NonAlignment 2.0: A Foreign and Strategic Policy for India in the 21st Century (6 page)

India’s policy towards South-East Asia should encompass the following key elements. First, it suits India to have ASEAN maintain its role as the pre-eminent platform through which the emerging economic and security architecture in the region is mediated. Second, India should resist endorsing the Chinese approach of projecting ASEAN+3 (China, Japan and the Republic of Korea) as the ‘Core’ of the emerging regional order, while consigning the East Asia Summit process to the outer track. Our objective should be to promote a regional order which has space for multiple and parallel forums for pursuing regional integration along variable tracks.

Third, both ASEAN countries and India depend heavily on seaborne trade for their prosperity. This is particularly true of their energy supplies. There are shared concerns over maritime security and India’s significant and expanding maritime capabilities will play an important role in shaping a maritime security regime, built upon a set
of mutual assurances among the major littoral and user states. Finally, the pursuit of closer economic integration with the region necessitates the rapid development of cross-border connectivity, through roads, railways, airlinks, digital highways and shipping routes. Even while India invests in reconnecting with the countries of South Asia, it must plan these links in the larger context of closer integration with the countries of South-East Asia. India should become a major stakeholder in the ambitious ASEAN Connectivity Initiative.

While emphasizing the primacy of ASEAN as a preferred regional partner, India should, in parallel, pursue a varied diplomacy on the bilateral side. It is obvious that Indonesia, as the largest country in ASEAN, will be a key partner for India in the region. The two countries share a convergent interest in ensuring freedom of navigation and maritime security in the Indian Ocean region. They have common concerns over the challenge which the emergence of China poses for their own respective roles in the region. Indonesia is also an increasingly influential actor in regional and international forums, such as the G-20. This adds to the value of maintaining a strong relationship with the country. The cultural affinity between the peoples of the two countries further enhances the quality of the relationship.

In the context of its Asian diplomacy, India has recognized the importance of Myanmar, which is its gateway to South-East Asia. Myanmar also shares the strategic ocean space of the Bay of Bengal and the Andaman Sea with India. Four of India’s key northeastern states, Arunachal Pradesh, Nagaland, Manipur and Mizoram, lie across the 1400-kilometre-long border with Myanmar. More recently, Myanmar has also emerged as a potential energy partner for India. These factors dictate a policy of high priority to this neighbour to the east, where a rapid, though uncertain, political transformation is under way. The opening up of the country, the diversification of its foreign relations, the flow of investment from multiple sources, all these will serve to diminish the dominant position that China has been able to establish in Myanmar’s long period of relative isolation. This can only benefit India.

India must recognize that China will continue to be a significant factor in Myanmar, just as it is in the rest of South-East Asia. However, India has the capacity and resources to establish a strong countervailing presence in the region. In this context, the early implementation of several key cross-border transport corridors is critical to the success of India’s Asian diplomacy.

In the case of each ASEAN country, there are particular
aspects of our relationship that can be leveraged. In forging close bilateral relations with Laos, Cambodia and Vietnam, India is a welcome source of human resource development and capacity-building. Vietnam has a much stronger shared concern over China than perhaps some other ASEAN countries and this creates opportunities for a measured increase in India’s security profile in Indo-China.

In the case of Singapore, the value of the island country lies in its role as a most convenient and efficient platform for doing business in South-East Asia. More than any other country in the region, it is the most sensitively attuned to the shifts in the balance of power in the region, and it is the country most alert to emerging economic opportunities in the region as well as globally. It can serve as India’s weathervane in the region, helping the country to adjust its own strategies in response to the shifts in the regional environment. Singapore will remain a key partner for India in the region.

Japan
: In recent years, two key factors have driven India and Japan into a much closer and expanded relationship: the concern over China and the economic opportunity that India offers to a depressed Japanese economy. The steady increase in the security and defence relationship between the two countries is a new factor in regional security and
is welcome since it gives India greater strategic space in the region. The maritime dimension of the security relationship will be the most important, dependent as the two countries are on the safety of their extended sea lines of communication (SLOC). This growing security relationship must be managed and constantly calibrated so as to act as a constraint on China without provoking hostile countermeasures. This will require finely nuanced policies from both countries.

Japan has great value for India as a source of capital and high technology. Unlike in the past, Japanese government and business are seriously looking at India as a major investment destination and economic partner. However, there remain concerns over India’s uncertain investment climate, red-tapism and poor infrastructure. Unless these constraints are swiftly addressed, a moment of significant opportunity and a major boost to India’s growth story may be lost.

Korean Peninsula
: In the early 1990s, South Korea overtook Japan in recognizing and exploiting the opportunities created by India’s economic reform and liberalization process. Today, South Korean companies have a major presence in India and their profile continues to expand. Japanese companies are still trying to catch up. South Korea has also emerged as an important source of
sophisticated technology, including in defence hardware. The more recent tensions in China–South Korea relations have also created political opportunities for India, driving a closer security relationship between the two countries.

North Korea has been a source of clandestine nuclear and missile proliferation to Pakistan, with China widely suspected of playing a supportive role. This makes developments on the Korean Peninsula a matter of considerable interest to India. It is also true that any major political disruption on the peninsula, such as the collapse of the North Korean regime, may set into motion major geopolitical changes. A reunified Korea under a democratic and prosperous South Korea would be the best eventual outcome from an Indian perspective. This may be the least preferred outcome for China and perhaps even Japan. A Chinese intervention in North Korea in response to its political collapse may set into motion a much wider confrontation and conflict in the region. This would adversely affect Indian interests as well. Given these possible scenarios, a closer engagement by India on the Korean issue may be worthwhile.

Taiwan
: India has acknowledged that Taiwan is a part of China. Nevertheless, it has, like several other countries, maintained trade and non-official relations with Taiwan. Despite its political isolation, Taiwan has
emerged as a regional economic powerhouse and the source of sophisticated technologies particularly in the information and communications technology sector. India has been slow in taking advantage of the opportunities that Taiwan offers, particularly in its hesitancy in allowing some political- and official-level relations, without inviting Chinese hostility. Yet, given that China itself is permitting ministerial-level exchanges with Taiwan, there is no reason why India should maintain its own relations with Taiwan at a level lower than what China itself pursues.

Taiwan also has value for India as an excellent source of information on China and for pursuit of China-related research and studies. As China’s regional and global profile increases, the value of offshore China-watching centres like Taiwan, Singapore and Hong Kong has greatly increased, since China remains relatively opaque despite its recent openness.

The third pillar of India’s Asian strategy is Central Asia. Unlike West and East Asia, with which India has contiguous land and/or sea access, Central Asia is separated from India by the territory of Pakistan and its illegally occupied territory of Jammu and Kashmir.
Pakistan does not allow access to Afghanistan and beyond to Central Asia through this territory, compelling India to seek a much more circuitous and difficult access through Iran. Nevertheless, Central Asia, in particular Afghanistan, Kazakhstan, Uzbekistan, Tajikistan and other countries in the region, are important to India for reasons of historical and cultural affinity, as potential sources of energy supplies, in particular natural gas, and as markets for Indian goods and services.

Central Asia is also a strategic theatre where Chinese influence is steadily expanding. It is likely to challenge the currently dominant position of Russia in what the latter regards as its ‘near abroad’. For this reason too it is a region of considerable significance for an emerging power like India. The challenge for India will lie in eventually obtaining access to Afghanistan and the Central Asian heartland through Pakistan, even while continuing to improve and upgrade the current transportation link via Iran. Pakistan will need to be persuaded that the negative leverage it exercises against India through denial of transit is outweighed by the positive benefits it could derive through serving as a bridge between India and Central Asia.

India’s integration into the global economy is vital to its continued prosperity. The international context represents a huge opportunity for India. India must recognize both that the foundations of its power will, in a large part, depend upon the economic footprint it will have on the world and that it has more to gain from globalizing its economy than it has to fear. In short, globalization presents India with more opportunities than risks. But at the same time, India has to recognize that those countries gain most from globalization that have put their own house in order.

India’s global economic engagement has to pursue two tracks simultaneously. On the one hand, India has to take advantage of its human capital and become a hub for low-cost manufacturing and services. Our ability to do so will depend upon our domestic laws and regulations, and our
ability to invest effectively in infrastructure and human capital. But there is every reason to believe that with modest reforms and political stability, India can be a very attractive destination for investors in its manufacturing capacity.

But India also has the potential to become a hub for high-end technology and value-added services. The twenty-first century will belong to economies that are at the cutting edge of technological innovation. It is difficult to imagine a technologically innovative economy that is not also an open economy. Competing in the international economy can be a spur to innovation, it can allow easy assimilation of technology and it has the potential of converting India into a research and development hub.

Domestically there will be some losers in the process of globalization. We should by no means overlook this fact. But India has the potential of globalizing in ways that minimize its costs. For one thing, India has to ensure that it does not globalize in a way that artificially represses domestic consumption. Second, some of the gains from growth have to be leveraged by the state to build a social safety net that can mitigate social risk. There need not be any contradiction between globalization and building a social safety net. At India’s stage of development the two are reciprocally connected. Growth will allow safety nets to be built. And social safety nets will in turn ensure
that we are in a position to take advantage of the global economy, and socially better able to weather some of its risks and uncertainties.

While the opportunities for India are immense, we should be clear-eyed about the potential complexities we have to navigate. The global economy is entering unchartered waters. A series of crises in Europe and America, emerging challenges for the Chinese economy, the rise of new competitors in Africa and other parts of Asia, all portend an uncertain decade of adjustment and readjustment. The global economy will see major realignments at different levels. Patterns of trade and manufacturing will continue to shift. The future of the dollar as a reserve currency is open for question. The architecture of global economic governance will be severely contested.

It follows that many of the intellectual premises that have shaped globalization over the last couple of decades will be questioned. Domestic political pressure in advanced economies may lead to more trade and immigration restrictions. The legitimacy of capital mobility will be seriously contested. Different national interests may make it difficult to create a global economic architecture based on consensus. In short, countries may not continue to view globalization as a non-zero sum game.

Internally too, each of the major economies is in a period of adjustment. Europe and Japan face, among other things, the challenge of an ageing population. Advanced economies will struggle to redefine and sustain their social protections. Governments may resort to industrial policy as a conscious policy tool. These patterns and trends are uncertain. But paying closer attention to the domestic policy choices of other countries, and determining how we can capitalize on them by our own policy choices, may afford India huge economic opportunities which could override the challenges posed by uncertainties in the developed economies.

India’s primary strategic interest therefore is to ensure an open economic order. While India has often been accused of being protectionist in the past, current events have left India on the better side of liberalization arguments. Thus, India might end up becoming one of the more prominent supporters of continued economic liberalization (primarily trade in goods and services, and possibly finance as well). India needs to start taking a more active role in bilateral and multilateral forums to ensure that the world economic order remains open. One step in this direction that may be feasible is the establishment of multiple bilateral FTAs, especially with the countries that currently contribute the greatest amount to global growth (Brazil,
China, South Africa, Turkey, Indonesia and Nigeria).

To a certain extent, there is a trade-off between pursuing openness through multilateral institutions and pursuing them through bilateral ones. In many ways bilateral agreements are a ‘second’ best. But they are easier to pursue than complex multilateral agreements. Yet India will need to ensure that its preference for bilateral agreements is not simply because it prefers the easy way out. Multilateral agreements remain an important goal, and will require greater domestic consensus-building.

One strategic reason to maintain a greater emphasis on multilateral forums centres on China. It is very important that China remains tethered to a fair multilateral system, and a rule-bound international order. In that context, India’s own commitments to multilateralism can help to promote a rule-bound system. India’s opting out, or placing less importance on successful multilateral negotiations (even if the short-term costs seem high), may have effects on the whole system. So on a range of issues—currency, trade, finance—India needs to consider its options in the light of these changing realities and imperatives.

Besides trade openness, India will have to push for greater mobility of people. It should possibly take a lead in innovative totalization agreements and tax treaties that
allow movement of labour and human capital. India has a possible advantage in services. India also needs to resist non-trade-related protectionism. A likely backdoor form of protectionism on the part of the developed economies is going to be a push for environmental standards and labour-related regulations. While India should commit to and enforce such environmental regimes and labour standards as are best for its population, it will have to build coalitions against arbitrary restrictions that amount to trade protection in disguise.

India should also formulate policy in relation to cutting-edge areas like natural resource export protectionism. The recent controversy over rare earth materials is just a reminder that natural resource protectionism may become a tool in international negotiations. Further, India needs to take a more proactive role in international regimes to control illicit finance. Illicit flows of funds and money laundering have economic and security consequences. It is in India’s interest to ensure that there is global coordination on bank transparency, money laundering and tax havens.

On questions of the mobility of goods, services, capital and labour, at present India’s restrictions greatly exceed those seen in the median G-20 nations. Hence, the domestic liberalization process continues to be important
and must be pursued, since India gains from unilateral liberalization, and also because India will not be taken seriously in the global debate on an open global order until it achieves above-median openness by the standards of G-20 nations. Notions of reciprocity should not be allowed to interfere with the more purely domestic agenda of removal of trade barriers. At the same time, India’s effective participation in global negotiations on an open world order will require bargaining chips. India will have to make difficult choices about what it is willing to put on the negotiating agenda.

Meeting this set of strategic imperatives rests on domestic political skills and judgements. Ideally all international norms of openness rest on reciprocity. India needs to preserve openness globally—and so it should be prepared to extend that opennesss to the domestic economy. Here, the challenge in our international negotiations has not often been lack of domestic consensus. It has rather been the inordinate veto power given to small lobbies or special interests. Their legitimate concerns need to be taken into account. But these should not be used as a pretext for stalling internal reforms that are vital.

India needs international investment for its own domestic growth. Indeed, India’s investment needs in vital sectors like infrastructure and defence are vast.
Given the instant mobility of global capital, increasingly in search of beneficial investment locations, it is in our strategic interest to attract as much foreign direct investment (FDI) as possible. Such FDI not only serves our domestic needs, but also gives us strategic leverage with other countries.

It is important that India’s FDI policy should be geared to enhancing the domestic knowledge base as well. In areas like defence, leveraging FDI for technology and knowledge access has been tried, but so far with very modest results. Corporate entities (both public and private sector) that enter into large-scale contracts with foreign entities must be able to use the scale of their investments to ensure that India benefits from technology or skills transfer (especially from countries hit by the recent financial crisis). This is particularly true of defence offsets, which have historically focused on low value-added activities. Access to technology and intellectual property issues will also arise in this process.

In the near future, managing India’s current account deficit is going to be a challenge, at two levels. First, no power can grow only by exporting, in the main, services or natural resources. India’s exports need to be more balanced. Second, our own domestic infrastructure requirements are likely to require significant imports.
Indeed, in many of the vital areas of manufacturing, from capital equipment to semi-conductors, India does not have adequate manufacturing capacity. The fact that we need to import can be a source of bargaining. But it is also a source of vulnerability and constrains our options.

We need continuous analysis and engagement with the future of the global monetary system. In particular, the possible decline of the US dollar and the somewhat inevitable relative rise of the Chinese yuan have major implications for how India orients its investment and reserve strategies. What should we be doing with our capital controls and limited convertibility in the long run? India is well positioned in this debate, given that the rupee has become a floating exchange rate from early 2009 onward, and that exchange restrictions have been greatly relaxed over the past two decades. This is a contrast to China and shows India as a responsible participant in the global economy. In addition, this has given India an edge in developing institutional capabilities in both monetary policy and finance. These propitious initial conditions imply that India may have an even better starting point (when compared to China) for policies that would be conducive to the emergence of the rupee as an international currency. Should India be ambitious and go down this route? Or should it let the terms of financial
engagement be exogenously set? To what extent are certain necessary domestic reforms dependent on taking a strategic view of the global monetary order?

India’s own financial sector is of paramount strategic importance. India has been prudent in charting its own path in this sector. Unlike most countries who are net importers of financial services, India is already a significant exporter of financial services and has a potential international financial centre in Mumbai. But we face a basic question: In view of the likely scenarios in the global financial world, what reforms will best position us to take advantage of emerging opportunities? Globally, the financial sector’s recent performance has attracted justified scepticism. As we seek to position ourselves as a financial hub, we shall need to balance prudence with bold innovation, so as to mitigate risks. The range of possible policy choices remains wide. But we do need a national consensus on at least this basic proposition: our choices in finance should not be made purely based on short-term crisis management considerations. They must be based on an understanding of the strategic value of a developed, globally oriented financial sector.

The fact that pressures on imports are likely to remain may also make it tempting to manage current account deficits by encouraging flows of ‘hot money’. But as far
as possible, India should encourage FDI, and not solve structural problems by short-term measures that may carry large costs later. Managing the current account will also require us to be inventive in encouraging new instruments like bilateral currency swaps.

We will need to devise a clear view of what kind of role we wish to play in the international economic order. Very important decisions that we are taking—capital account convertibility, the structure of banking reform, the creation of bond markets, exchange rate policies—are driven by immediate domestic concerns. While this may to some extent be inevitable, it is imperative that we keep firmly in mind the strategic consequences of such choices: Are we a net debtor or a net creditor? Do we have pretensions of having our currency among a basket of reserve currencies? Many policy options will depend on how we answer these questions.

Indian capital is itself rapidly going global. The reasons driving this are complex, but there are clear strategic consequences here too. What, for instance, will be the Indian state’s relationship to Indian private capital abroad? India’s diplomacy will have to be increasingly geared to serve its commercial as well as its other interests.

Our internal fiscal system needs to evolve considerably if it is to support India’s international aspirations. The
goods and services tax (GST), along with full integration of imports and exports (where imports are charged the domestic GST and exports are zero-rated, thus refunding the entire burden of domestic indirect taxation), will make a major difference to trade in goods and services. The shift to residence-based taxation will bring India on a par with the countries of the Organisation for Economic Cooperation and Development (OECD) and all sophisticated emerging markets on the treatment of capital flows, as opposed to the present Mauritius treaty. Special efforts need to be undertaken on appropriate tax treatment of Indians working abroad for part of the year, and on non-residents working in India for part of the year.