CAD and effect

Have the economic slowdown and rising deficits hurt India’s global profile?

Written by Sanjaya Baru | Published: April 19, 2013 2:26 am

Have the economic slowdown and rising deficits hurt India’s global profile?

Last summer,at the Shangri-la Dialogue in Singapore,when France’s newly appointed defence minister,Jean-Yves Le Drian,spoke eloquently about his country’s stake in Asia-Pacific security,he was asked a straight question from the audience — had France’s finance minister assured him that he would get the budget needed to ensure France’s continued investment in Asian security? Le Drian was honest and candid enough to admit that his colleague had given him no such assurance. Rather,he confessed,money would be a problem. Finance ministers around the world,especially in democracies experiencing fiscal pressure,are slashing defence budgets. Indeed,some are even cutting their budget for diplomacy. As fiscal constraints impinge on defence and diplomacy,governments find themselves increasingly homebound,even if diplomats happily travel to summits.

Not surprisingly,Finance Minister P. Chidambaram has also had to squeeze defence spending to get his fiscal numbers right,as his colleague across Raisina Hill does his best to maintain India’s external profile while dealing with spending cuts.

Through the 1990s and the 2000s,as its economy grew and the government’s fiscal capacity improved,India too derived strategic and foreign policy benefits from its improved economic performance. India’s defence spending increased and its strategic sight was set higher. The widening global footprint of Indian business,a consequence of a more open and robust economy,also helped. Support for India grew,for example,even in the US Congress,as more and more congressmen and senators voted in favour of India on issues relating to India’s national security.

While in the 1970s and 1980s,India’s finance minister would travel to Western capitals in search of aid and the external affairs minister would go around lecturing the world,in the 2000s,India’s finance and foreign ministers travelled to sell Brand India. India became more expansive in its relations with its own neighbours and declared a new policy of “unilateral trade liberalisation” in favour of less developed countries. India’s south-south trade increased as trade’s share in the GDP went up. India’s foreign aid budget too increased and an entire new bureaucracy was created to pursue trade,aid and investment policies aimed at winning friends and influencing people.

I put together a series of essays I had written in the 1990s and early 2000s on this theme in a book entitled The Strategic Consequences of India’s Economic Performance (Academic Foundation,2006). It should be obvious that those consequences were beneficial. If India gained in global stature and influence thanks to its improved economic performance and greater openness,the question arises if India has lost some of this sheen due to its reduced economic performance in recent months. The answer is yes.

It has been a long time since an Indian finance minister has had to undertake roadshows around the world to attract investment. Faced with an unacceptably high current account deficit,6.7 per cent of gross domestic product (GDP),and worried about the potential consequences of a sovereign ratings downgrade if his fiscal numbers do not improve,Chidambaram has had to travel to Tokyo,Hong Kong,Singapore,London,New York and Toronto in search of investors. Perhaps on his way back home,he should consider stopping in Dubai,Abu Dhabi and Doha.

Chidambaram is not new to the experience. He did a lot of this in the early 1990s and even in the mid-1990s. His predecessor and successor in the job,Yashwant Sinha,would have even more bitter memories of his money-seeking days. In 1989-90,he went around the world,as Prime Minister Chandra Shekhar’s finance minister,begging for money. The Japanese snubbed him and the Americans put up a bill of demands in exchange for dollars. After the nuclear tests of 1998,Sinha travelled again in search of dollars to beat the sanctions imposed on India. He found a newly enthused community of people of Indian origin willing to buy into his Resurgent India Bonds.

Today,the job is proving tougher. While Western powers and Japan are more friendly towards India than they were in the late-1980s or even late-1990s,many of them are themselves in deep financial trouble and will not loosen the purse strings readily unless there is something in it for them.

Given this domestic fiscal and external economic profile,it is not surprising that India baulked at the idea of increasing its share for the setting up of a BRICS Development Bank from $10 billion to $20 billion. The idea itself was the product of the days of bravado,bluff and bluster at the finance ministry during the fiscally irresponsible tenure of Chidambaram’s predecessor. But two years ago,when the idea was proposed by India,the country was still not seen as a potential applicant for another loan from the International Monetary Fund. Today,even a responsible financial newspaper like Business Standard has editorially suggested that India may have to go to the IMF to seek financial support.

Can a country seeking support from the Bretton Woods sisters really be expected to put more money into a rival upstart? The strategic consequences,if you like,of India’s reduced economic performance ought to have been clear to India’s strategic planners.

Till the economy is once again back on the rails and till Chidambaram has proved to the world that he has walked his talk,that is,reduced the fiscal and current account deficits,and helped step up investments at home,he would want India’s foreign policy managers to tread carefully and rub no one on the wrong side.

India is not alone when it finds its domestic fiscal and economic situation influencing and constraining its external engagement. Many countries are in a similar bind. Even the US finds its power and strategic engagement sequestered,so to speak,at the fiscal cliff.

China’s leaders too worry about domestic economic constraints limiting their external options. Not surprisingly,therefore,even as China browbeats Japan and flexes its arms in the East China Sea,it is in fact reaching out to many others to keep external tensions under control. Against this background,it is interesting to see China’s leaders reaching out to India,and a new element of the bilateral engagement is likely to be increased Chinese investment in India. Perhaps,Chidambaram’s next visit has to be to Shanghai.

The writer is director for geo-economics and strategy,International Institute for Strategic Studies and Honorary Senior Fellow,Centre for Policy Research,Delhi

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