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India’s Foreign Policy crisis

, September 13, 2013, 2 Comments

Re-looking at the Indian Tragedy
Just a decade ago India was being promoted as a shining light of Asia, globally. India was dubbed as economically resilient and fundamentally sound by an army of Indian economic think-tanks and financial analysts. Interestingly, the drivers of the national optimism then- demographic dividend, pool of talented labor force and burgeoning middle-class, are still in tact even to this day. Despite of these growth-drivers why is Indian growth so trepid and insipid?

Exports in light of shrinking Western consumerism
An army of economists and analysts across the globe have hotly reasoned, debated and argued about India’s astonishing currency and GDP collapse. A consensus emerged that India’s economic growth is pro-cyclical, which means the economy grows when foreign capital inflows peak driven by global liquidity but the economy contracts as the global liquidity dries up. It was thus identified that India might face increased difficulties in funding her deficits in light of capital flight for quality assets as the economic recovery in the developed countries attain strength. Economists unanimously opined that India must shore up exports to leverage the devaluation of the rupee and thus cut down the reliance on volatile foreign inflows to control deficits.

Unfortunately, the assessment lacks the understanding of the economic patterns unfolding in the developed world. The Western consumer, who driven by cheaper debt borrowed and consumed beyond his means is saddled with a lot of debt, is either unemployed or underemployed and saves a lot more than in the pre-crisis level. The ‘absorptive capacity’ of the Western consumers in the bailout and austerity infested rich countries is likely to erode continually. In a situation where in the consumers in the traditional export markets are retrenching which markets could India potentially target for exports and how?

Need for the Chinese medicine
The crisis that sank the Rupee and the GDP is in actuality the foreign policy crisis of India. India’s foreign policy has always been heavily influenced by global powers. During the cold war era our foreign policy was pegged to the influences derived from our relationship with the Soviet Union, despite of the Non-Aligned Movement. However, the fall of communism in the 1990s meant that the way we perceived the world around us was heavily influenced by the Washington consensus.

This had a big impact on our foreign trade policy. For decades we imported the Western perspective while dealing with the much lesser developed countries. Our interactions with the lesser-developed countries in Africa, South Asia, and Central Asia were dominated by aid-driven initiatives. While we built schools, roads, hospitals and power grids what we missed was a trade-centric collaboration.

China offers an important lesson on leveraging foreign policy to spot emerging export markets. One striking similarity between India and China is the entrepreneurial spirit of the people, but China seems to have leveraged the characteristic in a much better manner than India. While the US, Japan and the EU have been the key Chinese export destinations for over three decades, the country systematically elbowed out US and EU as the prime exporters in numerous African, Central Asian and Middle-Eastern countries.

The goal of this strategy was to ensure they hedge their export earnings from the woes of the Western consumers. Today, China exports a wide range of intermediate and high value goods to 49 out of 53 countries in the African continent and is a major exporter for all Middle-Eastern, Central European, CIS and Central Asian republics.

Expanding into Africa, Middle East, Central Europe, CIS and Central Asia has offered a huge leg up to the millions of SMEs in China. The deepening trade relationships with other emerging and frontier economies has helped the Chinese government in keeping a lid on unemployment as SMEs, which constitutes over 80% of factory jobs are busy meeting export orders. As a lot of countries in Africa, South Asia, Central Asia, Caucasus and the Caspian basin urbanize the Chinese factories are manufacturing all the essential goods that would help their newer export markets urbanize and modernize.

While the Chinese foreign policy in Africa, CIS, and central Europe has been branded by the Western and Indian media as ”Cheque-book diplomacy”, the Chinese engagement with the Middle-East and Central Asian republics is purely based on cultural and historical linkages dating back to the Silk Road era. China’s trade with Middle Eastern countries is inching closer to $200bn and $60bn with the Central Asian republics. The Chinese president is presently on a tour of Central Asian republics (Kazakhstan, Uzbekistan, Turkmenistan and Kyrgyzstan) to further deepen the trade exchanges.

Lessons for a reluctant student
Earlier this week, Ashraf Wathra, governor, State Bank of Pakistan, while speaking at a regional meet in the fabled Western Chinese silk road transit hub, Urumqi, urged China to spearhead development of financial institutional landscape in Central Asia. Albeit, Pakistan has minimal economic significance the statement was symbolic as it was backed by the governors of all the resource-rich Central Asian republics.

The Central Asian republics have also supported the idea of letting Yuan play a bigger role (trade and settlements) in the Ferghana Valley. Similar sentiments are echoed by policymakers in numerous African, CIS, and Caspian countries thus boosting Chinese ambition of graduating Yuan as a global currency rivaling USD and EUR.

India has always behaved like a reluctant student while learning the merits of a vibrant, and coherent foreign policy. While I don’t oppose the need to perk up exports but pegging our exports to the eroding consumerism of the developed countries is likely to produce unsuccessful results. India has a disappointing history of learning her lessons upon a massive failure, the IMF-directed reforms of 1991 is a classic case in point.

Going forward the trajectory of our growth would be largely determined by the way we as a country interacts with the other emerging and frontier countries. Indian foreign policy makers must duly recognize the role foreign policy plays in trade and economic co-operation. India must leverage her legendary cultural linkages with the South Asian and Central Asian republics to begin with so as to unlock fresh opportunities for our exporters to expand in newer markets. India on various junctures have disappointed our potential export markets like Bangladesh, Myanmar, Bhutan closer to home due to our insipid foreign policy.

India’s entrepreneurial zeal has everything that the emerging and frontier economies need in order to urbanize, and modernize. On various occasions’ policymakers in Central Asia and Africa lauded India’s ascendancy in medicine, science, IT, telecom, steel, food processing, chemicals and education sectors. Unfortunately, India never paid much heed on these endorsements and thus allowed China to conquer the set of countries with whom we share deep cultural heritage. Stepping up exports to emerging and frontier economies would provide the much-needed incentive for SMEs to industrialize thus creating demand for manufacturing.

The benefits of increased industrialization would trickle down positively on the millions of unskilled and semiskilled labors who couldn’t participate in the last decade’s high-skill IT boom. The real mess is in our foreign policy! Meaningful and result-oriented engagements with the neighboring South Asian and Central Asian republics to foster trade collaboration would be a perfect insure against the short-term speculative inflows of portfolio investors.

As India earns credibility as a serious export country more manufacturing FDI would replace short-term FII inflows. A fresh focus over the emerging and frontier markets would not only help the country in finding new export markets but also provide a significant foothold in the region surrounding China, which poses consistent threats to our territorial integrity and economic stability.






About author
Snehal Manjrekar with an MBA Finance degree from Karnataka University has over six years of diversified experience in Fixed Income Indexing, Corporate Finance, Market Data, and Competitor Intelligence. ...more
  • Ratika Datta

    With all due consideration to the foreign crises situation due to foreign liquidity mopping up cyclically which can happen anywhere in Em Row, Can’t the country have a Mauritius Route like bilateral agreement wid careful scrutiny of avoidance of pitfalls and link it with possible Capital Market gains to both countries (Us n India)as anyways Sir Financial Inclusion wid greater careful hedged exposure till 2017 (5yr plan ) in balance-sheets is d target in India? Tht way liquidity may be quadrupled via Capital Gains multiplied times with a Long-term aspect.

    –Ratika Datta

    • Snehal Manjrekar

      Thank you very much for your comments Ratika! Enhancing capital market liquidity may improve the fund-raising prospects for few corporate borrowers. The volatility in our capital market is largely driven by speculative investments. While having measures in place to counter the liquidity mishaps is a good way to begin it is not something that would help the country in long-term. As an EM economy we must industrialize so as to strengthen our growth fundamentals and attract the ”right” kind of long-term investors who could fund our infrastructure, factories and ports. Countries like America gaveup industrialization for increased financialisation. The result is an economy susceptible to asset price bubbles with a widening income gap between the rich and the poor. We are not prepared yet to ignore industrialization at the expense of financialisation.