A quiet Chinese challenge to India's pre-eminence in South Asia through diplomatic and aid effort has now been extended to small island nations dotting the Indian Ocean. While China, Japan, South Korea and Southeast Asian nations fight over specks of islands and reefs in East and South China Sea, mainly because of undersea resources, islands in the Indian Ocean are emerging as a new focus for struggle.

The latest hotly contested arena: Maldives, a chain of 26 islands about 1000 kilometers due south of India. With just 320,000 nationals, Maldives has assumed a disproportionately large profile primarily because of its geopolitical position astride strategic sea lines of communication and China's attempt to win influence.

The rivalry was brought to light when Maldives canceled a lucrative contract granted to Indian and Malaysia companies amid speculation that a Chinese company was behind the move, although the reality could be more prosaic. In November, the Maldivian government unilaterally terminated an agreement with India's GMR Infrastructure, Ltd., and Malaysia Airports Holdings Berhad to operate and modernize Ibrahim Nasir International Airport in Male, citing irregularities in the award of the US$511 million contract.

The two firms were jointly awarded the 25-year contract in 2010. The largest Indian foreign direct investment in Maldives had huge symbolic importance for India's profile in the atoll nation. GMR took the battle all the way to the Singapore Supreme Court, which ruled that Maldives indeed had the power to take control of the airport. GMR intends to seek compensation of more than US$800 million from the Maldivian government for terminating the deal whereas Male is insisting on a forensic audit from an international firm.

Many in India had expected New Delhi to escalate the conflict, by declining to release annual budgetary support of US$25 million, forcefully reminding Male about its security dependence on India. Ignoring such calls, the Indian government has been quick to convey to Maldives that, if there were political reasons for the contract's cancellation, these "shouldn't spill over into a very, very important relationship, a very valuable relationship" between the two states. Two days after the project's cancellation, the Maldives defense minister flew to Beijing.

New Delhi recognizes the strategic importance of Maldives. Any escalation by India would have only fanned anti-India sentiments in the island nation, allowing other powers, especially China, to further entrench themselves at India's expense. It's possible that the military government's move to cancel the contract was primarily political, setting the stage for 2013 elections. After ousting the democratically elected Mohamed Nasheed in what was in effect a coup in February 2012, current President Mohamed Waheed is expected to contest the presidential polls in 2013. The pressure of competitive politics may have led him to exploit anti-India sentiment being fanned by extremist groups in this Muslim nation.

New Delhi has also hinted at the possibility of external forces playing a role in the contract's cancellation, with suggestions that the Maldivian government wanted to push out the Indian company, replacing it with a Chinese firm. Waheed's coalition partner, the radical Islamic Adhaalath Party, made it clear that it would "rather give the airport contract to our friends in China."

That Male's move surprised New Delhi is an understatement. The Indian defense minister was in Maldives in October, ostensibly strengthening security ties. At that time, the two sides decided to elevate defense cooperation: New Delhi is stationing a Defence Attaché in Male, extending deployment of its ALH Dhruv helicopter by two more years, providing training to the Maldivian Air Wing, positioning an Indian Navy Afloat Support Team to train Maldivian naval personnel and providing assistance for surveillance of the Exclusive Economic Zone. New Delhi and Male underscored these measures as sign of a united front against the challenges of terrorism and non-state actors.

India refused to take sides when Nasheed, the first democratically elected president of Maldives, was ousted from power and immediately reached out to the new President, assuring him of continuing cooperation. The reason is simple: India simply cannot afford to alienate the government in Male given China's growing reach. The president of Maldives was in China in October when Beijing announced a US$500 million package of economic assistance for Male. New Delhi views Maldives as central to the emerging strategic landscape in the Indian Ocean.

India had always viewed Maldives as important for maintaining security in the Indian Ocean region, but attempts by Beijing to expand its footprint in Maldives and the region have raised the stakes for New Delhi. China has also been busy forging special ties with other island nations on India's periphery including Sri Lanka, Seychelles and Mauritius.

China's attempt to gain a foothold in the Indian Ocean came into stark relief last year when reports emerged of an offer from Seychelles - another strategically located island nation in the Indian Ocean - to China for a base to provide relief and resupply facilities to the People's Liberation Army Navy. Though promptly denied by Beijing, the offer underscored the changing balance of power in the region. India has traditionally been the main defense provider for Seychelles - providing armaments and training to its Peoples' Defence Forces, or SPDF. India extended a US$50 million line of credit and US$25 million grant to Seychelles in 2012 in an attempt to cement strategic ties.

China has been proactive in courting Seychelles since former Chinese President Hu Jintao's visit to the island nation in 2007. Much to India's consternation, Beijing now participates in training SPDF and provides military hardware. China has expanded military cooperation with Seychelles, providing two Y-2 turboprop aircrafts for surveillance of the economic exclusion zone.

The Chinese defense minister was in Sri Lanka in October to offer support worth US$100 million for various welfare projects in northern and eastern Sri Lanka, areas beset with Tamil insurgency. At a time when domestic political constraints have made it difficult for New Delhi to reach out to Colombo, Beijing has been quick to fill that vacuum. Even Mauritius, the security of which is virtually guaranteed by Indian naval presence, can't resist the lure of Beijing funds.

With the rise in the military capabilities of China and India, the two are increasingly rubbing against each other; China expands its presence in the Indian Ocean region and India makes its presence felt in East and Southeast Asia. In this context, Indian External Affairs Minister Salman Khurshid recently suggested that India must accept "the new reality" of China's presence in areas it considers exclusive, seeming acknowledgement that both the South Asian and Indian Ocean regions are rapidly being shaped by the Chinese presence.

China's rising profile in South Asia and the Indian Ocean region isn't news. What's significant is the diminishing role of India and the rapidity with which New Delhi has ceded strategic space to Beijing in regions traditionally considered India's periphery. This quiet assertion of China has allowed various smaller countries to play China off against India. Most states in the region now use the China card to balance against India's predominance. Forced to exist between two giant neighbors, the smaller states have responded with a careful balancing act. The recent spat between New Delhi and Male merely reflects the evolving ground realities in the Indian Ocean region.

(Harsh V. Pant teaches in King's College, London)