Capitals around the world from Tokyo to Washington, after the BJP’s historic Lok Sabha win, will now expect Narendra Modi to deliver on the promises he made five years ago on the economic and foreign policy fronts.
Next-gen economic reforms
The challenges facing Modi and the BJP-led NDA government are many. First and foremost is the economy. India’s last major economic reforms took place in 1991. India now needs the next generation of economic reforms that will focus on critical areas of land, labour and capital.
The Indian economy is growing at around 7 per cent annually, but it has been a jobless growth. Recent months have also witnessed a decline in consumer spending with the FMCG sector being hit the hardest.
India needs growth in labour-intensive (not capital-intensive) sectors. With American and Japanese companies seeking to leave the Chinese market, India should have been the default market. However, that has not been the case.
Most domestic, let alone foreign, investors have been in a wait-and-watch mode over the last few years. This is one of the reasons why the flagship Make in India programme has not achieved success. Instead, there has been a slowdown in industrial production in India.
Challenges in neighbourhood
The foreign and security policy challenges facing the new Indian government are immense. For India, its immediate neighbourhood of South Asia is critical. But 70 years after Independence, India is still trying to ensure that all its neighbours respect Indian primacy.
The deepening economic and military presence of China in India’s backyard has only belatedly made New Delhi realise that managing a sphere of influence is not just about telling others what to do, but also expending the resources to deny space to competitors. While there has been a rise in Indian investment and capacity building in South Asia, it is still a long way to go.
Every new Prime Minister in India has hoped to leave as their legacy better relations with Pakistan. Modi followed the same pattern when he took over as the PM in 2014. The relations between the two countries nosedived in the months leading up to the 2019 elections.
While there are now indications that some form of talks may resume, New Delhi must remember that for Islamabad (or more precisely Rawalpindi), just holding talks is victory because it takes international pressure off Pakistan. New Delhi, however, would need substantial discussions on key issues, especially terrorism.
Pakistani civilian prime ministers may seek better relations with India, but they are an endangered species and the country’s foreign policy remains in the hands of the military-intelligence establishment for whom India continues to be an existential threat.
Indian Prime Ministers since Rajiv Gandhi have hoped that talks with China will somehow change Beijing’s strategic calculus. Modi too had hoped that his personal relationship with the Chinese president and their frequent meetings would change the dynamics.
But India would do well to learn from Japan. Beijing built economic ties with Tokyo, but continued to build its economic and military capability so that it could also threaten Japan and Japanese interests.
What will make Beijing change its view on Delhi is not just talks but an economically powerful and militarily strong India that has good relations with its neighbours and strong partners in the region.
India-US dynamics
The India-US relationship is multi-dimensional and has strengthened over the last few years. The Trump administration would like to continue this relationship with the Modi administration.
The US-India defence and security partnership has deepened over the years. However, areas of divergence exist, primarily in trade and in ties with Iran, Russia and Afghanistan.
India is key to the US-Indo Pacific Strategy, the US-South Asia strategy and is mentioned prominently in the US National Security Strategy (NSS) document. The US even renamed its Pacific Command as the Indo-Pacific Command, but the Indo-Pacific convergence needs harder work, especially on the American side.
For India, the Indian Ocean is more important than the Pacific because India’s interests are primarily in South Asia and the Middle East. For the US, China and the South China Sea are critical.
Similarly, India and the US also differ to some extent on Afghanistan. A stable Afghanistan that has control over its territory is critical for India.
India is one of those countries that have been in favour of American presence in Afghanistan. Not only does New Delhi feel left out of the current talks between the US and the Afghan Taliban, it has reservations about the direction in which they appear to be headed. India fears both a sudden American exit from Afghanistan as well as the inclusion of the Afghan Taliban in the country’s political set-up, which can compromise the gains of the last 18 years.
India has old relations with Russia, which is still one of India’s top military suppliers. Sooner or later, India will also have to worry about the CAATSA sanctions that have not been imposed by the US but are like a Damocles’ sword, depending on how many large defence items India purchases from Russia.
Iran is another area of friction. For India, Iran is of strategic and economic importance. India’s only access to Afghanistan is through the Iranian port of Chabahar and Iran has been one of India’s top oil suppliers. American sanctions have led India to stop importing oil from Iran as of now, but New Delhi has done this reluctantly.
US-Iran tensions and the recent decision by the US government to end granting any oil waivers to countries like India mean that New Delhi will need to reconfigure its historic policy of maintaining multiple sources of energy. The Modi government while agreeing to reduce oil imports from Iran had sought to defer the final decision till the Lok Sabha elections.
On the economic front, the key prickly area is trade and the fallout of the termination of the Generalized System of Preferences (GSP) programme. India, like other developing countries, benefitted from the US GSP programme for years, under which certain products could enter the United States duty-free if beneficiary developing countries met eligibility criteria established by the Congress.
In March this year, the US said it would terminate India’s designation under this programme on the ground that India failed to provide the United States with assurances that it will give “equitable and reasonable market access” in certain sectors.
The US claims that India has extremely high tariffs. India’s response is that its tariffs are not as high as others, including the US, and that many countries impose high duties on certain products.
Further, India has increased its purchase of oil and gas and civilian aircraft and defence equipment from the US. There has also been a steady decline in trade deficit over the last three years. The India-US bilateral trade was $126 billion in 2017 and rose to $142 billion in 2018. The US exports to India in 2018 grew at nearly 30 per cent while Indian exports grew at about 12 per cent.
While India has made accommodations on the economic front, there is a clash between ‘Make in America’ and ‘Make in India.’ Both President Trump and Prime Minister Modi want to build their domestic economy, for which they need to attract investment and strengthen manufacturing within their own country.