India Transformed

by Rakesh Mohan

  As pointed out earlier, the global financial and economic crisis has altered major power relations. Europe has turned inwards and remains preoccupied with multiple crises. Its economies remain stagnant, even as social stresses and strains begin to spawn ultra-right and xenophobic sentiments across the continent. Extremism among its deprived Muslim communities is becoming a worrying threat. These negative trends may worsen if economies continue to stagnate and unemployment remains high. In 2004–05, India and the EU forged a very strong strategic partnership based on their shared values of multi-ethnic, multicultural, multi-religious and multilingual plural democracies. Each side had a stake in the success of the other and India looked upon a strong, united Europe as a pole of its own right in the global order. That has changed in the past decade, thanks to the Eurozone crisis, which has muted the voice of Europe in international affairs. The crisis has also led to the independent power and influence of Germany, which is now indisputably the strongest power in Europe. This has its own implications for the future of Europe. Some analysts see the crisis in Ukraine as a not too subtle attempt by the US and the UK to rein in Germany and retard its growing engagement with Russia. There is no doubt that the West is divided over how to deal with Russia. Few wish to return to the dangerous tensions of a renewed Cold War in Europe, but there is also legitimate apprehension over Russian intentions.

  Both in Europe as well as the US, we are witnessing a wave of anti-globalization and anti-immigrant sentiments, which is also tinged with rising xenophobia. This has already manifested itself in the positive popular vote in June 2016 supporting ‘Brexit’, or Britain’s exit from the EU. It is also manifest in the election of Donald Trump as President of the US in a presidential election campaign marked by open advocacy of regressive and insular policies with relentless demonization of immigrants. These negative trends will adversely impact India’s economic prospects, in particular, its expanding IT services exports.

  For India, the Ukraine crisis that erupted in 2014 and led to a serious worsening of relations between Russia and the West has introduced a new element of discomfort as it seeks to maintain its residual relationship with Russia, without impacting its growing partnership with the US. It is also uncomfortable over the tightening embrace between Russia and China, which can only work to India’s disadvantage. In provoking the crisis over Ukraine, the US does not appear to have thought through its incompatibility with its pivot to Asia, which is directed towards countervailing growing Chinese power. In the US–China–Russia triangle, it is China that now holds the levers, not the US as hitherto. The Trump presidency initially seemed to promise an improvement of relations between the US and Russia, but allegations that Russia may have interfered in the US election process and that there were unreported contacts between Trump’s campaign staff and Russian officials appear to have frozen any prospect of easing tensions between these two major powers. This can only reinforce Russian dependence on China for political and economic support.

  The Ukraine crisis has become interlinked with another recent trend— that of falling oil prices. The sharp and unexpected fall in oil prices is attributed to over-supply, particularly from shale oil production in the US. However, there is a geopolitical element here as well. There appears to be a tactical understanding between the US and Saudi Arabia, which is the most influential ‘swing’ producer of oil, to drive oil prices down in order to penalize Russia as also to put pressure on Iran, both of whom depend heavily on oil revenues for their economic well-being. The current glut in the oil market is a temporary phenomenon. The growth in demand for oil is currently 1 million barrels of oil per day, but the extent of replacement of declining oil production in existing fields is about 5 million barrels per day. Furthermore, each barrel of replacement oil is more costly to produce. Therefore, most analysts expect that oil prices are bound to rise sooner rather than later. Therefore, if Russia can tide over its current crisis over a year or two, which appears likely, then it will re-emerge as a key energy player again with all the influence that this could bring to it.

  The implication of this for India is that it should not assume a prolonged decline in oil prices in drawing up its long-term energy strategy. However, this temporary phase of low prices should be leveraged to reform energy subsidies, acquire oil and gas assets abroad at more favourable prices and continue with a long-term strategy to bring about an accelerated shift from its current reliance on fossil fuels to an economy based progressively more on renewable and clean sources of energy such as nuclear energy.

  India’s energy security concerns are nevertheless currently tied to the situation unfolding in the Gulf and West Asia. Any major political upheaval in the region is likely to interrupt energy supplies to India, with negative consequences for our future prospects. The diversification of supply sources away from the Gulf is, therefore, an urgent necessity as is the need to ramp up domestic production. The Iran nuclear deal, arrived at in early 2016, has been one positive development in an otherwise bleak landscape in the region. It has opened up new opportunities for India in one of the most important countries of the Gulf. The Modi government has also undertaken bold new initiatives to upgrade India’s relations with the Gulf countries, including Saudi Arabia and the UAE, the two countries that are both key oil and gas producers and that also play host to a substantial Indian diaspora.

  Another related contingency to plan for is the impact of any political turmoil in this region on the welfare of the over 6 million Indians who live and work there. As was apparent during the abduction of Indian nurses and workers by ISIS in Iraq, expat Indians are very vulnerable to shifting political changes in the region, and India has few instruments of influence available among countries in the region. The evacuation of a few hundred Indians during a crisis is a major operation. If larger numbers are affected, India’s own resources can be easily overwhelmed.

  The other dimension to consider is the sharpening of the sectarian divide in the region and its fallout on our own Muslim population. There is also the need to carefully study the attraction of ISIS for young Muslim men and women across the world, including India. While ISIS is described as being medieval in its mores and conduct, its appeal for young men and women appears to lie in, paradoxically, the opportunity it offers to break away from the conservative and repressive code of traditional Islam. For young women living together as ‘temporary wives’ of ISIS fighters, this can be a liberating experience rather than a relapse into repressive medievalism. This aspect has somehow been missed in the discourse over ISIS. Asking conservative family elders to warn their children against the barbarity and un-Islamic conduct of ISIS is unlikely to work, if the point of attraction lies elsewhere. It is by encouraging a more liberal and accommodating Islam, such as that which prevailed before Wahabi influences crept into the subcontinent’s Muslim societies, that the lure of ISIS may be confronted.

  If there is one geopolitical crisis that could derail India’s prospects and impact its social cohesion and plural culture, it is the very real likelihood of the current turmoil in the Gulf/West Asia spreading to the sheikhdoms and to Saudi Arabia. Planning for this contingency should be a priority in our national security strategy.

  One does not envisage much change in India’s China strategy. It will continue to be a mix of both engagement and competition, with a precise mix varying according to the changes in the regional and global situation. There was an expectation that with both India and China now being headed by strong leaders, Narendra Modi and Xi Jinping respectively, there may be a window of opportunity to seek a political resolution of the long-standing boundary dispute. This has not happened. The key question is on what terms and conditions the dispute could see resolution. To be politically acceptable in India, it would have to be a Line of Actual Control (LAC) plus solution. China’s current posture does not appear to hold out a possibility of such an agreement in the foreseeable future. There is also the lingering issue of Tibet, which hangs over the relationship. Therefore, managing the
dispute through confidence-building measures, reducing its salience in the overall relationship and continuing the practice of regular engagement at the summit level will all contribute to the relationship remaining stable despite its essentially competitive underlay. A strong set of diversified relationships with major powers, in particular, the United States, gives India greater room for manoeuvre vis-à-vis China rather than provoking its hostility. As long as India refrains from becoming a member of an anti-China military alliance, China has more to gain by increasing its engagement with India than by confronting it. It is inevitable that each side will continue to develop relations with the other’s neighbours. For India, the strategy has to include delivering on the stated priority to our subcontinental neighbourhood so that we do not leave spaces that China or others can take advantage of.

  India and China have expanded their cooperation in areas of convergent interests. As members of BRICS (Brazil, Russia, India, China and South Africa) and now of the Shanghai Cooperation Organization (SCO), China and India have platforms for closer economic and political engagement. India decided to join the Asia Infrastructure Investment Bank (AIIB) launched earlier this year by China and the two joined hands to launch the BRICS Development Bank, which is headed by an Indian. These new financial institutions could become important sources of finance for India’s own infrastructure development.

  India confronts a new challenge in the OBOR initiative launched by China, which seeks to invest the country’s surplus capital in creating modern transport and communication infrastructure and logistic hubs linking Asia and Europe both through the land and maritime routes. On the one hand, such infrastructure would also be available to India for its own expanded regional and global economic engagement. On the other hand, once in place, OBOR will also substantially reinforce China’s security reach. Nearer home, the CPEC, which is part of OBOR, traverses POK, which India claims as its sovereign territory. This has already led to tensions both with Pakistan and China, and India declined to attend the recent launch of the OBOR in Beijing.

  Main Trends to Watch Out For: The Way Ahead

  One, we have entered a new phase of a renewed great power rivalry and incipient confrontation, which presents India with a more complex and polarized international environment. This could limit the country’s room for manoeuvre but may also create opportunities for India to expand its own strategic space. The more successful India is in sustaining economic reforms and accelerating its growth, the more it would be able to expand its regional and global profile.

  Two, the global financial and economic crisis, which still has to run its course, has made the international economic environment less supportive of India’s development ambitions as compared to the two decades following the end of the Cold War. Protectionist trends are gaining strength, which may marginalize India and push it to the periphery of the global economy. While external trade and investment will remain significant, the key drivers for growth may have to be domestic. The adoption of GST is a significant reform, creating a more integrated national market for the first time.

  Three, India could face a major crisis as a fallout of intensified political turmoil and sectarian conflict in the Gulf and West Asia, with few levers available to influence events. This would be in the nature of a more immediate challenge. Managing the rise of China would qualify as a more long-term challenge. The country needs an overall strategy to cope with both these security challenges.

  The key asset that India could leverage is its potential to emerge as the world’s fastest growing major economy as China’s own growth decelerates. A period of sustained and high rate of growth would enable India to move towards the centre of the global economy from the margins and be able to negotiate from a more favourable position. This would also expand India’s options in its foreign relations both in the region of Asia and beyond. This was certainly our experience in the aftermath of the adoption of the first generation of reforms, particularly in the peak growth years of 2004–07. India’s economic performance and its undoubted potential for accelerated growth in the future enhanced its foreign-policy options. Conversely, when the growth trajectory slumped in the subsequent years under the impact of the global financial and economic crisis of 2007–08 and several missteps in the management of the economy thereafter, India’s regional and global profile too diminished. It is only after the election of Narendra Modi as prime minister in 2014 and the expectation of far-reaching second-generation economic reforms that there has at least been a perceptional change about India’s economic prospects and its potential to play a greater role regionally as well as globally. These second-generation reforms need to be directed towards the market pricing of resources, the elimination of regulatory and bureaucratic rigidities and creating a predictable, efficient and market-friendly economic environment. India needs a steady infusion of capital and modern technology to sustain high rates of growth, and this is where foreign policy can create new opportunities as well as support expanded economic engagement with potential partner countries.

  India’s growing economic and security profile finds greater acceptance regionally and globally, as it is perceived as a non-threatening and benign power. This is a major advantage compared to China, whose rise is already creating anxiety and concern both in its periphery as well as among major powers. India must continue to retain this perceptional advantage through diplomacy.

  The priorities set forth by the Modi government and the initiatives it has taken so far reflect some of these elements. There are no major departures from the direction set by the previous governments in the post–Cold War era, but there is a more determined and energetic pursuit of the objectives set forth already. There will, however, be the need for some course corrections and fresh initiatives as the international environment becomes a more contested space and the frequency and salience of regional and resource-related conflicts increase.

  9

  Security and Sovereignty in an Open Economy: New Thinking after 1991

  Sanjaya Baru

  The 1990s brought about an important shift in the thinking on national security: India started viewing power in economic rather than military terms.

  The year 1991 marked a turning point for India, but not just on an economic front. In that landmark year, there was also a shift in thinking regarding the role of defence spending in national security and, more importantly, the relative importance of development and human (social and economic) security in national security and stability. In 1991, the Republic of India was still a young nation, having been constituted less than half a century earlier. Much policy attention was still focused on national security and integrity. Many new nations formed in the middle of the twentieth century had not survived their teething years. The Soviet Union was on the verge of collapse, despite having emerged as one of the post-war ‘superpowers’. In the midst of a fiscal and balance-of-payments crisis, India learnt its lessons quickly.

  At least three factors contributed to the new thinking on national security. First, the fact that the fiscal and balance-of-payments crisis of 1990–91 was in part triggered by a sudden increase in defence spending and defence imports in the second half of the 1980s; second, the implosion of the Soviet Union under the weight of its economic weaknesses, partly on account of excessive investment in defence and inadequate investment in economic capabilities; and third, the incipient rise of China, based on a more open economic model, mimicking the export-led industrial strategy of much of East Asia.

  I. Defence Spending and the 1991 Crisis

  In the 1950s, when the country’s focus was on economic development and the government of Jawaharlal Nehru did not apprehend any major external threat to national security—despite the early provocation by Pakistan in Jammu and Kashmir—defence spending remained modest. It was less than 2 per cent of the gross domestic product (GDP) through the 1950s. The border conflict with China in October 1962 forced India to increase its defence spending. In the three years following the conflict, defenc
e spending averaged 3.5 per cent of GDP. Over the next two decades, from 1966 to 1986, the annual average defence spending to GDP share remained around 3 per cent, in the range of 2.75 to 3.25 per cent. In the three years after that, it once again exceeded 3.5 per cent of GDP, rising to a high of 3.59 per cent in 1987–88, and then fell below 3 per cent. It has remained well below that over the past two decades (see Table 1).

  Table 1: Trends in Defence Spending

  Year

  Defence Expenditure

  as Percentage of GDP

  (annual average)

  Defence Expenditure as

  Percentage of Central Government

  Expenditure (annual average)

  1961–62

  1.69

  19.61

  1963–66

  3.50

  23.70

  1967–71

  2.80

  22.87

  1971–73

  3.28

  22.20

  1973–83

  2.97

  19.17

  1985–89

  3.41

  16.10

  1991–96

  2.52

  14.23

  2000–01

  2.36

  15.24

  2005–06