While last week’s border skirmishes between India and China sent commentators rushing to Google Maps to locate obscure mountainous locales, the jousting in the Himalayas may prove to be a geopolitical inflection point. On strategic affairs, New Delhi and Beijing have long been at loggerheads, but the former has attempted a tightrope walk of cozying up to the West without alienating the communist regime. That may be about to change. In the wake of the brutal killing of at least twenty Indian soldiers by Chinese forces wielding a medieval mix of stones, clubs, and nail-studded rods, India might be forced to rethink its longstanding policy of strategic hedging.
It's the Economy, Stupid
Yet the foreign policy impact of last week’s high-altitude encounter will turn less on India’s diplomatic and defense maneuvers than on simple economics at home. India’s ability to project power abroad, protect its homeland, and assemble and sustain meaningful partnerships depends on the capacity of India’s political leaders to quickly and competently get its economy back on track. The foreign policy crisis consuming the government of Indian Prime Minister Narendra Modi in the wake of the border clash—as real and raw as it might be—cannot be resolved unless India first fixes its economic emergency.
The stringent coronavirus lockdown Modi imposed in late March imposed severe economic costs on India’s 1.3 billion citizens. HSBC India projects that India’s gross domestic product will shrink by 7.2 percent this fiscal year. But perhaps more worrying is the bank’s assertion that trend growth in India, as high as 7 percent just three years ago, has slumped to a ho-hum 5 percent.
In other words, even if India were to emerge quickly from the shadow of the coronavirus (this is a big if, given that its caseload is unlikely to peak until August), the economy’s pre-existing conditions will impede forward momentum. Even before the pandemic, India was in the midst of a protracted economic slowdown, with growth sagging to an eleven-year low of just 3.1 percent in the quarter ending March 2020. And even this meager figure is itself likely overstated, India’s former chief economic advisor Arvind Subramanian has argued that India’s GDP growth rate could be exaggerated by as much as 2.5 percentage points.
For the better part of a decade, India has been struggling to resolve a knotty twin balance-sheet crisis. Infrastructure and natural resource companies (such as those involved in construction and mining) were saddled with a noxious debt hangover, while the books of the country’s public sector banks were riddled with a troubling share of non-performing assets (NPAs). With access to credit choked, the shadow banking sector rushed in to fill the void, only to find itself beset with the same charges of dodgy lending.
The economy hobbled along, driven by government expenditure and private consumption. These twin engines are now running on fumes. India’s combined fiscal deficit is on the order of 10 percent of GDP. Government revenues have collapsed, thanks to the patchy rollout and convoluted design of the Goods and Services Tax (GST) and a risky corporate income tax cut. Consumption too has gone for a toss; in 2019, leaked government data showed consumer spending falling for the first time in over four decades—leading the government to junk the survey in an effort to bury bad economic news. Exports, booming during India’s heady years of the 2000s, have sunk as global trade headwinds have intensified.
What’s Next?
How can New Delhi get the economy back on track? First, India must ensure that the economic slowdown does not careen further into a humanitarian crisis by expanding access to the food security net, increasing health spending, and addressing the dire situation faced by tens of millions of internal migrants fleeing big cities.
Second, India should act decisively to clean up the residue of toxic assets encumbering private investment activity. In 2017, the government’s flagship Economic Survey recommended the creation of a bad bank to ease the NPA burden on banks; three years later, this idea is finally under consideration. An asset quality review of largely unregulated nonbanking financial companies must follow.
Third, the Modi government must rediscover the promise on which it first sailed to power in 2014: maximum governance, minimum government. The last six years have seen scarce progress on administrative reforms; in a weak state like India, the objective is not to shrink government per se, but to shrink government paperwork. The recent decision by some state governments to reform archaic labor laws signals positive intent, but they must not confuse the removal of stifling hiring and firing practices with the elimination of workers’ basic protections.
India’s citizens are repelled by China’s recent aggression, which represents the culmination of a series of expansionist measures that have silenced even New Delhi’s most reliable China backers. While India’s foreign policy mandarins debate a reorientation of the country’s strategic posture, it is the economy that demands priority attention. After all, as a common refrain in India goes, the best foreign policy is 8 percent growth.
Comments(11)
Vaishnav is right on the mark. AsNehru is reported to have said: "There is indeed justice in the world, but you have to be strong enough to get it." This was the hallmark of the Chinese strategy when it decided in the late-1970s to open up its economy. Hope Modi takes Milan's advice to heart.
Nehru only talked... Chinese showed. Congress weakened and corrupted India all along. And why Carnegie for peace is interested in politics? All too shady!
It is a tough balance for India to achieve where on one hand India has to keep on changing and opening to grow economically and on the other hand to ensure that its progress keep secure borders and country stable from interference of foreign powers namely China and Pakistan. I think to achieve a stable growth of it Economy, India has to start seriously open to Western countries as well as USA mainly to create deeper trust. That can guarantee a active US involvement into Indian defense.
All very good suggestions which are well known to those concerned with India. There are many more measures which need to be taken to improve the economic growth rate and attract more productive investments. Governance in all institutions and sectors need tremendous strengthening as detailed by Dev Kar in his recent book : India : Still a Shackled Giant, Penguin India 2020. But this is going to be a gradual process even if the transformation is revved up by strong political leadership. Modi is strong but his associates can behave dysfunctionally , putting his leadership in collision with state governments. Modi needs to rethink his political stance vis-a vis state leaders and establish a collaborative relationship to implement reforms. India is a decentralized economy with the central and state governments sharing power and Modi cannot rule by decree or impose change without consent and support of the state governments. Building a mutually collaborative relationship is the bedrock of reform in India. India must strengthen its defense capabilities simultaneously with the economy. This is a true chicken and egg question but India cannot wait until the resources are available for defense investment. One way would be to plan and strategize better and invest resources on capabilities needed to counter the Chinese threat. It is unlikely that China will launch a full scale war with India over border conflicts but can escalate to inflict more damage. India needs to position satellite technology to look over China's troop movements and position Russian anti missile technology to counter Chinese air threats. At the same time to deal with savage warriors , it should upgrade its training of soldiers for hand to hand combat. Gurkha soldiers fighting with Kukris are formidable mountain fighters and need to be brought into action. Indian soldiers should be provided and trained with suitable weaponry , short of arms, to counter Chinese thugs. This could include high power hand held tasers and other chemical spray weapons. These don't require huge financial outlays. India has the resources now to fight back China's border attacks , but obviously in the long run it will need to get its economy going to invest in competitive weaponry. Russia is a country with a relatively weak economy compared to both the USA and China but it has a military which neither can take on without a risk of major losses and no surety of winning. Perhaps this is an example which India needs to adopt militarily , not of course its political or economic systems.
India sent a midnight taskforce to raid Chinese positions and criedwolf when they got trounced. Had China attacked Indian army posts India would have unleashed an artillery barrage.
Very apt analysis and pragmatic suggestions. Congratulations Milan - Vipin Tripathi
The reality remains that India cannot compete with China in any way. Militarily, industrially, economically or politically China beats India every time. As such, China is 5 times larger economically and spends 4 times more on military. It produces every kind of product at great prices. India produces few goods that the world wants in an open market and most are shoddy at best. Plus, the rabidly Hindu nationalist Modi government has completely mismanaged the economy and instead placed emphasis on bigoted Hindu supremacist policies thst discriminate against minorities, especially Muslims. It has left its economy in tatters, mismanaged the coronavirus response, wrecked India's international reputation and prevents India from competing with any power!
Following up on my initial comments, for India to compete with China, India needs to build its manufacturing capabilities which trails far behind China's. Computer and artificial intelligence coupled with advanced manufacturing technologies has allowed China to propel ahead of most countries in both consumer and defense goods.. This is the area where GOI and the private sector have to work together to build up so that India can manufacture advanced defense systems including drones. Indian engineering universities also lag behind China's in teaching advanced robotic manufacturing technology. India must invest in these areas if it is to counter China successfully in the long run.
True. But India has to prove itself. To achieve all you have mentioned, Indian Military has to show to the region and the world that it can solve its defense and internal security matters as and when it originates. The message has to be clear. I can go back to Romans to how power were made and kept and it is sending a clear message. China and Pakistan will keep on destabilizing India till then. It is in their interest. Once that message is clear, India as to built itself internally to send a message that India is not just owned by Tatas, Birlas, Gandhis and Ambanis but any common India can have a dream and system is their to give them a fair chance. India has human resources and I hope we realize that it is a great asset if used properly.
The promise of India as a balance to China is vastly over-hyped. India is decades behind of where China is today in 2020, and worse yet for India, the gap is growing rather than narrowing. Part of India’s predicament is of its own making: an irrational belief that Modi alone can solve the deep structural problems of India, when in reality he has done little to make India more attractive, and has instead blurred the moral distinction between Beijing and Delhi. For example, while the world rightly criticizes Chinas actions in Hong Kong, it absolutely pales in comparison to what India has done in Kashmir over the past year. And while Indian pundits foretold of great riches for their country as a result of the US-China trade war, India’s non-oil exports actually dropped, while Bangladesh and Vietnam took the majority of growth. And lastly while much is made of China’s disputes with its neighbors, India isn’t on great terms with its own neighbors. It blockaded Nepal for 5 months in 2015 after expressing anger at Nepal’s constitution, while it recent has angered Bangladesh by repeatedly terming Bangladeshi migrants as termites. Even in Afghanistan, there were large scale protests against India in the wake of widespread anti Muslim violence in Delhi fanned by the ruling party.
India should steal all the technology that China has stolen through forced technology transfers and by economic espionage by the Chinese did to the West. They have a huge economy thanks to the things learned from stealing technology. We should do it too. We need technology in India as well.
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