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Geo-economics of Indian foreign policy

PM and Chinese President Xi Jinping witn (CC BY-SA 2.0) by narendramodiofficial

Continuing along the lines of our last column, where we had commented on some aspects of Chinese-Indian competition on the African continent, we now take a closer look at the economic and financial constraints on the Indian government to follow suit on their strategic options and choices. In 2019 the Indian economy has become the world’s third largest, in purchase power parity (PPP), and sixth largest in US dollar terms. In its second term, the Modi government is now challenged to fulfill promises of higher growth rates by focusing on economic policy. Stepping up investment in infrastructure and facilitating the ease of doing business in India should now be India’s priorities. The latter is of central importance for attracting more foreign direct investment (FDI) and thus promoting India’s export capacities. India may be practically on parity with China regarding the size of its population, but economically it is still just one fourth of China. This clearly limits Prime Minister Modi’s ability to compete with China in international trade, in enhancing its political influence on other countries and in stepping up its military means for the country’s security and strategic outreach. His young electorate expects him to do more and economic and political challenges abroad force him to do more. But a high fiscal deficit of central government is putting tough financial constraints on the government’s ability to fully implement their strategic choices.

The current external economic strategy comprises a protectionist element: the Indian government has raised customs tariffs on dozens of import goods and taxes on oil. Another element is the liberalization of norms for foreign direct investment. Measures in the monetary field are a third element; by issuing dollar-dominated sovereign bonds, the Modi government takes new risks, as Indian governments have avoided to contract sovereign debts since the humiliating concessions to IMF- and World Bank demands in 1991. The new wave of protectionism must be partly seen in the context of new import duties imposed by US President Trump. While China is at the center of the current US “trade war”, India is also included in the US list of “US trade deficit culprits” like Germany and Japan and is paying parts of the costs of the US trade war imposed on others.

One more effect of government expenditure restraints is the impact on defence and diplomacy. Over the whole first term including the first year of Modi’s second term in office defence spending has continuously gone down as a percentage of total central-government expenditure. Since personnel costs for the armed forces account for nearly two thirds of the defence budget, there is not enough left for necessary capital expenditure for defence. This is seriously affecting the modernization of India’s defence equipment. With this, India cannot dream of competing with China’s military might.

A bigger problem for India than military might, however, is China’s economic power. But PM Modi has managed to smartly concentrate his means through a geo-economic initiative by which he is pursuing a policy of ‘non-reciprocal trade liberalisation’ vis-à-vis less-developed smaller economies in India’s neighbourhood such as Bhutan, Maldives, Nepal and Sri Lanka. This policy aims at bringing these smaller South Asian countries closer to India by voluntarily conceding unilateral advantages of custom duty exemptions. In addition, and pressurized by China’s huge development assistance budget, India is also increasing its funding for diplomacy and aid. The major recipients of Indian development assistance are Bhutan, Maldives, Nepal and newly Mauritius. But the funds engaged in the framework of this policy are no match for Chinese expenditure in South Asia and Africa. Most remarkably, in addition, is the budgetary consequence that the strategically motivated project of a trade route through the Iranian port of Chabahar, which is set to open a separate access to Afghanistan and Central Asia, is not getting fresh funds for the completion of the port of Chabahar. Thus, China’s Belt and Road Initiative (BRI), remains unchallenged by India. At least, India under Modi continues to diversify its strategic alignment with a variety of powers. It has joined trilateral groups with the US and Japan and at the same time with Russia and China, while it remains engaged with the emerging economies of the so-called BRICS (Brazil, Russia, India, China, South Africa). In the defence procurement field India counterbalances its growing cooperation with the US by purchasing Russian military goods against the US threat of sanctions. The conclusion is not new: Limited financial means are forcing India’s government to play its remaining strategic cards particularly smartly, what PM Modi has exactly been doing in external relations since coming into office in 2014. As the trauma of a potentially hostile antagonism with China remains a fundamental factor determining India’s role in its neighbourhood and wider region, Modi’s government is forced to generate more economic growth than in the past in order to make the means available which are necessary for underpinning its strategic choices. The current growth rates are not sufficient.        

13th December 2019/Philippe Welti

(Sources: The International Institute for Strategic Studies, Strategic Survey 2019, London 2019; The International Institute for Strategic Studies, The Military Balance 2019, London 2019)

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