Strategic Consequences of India’s Economic Performance

by Sanjaya Baru; Academic Foundation, New Delhi, 2006; pp 496, Rs 795.

S K RAO

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The book is rich in its sweep and in the mastery of detail. Here I focus on six central themes that Baru touches on, and comment on them.

Economic Growth and National Security

A central argument of Baru is that “it is not economic growth in itself that holds the key to India’s global profile and power, its strategic role and relevance and its national security but the nature of that growth process and the manner in which the economic challenges it faces today are addressed” (p 34, para 4). There are several strands to this argument of his. First, he believes that economic policy can be an instrument of foreign policy (p 60, para 1), and that “business and economic cooperation can help ease political tensions and reduce the relevance of border disputes” (p 404, para 4). Underlying this is the idea that trade and investment flows among countries create an interdependence and countries are more willing to downgrade bilateral political differences when economic prosperity is at stake. He refers to the changed relationship between China and the US in recent years. In his view, China has locked the US into a relationship of mutual dependency whereby the US middle class households would be hurt if the US-China trade relationship is interrupted. Indeed, he believes that China has used trade as a strategic policy weapon, building a relationship of mutual benefit, not just with the US, but also with an increasing number of countries worldwide (p 394, para 2). From this central insight of his, the author goes on to argue that public procurement and major business deals must be linked with explicit foreign policy objectives, as China has done systematically (p 69, para 3).

This insight leads Baru to argue for several positions. Firstly, he views the globalisation process as largely a positive phenomenon, and sees the opening up of the Indian economy following the 1991 reforms in a beneficial light, not only in that they have spurred economic growth, but have thrown open opportunities for building strategic and political relations with the outside world that could be of benefit to India. He says that, “an India that is economically stable and prosperous and is increasingly involved in global economic flows is more likely to build webs of economic interdependence which offer it greater political security” (p 142, para 1). He sees external economic policies as inextricably intertwined with foreign policy – “trade policy is foreign policy” (p 97, para 2) – and that India should have mechanisms to better coordinate the economic and foreign policies.

The thesis that economic and foreign policies influence each other is, of course, something we widely accept in the contemporary world, and nations conduct their policies fully cognisant of it, as Baru says. In procurement of goods and services in critical areas, e g, purchase of aircraft or oil, most nations are conscious of this interrelationship. However, in the context of India, three questions arise: first, does the opening up of the economy, as part of the globalisation process, have any processes in pursuing a holistic policy in this regard?

In his essay, ‘Liberal Economic Policies and National Security’ Baru addresses himself to the question of whether national security is compatible with open economy (p 87). He believes that external economic liberalisation can be an important element of a national security strategy (p 97, para 1). While it can be accepted that a more open economy creates greater interdependencies and provides more space to pursue strategic security objectives, can we assume that a more open economy always leads to better economic, food, energy and technological securities?

In the context of India, many have argued that India had no choice but to follow autarkic policies in the post-independence years, and a more open economic regime would not have served her economy well. Following the liberalisation of the economy in the wake of the 1991 balance of payments crisis, some – though not all of those who supported the autarkic policies earlier

– have expressed the fear that open trade and investment policies in India could lead to de-industrialisation. There is, indeed, a strong school of thought that believes that globalisation as we see it today is resulting in less economic security and impoverishment of the third world. The Mexican debt crisis of 1982, the east Asian economic crisis of 1997, and others have exposed an ugly side of globalisation, and an open, unguarded position about the virtues of economic policies might indeed lead one into deep waters. Having said this, it would be wrong to attribute to Baru a blind view of the virtues of the open economy policies, however much space he sees in them for pursuing strategic advantages. In a very thought-provoking essay on ‘National Security in an Open Economy’, Baru, for example, says, that “...we must guard against the danger of de-industrialisation and of a loss of competitive advantage of our own industry…The threat of deindustrialisation is real and the decline in the investment ratio and capital expenditure is alarming. If allowed to drift, this situation can hurt India’s economic security” (p 98). What Baru is arguing for is not the blind pursuit of an open economy, but to recognise that greater openness –

Economic and Political Weekly March 17, 2007 and the economic interdependence that it creates – produces a dynamic that opens space for pursuing other strategic objectives, and India must be alive to this dynamic in setting her economic policies – a view which I wholly agree with.

But how do we view the national security concerns? And what are they? In this context, Baru identifies three traditional security concerns: food security, energy security and access to new technologies (p 142, para 1). Is globalisation likely to affect these securities? He believes that in all these respects, India would gain by greater engagement with the outside world. As he says, “an inward-looking economy, a navel-gazing polity and a people that will not give but only ask, are unlikely to be a secure nation” (p 142). I think the central point is that a nation, that has a higher ratio of trade and foreign exchange reserves to GDP, has a greater capacity to import essential things in times of need, and a greater bargaining capacity in the international arena to set its own terms for imports and exports, including technology transfer. One must also recognise that an economy that is forced to be competitive is under greater pressure to innovate and cut costs, and is therefore, better situated to provide a platform for industries – national and international – working to new technologies.

Many have worried that the global trade regime in agriculture denies opportunities to developing countries to export agricultural produce. An opening of trade indiscriminately, therefore, can indeed hurt our farmers. India is rightly demanding a reduction in subsidies to and protection of agriculture in the US, Japan and Europe as an essential condition for the restarting of the Doha trade round that has been grounded. We need to recognise that our ability to put pressure on other nations is itself enhanced by our growing international economic position and Baru’s argument – that greater economic interdependence provides strategic advantages in global negotiations – is apt.

Of course, we must also recognise that trade can bring with it economic imperialism, and threaten national security as India knows only too well from its colonial experience. Nations rich in minerals, in the exploitation of which foreign investment dominates – e g, oil – become prey to imperial pressures. In the guarding of one’s freedom, therefore, it is necessary to recognise this and build strong defences. In the case of India, however, this is a remote threat in the warding off which the answer does not lie in becoming insular.

India and the US

In India, there has been – and there still is – considerable suspicion of the US. These suspicions were rooted in the postindependence experience when the US, unhappy with India’s policy of nonalignment, was more an ally of Pakistan than India, and indifferent to her need for food, energy and defence security. This is not to say that the US was an enemy of India, but the Indian public was rightly wary of the pressures from the US to turn

Economic and Political Weekly March 17, 2007

India into a tool of her foreign policy in the periods when it was engaged in the unacceptable wars such as in Vietnam. The two largest democracies in the world remained estranged, rather than fraternal.

The success of the green revolution providing food security, the collapse of the Soviet Union, the economic reforms in India in the 1990s giving much more space to the market forces, and a reassessment of the US’ own attitude to India as a future power rooted in democratic traditions – all this has changed Indo-US relations qualitatively in recent years.

It is to the merit of Baru to study these changing relationships, and argue for a changed relationship between India and the US. He notes that the India-US relations were often characterised by “a weakly chaotic and dynamic system”. But he considers that, in IT, India may have found the required ballast for the stable and energetic progress of its bilateral relationship with the US. The large presence of the Indian IT professionals in the US, India’s openness in the media and the growing business relations have changed the tone of the US relationship with India. The threat of terrorism has made the US to reassess its relationship with India and turned the two estranged democracies to fraternal democracies.

Baru mentions that there is much to be gained by cultivating a positive relationship with the US. He quotes Henry Kissinger, known for his acuteness in diplomacy – and who was responsible for bringing about a change in the US-China relationship – on the growing recognition in the US of India as a future power, and therefore, the need for the US to come closer to India. Baru also believes that the key to a firmer relationship between India and the US lies in a fast-growing Indian economy at 7 per cent plus. He sees much value in a stronger relationship between India and the US and considers that India must work towards an outcome where the US acquires a stake in the success of the Indian economy (p 269). Baru is broadly right in this. As China has demonstrated, one can cultivate a deeper economic relationship with a powerful country like the US, without sacrificing our national interests, as India herself has the stature of an independent power. And India, which is aspiring for global leadership through membership in the Security Council,and cultivating independent and deeper relationships with Russia, China and east Asia, will find it to its advantage to have a stronger economic contact with the US. As Baru says, acquiring economic and political leadership carries with it the obligation of being more open to global investment and trade flows (p 71, para 1). This is not to say that we liberalise indiscriminately: we should not, for example, liberalise the entry of foreign banks into India – as the US and EU are pressing for in the ongoing WTO negotiations – before we put our own banks on a sounder footing, particularly by helping the public sector banks to recapitalise themselves by reducing the government holding, as the Narsimham Committee recommended. I would also be wary of foreign participation in television and the other media: while the US and Britain might be India’s natural partners in the broadcasting and entertainment industries in the light of English-speaking population in India, foreign ownership of the media can have an insidious influence on opinion-making, and India needs to be wary of it.

India and China

A running thread in Baru’s collection of writings is how China has been far more successful than India in deploying the trade and investment weapons in securing its strategic objectives – a view which many now seem to share. He admires the pragmatism of China’s leaders – Deng Xiaoping – and those who inherited his mantle – that is facilitating the reemergence of China as a great nation. From his visits to China, Baru records much that is interesting. He quotes a Chinese acquaintance as saying: “There is nothing like capitalism and socialism these days. Everyone is practical, they are interested in business and in improving their standard of living. We are now pragmatic” (p 385). And he brings attention to the change in the name of the official newspaper of the Chinese Communist Party paper from its original Red Flag to its present Quishi – which means “seek truth from facts”!

But is China a strategic rival – indeed, a hostile force – to India? What are the strategic interests of India in our neighbourhood? He believes that China’s interests in central Asia are strategic; and he is convinced that the Chinese like peace on their borders and good relations with their neighbours to enable them to divert all their attention and resources to industrialisation. He is, probably, right: the history of China indicates a mind that is China-centric and satisfied with the territory she has. But China also shows a mind that is prepared to cultivate our neighbours for strategic reasons as a means of coercing India to serve its larger interests. One way by which India can neutralise it, and turn the India-China relationship into a much more positive force, is to develop deeper economic relations with China and have an active Look East policy.

We certainly need to put more effort into making India-China relations on a stronger footing – and all the indications are that they are moving ahead. We need to put the border disputes aside, and deepen the economic relationships. At present, our trade involves the export, to some extent, of raw materials such as iron ore and import of manufactures. We need to change the character of this, and export value-added products and services. In return, we could invite the Chinese to take a more active part in our infrastructure development, in which they have built up much experience.

Our expanding trade with China should also involve, Baru says, a policy of encircling China and Pakistan by good trade relations with all the other neighbours of those countries – using trade as a diplomatic weapon. The holding of regular meetings at the foreign minister level by Russia, China and India is, indeed, a very welcome development, very much in the lines of what Baru is advocating. This recent development shows China’s belief that India’s factious polity will limit her economic and military potential (p 413, para 2) is weakening somewhat. A key to strengthen this emerging fraternity lies in the economic relationships among them.

Look East Policy

A refreshing part of Baru’s writings is his analysis of India’s relations with the east, against a deep understanding of India’s historical contacts. His essay, “How Asian is India?” contains much scholarship and helps to reposition our sights informed by history, in terms of security, trade and investment relationships. Baru rightly points out that India’s cultural imprint is visible all over Asia. The question is: in what way can we exploit it? He notes that Nehru helped India’s relations with east Asia to move to the centre stage, but

Economic and Political Weekly March 17, 2007 that politics of the cold war constrained relations. And India and Japan have ignored each other for a long time and a change was visible only recently (p 276). Baru says that our closed economic policies have limited the scope of deeper relationships with east Asia – and to operationalise India’s relationships in south and east Asia, India will have to walk further on the path of economic liberalisation and modernisation. An interesting point he makes is that India can become a part of the flying geese pattern, with China, Korea, Thailand and others forming the pack.

A question that arises is whether there are ways by which Asian countries could strengthen their mutual economic relationships. One idea that has been floated at the time of the east Asia crisis in 1997 was the formation of an Asian Monetary Union, possibly leading to stable exchange rates between the leading Asian currencies and the emergence of an Asian currency unit, like the Euro. But the idea of an Asian Monetary Union or an Asian Monetary Fund, that would supplant the power of the IMF, was fiercely resisted by the US, Britain and others, who have a hold on the IMF and through it on the rest of the world. However, as the weight of economic activity shifts to Asia, and the Asian economies get better integrated with each other, the idea of an Asian Monetary Fund is gaining ground – and it is clearly to the interest of India to become a leading member of the process leading to it. It could help address a number of strategic issues that India faces in its relations with Asian neighbours.

A considerable part of Baru’s book – and thinking – is devoted to discussing how deepening economic relations in south Asia can contribute to an easing of political, border tensions between India and her neighbours. His central idea is that India should use trade as a lever for closer political understanding in south Asia – and he believes that India should take the lead in this, as it enjoys a considerable trade surplus with many of her neighbors, e g, Bangladesh and Sri Lanka. This is a line of thinking much to be commended. India has already signed a free trade agreement with Sri Lanka, and this is resulting in greater confidence in Sri Lanka and expanded trade and investment flows between these two countries. However, India’s ability to achieve closer economic integration in the South Asian Association for Regional Cooperation (SAARC) counties is stymied by Pakistan’s spoiling attitude; the emergence of a Bay of Bengal Community, known as BIMTEC – Bangladesh, India, Myanmar, Sri Lanka and Thailand – is a promising development, and India should nurture it as a way of breaking out of the gridlock that has developed in the SAARC. As Baru says, economic cooperation must take precedence over political issues in the region (p 270). I believe this is a sound approach.

This is not to say that we can ignore Pakistan or that it is unimportant in our own economic calculations. As Baru says, improved relations between India and Pakistan can alter investor sentiment in the region (p 284, para 4). And Baru’s Chapter 34 appropriately carries the title, ‘South Asia Can Rise and Shine Together’!

It is clear that the burden of Baru’s reasoning requires adequate mechanisms for coordination of economic, foreign and security policies, and his view seems to be that India effectively lacks such internal mechanisms. He believes the business sector should be more actively involved in our diplomacy (p 164). As Baru writes, “It is …possible to view business and economics from an activist perspective and utilise them as instruments of change, as drivers of policy. That is precisely what China did, when it consciously entered into an active trade and investment relationship with the US” (p 206, para 2). The Indian strategic and foreign policy establishment is slow in recognising this. It is rather surprising that we do not seem to have an overarching mechanism that enables the government to draw the synergy that exists in approaching the economic, foreign relations and security issues in a holistic way. It is high time such a lacuna is filled.

Concluding Remarks

Baru’s collection of writings and essays, many of which had been drawn from his previously published writings, are wideranging. They are driven by a sense of patriotism, and escape the mindset that has ruled the policy-makers of India in the past, and indeed, in the present. He argues his case with passion, and with a detail that enriches and illustrates his argument. He is not just toeing a G8 line that argues for the opening of markets at the cost of India’s development. In a perceptive essay, “Who Wants Charity?”, he argues against bilateral aid that is corrupting – with corrupt alliance of officials with aid givers (Chapter 18). He is exploring how India’s interests might be best served – and in one essay (Chapter 62) he goes on to examine what the Indian cinema can do to buttress India’s strategic interests! In another – ‘An India of Narayana Murthy or Sudarshan?’ – he comes out passionately against fundamentalism and obscurantism, and argues for a merit-based secular society – values that we have inherited from Gandhi and Nehru.

Baru rightly says that the roots of India’s problems are internal; don’t blame the outside world too much (p 134, para 3). I think this is broadly right. In any case, looking for scapegoats for one’s misery saps one’s energy. We must learn to use the opportunities that India has – and they are expanding – in a creative way. As Baru mentions, India will be seen as the power of the future, and that should in turn multiply its power in the present (p 435). And we should capitalise on this.

EPW

Email: skrao@asci.org.in

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