The new BJP government has announced its intention to allow foreign investment in defence related industries. This carries on from the 26 per cent private sector involvement that was allowed in 2002 by the Vajpayee government. Over the past 10 years however, the UPA government neglected private involvement and defence orders to private sector remained negligible.
India's foreign policy and defence strategy framework has remained divorced from its economic interests for several decades. Under Nehru, the Indian economy remained a closed, centrally planned economy. Domestic economic policy did not exercise pressure on foreign policy to seek trade relationships with other countries on favourable terms. This left Nehru to position India as a moralistic, grandstanding country, with little gained in economic terms from its foreign policy.
Post liberalisation in the nineties, it became imperative for India to integrate its foreign and defence policy with its industrial and economic development. Narasimha Rao's government in the early 1990s first articulated India's “Look East” policy-emphasising economic and political relationships with ASEAN countries. Vajpayee took the initiative further after demonstrating India's nuclear capability. Vajpayee's overtures to military ruled Myanmar rank among the first signs of pragmatism over moral posturing.
Foreign policy integration with economic policy and India's strategic defence planning suffered considerably under the previous two UPA regimes. Meanwhile, China gained primacy in all our neighbouring countries. In Myanmar, ONGC Videsh's gas find is being piped to China. In Maldives, GMR lost control of the airport it helped develop-presumably at the behest of China-which offered Maldives a $500 million loan. China invested in and developed Gwadar port in Pakistan (now operated by China), Hambantota port in Srilanka and Chittagong port in Bangladesh-in effect encircling India with potential landing and refuelling points for its naval forces. China has also recently signed up a gas purchase agreement with Russia that aligns the interests of Russia and China. Russia was once India's bulwark against China, Pakistan and even the US.
Nation states wage wars to control either resources or markets. Economic policy directly converts to military and foreign policy. If India has to regain its position as a major power in the world, it has to choose its friends carefully. In this context, providing market access to other countries-whether for trade or investments has to be carefully weighed against reciprocal concessions received. The rest of the article deals with our near neighbours and key partner countries that are likely to shape the future of India.
India's new PM is seen as business friendly in China. China became the first country to send its foreign minister to India post Modi's take over as PM. Reports suggest that China has offered to invest in Indian infrastructure to the tune of $300bn-33 per cent of India's requirements. However, fundamentally, relationship with China remains one of competition. China is the only Asian country with a permanent seat in the UN Security Council. Its hold on the ASEAN countries through its trade links and prevents India's entry into that trade bloc-though some movement was achieved through a Trade-in-Goods agreement with ASEAN countries.
India has a large trade deficit with China and one that keeps growing. Attempts by Indian companies to set up business in China have not been particularly successful-even in information technology and pharmaceutical sector-two areas where India has global size and presence.
China would wish India to open up its telecommunication and infrastructure sector, and move away from USA as a strategic partner. In addition, it seeks large parts of Indian territory, reduction in support to Tibetans and acceptance of its rapidly expanding naval presence in the Indian ocean.
This may well be the defining economic relationship in near term for India. Japan along with Vietnam has territorial disputes with China and will be happy to see India step up to the plate as a counter weight to China. Japan is already a large investor into India-with the most recent investment being the North South Freight Corridor. India's relationship with Japan has long floundered on Japan's opposition to India's nuclear capability. The current Japanese PM is however, likely to ignore that in the context of increasing tensions between Japan and China, and Japan's own more muscular response of building up its military capacity. With its low interest rate, slowly growing economy and large domestic savings pool, Japan has been looking at the Indian market with interest.
Another country that India started dialogue with under the previous NDA regime, Israel has rapidly become a key supplier of defence equipment to India. Backed by technology from the US, defence equipment from Israel does not come with the onerous and demeaning “end use monitoring requirement” of US defence suppliers. In addition, Israel is open to intelligence sharing on religious fundamentalists groups operating in the middle-east and in India's neighbourhood that seek to target India.
Russia has been India's only all-weather friend. In recent years, this closeness has eroded, with India conducting joint military exercises with the USA and seeking to diversify its weapon sources away from its dependence on Russia. With tensions rising between Russia and the US over Syria and now Ukraine, India will have to tread cautiously. Over the past few months, Russia has ended its arms embargo to Pakistan, and signed up a significant gas supply arrangement with China-both steps that signal weaker Russia-India relations. India's inability to hasten construction of nuclear plants sourced from Russia has also rubbed them the wrong way. This is visible in the sharply higher price that India had to agree to, for its refurbished aircraft carrier purchased from Russia.
Recently, India has tried to refocus on its relations with Russia. India did not vote against Russia on its annexation of Crimea. India has significant energy investments in Russia. Russia is also developing the Brahmos missile systems along with India-perhaps India's most successful foreign defence collaboration. The need for strong and sustained Indo-Russian ties remains paramount.
Relations with USA always seem to suffer under the US Democrat leadership. The Obama administration is no different. Relations with the Modi administration have to be reset following denial of visa to Mr. Modi by the US administration under pressure from its own religious right-wing.
Even in the best of times, US interests do not necessarily coincide with Indian preferences. India has often been forced to take action to please the US despite such action being harmful to its own interests-without significant upside. US sanctions against Iran forced India to reduce crude imports from that country, adversely impacting India's energy basket. US on the other hand has consistently ignored Indian interests in Afghanistan, and turned a blind eye towards Pakistani action against India in its quest to extract support from that country. Similarly, after helping India to gain exemption from the Nuclear Suppliers Group (NSG), it has blocked attempts to transfer nuclear technology to India, since its own industry is unwilling to supply nuclear equipment without protection against liability. China, on the other hand, continues its support to the Pakistani nuclear program without seeking approval of the NSG.
Modi government's policy
The new government will possibly look at defence and foreign policy as an extension of India's trade and business interests-which is as it should be. Pragmatic policy requires using India's vast market potential to drive attractive deals to ensure energy sufficiency, and market access for India's services and produce. India has to aggressively defend itself against non-tariff barriers such as the ones US pharma industry is erecting on the pretext of quality or lack of intellectual property protection.
Similarly, India needs to develop its trade with China in a manner that ensures access to Chinese domestic market for Indian produce. In addition, India has to ensure that China understands that its support for Pakistani militants could well turn its own western borders adjoining Kyrgyzstan into a bigger mess than they already are.
The current government is also likely to favour a strong rupee policy. This will work only if India's productivity can improve significantly. Else, India's export performance will suffer.
It appears that the country most likely to become India's partner for growth in the coming years will be Japan. Unlike China, it has no territorial disputes with India. As the US looks at its partners, like Japan, taking up a greater share of military spend for their own defence, India would be a logical counter weight to China.
The US, while it too targets the same outcome, offers almost nothing in return. India has to also ensure that it renews its ties with Russia, and if possible extend the energy and military partnership the two countries enjoy.
India needs to see its foreign policy largely through the prism of “what is in it for us” and not some obscure “high sounding” principle that achieves nothing in real terms.
Anand Tandon is an independent analyst.