India Rising – A Foreign Police Special Report

From the economy to Afghanistan to grand strategy, six looks at an emerging superpower.

NOVEMBER 5, 2010

It’s been a tough week for Barack Obama, who is reeling from a crushing midterm election defeat, yet more bad economic news, and a domestic agenda under assault. No doubt the U.S. president is thrilled to be leaving Washington Friday on a 10-day tour of Asia, where he’ll be welcomed by four democratic countries that are nervously watching the foundations of American supremacy crumble before their eyes, while China’s growing economic swagger and military might shakes up the region’s balance of power.

Of these four — India, Indonesia, Japan, and South Korea — it’s India that inspires the most hope among American strategists. Yet for all the talk of “natural allies,” and despite all the excitement about India’s emergence as a 21st century superpower-in-waiting, Washington and New Delhi haven’t managed to tie the knot. Over the last two decades, economic and security ties between the two countries have blossomed, but deep differences of opinion remain. Will this be a watershed moment? Or another missed opportunity?

To find out, FP turned to some of the world’s top experts on South Asia. Here’s what they told us.

India’s Strategic Future

Why India needs to move from “strategic autonomy” to strategic cooperation with the United States.

BY C. RAJA MOHAN | NOVEMBER 4, 2010

Unlike in Washington, where governments are noisy in articulating their worldviews, for the permanent bureaucracy that runs New Delhi’s foreign policy, silence is golden. But Delhi’s reluctance to articulate a grand strategy does not necessarily mean it does not have one. Since India embraced globalization at the turn of the 1990s, many of its traditional strategic objectives have evolved, and the pace of that evolution has gathered momentum as India’s economic growth has accelerated in recent years.

Yet the United States remains unclear about its potential ally’s goals and objectives. Despite significant advances in Indo-U.S. relations during George W. Bush’s presidency and bipartisan agreement in Washington to support India’s rise, Barack Obama’s administration has found it hard to make big strategic advances. U.S. officials dealing with Afghanistan and Pakistan seem to find India — and particularly its reluctance to offer concessions on Kashmir that might presumably encourage Pakistan to cooperate more thoroughly in Afghanistan — part of the problem. American negotiators on climate change and trade find the notorious prickliness of the old non aligned India alive and well. And the Pentagon is frustrated in its efforts to build a partnership with a New Delhi that resists cooperation on U.S. terms. But American strategists should take heart: If Washington can be patient, endure an extended courtship, and above all take a longer-term view of the relationship with Delhi, it will find much to like about India’s foreign policy.

The problem for India’s top strategists is not that they don’t seek a grand bargain with the United States. It is about negotiating equitable terms. It is also about bringing along a political elite and bureaucracy that are adapting too slowly to the new imperatives of a stronger partnership with Washington. But make no mistake: Engagement with the United States has been the Indian establishment’s highest foreign-policy priority over the last decade and a half.

India’s grand strategy has four broad objectives. In all four areas, strategic cooperation with the United States is critical.

India’s first objective is to pacify the northwestern part of the subcontinent, or the AfPak region, as it is known in Washington. All of India’s great empire-states  throughout the last 2,500 years, from the Mauryans to the British Raj, have had trouble controlling these turbulent lands across the Indus River that frame the subcontinent’s western frontier.

Indeed, ever since Alexander the Great and his army first arrived on the banks of the Indus, most foreign forces and alien ideologies have come to what is now India through the northwestern route. In the past, India managed to absorb the invaders and modify their ideologies. All it needed was sufficient time. But weakened by the subcontinent’s partition in 1947 and faced with U.S. and Chinese support for Pakistan during the Cold War, India has had little time and space to manage the conflict with its troublesome sibling to the northwest.

American commentators often discount the threat that Pakistan’s military poses to India. Indian strategists don’t have that luxury. Armed with nuclear weapons and allied with radical Islam, the Pakistani Army remains extremely dangerous — a situation compounded by America’s current dependence on Islamabad to pursue its objectives in Afghanistan and in the tribal areas across the border.

The challenge for India is not just about managing its differences with U.S. policies in Afghanistan and Pakistan. New Delhi has no choice but to work with Washington to stabilize its northwest. That in turn involves encouraging the United States to think very differently about Pakistan and its relations with Afghanistan and India. And that demands getting the United States to pressure the Pakistani Army to end its promotion of extremism in Afghanistan and India.

Both New Delhi and Washington want to move the AfPak region toward political moderation, economic modernization, and regional integration. Neither can achieve these objectives on their own. But they have so far failed to have an honest discussion about how to move forward together, let alone begin coordinating their policies.

India’s second objective is to become an indispensable power in the littorals of the Indian Ocean and southwestern Pacific. For nearly two centuries until partition, the British Raj was the source of stability and the main provider of security in these regions. But after independence in 1947, India chose an inward economic orientation and focused on the global mobilization of the Third World during the Cold War. Not surprisingly, India resented the dominance of the Anglo-American powers in its strategic backyard.

As the power of a rising China today radiates across the subcontinent, the Indian Ocean, and the western Pacific, balancing Beijing has become an urgent matter — especially given the relative decline of the United States. In the past, India balanced Beijing through a de facto alliance with the Soviet Union. Today, it needs a strategic partnership with the United States to ensure that China’s rise will continue to be peaceful. With Washington yet to make up its mind on how best to deal with Beijing, India has no option but to hedge against growing Chinese power as well as the dangers of a potential Sino-American condominium. This necessarily involves nuanced bilateral economic and political engagement with China, albeit with eyes wide open.

Meanwhile, New Delhi’s focus is on China’s neighbors. India is holding on to its old partnership with Moscow, stepping up its economic and security cooperation with Japan, South Korea, and Mongolia, and raising its economic and strategic profile in Southeast Asia and Australasia.

India’s third objective is to increase its weight in global governance and eventually emerge as a “rule-maker” in the international system. In that sense, India’s civil nuclear initiative with the Bush administration was as much about producing electric power as it was about redefining India’s position in the global nonproliferation regime. But U.S. support for India’s bid to become a permanent member of the U.N. Security Council has been elusive. The United States, instead, wants to test whether India is a “responsible stakeholder” in the negotiations on issues ranging from climate change to international trade. From India’s perspective, these American benchmarks have tended to be self-serving and defined by the latest intellectual fashion in Washington. India is prepared to engage on these issues and participate more fully in global decision-making bodies on the basis of its own enlightened self-interest, but is not prepared to take tests from anyone.

India’s fourth objective is to strengthen the factors that are critical for becoming a credible power on the regional and global stages. This involves sustaining its current high economic growth rate, consolidating its advantages in knowledge industries, providing education and skills to its younger population, and modernizing its armed forces and security agencies. On all these fronts, India needs deeper and more open cooperation with the United States through the integration of their advanced technology sectors, trade liberalization, opening the Indian education system to American universities and community colleges, U.S. investments in the Indian defense industry, and American expertise to upgrade Indian intelligence gathering and processing. New Delhi is already engaged with Washington on all these fronts, but the results remain way below potential.

Most of all, the United States needs to recognize that it is dealing with a new India. For too long, India saw itself as a weak, developing country unwilling to unlearn its anti-colonial grievances. Only in recent years has India begun to inch away from its previous focus on  the chimera of “strategic autonomy” to emphasize its own role in shaping the regional and global environments.

In the past, India’s internal identity as a liberal democracy was in tension with its external image as the leader of the global south against the West. A rising India — with its robust democracy, thriving entrepreneurial capitalism, and expanding global interests — is bound to acquire a new identity as a champion of liberal international order.

What remains to be seen is whether the Obama administration can seize this moment. Obama has certainly talked the talk, but it is not clear whether his administration is ready to walk the walk to accommodate India’s rise. That might require a leap into the unknown — a historic revision of the international hierarchy of power — that so far, the United States has been unwilling or unable to take.

C. Raja Mohan is the strategic affairs editor of the Indian Express in New Delhi and adjunct professor of South Asian studies at Singapore’s Nanyang Technological University.

India’s Unfinished Business

Nobody jokes about the “Hindu rate of growth” anymore. But with hopes for further reform fading in New Delhi, will the Indian economic miracle come to an early end?

BY ARVIND PANAGARIYA | NOVEMBER 4, 2010

When U.S. President Barack Obama arrives in Mumbai Saturday, he’ll be landing in what remains one of the poorest countries in the world, with urban slums that stretch for miles and a rural landscape that remains remarkably similar to that in the days of the British Raj. For all you hear about Internet start-ups and high-tech call centers in Bangalore and Chennai, India currently accounts for just 2.25 percent of the world’s GDP and 1.3 percent of its merchandise exports. It ranks 11th worldwide in absolute GDP and 161st in per capita GDP. Its economy is less than one-tenth the size of America’s, but its population is more than three times as large. So why all the hype?

The United States and many other countries are betting on India not because of where it stands today, but where they see it going in the next 15 years. In real dollars, India has grown at an annual rate exceeding 12 percent during the last seven fiscal years. Even going by the conservative assumption that the country will grow 10 percent per year in real dollars over the next 15 years, it will grow from $1.3 trillion in fiscal year 2009-2010 into a $5.5 trillion economy by 2024-2025. Depending on how Japan does during these years, India would then have either the third- or fourth-largest economy in the world.

American perceptions of India are also shaped by the large number of highly successful Indians, the vast majority of them first-generation immigrants. While the presence of Indians in the United States is not new, their phenomenal success is. Over the last 15 years, their influence in the tech and finance industries and higher education has grown as that of no other single immigrant group — Ajay Bhatt, inventor of the USB port, Vikram Pandit, CEO of Citigroup, and Indra Nooyi, CEO and chairperson of PepsiCo, are today sources inspiration across America. At any given time, there are 100,000 bright Indian students studying at U.S. universities. They promise to be a part of the highly mobile international labor force that will play a decisive role in designing tomorrow’s global economy.

A final factor driving American perceptions of India is the resilience of its democracy during the 63 years of its post-independence existence. Its vast size and diversity notwithstanding, India has remained a vibrant democracy with a fiercely independent press and judiciary and growing oversight by NGOs. Its superior economic performance in recent years has also put paid to the notion that democracies are inherently incapable of the kind of miracle-level growth that South Korea and Taiwan achieved in the 1960s and 1970s and China has been clocking over the last three decades. Unlike authoritarian China, which seeks to be a rival power and has adopted an increasingly belligerent posture in the region, Indian democracy promises to be accommodating and friendly.

But none of this will matter if India fails to fulfill its economic promise. As the recent revelations about corruption and mismanagement of the Commonwealth Games dramatically showed, India’s government still has a long way to go — the country’s phenomenal success over the past two decades has come largely because its politicians and bureaucrats have gotten out of the way. Fortunately, there are four powerful reasons why India will forge ahead, regardless of what happens in New Delhi.

First, except in agriculture, India is now highly open to trade. Trade in nonagricultural goods and services and the flow of portfolio and direct foreign investment are now almost as free in India as in China. Restrictions on outward investment by Indian multinationals have also been considerably relaxed. The result has been India’s rapid integration into the world economy: Trade in goods and services as a proportion of GDP has risen from just 17 percent in 1990-1991 to 53 percent in 2008-2009, and foreign direct investment has risen even faster, from $0.1 billion in 1990-1991 to $64.1 billion in 2009-2010. Not just private Indian companies like Reliance Industries Ltd. and Tata Motors, but also public sector enterprises such as the Steel Authority of India and Bharat Heavy Electricals now compete against the world’s best, forcing them to be efficient and productive.

Second, while the Indian government’s ability to deliver pales in comparison to that of China, India’s dynamic entrepreneurs shine in comparison to their hidebound Chinese counterparts. Even with their hands (and feet) tied by the government’s command and control regime, these entrepreneurs founded new business groups such as Reliance, Goenka, and Khaitan and built up existing ones such as Tata and Birla. And as the lifting of the government’s heavy hand has freed up the economy’s “animal spirits,” India’s new openness has brought supercompetitive foreign entrepreneurs onto Indian soil. This mix promises to channel savings into highly productive investments.

Third, India’s savings rate has climbed steadily upward, reaching 33 percent in 2007-2008 from 22.8 percent a decade earlier. Rarely if ever does a country’s savings rate collapse quickly after reaching such a high level. So it’s a safe bet that savings, and therefore investment, will remain a driver of India’s fast growth.

Finally, India has a young population that is growing younger. The dependency ratio, defined as the number of dependents per 100 working people, fell from 66.33 in 1998 to 57.5 in 2008 and is continuing to fall. More importantly, the vast majority of those dependents were below age 15 in 2008. Over the next decade and a half, most of these youth will join the workforce. Labor shortages will not hold India back.

Can India do better? The answer is an emphatic yes. India’s economy is still predominantly rural, with more than half of the workforce employed in agriculture, compared with 39.5 percent in China as of 2009. India’s manufacturing sector is another disappointment. In most poor, heavily populated countries that grow rapidly, manufacturing leads the way. For example, the share of manufacturing in South Korea grew from 17.7 to 26.6 percent GDP and 9.4 to 18.6 percent in employment between 1965 and 1975. But in India, manufacturing’s share of GDP remained unchanged between 1993-1994 and 2004-2005, while the sector employed only a slightly larger percentage of the Indian workforce. The result: 58.5 percent of Indian workers were still in agriculture in 2004-2005. The dismal growth in manufacturing has also meant poverty in India has declined more slowly than in other fast-growing economies.

It’s no mystery why this is the case: India’s stringent labor laws, one of which makes it virtually impossible for firms with 100 or more workers to respond to changing market conditions with layoffs, have greatly inhibited the growth of labor-intensive industries like clothing manufacturing. On average, firms in India’s apparel sector are much smaller than not just those in China, but also those in Bangladesh and Sri Lanka. Consequently, India exports about as much clothing each year as Bangladesh, which is one-seventh its size in terms of population and one-tenth as much as China.

The list of unfinished reforms in India remains long. The most important ones include cleaning up growth-inhibiting laws relating to land and labor markets, privatizing state-run manufacturing firms and banks, allowing foreign investors to fully enter the retail sector, reforming the higher education system while improving the quality of primary education, overhauling the health sector, eliminating regressive subsidies on food, fertilizer, and electricity, and building major infrastructure, including roads, ports, airports, and electric power generation.

There’s a chance that during President Obama’s visit the government will announce its intention to open the retail sector to foreign investors. Some partial privatization is also under way. But beyond these measures, critical reforms remain unlikely under the present government, whose left wing opposes free market policies. This means further acceleration of growth is unlikely. The good news, however, is that with considerable external and internal liberalization already in place, significantly increased savings rates, and favorable demographics, India’s future looks bright indeed.

Arvind Panagariya is a professor at Columbia University, a nonresident senior fellow at the Brookings Institution, and the author of India: The Emerging Giant.

 

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