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How prospects for global economic growth influence Indias foreign policy
Article Type: CEO advisory From: Strategy & Leadership, Volume 42, Issue 2
Indias rapidly growing economy, now projected to be the worlds third largest by 2028, is spurring analysts to rethink the once commonly held view that the prospects for this giant were marginal. Given this re-evaluation, understanding Indias foreign policy ambitions as it increases its global presence will be a requirement for business, government and academia.
A historical context
Indias current growth potential needs to be considered in a historical context. Post-independence India, suffering from endemic poverty, and fettered by an inward looking economy, was long seen as a complex and problematic state, with few potential rewards for international business. The first Prime Minister Nehrus policy of peaceful co-existence, designed to keep India out of the Cold War, often translated into a policy of relative international isolation.
Indias regional economic links were equally poorly developed. Despite early hopes for trade with post-revolutionary China, a 1962 border war, along the unmarked Himalayan common border in Indias North East, which China easily won, led to a long stand-off that is only now beginning to thaw. Chinese imports from India, though up strongly in 2011, are still relatively low, with an almost US$30 billion trade imbalance in Chinas favor. Relations with China remain poor and anti-Chinese rhetoric is common in political life.
Also dimming regional economic prospects, Indias three wars with Pakistan, its next biggest neighbor, have left an on-going legacy of distrust and low-level conflict, over Kashmir in particular. Moreover, Pakistans close military relationship with the US also meant that Indian-American relations remained very poor and underdeveloped well into the 1990s, further diminishing Indias global economic reach.
The opening up of the Indian economy in the 1990s and the relatively consistent GDP annual growth of close to 10 percent from 2003 has changed many perceptions of India. There remain many skeptics however, both inside and outside India, who do not believe that India has the strategic capacity or resources to become a significant international power. The sharp decline in the rate of GDP growth in 2012 leads some commentators to conclude that the annual growth will even out at about 4 percent, not enough to sustain Indias upward trajectory given its population growth.
The skeptics also see evidence of resistance to Indias growing engagement with the world economy in nationalistic debates around a possible free trade agreement with the EU. Opposition has centered on a few key issues. EU demands for patent protection for seeds and other agricultural resources is highly controversial in a country where there are so many small farmers. EU opposition to Indias emerging generic drug industry is being equated by the Indian press on a par with the pharmaceutical industrys earlier failed attempts to restrict access to cheaper HIV medicines in Africa. Additionally, greater foreign investment in the insurance sector and proposals for reductions in import duties on items such as cars and car parts are being resisted by domestic business interests.
Globally focused despite the challenges
Though observers should not over estimate Indias new potential, it would be a mistake to allow Indias historical problems of poverty and population growth to dominate the near-term outlook. There has been a significant strategic shift in Indias international perspective which is likely to continue to direct the policy choices made by its national leadership, no matter which likely combination of parties is in power at central government after the 2014 national elections.
For example, the internationally focused service sectors in the cities of Bangalore, Hyderabad and in the Eastern suburbs of New Delhi need India to be part of a global trade system. Their customers and potential customers are global and they are increasingly part of complex multinational logistical chains. A protectionist India is not an alternative economic model for these companies.
Larger domestic businesses need also to look to international opportunities for growth opportunities. Their most prosperous local market segment, some 350 million domestic Indian consumers at the top of the income pyramid, is not as attractive as it appears, given how low the income threshold for “middle class is in the Indian context. In addition, state governments in India have significant powers over local taxation and regulation of goods, meaning that there is no way to access an Indian market of 350 consumers, much less a national market of 1 billion citizens. The problem is that state governments impose distinctly different controls, standards and taxes and also restrict inter-state movement of goods. Worse, there is heavy reliance on road checks at state boundaries to prevent tax avoidance. This leads to long delays and increased costs on some routes. Nandan Nilekani, one of the founders of Infosys, highlighted how weak infrastructure and the bureaucratic delays when transporting goods across internal state boundaries made expansion of domestic businesses extremely difficult. Such internal barriers to trade have the perverse consequence of making international trade comparatively more attractive to small and medium-sized enterprises.
Trade and capital flows
Indias export growth in recent years reflects this change in focus from the domestic economy to international trade and investment. Indias exports have grown from below US$50 billion in 2000 to over US$300 billion by 2012. Exports now make up a more significant share of GDP – up from 13.4 percent in 2007 to 16.3 percent in 2013.
In recent years, India has dealt with the economic downturn in Europe and North America by diversifying. For example, Asia, including the Gulf, now accounts for over 50 percent of Indias exports, up from 43 percent in 2003. Africa has grown from 6 to 10 percent of Indian exports in the same period. This is a relative change, however, as trade with the EU and US also continues to grow, if at a slower pace. If trade between India and all EU member-states is combined, the EU is Indias largest export market, just ahead of the UAE and the US. All of these trends continue to make government and business more committed to Indias integration into the global economy.
Foreign direct investment (FDI) flows are creating similar pressures. FDI into India has slowed a little in 2013, but from a base of US$4 billion in 2000, inward FDI peaked at US$45.5 billion in 2011-2012, only falling back to US$36.8 billion in 2012-2013. India also remains very attractive to foreign institutional investors who provided over US$27 billion of total FDI in 2012-2013.
India is a growing source of outward FDI, which has grown from US$600 million in 2000-2001 to almost US$30 billion in 2012 (Export Import Bank of India). A 2011 UNCTAD report placed India as the twentyu-first largest source of FDI in the world. In terms of value of cross border acquisition deals, India was fifth in the world after the US, Canada, Japan and China. Indian acquisition deals also tend to be large ones; it is second only to China for the average size of net purchase deals. All of the standard reasons for FDI outflows are present in Indian companies transactions – seeking natural resources, seeking access to high technology and trying to improve market access for Indian MNCs. All of these challenges will require the support of an Indian government strongly focused on enhancing its global position.
Opening the retail sector
In the retail sector, despite high-profile political opposition to liberalization and a drawn-out public debate, ultimately legal changes were approved that allowed large multinationals limited access to the Indian market. In a landmark case, Tesco announced in late 2013 that it had received government approval for an €80 million investment plan in conjunction with Indian giant Tata. Its expansion will be slow due to continued restrictions, but even in this most sensitive sector the Indian government is now clearly moving towards the opening of the economy.
Finally other aspects of Indian foreign policy offer evidence of a more international focus. For example, India sets a high priority on seeking a permanent seat on the UN Security Council. And though India is certainly resistant to international carbon dioxide limits, that stance reflects its phase of development and its very low per capita CO2 outputs. On balance there is little in Indias broader foreign policy goals that will restrict its desire for greater integration into a neo-liberal world trading system.
Challenges remain and Indian political parties of all sorts remember that the Indian Peoples Party (BJP) lost office despite the economic boom in 2004, as their campaign slogan “India is shining angered the many millions who did not see this reflecting their daily reality. The on-going high levels of poverty and inequality mean that the greater integration into the global economy needs to be matched by a mandate to expand access to education, as well as increased social programs and internal distribution of income. However, such goals will not likely shift Indias focus back to a domestic and protectionist vision. Indias share of global trade and investment is rising and its growing population is increasingly seen as a source of power and talented labor rather than just a social challenge.
Director of the Institute for International Conflict Resolution and Reconstruction and Executive Dean of Dublin City University Faculty of Humanities and Social Sciences (firstname.lastname@example.org). He is Editor of Irish Studies in International Affairs. His advisory is based on a recent lecture inaugurating the Ireland India Institute at DCU.
1. Some researchers that use a purchasing power parity measure see India becoming the world s third largest economy this year! See recent reports on Indias comparative performance. http://www.cebr.com/reports/cebr-world-economic-league-table/ or www.forbes.com/sites/kenrapoza/2011/09/21/india-likely-to-replace-japan-as-worlds-third-largest-economy/
2. Nilekani, Nandan (2008), Imagining India: The Idea of a Renewed Nation. London: Penguin Books.