The din of the electoral campaign has abated and the culmination is a runaway victory for the National Democratic Alliance, led by Narendra Modi. Undeniably, global attention is riveted on India as a new government led by Modi takes office. This has been a phenomenal election in many ways, fought largely on domestic issues. Foreign policy issues have been marginal in it, except for some comments by Modi during the campaign and media interviews relating to Bangladesh, China, Pakistan and the United States of America.
Any government that has promised to embed development and growth at the core of its governance agenda will have its task cut out. With more than 45 per cent of India’s gross domestic product coming from merchandise trade and services, correcting the decay in manufacturing capacity, creating foreign direct investment/investment climate, building economic infrastructure, providing employment for the young aspirational millions and a host of other challenges face the country, because of which the new government must revamp the way the government conducts economic diplomacy. This does not involve just the ministry of external affairs but all economic ministries that tend to work in silos and give higher priority to protecting turf, rather than coming together in a shared approach to get the best deal for the country.
Globalization has transformed the way in which countries interact and forge relationships, fundamentally changing the nature of diplomacy. This transformation encompasses new stakeholders, including transnational corporations, non-governmental organizations and other non-State actors, which are playing an increasingly important role in the expanding domain of diplomacy. In the context of a liberalized and open economy framework, there are many overlaps between economic interdependence, requirements of policy coordination and a wide spectrum of private economic interests, each of which have a bearing on the economic relationship between nation states.
The paradigm of “economic diplomacy” is, however, not entirely new. Its origin, formally recorded in Indian literature, can be traced back to Kautilya’s Arthashastra. Indeed, throughout history, instances of statecraft being deployed through economic tools have been visible. The US-led Western economic sanctions currently imposed on Russia or sanctions against Iran are examples of economic diplomacy, albeit in a negative way to achieve certain objectives that go against the interest of the countries at the receiving end .
For India, the first focused attempts at economic diplomacy after Independence were during the early 1970s, following the oil crisis, precipitated by price manipulation by the Organization of Petroleum Exporting Countries. Since oil prices experienced manifold increases over a relatively short period of time, India opened a number of embassies in the oil exporting countries of the Gulf and North Africa. Young foreign service officers were assigned Arabic as their compulsory foreign language and thousands of workers and technicians went to work in oil-rich countries, creating systemic dependencies between India and the extended Gulf region. India benefited from remittances from overseas workers and continues to do so.
As India grew and gradually became hungry for overseas investments and markets, the second wave of economic diplomacy was deployed in the 1980s. This included attempts at aggregating and mobilizing a broad array of stakeholders ranging from industry to trade bodies. These associations and bodies, such as the various chambers of commerce and industry, became important partners.
The third, and perhaps the most crucial, step towards the new paradigm of economic diplomacy which India deploys followed naturally from the economic reforms of the early 1990s. India began to rebrand itself as a semi-open economy, which was a viable and profitable investment destination as well as capable in pharmaceuticals, petrochemicals, textiles, software and the services sector. This period also coincided with India’s ascension to new international regulatory regimes — principally the World Trade Organisation. The establishment of the WTO raised the importance of multilateral economic diplomacy and led to a broadening of international discussions on areas within the aegis of economic diplomacy, whether multilateral, bilateral or regional. The frameworks of negotiations, dispute settlement mechanisms and other aspects of the WTO posed a new challenge in developing countries, such as India.
The proliferation of free trade and preferential trade agreements perforce requires close coordination between Indian missions abroad, nodal ministries, industry-level stakeholders, as well as various other stakeholders in the domestic economy to optimize outcomes. The structure of regional agreements varies hugely. They all, however, have in common the same objectives to reduce trade barriers between member countries. A number of agreements now also cover the services sector and other areas of cooperation. Concomitantly, political will, institutional coordination cutting across bureaucratic turf and enhanced alignment on the primary objectives of Indian economic and foreign policies can enable optimal outcomes.
Diplomacy, at its very core, is about negotiating interests to create a stable and secure external environment, to facilitate economic growth, development, well-being and prosperity of any country. It would be suicidal for countries integrated in the global system to remain adrift, without an over-arching framework for economic engagement with other global actors. In the past, the role for economics in foreign policy was limited. The quest for foreign currency through bilateral and multilateral channels to close the foreign exchange gap was one of the main objectives of external economic engagement.
The larger question of capacity still dogs India’s diplomatic efforts. The ministry of external affairs has taken a number of measures to ensure that there is commensurate capacity to deal with all the work that comes with being a large country and a major global actor. This has included steps such as enhancing the cadre strength of the Indian foreign service, integration of officials from other sister services, sourcing expertise and manpower support from the non–government sector and opening a new division for development partnership. There are also a number of initiatives to improve inter-ministerial coordination and this is where the role of political will is undoubtedly central.
The reforms initiated in 1991 and the more recent efforts have had a big impact on India’s external relations. Its economy over the past few decades has reflected a combination of high growth and stability. India has entered into liberal bilateral trading arrangements as well as a number of regional and multilateral agreements. India’s new role as an economic partner, with a share of 80 per cent of the cumulative value of South Asian economies, is central to its image. Concomitantly, political will is critical in ensuring that India is able to leverage its position as well as build upon its brand in order to facilitate trade and investment in a world without any particular centre of economic gravity.
The years 2012-13 saw continued turbulence in the global economy and a marked slowdown in gross domestic product growth across economies, including India. Yet India, like many other large developing economies, continues to grow at a pace that advanced economies cannot match owing to structural ceilings. Member countries of the Organization for Economic Cooperation and Development, an organization of economically developed countries, are on average growing at less than 2 per cent year on year, and grew at less than 1 per cent in 2013. In contrast, economies of the developing and emerging world have averaged growth rates in multiples of OECD rates, in spite of the financial crisis. The BRICS economies grew at an average close to 4.7 per cent in 2013. The accompanying economic shift, displays a number of uniquely 21st century characteristics that must infuse our diplomatic efforts.
A truly multipolar world may not have arrived but it is clear that power, especially economic power, no longer resides within one region. This is reflected in the polycentrism embedded within interactions in the global arena, with increasingly broadening participation of nation states, markets and institutions and even imbalances of savings and investment. The global economic and financial crisis has brought a significant change in global economic governance and therefore the nature of economic diplomacy. The close financial and trade ties forged among economies by the globalization process has enabled the crisis to spread almost instantaneously to practically every country of the world. The international system has allowed governments to build up huge balance-of-payments imbalances. Current account surpluses in several emerging market economies are said to have helped fuel the credit booms and risk-taking in the major advanced deficit countries at the core of the crisis.
Indeed, responsibility, presence and integration are all key components of India’s development cooperation machinery. The development partnership administration of the MEA instituted in 2012 is in charge of the expansion of India’s development cooperation. The DPA’s role is to integrate a range of activities including trade and investment, technology transfer, financing through credit and capacity building.
India has essentially, three main instruments for development assistance, all of which are now coordinated under the DPA: technical cooperation (capacity-building and knowledge transfer), lines of credit and grants assistance. Under the Indian technical and economic cooperation programme, short and medium-term courses are offered in various Indian institutions, covering subjects like accounts, audit, banking, finance and management, IT, telecommunications, small and middle enterprises/rural development, environment and renewable energy. Specialized courses are also offered in parliamentary procedures, election management, mass communication, remote sensing and so on.
The division works with a number of public and private institutions to deliver on India’s development cooperation objectives. During the recent India-Africa summits, India promised to establish about 100 capacity-building institutions to build and strengthen capacities at the pan-African regional and bilateral levels. Some of these include the India-Africa Institute of Information Technology, the India-Africa University for Life and Earth Sciences and the India-Africa Civil Aviation Academy.
Lines of credit are government of India-backed and Export-Import Bank of India-run credit line agreements signed between the head of the Exim Bank and respective partner governments. The Exim Bank lays special emphasis on extending lines of credit as an effective market entry and market diversification mechanism for Indian exporters. During 2013, 16 new LOCs aggregating $833.59 million were extended by the bank to support export of projects, goods and services from India. As of March 31, 2013, the bank has in place 167 LOCs covering 75 countries in Africa, Asia, CIS, Europe and Latin America with credit commitments aggregating $8.57 billion. Approximately 70 per cent of the LOCs supported by the Indian government were extended to African countries; these LOCs are part of a larger effort by the government of India to build development partnerships with African countries in order to enhance interests in the continent. These LOCs are critical instruments for new international economic diplomacy. They are used to help promote India’s political, economic and strategic interests abroad and to promote trade and investments under South-South cooperation.
India’s development cooperation is fundamentally demand driven. When assistance is sought, India is able to leverage available resources to fulfil our responsibility to global stability and prosperity. The DPA is exploring new models of partnership with both the private sector and civil society. It has also begun its engagement with NGOs and academia in an effort to define and articulate a model which is premised on certain basic tenets including non-interference, non-prescriptive approaches and enhanced community-based engagements. This multi-stakeholder process is at the essence of the new approach in India’s economic diplomacy efforts.
Aside from economic interactions between countries, economic diplomacy is critical from the standpoint of how India, along with other similarly placed developing countries, can assume a leadership role in the international rules-based order with the Bretton Woods institutions at its core, as well as react to systemic market imbalances.
One-third of India’s external trade is with its East Asian neighbours. By engaging with the Association of Southeast Asian Nations, India seeks to expand the trade front from its current $80 billion to $100 billion by 2015 and $200 billion by 2022. In 2009, an agreement on comprehensive economic cooperation between the ASEAN and India was signed. Other regional bilateral trade agreements have been signed with East Asian countries which include the comprehensive economic cooperation agreement with Singapore in 2005 and the free trade agreement with Thailand in 2003. In 2009, India initiated the comprehensive economic partnership agreement with South Korea and in 2011 with Japan. The India-Malaysia CECA was also signed in 2011. The “Look East Policy” must change into “Staring East” in a sustained manner.
Although an economic division came into existence at the MEA as early as 1966, following recommendations of the Pillai committee report, it remained essentially a hybrid model. The secretary for economic relations in the MEA still heads a cluster of separate divisions for the sake of better coordination and efficiency. But coordination and consultation are perfunctory or virtually non-existent among the MEA and other ministries and stakeholders primarily because of turf protection attitudes.
Economic diplomacy for a large economic power such as India in the post-financial crisis era, must include responsibility, presence and integration of its actions. Responsibility over actions and interactions, presence in geographies both near and far and integration with markets through enhanced physical and soft linkages must drive India’s economic diplomacy. A three-tier system of standing committees at the levels of joint secretary, secretaries and ministers of all economic ministries involved in economic diplomacy should be set up to debate and decide on issues in an integrated manner. Where a cabinet decision is required to settle inter-ministerial differences, issues can be referred to it. There should be greater deployment of officers from different services in different ministries, so that there is a fair intermingling of services in each ministry. Whether this or some other structural change is introduced, there is no doubt that major bureaucratic engineering is essential for providing the strategic toolkit that India deserves to conduct its economic diplomacy.