For over 15 years, scholars have argued that the US-led international rules-based order is effectively dead, but such a shift gains legitimacy only when acknowledged by political leaders. Canadian Prime Minister Mark Carney’s recent Davos address symbolically marks this end, akin to how the Suez Crisis signaled the decline of British imperial power. More significant, however, was Carney’s focus on the future role of middle powers.
Whether India is a middle power or not is beside the point; New Delhi does share many of the constraints. The US is weaponising its economy and dollar-based system, and the Chinese are exporting their industrial overcapacity, effectively destroying any semblance of a level-playing field for others.
More specific to India, there are three unique challenges. First, for over two decades, India spent a lot of political capital on the US relationship, and it’s now turning a bit sour — but New Delhi still needs access to American markets. Second, while there is a nascent thaw emerging with China, Beijing is fundamentally opposed to the prospect of an industrial India. Finally, despite a flurry of reforms, India has struggled to facilitate broad-based industrialisation — something it needs to both lift incomes and national security in an uncertain world.
To overcome these overbearing constraints, India needs to craft a comprehensive commercial foreign policy. Traditionally, a country’s foreign policy objective is to secure its external security environment, which allows commerce to prosper. At this juncture, ensuring security is no longer enough, and states need to actively craft their economic environment as well. While even during ordinary times, states deploy domestic political economy tools to overcome external economic constraints, this moment requires something far more comprehensive.
Consequently, a commercial foreign policy can be understood as a deliberate coordination of a state’s diplomatic capacity with domestic fiscal and regulatory tools to craft a country’s external economic environment. In the Indian context, this translates to actively using the country’s fiscal and regulatory instruments in conjunction with commercial diplomacy to overcome both domestic and global challenges to industrialisation.
After years of flirting with protectionism, the Indian government has reconfigured its trade policy. As a result, over the past couple of years, New Delhi has successfully negotiated a flurry of trade deals, including ones with the UK, Australia, the United Arab Emirates, and now a major agreement with the European Union.
As argued by trade economists C Veeramani and others, just signing trade deals is not enough to facilitate industrialisation and export growth, and more structural reforms need to be undertaken. For their part, the Indian government has undertaken significant reforms, especially with respect to labour laws, correcting some of the tariff inversion, corporate tax, and the domestic consumption (goods and services) tax. Yet, industrialisation or the necessary domestic and foreign direct investments have remained elusive, as highlighted by Ruchir Sharma.
Given these reforms, coupled with India’s industrial policy (Production Linked Incentives), should have ideally facilitated some major manufacturing breakthroughs. Add to it the fact that the US interest rates have been steadily climbing down, which should further incentivise manufacturing FDI into India. Barring electronics, and especially smartphones, there have been no major breakthroughs.
What seems to be holding back India’s manufacturing takeoff is a cumbersome regulatory environment coupled with an inability to implement contracts due to a dysfunctional judicial system.
How can a commercial foreign policy resolve some of these issues?
There have to be three clear elements to India’s commercial foreign policy.
First, build domestic regulatory enclaves, which feature less taxing licensing and compliance burdens, as well as simpler mechanisms for dispute resolution. An ideal strategy would be to revamp the major special economic zones (SEZs) in India’s leading industrial states (across the South and West) and make them attractive sites for investment seeking and industrial cluster formation. The federal government should deploy some of its fiscal capacity to build more SEZ-centric infrastructure necessary for the smooth functioning of firms.
The second element speaks to the heart of the strategy. Over the past decade, the Indian economy has essentially been propped up by a surge in public capital expenditure, which for its part has significantly revamped the country’s infrastructure. However, as Mihir Sharma argues, “highways to forgotten towns”, is great in principle, but is unlikely to facilitate private and foreign investments.
It is now time to tweak this infrastructure-heavy economic strategy and redirect a portion of federal fiscal capacity in resolving some of the hurdles Indian manufacturing faces. What would this mean in practice?
Consider this: Currently, one of the major challenges Indian manufacturing firms face is China’s export curbs on capital and intermediate goods. At this point, China not just supplies the biggest chunk of these machinery and other intermediate inputs, but also at the most competitive prices. Providing them to India would effectively mean that Beijing itself is assisting the emergence of its key Asian adversary. Here, the government in Delhi has two options. It should first provide Chinese suppliers with financial incentives to export those goods to India. If this doesn’t work out, the government should essentially subsidise (paying the differential) for those capital goods imports from other countries manufacturing those goods, such as Germany.
Third, executing this kind of commercial foreign policy would require the necessary human resources. Now, it is unfeasible to expect the bureaucracy to transform itself into a developmental state. Though there are relatively minor reforms that can take us a long way.
The Ministry of External Affairs (MEA) should hire industry consultants and place one in every single MEA regional division. In turn, this group of industry consultants should hold regular meetings with different industry representatives from India. Finally, India’s foreign embassies and high commissions should be constantly apprised about these inputs from industry associations.
These consultants can effectively bridge the information gap between the constraints Indian firms face regarding foreign investments. This rather simple reform can add a major commercial arm to India’s existing diplomacy. Over time, the agenda should expand to bolstering the commercial arms of India’s embassies and high commissions.
As the walls between security and commerce collapse, the gulf between domestic economic and foreign policy ought to come down.
The writer is associate fellow, Observer Research Foundation (ORF)
Curated by Dr. Elena Rodriguez
