NEW DELHI, April 3 (Reuters Breakingviews) – The next decade could very well be what Narendra Modi is calling “India’s moment” – a time when stars align to shape the country’s economy and reputation in to boost the world. But to make the most of the opportunities, the prime minister, who is expected to run for a third term next year, needs to avoid cockiness.
India is at a geopolitical sweet spot due to rising tensions between the United States and China. America and its allies in Europe and Asia have a strong incentive to build India as a counterweight.
It also has homemade benefits. India has a rapidly growing young workforce while China is shrinking and aging. The digitization of its $3.5 trillion economy is “remarkable,” according to the International Monetary Fund. Even previous issues like poor infrastructure, weak capabilities, and power outages are being addressed at different speeds. This means that India has enormous catching-up potential compared to China, whose economy is five times larger.
The fact that India is still developing also means it could overtake its neighbor into a low-carbon future – putting it in an advantageous position as global trade restructures towards green lines.
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CLOSER TO THE WEST
India, understandably, does not want to be in another country’s camp. But the growing polarization of world politics into an American-led and a Chinese-led group is restricting their freedom of action.
India can no longer rely on Russia as a strategic partner, not least because Moscow’s weapons have fared poorly in Ukraine. Moreover, it will not want to rely on Russia as the latter is increasingly falling into the pocket of China, which poses India’s greatest threat.
It might seem that India and the United States would be natural bedfellows. But the purpose of China’s 2020 Himalayan border skirmish may have been to send a message to India not to get too close to America.
This puts the country in a catch 22 situation: it probably won’t be able to stop China without the support of the United States and other allies, says Happymon Jacob of the Council for Strategic and Defense Research, a think tank. But if New Delhi gets too close to Washington and military aid doesn’t come quickly enough, Beijing could step up its aggression.
India is tentatively approaching America – for example, via the Quad, a geopolitical alliance that also includes Japan and Australia. Meanwhile, the United States is not yet ready to provide India with the most advanced defense equipment that it provides to other members of this cohort.
The question also arises as to whether the values of both countries match. The hard-nosed realpolitik view is that it doesn’t matter since India and the United States pose a common threat.
But America issued a hard-hitting report last month detailing “significant human rights issues” and abuses in India, including reported attacks on religious minorities, dissidents and journalists. This suggests that a lack of shared values may ultimately limit the depth of the two countries’ partnership.
CHINA’S PLUS ONE?
This is significant for India’s economic future as geopolitical considerations increasingly drive global trade. One aspect of this is the so-called “China plus one” strategy, according to which multinational companies want to set up more of their new factories outside of the People’s Republic.
The United States encourages this process through what they call “friendshoring.” It is trying to set up alternative supply chains in friendly countries so that China cannot blackmail it if there is a conflict between the two.
India has already managed to attract eye-catching investment from Taiwan’s Foxconn (2317.TW), a key supplier to Apple (A`L.O). But again, it’s important not to exaggerate the country’s strengths.
India posted 9.1% growth in the last fiscal year, but this followed a 5.7% decline in the previous year. Additionally, some economists believe growth statistics are unreliable after 2015 revised how they are calculated. There are similar concerns about the data from China.
Meanwhile, foreign direct investment – which accounted for 1.5% of gross domestic product net of repatriations and divestments in 2021, compared to China’s 2% – is building from a much lower base and has yet to really take off.
One reason is protectionism. The country is not part of the trade pillar of America’s Indo-Pacific Economic Framework for Prosperity or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The tariffs are also high. As a result, the economy does not fully benefit from strong competition and the prices of some components are higher than on world markets.
Another is allegations of government favoritism over big domestic conglomerates, including the Adani group, which Modi has dismissed as “lies and abuse.” Companies outside of the Charmed circle may fear they are not being treated fairly and may be reluctant to invest.
If India were the only game in town, it could sit back and wait for investment to fall into its lap. But it is not. Other developing countries are keen to attract investment that would otherwise have flowed to China – and some, like Vietnam, have India ahead in terms of ease of doing business, skills and infrastructure.
Of course, as a communist-ruled country, Vietnam is hardly considered perfect, and none of these alternatives is as big as India. So if the American and Chinese economies were to fully decouple, there would be enough investment for everyone.
But the break in economic ties is likely to be partial, not total. So New Delhi will have to compete fiercely to attract a large share of what may still be significant investment flows.
There is much Modi can do to make the most of India’s geopolitical opportunities. He can get even closer to the West, he can address alleged human rights issues, and he can open up India to more trade. It can also accelerate India’s green transition, a topic I’ll cover in a future column.
It’s not clear if the Prime Minister is ready to do all these things. But if he does, this will truly be India’s moment.
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Edited by Thomas Schum
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