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India's economic diplomacy

August 14, 2003

To derive the full political benefits of economic diplomacy, the leadership will have to act decisively to break the old mindset, which defines national security and trade policy in separate and narrow terms.

WITHOUT MUCH ado, a new trend is quietly transforming the nation's foreign policy — economic diplomacy. The reforms initiated in 1991 and some intensive recent efforts have begun to have an impact on our external relations that few could have visualised. Negotiation of liberal trading arrangements with key nations, large-scale national investments in the hydrocarbon sectors of other countries, focus on developing transport infrastructure in the neighbourhood, India's new role as an economic donor, and the focus on mega projects such as natural gas pipelines cutting across our borders have significantly transformed our foreign policy template.

The popular debate on foreign policy, however, remains focussed on the political. Since the nuclear tests of 1998, much of India's diplomatic energy had gone into managing the fallout. War and peace with Pakistan, addressing the political differences with China, handling the unending tensions with the smaller neighbours, the concerns with cross-border terrorism, and creating strategic partnerships with major powers have been the stuff of India's recent diplomacy. While these issues continue to dominate the agenda, issues of trade, access to markets in the region and beyond, energy security, and the imperatives of regional economic integration have opened up unprecedented prospects for a recasting of India's external relations.

The Indian discourses on foreign and economic policies tended to be compartmentalised in the past, although the latter was not completely absent in the conduct of the former. Economics played a different role then. The quest for hard currency was a major foreign policy concern. Indian missions in the developed world had to ensure that there was enough aid flowing through bilateral and multilateral channels to bridge the foreign exchange gap. Negotiating cheap and reliable oil contracts with producer countries was another task. Within the Non-Aligned Movement and in the Group of 77 at the United Nations, India took the lead in articulating the need for collective self reliance and raising the demand for a restructuring of the international economy to suit the needs of the developing countries. This multilateralism however came to a nought thanks to India's relative decline in the global economy. Despite talk of collective self-reliance, there was very little commercial activity between India and the developing world in general. Even historical economic links within the neighbourhood got disconnected in the first few decades of Indian foreign policy.

But all that is changing. A look at India's current position at the World Trade Organisation might suggest the opposite. While India remains loathe to opening up its markets under pressure at the WTO, it certainly has been willing to loosen control over its economic space through a variety of bilateral free trade arrangements. India is aware that opening up its own markets to the outside world is inevitable over the long term. New Delhi hopes that bilateral free trade arrangements will let this happen in a controlled manner and give Indian industry time and space to compete in markets around the world in the coming years. While maintaining a tough posture at the WTO, India is negotiating a rash of preferential and free trade agreements with a number of countries.

To the east, PTAs with Thailand and Singapore are in an advanced stage of negotiation. India has also promised to work out trade liberalisation with the Association of South East Asian Nations over the next decade. India has agreed to initiate a study on comprehensive economic cooperation with China. As the ASEAN itself negotiates free trade agreements with China, Japan and South Korea, the idea of a larger framework that includes India presents itself. It is not impossible to visualise an Asian economic community built around Japan, ASEAN, China, India and South Korea (JACIK), an idea that is already floating around. While Asian unity has long been a dream for Indian foreign policy, there is an opportunity for the first time to give it concrete economic shape. JACIK could emerge as an economic bloc that can be compared with the expanded European Union and the North American Free Trade Area.

India's trade and economic cooperation initiatives are by no means limited to East Asia. To its west, India already has a PTA with Afghanistan and another is under consideration with Iran. The countries of the Gulf Cooperation Council (GCC) are looking at creating a trading bloc and are interested in working out common trade liberalisation with India. When the South African President, Thabo Mbeki, arrives in New Delhi in October, India will be signing a framework agreement on trade liberalisation with the South African Customs Union, a regional grouping led by Pretoria. India is also engaged in trade talks with Latin American regional groupings, where Brazil is the dominant player. In a recent initiative, India, South Africa and Brazil decided to explore common economic interests through mutual cooperation as well as develop a united front in multilateral organisations. With South Africa and Brazil close to a PTA, the triangular economic cooperation among three large emerging powers has an exciting future.

But nowhere is the geopolitical significance of emerging economic diplomacy more significant than in the subcontinent and the extended neighbourhood. The highly successful Free Trade Agreement with Sri Lanka could become the trendsetter for future economic cooperation in the subcontinent. Commercial flows between the two have increased nearly threefold since the agreement was signed in 1998. That there is a long way to go is reflected in the fact that Sri Lankan trade with the United States is larger than it is with India. By reducing Sri Lanka's import-export ratio with India from 16:1 in 1998 to 5:1 in 2002, the FTA has demonstrated that trading with the larger neighbour would not be inimical. India is all set to expand the FTA with Sri Lanka and hopes to begin discussions on free trade with Bangladesh shortly.

The Indo-Sri Lankan trade experience shows that the economic integration of the subcontinent is at hand, if India is willing to be more creative in its policies towards the neighbours. With massive trade surpluses in India's favour, it is in New Delhi's interest to offer greater market access and facilitate investment in the neighbourhood. India, which thunders against the protectionism of the developed world, remains a relatively closed market to its neighbours despite the recent changes. Our neighbours have genuine complaints about tariff and non-tariff barriers in accessing the Indian market. India can take a leaf out of Brazil's book in making a strategic decision to allow trade surpluses in favour of its neighbours. The political benefits of such a move are indeed immense.

As trade flows expand in the region, the focus has inevitably turned to transport infrastructure. India has begun to invest in road-building in Myanmar that will link it to South East Asia. New Delhi has also committed resources to building a transport corridor through Iran to Afghanistan, in a bid to overcome the political barrier that Pakistan has been to regional economic integration. Iran will also become the gateway to Russia and Europe through the North-South Corridor that is being developed. The historic Silk Route between India and China will be opened shortly to link Sikkim and Tibet. Sri Lanka has been interested in building a land bridge to India that can move people and goods. At the same time, transport links with Nepal and Bangladesh are in an awful shape and demand immediate political attention.

Energy security considerations have moved India from being a mere buyer of petroleum products to a major investor in equity oil around the world from Sakhalin to Sudan. And the size of its petroleum market has given it a powerful card in shaping the politics of natural gas pipelines in the region. Sections of the Indian establishment have begun to see the strategic value of economic diplomacy but it is yet to spread across and filter down to the operational level. India is in a position today to leverage access to its big market to bring down barriers within the subcontinent and between South Asia and the extended neighbourhood.

The story of India's economic diplomacy has barely begun. For generations of Indians, the begging bowl has been an important symbol of Indian diplomacy. It is refreshing to see New Delhi now offer large credit lines across the world and help others make progress. To derive the full political benefits of economic diplomacy, the leadership will have to act decisively to break the old mindset, which defines national security and trade policy in separate and narrow terms. If the Government can bring together the disparate strands of its economic diplomacy and give it bureaucratic coherence and political purpose, India would dramatically enhance its standing in the region and beyond in the coming years.


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