Distinguished Lectures Distinguished Lectures

The importance of Economic Diplomacy in India

  • Distinguished Lectures Detail

    By: Amb (Retd) Deepa Gopalan Wadhwa
    Venue: Indian Institute of Management (IIM), Bodhgaya
    Date: June 18, 2019

It is an honour to be addressing the students and faculty of IIM, Bodh Gaya under the Distinguished Lecture Series of the Ministry of External Affairs. As I face an audience of young, bright people who are here by dint of their intelligence, hard work and aspirations to transform the narratives of their lives, and in that process, that of our nation too, I thought that I would talk about a subject from my field of professional experience which would be pertinent to what you might do in the future.

In today’s world with an explosion of communication technology, where information is available literally at one’s finger tips, you all must be aware of the highlights of India’s international engagements, such as the presence of the leaders of BIMSTEC countries at Prime Minister Modi’s swearing in ceremony on May 30 , his visits to the Maldives and Sri Lanka immediately on taking office, or his participation in the SCO summit where he spoke unambiguously of the global threat of terrorism and met with leaders such as the Presidents of China and Russia. For most, foreign policy, and diplomacy which is the instrument of foreign policy, is seen principally in the context of political and security relations.

There is also some fuzziness of understanding of what exactly is the role of the Ministry of External affairs and its Diplomatic offices abroad, and what are the functions and responsibilities of Indian Foreign Service officers, other than the visible consular functions of issuing passports and visas, and the protocol related to the handling of visits of high profile foreign dignitaries. So I thought that I would use the opportunity of my interaction with you to speak about a relatively lesser known aspect of foreign relations- economic diplomacy- and to make it interesting, locate it with examples, in the context of India’s relations with Japan, as I had the privilege to serve as the Indian ambassador to Japan from 2012-2015.

Permit me to first explain a bit about what constitutes economic diplomacy. From a historical perspective the need for regulation and facilitation of trade and commercial exchanges which go back many millennia, were the primary impulse for the establishment of the forerunners of diplomatic missions where some sort of permanent presence of a state was set up on foreign soil, with the permission of the local authorities , of course, to support their traders and trading interests. In the history of colonialism too, it was said that flag followed trade. Thus, economic relations and consequently economic diplomacy were, in many cases, the precursors of political relation between countries in the past. From there on flowed the belief that good political relations would lead to closer collaboration in economic areas and as a corollary that economic cooperation could not optimally thrive in a political vacuum. Another side of this apparent symbiosis is that strong economic relations can have a significant influence on political relations, as can be seen today in China’s success in widening the geographical reach and partnerships of the Belt and Road Initiative (BRI) where it is reaping the political and strategic benefits of its economic relations.

Economic diplomacy has acquired even greater salience in the post globalized world given the interconnectedness of national economies and the realization of governments that they have to work closely with industry and civil society to be competitive globally and accrue economic benefits nationally. A document of the Ministry of External Affairs states that the primary objectives of India’s foreign policy is to "promote and maintain a peaceful and stable external environment by which domestic tasks of inclusive economic development and poverty alleviation can progress rapidly”. It is thus clear that the goal of our foreign policy is the economic empowerment of our citizens and this in turn is intrinsically linked to the world outside as we seek to access resources, markets and technology, achieve food and energy security, and ensure skills and jobs for our citizens. Hence, economic diplomacy becomes an important instrument to achieve the objectives of our foreign policy. As a consequence, for many of our embassies abroad, our economic interests have increasingly become the prime mover of our relations with the host country.

There are many dimensions of economic diplomacy. In the past, economic diplomacy used to be synonymous, especially in the developed world, with trade diplomacy, as countries aggressively sought markets for their manufactured goods. Today, the definition of economic diplomacy is much wider. It includes promoting our exports of primary commodities (like when we have surpluses of food grains), manufactured goods and services such as IT and IT enabled services in established markets, as well as seek a diversification of our markets; ensuring food and energy security through securing assured supplies via agreements with foreign governments and acquisitions such as investing in new oil fields abroad; accessing technologies and raw materials which are necessary for our industrial growth or increasing agricultural productivity; attracting foreign investment in the form of both FDI and Development Cooperation projects with a focus on realizing the goals of developing world class infrastructure and logistic networks and of ‘Make in India” which aims to make India a manufacturing hub and an important part of regional and global value chains; actively promoting greater EPC projects by Indian companies abroad which is a growing trend in the Middle East, South East Asia and Africa; supporting Indian companies which are increasingly investing abroad with the host governments and authorities; working to increase tourism to India; and identifying, planning and working to deliver on development cooperation projects in partner countries. This last-mentioned facet of India’s foreign policy is, an important outreach of our economic diplomacy. Despite being a recipient of external aid, which is primarily in the form of soft loans, India has also emerged as a donor through export credit, loans and grants, which in turn provide leverage for trade, services and investment opportunities for Indian companies. In addition, economic diplomacy also entails negotiating favourable regulatory environments and term of trade in goods and services, flow of investments and technology and labour etc. in the bilateral context as FTAs, and in also plurilateral and multilateral regimes such as RCEP and WTO.

You must wonder that in this very wide remit, where there are many principal players such as industry, export promotion bodies, chambers of commerce, specialists in trade and investment related matters, and subject specific ministries of the government, what is the role of the Ministry of External Affairs and our diplomatic offices abroad.

The Ministry of External Affairs structurally has multiple departments, or divisions as they are called, devoted to various facets of economic diplomacy, even as economic relations is a common crosscutting theme dealt with by all territorial divisions dealing with specific countries and geographies. The Economic Division of the MEA seeks to be a single stop where anyone seeking information on any aspect of India’s economy, statistical data, policies, programmes, laws, regulations, procedures etc. can turn to. There are, in addition, divisions dealing with aspects of our multilateral economic relations such as our interests in the WTO and other trade related UN bodies, as well as dealings with other groupings set up because of congruences of economic interests, such as BIMSTEC, SAARC, IORA etc. A recently added division deals with economic engagement of our States with foreign countries which has come about due to a devolution of powers from the Centre.

Embassies and Consulates in turn, all have dedicated wings with officers dealing with multi-pronged economic relations which is coordinated and closely supervised by the Ambassadors themselves. These economic wings work closely with the local industry, government departments and trade bodies and pass on information on opportunities and challenges to the relevant divisions of the Ministry of External Affairs, as also related ministries such as the Ministry of commerce and Industry, Finance, IT, Textiles, Food Processing, Railways etc. Embassies and Consulates also have the very onerous responsibility to brand India in their countries of location through promotional activities such a Seminars, Business meetings, putting together business delegations, disseminating information through all possible channels, and being alert and responsive as the first point of interaction with India of foreign commercial entities. Our diplomatic missions also perform the function of issuing business visas and the ease with which this is done is an important initial signal of the ease of doing business with India.

I will illustrate the functioning of economic diplomacy with examples pertaining to one of our closest relationships, that is with Japan, with whom we share what is called a "Special Strategic and Global Partnership”. Economic engagement is a key dynamic of the partnership with Japan emerging as the third largest investor of FDI with a cumulative investment of US$27 billion since 2000, and the largest ODA partner, supporting transformative projects specially in the key areas of infrastructure and transportation. On the trade front, India and Japan negotiated a Free Trade Agreement in 2011, called the Comprehensive Economic Partnership Agreement, CEPA, which was supposed to catalyze trade and investment between the two countries. However, trade at just about US$ 15.7 billion in 2017-18 is far below potential and is one of the many challenges of our economic diplomacy. A new area of growth is Japanese interest in the India start up ecosystem with investment by Japanese private equity and venture capital funds growing from around US$2 billion in 2015 to US$ 5.9 billion in 2017. The number of deals has also sustained with 32 in 2018, in sectors as diverse as e-commerce, automotive, real estate, biotech, transport, media etc. Led by Soft Bank, which is one of the biggest investors in Indian startups, with stakes in Ola, PayTm and Oyo, other Japanese VCs and investment houses have also invested in Indian startups. An India Japan startup investment hub has been established in Bangalore in 2018, following a decision taken at the Summit meeting between Prime Ministers Narendra Modi and Shinzo Abe in 2017.

The Embassy of India in Japan attaches the highest priority to maintaining close contact with the captains of Japanese industry, Chambers of Commerce, and key governmental ministries to promote economic ties. Thus, it was during my tenure in Tokyo that the Soft Bank CEO Mr. Masayoshi Son first met with PM Modi, who was on a visit to Japan in 2014, and expressed his interest in mega investment projects in India, starting with solar power projects. Besides facilitating his meetings with our leadership, the Embassy was a key conduit for providing information, organizing delegation visits and helping to resolve issues as they invariably came up. From this initial meeting, Soft Bank, as mentioned earlier, has proceeded to become one of the largest investors in India across a spectrum of areas.

In another instance, I found that one of the largest garment retailers in Japan, with an impressive global footprint, sourced more than 80% of its products from China. It took me over a year of persistence to arrange a meeting with the self-made CEO of the company, now considered to be one of the most wealthy men in Japan and convince him of the strengths of India and why he should look to both source supplies from India as well as invest in retail outlets given the dynamic of our young, urban demographics. At the initial meeting, where I was met with some skepticism, the CEO said that he could consider visiting India on condition that meetings were fixed with the highest levels of decision making so as to avoid the pitfalls of red- tapism and be assured of governmental support. I was able to organize a visit for him to Delhi, during which he met the Prime Minister, and today, almost 5 years on, I am happy to see that not only does the company source from india, forcing our garment exporters to rise to the high exacting standards of japan, but the first retail outlet of the company will soon open in our capital city. Through this exercise of economic diplomacy, not only were we able to obtain foreign investment, but also meet the goals of Make in India, and in the process, attain standards to make us globally competitive. Economic diplomacy, therefore, involves scouting for, and identifying opportunities and facilitating the entry of global companies into India, with of course, the active support of the Ministry of External Affairs and other relevant institutions.

In the area of trade promotion too, there is much that our diplomatic missions can do. They systematically analyse the export trends of India and the demands of the local markets. This analysis also covers a study of comparable products which are imported from third countries which Indian exporters could also supply, and an understanding of the trade structure of each commodity, the regulations, standards, processes relevant to imports, etc. This information is then passed to apex bodies of industry, export promotion boards, and large exporter houses in India. Thereafter, visits by trade delegations from both sides are facilitated, participation in important trade fairs encouraged, B-B meets organized and trade complaints, as and when they arise, are attended to.

An instance of problem resolution which comes to my mind is that related to a sudden ban on shrimp exports from India to Japan in 2012, on the grounds that our frozen shrimps contained unacceptably high levels of an antioxidant called ethoxyquin. This was a major set back as Japan was an important market with exports valued worth over US$ 300 million and naturally the effect had a cascading effect in India going all the way down to shrimp farmers along the eastern coast. The embassy was asked by the Marine Products Export Development Agency of the Ministry of Commerce in Delhi to intervene urgently with the relevant Ministries in Japan because this sudden ban was on specious grounds as the levels of acceptable ethoxyquin residue had been arbitrarily fixed and conformed to no acceptable international standards. Accordingly, the matter was taken up with vigour and persistence and escalated to the Ministerial level in Tokyo, as also with trade related bodies. Our efforts paid off when the ban was relaxed after several months and both countries agreed to mutually agreeable standards and testing procedures. We realized later; it was actually a non-tariff barrier introduced because of pressure from domestic companies who were alarmed by rising exports from India. The role played by the Embassy in Tokyo in resolving the issue was invaluable and our advantage was of being in situ and meeting and sensitizing the key people who could overturn the ban.

Another area where the embassy in Japan played a role was in identifying and promoting partnership agreements between Indian states and Japanese counterparts called prefectures. Indian states now actively vie with each other for foreign investments, with foreign partners seeking the best terms and facilities offered by competing states. State governments have been mounting delegations often at the level of Chief ministers, along with representatives of local industry looking for companies to build infrastructure and invest in dedicated industrial parts set up by them. Since Japanese industry, especially SMEs are well dispersed around Japan, and prefectures are also looking to promote investments abroad and seek markets, but hesitate because of the perceived size and complexity of India, setting up partnerships agreements at the state-prefecture level was found to be an ideal way for such companies to explore opportunities in India, facilitated by partner state governments. In the course of my stay in Japan we received several state level delegations and were able to initiate 5-6 such partnerships which seem to be working well. Here again the main objective was purely economic.

I can cite many such examples where the embassy-initiated ideas for partnerships, fostered the ideas to maturity and then monitored them acting both as facilitators and trouble shooters. Since there are annual summit meetings between the Prime Ministers of the two countries, there was constant pressure on us to explore and suggest new areas for cooperation. These also extended to areas related to science and technology such as cooperation in the development of methane hydrates which holds promise of a new source of energy and is found in the seabed around India, clean coal technologies and cooperation to jointly develop rare earths. There are many big ticket examples of the results of economic diplomacy in the context of India Japan relations such as the signing of the agreement on the High Speed Rail which was a decision of the leadership of the countries but in which the Ministry of External affairs had a key role, or the development of industrial corridors such as the Delhi Mumbai industrial Corridor, and Japanese commitments to increase the quantum of investment and companies in India. Economic diplomacy has today extended beyond the bilateral frame work to Japan and India seeking to promote economic cooperation in Africa, or jointly developing connectivity projects in South East Asia which also have strategic objectives.

So, I will conclude by saying that I believe many of you will one day find yourselves in positions where you have the opportunity to work in collaboration with our foreign policy establishment to promote the economic interests of the country. The most obvious is of course if any of you choose to join the Foreign Service, which provides a diversity of options and areas to work in. But should you join the corporate world or choose to be entrepreneurs, in this globalized world there will be many areas of work with foreign exposure where could engage with our diplomatic embassies abroad or the Ministry of External affairs. When you are such a position, I do hope that you will remember that the access you have to technology, finances, domain knowledge and information can be put to use to build bridges and serve national interests.