Political fight won’t secure the Indian and neighboring countries relations, but Economic Policy could

The Ministry of External Affairs (MEA), also known as the Foreign Ministry, is responsible for foreign relations of India. India has formal diplomatic ties with almost every nation. India is connected to lots of countries for economic and trade reasons being the world’s most-populous democracy and the fastest developing major economy with growing GDP.

India has significant regional influence across South Asia due to its size, comparative economic power, and historical and cultural importance in the region.The disputed border between China and India is often highlighted as a big bone of contention in Sino–Indian relations. More recently, in 2017 there was some tension between the two countries regarding Doklam. Trouble erupted when Chinese troops commenced construction of an existing road in Doklam on the Bhutan-China border area Donglang. Indian armed forces resisted it protecting their ally Bhutan. Later, India and China both announced that they had withdrawn their battalions. This is referred to as the Doklam Standoff.

Also, the Kashmir disagreement is perhaps at the heart of South Asia’s problems, and India’s relations with its regional neighbors, including China, will suffer until it is amicably resolved. Of much greater worry is the strategic relationship in South Asia that involves the four countries of China, India, the United States and Pakistan. It has both regional and wider implications. At the crux of this is the ever-present India–Pakistan conflict over Kashmir. What complicates matters is the ongoing US contribution in Afghanistan and Pakistan.

The relationship dynamics between these four major powers sharing a quadrilateral relationship to say the least, is complex. China supports Pakistan in its conflict with India. This is a serious cause for ongoing undercurrents and a perennial source of distress in the Sino–Indian relationship. To make matters worse, the US relationship with Pakistan is weighed down with complications and political enigmatic ties. Though, its relationship with India appears to improve after the nuclear deal of 2008. Moreover, because relations are set to improve between India and the US , it causes heartburn for China. It is afraid that the US might establish a vice like grip and this concern impacts China’s relationship with both the US and India. Getting a handle on this complex web of relationships is critical to understanding the issues which are at the heart of China–India relations. This indeed has a significant bearing on the relationship between these countries and the manner in which they interact in the region.

Pakistan is the issue at the heart of strategic politics in South Asia, and it is perhaps Pakistan — even more than Afghanistan — that holds the key to stability in the region. The US and India have specific bilateral issues to resolve between them, but while Pakistan and Afghanistan remain unstable. Since Pakistan inimitably is a safe operational haven for terrorists groups that threaten India, it will be difficult for the Indo–US relationship to progress. What makes matters complicated is the complex relationship China has with both the US and India.

A clear picture of India’s priorities and strategic objectives are essentially five-fold:

  • Prioritizing an integrated neighbourhood; “Neighbourhood First.”
  • Leveraging international partnerships to promote India’s domestic development.
  • Ensuring a stable and multi-polar balance of power in the Indo-Pacific; “Act East.”
  • Dissuading Pakistan from supporting terrorism.
  • Advancing Indian representation and leadership on matters of global governance.

Some nuances of the economic policy of Indian Government in 2017-2018

  • Create a unified national goods and services tax
  • End retrospective taxation of cross border investments
  • Deregulate diesel pricing
  • Deregulate natural gas pricing
  • Deregulate kerosene pricing
  • Remove government mandated minimum prices for agricultural goods
  • Use direct Benefit Transfers to deliver cash subsidies
  • Use direct Benefit Transfers to deliver goods subsidies
  • Deregulate fertilizer pricing
  • Allow more than 50% foreign investment in insurance
  • Allow more than 50% foreign investment in defence
  • Allow more than 50% foreign investment in railways
  • Allow foreign lawyers to practice in India
  • Allow foreign investments in more construction projects
  • Reduce restrictions on foreign investments in multi-brand retail
  • Reduce restrictions on foreign investments in single-brand retail
  • Allow more than 50% investment in direct retail e-commerce
  • Fully open the coal mining sector to private/foreign investment
  • Relax government controls on corporate downsizing
  • Stop forcing banks to lend to ‘private sectors’
  • Establish processes for thoughtful financial regulations
  • Make it easier for states to use eminent domain to purchase land
  • Extend the expiration date of industrial licenses
  • Make it quicker and easier for companies to go through bankruptcy
  • Offer one-stop shopping for clearances for new businesses
  • Ensure that business owners can receive a permit in 10 days or less
  • Institute a mandatory 30-day ‘ Notice and comment’ period for proposed regulations
  • Raise the ceiling of foreign institutional investment in Indian companies
  • Remove sectoral investment limits
  • Conduct transparent auctions of telecom spectrum

Impact of the present economic policy- an analyst’s views:

  • The lingering impact of demonetisation and implementation of the goods and services tax (GST) was the topic of heated economic conversations in India in 2017.
  • A 30-notch jump up the World Bank’s ‘Ease of Doing Business’ ranking to 100 among 190 countries and a much-awaited sovereign credit rating upgrade by Moody’s Investors Service confirmed the reform credentials of the Narendra Modi government.
  • Growth accelerated to 6.3% in the September quarter, thanks to restocking by companies that had cut inventory in the run-up to GST.
  • If 2017 was the year of disruption, the government will be hoping that 2018 shapes up as a year of consolidation.
  • Most analysts expect economic growth to pick up in 2018, helped by a global recovery and a domestic manufacturing rebound.
  • RBI expected growth, measured by gross value added (GVA), to pick up to 7% in the December 2017 quarter and 7.8% in the March quarter.
  • Recent indicators of exports, core sector data and the manufacturing Purchasing Managers’ Index, indicate an economic recovery is underway.
  • At least two risks could derail the recovery:
  • First, rising crude oil prices. India was a major beneficiary of a sharp fall in oil prices starting in 2014 to $28 per barrel in 2016.
  • Price of Brent crude oil rose 18% in 2017 to $67.02 per barrel in December, a 30-month high. While higher fuel prices are likely to inflate input costs, exerting pressure on the margins of manufacturing companies, it will also widen the fiscal and current account deficits.
  • The immediate worry is its inflationary impact. Retail inflation surged to a 15-month high of 4.9% in November from 3.6% in October after remaining below 4% for 12 consecutive months.
  • Most economists believe RBI will keep its policy rates unchanged, but we cannot rule out a rate hike if retail inflation remains above 5% for two consecutive quarters in 2018.
  • Secondly, the deteriorating fiscal situation. While rising crude oil prices will inflate the government’s subsidy bill, a drop in indirect tax collections after implementation of GST and lower non-tax revenue may make it almost impossible to achieve the fiscal deficit target of 3.2% of gross domestic product (GDP) for 2017-18.
    The latest data showed that the government’s fiscal deficit reached 112% of the full-year target during April-November 2017.
  • On top of it, the government has been expanding its spending and decided to borrow Rs50,000 crore more through long-term bonds. Most analysts expect the next budget for 2018-19 to be presented on 1 February to be a populist budget, it being the last full budget of the Modi government ahead of the 2019 general election.
    Rural distress has emerged as a common theme across the country, leading to many farmers’s protests and demands for farm loan waivers.
  • Finance minister Arun Jaitley has indicated that the focus of the next budget will be on the rural economy and infrastructure.
  • The government runs the risk of marring its record of fiscal prudence in four successive annual budgets if it opts for aggressive spending in its last year in office.
  • But the real challenge before the government will be to sustain the pace of structural reforms during the final leg of its term.
  • Public sector banking consolidation, privatization of Air India, more reforms in land and labour laws and agriculture are issues that cannot be postponed.
  • Administrative reforms, on which the government has delivered little despite its promise of “minimum government, maximum governance”, need immediate attention.

The present government’s fiscal initiatives are bringing visibility to India as a sought after investment destination. One thing that has resulted due to the reforms is the closer ties that India is developing with South Korea .China is South Korea’s significant other as far a trade is concerned. Hence, China could see a threat from India as far as economical issues are concerned. India should see this emerging opportunity and strengthen ties with South Korea. South Korean companies operating from China are diversifying their businesses in countries like Vietnam and India. This could mean a stellar growth in Korean companies functioning from India.

India should figure out that its bilateral ties are the hallmark of its diplomatic relations with its neighbors. However, existing operational processes in international relations wager that multi-pronged relationships, regional power and one-upmanship are also necessary for political growth and strategic economic development.