain. At an economic level, India and China agreed a target for bilateral trade with a volume of some 100 billion dollars by 2015. That sounds great on paper. But India will not accept this at any price. After all, India's trade deficit with China is too high at 40 billion dollars. Modi must boost India's exports to China. He has no choice.

Anti-Chinese demonstrations in New Delhi reminded Xi Jinping, if he needed reminding, which is highly unlikely, that India is the home to the spiritual leader of the Tibetans, the Dalai Lama, and his supporters, who continue to demand independence from China. For its part, India remains deeply suspicious of China's close links with its arch enemy, Pakistan. Moreover, India shares Japan's concerns about Chinese claims in the South China and East China seas and is worried that these might conflict with India's energy interests.

Coming after his visits to neighboring states and to Japan to underline India's ambitions on the world stage, Modi will have been pleased to speak to Xi Jinping before his own talks with US President Barack Obama at the end of September. The message to both men will be clear. India intends to play a far more active role internationally - also at the United Nations - than in the past.

Thus the summit served to shape the initial contours of what could be an improved relationship and survived a serious border incident. Perhaps because both leaders have only recently come to power they are unencumbered by the disputes of the past and appear willing to build bridges between their nations in those areas where they can both benefit the most. Despite the outstanding problems, cautious optimism is called for. The prospect of the much heralded Asian century with two economic powerhouses at the heart of the world economy may just have come a step closer.