PM Modi's Foreign Policy: An Update

  A recent Policy paper (WsPP 4/2015) analyses the changes in foreign policy under PM Modi’s government. Here are some excerpts from this paper giving a flavor of the issues and arguments [i] :

     The most fundamental change in Foreign policy, is the one referred to in October 2014 as “India First.” [ii]   The choice of words was perhaps not the most diplomatic, but the implications remain the same and are amply supported by subsequent developments.  One of the achievements of the previous NSA was to bring out a foreign policy paper titled “Non-alignment 2.0” i.e. the 21^st century version of the post War (WW II) foreign policy of “non-alignment” between the two poles of that time, USA and USSR.  By definition, Non-alignment starts with a definition of the “poles” or countries and their policies, between which one is non-aligned.   “India first” turns this approach on its head, by defining India itself as one of the poles, with a clear set of domestic and international objectives and expectations from other countries.  Instead of looking first at what other country’s objectives and expectations are, and  weaving our way through the contradictory objectives of other poles, we as a fixed pole, first define our own objectives and our expectations from other countries, including the “poles.” We then try to convince them to support our objectives, making whatever bargains necessary for achieving these objectives. 

     An essential element of this changed perspective, is the new government’s “pragmatic actions and ‘view of the world,’ ”  Therefore there has been a search for deals with every pole to further India’s  “primary objective of closing the economic and technological gap and building national power, in a pragmatic forward looking manner jettisoning ideological blinkers and minimizing historical baggage(Oct2014).”  This is neither ‘non-alignment 3.0’ nor ‘multi-alignment’, but the first step in the “Multipolar transition to a Tri-polar world” in which India will be one of the three leading poles by 2020, albeit the weakest of the three.[iii]  India in 2013 ranked third behind USA and China in terms of size of GDP at PPP and tenth behind Russia (9^th) in terms of current dollar GDP. Its economic power, as measured by the VIPP index of potential power, was six.[iv] Author’s projections indicate that India’s rank will rise to number three by 2020. The Modi government’s aspirations of India becoming a ‘leading power’ not just a ‘balancing power,’” as outlined by the foreign secretary, reveals an appreciation of the emerging possibilities.

   Some analysts have called India’s new foreign policy approach as ‘multi-alignment.” But this is a misnomer, because India is not aligning either with the sole super power USA or with the fast rising great power China, nor with the Great powers of the past (Japan, Germany, Russia, France, UK).  It’s a “multipolar transition” because the relative position of these powers, with different strengths and weakness, is undergoing rapid change.  India is on the way to equaling and/or excelling them in certain dimensions, while still being in a position to benefit from their historical strengths.   This uncertain world, with the old equilibrium slowly crumbling, but a new one could take two decades to emerge, can be characterized as a multipolar transition.

   In October 2014, there were five areas in which I saw an emerging change in foreign policy: "The centrality of economic & technological development, the integration of domestic and foreign policy with respect to this objective, the emphasis on “national power” including “military power” and “Soft power” and a reduction in self-imposed constraints on actions that third counties may construe as inimical to their interests.”[v] These changes are now clearly underway.

  The policy paper argues that, (a)  Relations with USA have taken a decisive strategic upswing, but could grow even faster if the USA understood India’s limitations of low per capita income and high poverty and acted with more generosity, given these limitations. (b) That India is moving towards a policy of “symmetry” viz China, and (c) India is adopting a two pronged strategy toward Pakistan, based on a hard headed understanding of the deep state and its actions.  Further details can be seen in the policy paper (WsPP 4/2015).

 

   “The PM Modi led Indian government is changing the emphasis of India’s Foreign and National security policies. Elements of this change in approach are already visible. These involve a clearer definition of Indian interests (“India First”) in terms of economic and technological development, a greater focus on these goals in foreign policy and a consequent integration of domestic and foreign policies. Other changes involve a greater focus on the development of national power, in particular an enhancement of the somewhat neglected element of military power, its broader definition to include asymmetric warfare of which State financed-directed non-state actors are a dangerous part, and a jettisoning of self-imposed constraints of ideology and misplaced fear of offending other countries who display no such squeamishness in their behavior.   Overall a much more confident, credible and effective national security-foreign policy is predicted to emerge over the next five years.” [vi]  These have been rapidly operationalized over the year.

   A philosophical under pining cum broader direction for India’s new foreign policy is also emerging.  This is implicit in the government’s formulation of India going from being a “balancing power to a “leading power.”  The government plans to pursue a policy that accelerates the development of India to the position of the third most powerful economy in the World. It will also attempt to raise India’s rank in  strategic-military power, an effort that is more difficult, time consuming and costly, and therefore can benefit greatly from help from super power USA and other historical Great powers like Russia, France, UK, Japan and Germany.[vii]

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[i] Virmani, Arvind, “Foreign Policy Under PM Modi”, Policy Paper No. 4/2015, New Delhi, May 2015. https://sites.google.com/site/drarvindvirmani/policy-papers

[ii] “Foreign Policy under Modi: http://dravirmani.blogspot.in/2014/10/indian-foreign-policy-under-modi.html

[iii]  Virmani, Arvind, "A Tripolar Century: USA, China and India," Working Paper No. 160, ICRIER, March, 2005. http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233. And other papers at https://sites.google.com/site/drarvindvirmani/india-great-power .

[iv] See for instance, Virmani, Arvind, "Fall and Rise of India", Working paper No. WsWp 1/2013, October 2013. https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxkcmFydmluZHZpcm1hbml8Z3g6M2E0ZTNiNmVhYjA3MTM1Mw and other papers at  https://sites.google.com/site/drarvindvirmani/india-great-power .

[v] Foot note 1 op cit.

[vi] Foot note 1 op cit.

[vii] For details see policy paper at https://sites.google.com/site/drarvindvirmani/policy-papers

Make In India: Economics & Political Economy

Introduction

       There is a general consensus that the Share of manufacturing in GDP is too low in India. This depends to some extent on the benchmark; it is certainly true when the benchmark is other fast growing economies of Asia.  Historically, across the World, the growth of the modern manufacturing sector has played a vital role in helping shift people out of low productivity traditional agriculture to high productivity urban jobs.  The share of the Indian labor force engaged in agriculture and/or dependent on it is too high.  The slow growth of modern labor intensive manufacturing is directly linked to, and an important reason why, the shift of labor from rural to urban areas has been so slow. When it comes to what should or should not be done to change this situations, however, there were many different viewpoints and contradictory policy prescriptions. The make in India campaign can help resolve these differences and create a reform program which all can support.

Development Economics

  The economic (economists’) discussion on this subject has been characterized largely by pre-1990s thinking.  This was the debate about import substitution versus export orientation.  Some of us involved with the choice of development path during the 1990s argued for an export neutral approach to trade, capital market, taxation and other policies. This approach was largely accepted and followed in the policy decisions made in the 1990s and 2000s.  The result was a new paradigm for corporate investment and growth: To invest at global scale to produce global quality goods and services and market globally. Given that a large part of the market for Indian companies was in India, a large per cent of the investment was also in India as was much of its funding.  But all these decisions were driven, by the needs of efficiency, productivity, demand and profitability in a largely neutral environment. This can and must remain the basic paradigm of the “Make in India” campaign.

Defense

  There is however, one exception to this neutrality paradigm: Defense production. Worldwide, strategic technology and production (including defense) is heavily controlled and constrained by confidentiality. The defense industry, even in the most free market economy, the USA, consists mostly of monopolies or duopolies heavily subsidized and controlled by the government. Import substitution and export thrust are therefore valid instruments for achieving the growth of the Private defense industry in India.

Political Economy 

The significant new element in the “Make in India” campaign (in my view) is to address the issues of Political Economy.  There is a joke among economists, that if you get 5 economists in a room and ask their opinion on an issue you will get six different views. Each will have a different view, contradicting all the others, and one of them is bound to change his own views during the course of the discussion (but not to the views of the other 4). In such an environment, where every member of the elite has a view, it is very important to first to get all on board to agree on the basic objective. Then take everyone’s suggestions to make a list of policy reforms and institutional actions that are vital to success.  Thus each will have to accept one or two policies that they do not agree with in return for the 4-5 that they think are vital to success.

Policy Reform

What are the policies that are vital to success of the “Make in India” campaign? One of the greatest obstacles to “making in India” is the jungle of laws, rules, bureaucratic controls and procedures.  As these are too many to enumerate in detail, they are very broadly captured under the banner, “Ease of Doing Business”.  Thus the campaign to improve the ease of doing can be seen as an umbrella that covers many diverse and different aspects of this problem. There are however two important sub categories that deserve special attention. An important instrument for achieving this objective is technology, encapsulated in the overlapping campaigns for “e-governance” and “Digital India”.

Tax Reform

   Firstly “Tax Terrorism,” the word boldly coined by the BJP manifesto.  The complex tax laws and rules and its bureaucratic systems need special attention and effort, because of the damage it has done to the economy in recent years.  This has happened despite decade long effort, starting in late 1980s, to simplify the tax system, both tax experts and tax payers remain highly dissatisfied with it. The fact that it could effortlessly cause so much damage to the economy is proof positive of the need for further reform of the entire tax system.

Labor Laws

      The second is the complex system of labor laws, rules, regulation, which has spawned an “inspector raj” that is simultaneously oppressive and dis-functional.   The result is a dualistic system with a missing middle: It consists at one end, of tiny-small low employment, low tech, low productivity firms, at the other end of highly skill and/or capital intensive, highly productive firms with very few jobs for the common man(integrated auto firms).  The firms with moderate skill, moderate capital requirement and medium to large employment potential are rare in Indian manufacturing & industry.  An important reason for the low share of manufacturing in Indian GDP is therefore the absence of these “mid-category” firms.  The oppressive system of labor controls ensures that small and tiny firms don’t adopt new technology and grow more productive, and new investment doesn’t flow into either medium technology & skills or labor-intensive manufacturing. 

Infrastructure & Skills

   Maximization of efficiency requires that domestic supply chains be able to access all parts of the country where natural or human resources reside. This requires connectivity and appropriate infrastructure. From one perspective, the only additional infrastructure required by the international supply chain is efficient ports. Even this helps domestic production through efficient supply of inputs into import competing products. Thus there is large overlap between the Indian infrastructure required for marketing of goods and services domestically or abroad.

Same is true of job skills. The entire range of skills needed for growth of manufacturing, is an essential element of “Make in India.”  Firm and product specific skills have however to be generated by the high end companies by and for themselves.  In addition, the skills that go into services, agriculture and construction also contribute to the competitiveness of manufacturing and thus to “Make in India.” They are also vital to create self-employment opportunities for the mass of rural youth.

Conclusion

  “Make in India” is both an economic and  political economy umbrella for creating a consensus for and making the vital policy and institutional reforms that can accelerate the growth of manufacturing and  higher quality jobs in this sector. It can also stimulate the creation of employment opportunities in services needed for manufacturing,  agriculture and construction. 

Post Script

   The ability of Private Indian companies to Make in India will be boosted by the signing of the, “Framework For The U.S. – India Defense Relationship,” 2015.  Para 6 B of this agreement outlines the objectives of the Senior Technology Security Group (STSG), “to develop understanding of export licensing and technology security processes and practices and to establish a technology security dialogue for adequate protection for advanced technologies.” Para 6C outlines the objective of the joint technical Group (JTG) to “discuss and co-ordinate defense research and production..” In practical terms, these groups will help Indian private (& public sector) firms get inside the moat of security that protects the latest US defense technology from foreign firms, while ensuring that the information does not leak to third countries. The work of these groups should make it easier for Indian firms to look for Joint Venture (FDI) Partners and collaborators, access the best US sources for high tech component, parts, sub-assemblies and assemblies and to sub-contract goods and services that can be more efficiently supplied from India.

A version of this article appeared in ET Blogs under the banner, "Policies Vital to success of Make in India campaign" at, http://blogs.economictimes.indiatimes.com/PolicyAnalysis/policies-vital-to-the-success-of-make-in-india-campaign/

Does Modi Government have an Economic Model?

  

      One of the reasons for the disillusionment of the educated middle class with the Central Government during 2010 to 2012 was the contradiction between the well-publicized turn to moral philosophy and legal rights and the media exposure of corruption and inefficiency.  The pendulum had swung too far to the abstract & the legal from the pragmatic and the practical.  The incompetence and corruption that intervened between philosophy and results, needed to be addressed, for the public to see beneficial outcomes.

   Has the pendulum swung too far in the other direction?   Is the new government focused excessively on lists of programs and projects and thus prone to ad hoc and inconsistent decisions, without big picture or philosophy to guide individual ministers and bureaucrats?  Does “Modinomics” mean the “Gujrat model”? If this State originated model is applicable only to a sub-set of the larger set of issues dealt with by the Central government, does it mean that “Modinomics is directionless”?  Does the Modi led government have a development philosophy or model, to guide policy and institutional reform decisions?

We can discern three principles underlying Shri Modi’s approach to economic development.

1)      Business is the creator of productive jobs in the economy. All types of business (tiny, small, medium, large; domestic, FDI; private, public sector; manufacturing, services, agriculture), have to play their due role. Effective use of technology and skills is what makes both employment and business, productive.  The jungle of laws, rules, controls and procedures has stifled growth of business, productive jobs and employment. Cutting through this jungle will let the light of the sun on to the ground where these business enterprises and entrepreneurs operate, so that they can blossom. Many policy pronouncements, such as on “Ease of Doing business,” are driven by this underlying approach.

2)      Good Governance is the key to Government provision of Public Goods and Services and successful Social Welfare programs.  Between the input of funds and the achievement of desired outcomes lies the black hole of Government.  Efficiency, honesty (viz corruption) and sincerity (public service, national interest) in government functioning is therefore a critical element in achieving any Social welfare objectives.  Further, technology (e governance) can be an effective instrument for achieving efficiency improvements.  The Federal principles enshrined in the constitution plays a much more important role in defining the areas of responsibility of the Central & State Governments than social philosophy or ‘superior’ moral sensibility.

      Government is also seen to have an important role in creating the economic environment (macro, infrastructure, financial systems, skills, technology development and adoption) in which the business (mentioned in 1) can grow and produce productive employment. However, this aspect differs from earlier governments, only on the relative emphasis placed on different elements of the economic environment.

3)         Government controlled Assets, infrastructure and business can be used to generate profits for investment and growth. This reduces the need for both taxes and tax incentives and for subsidies, all of which are distorting and usually lead to corruption. There is also a belief that this government can manage the public sector, honestly, sincerely and efficiently to generate larger profits and speedily direct these into investment in sub-sectors that will accelerate economic growth (rather than crowding out private investment as happened so often in the past).  Parts of this approach are still evolving, particularly the identification of government owned business, assets and financial institutions that generate losses and negate the investment-growth objective.

      The first element acknowledges the benefits of a competitive market economy and puts the correction of “government failure” as its central issue. The second principle acknowledges both “government failure” and “market failure” and attempts to correct both to enhance the benefits from both. The third element is a little schizophrenic, based as it is on a historical legacy. It makes the optimistic assumption that a Modi government can attain the quality of public sector governance seen in a few countries (Japan, Singapore, S Korea, China) and mimic their relative success.  However, most developing countries, including India, have failed to maintain the quality standards needed for success.

     Classic public goods like defense and sectors with large externalities like most rural infrastructure and monopoly networks in urban areas(sewage, water, electricity distribution, roads, public transport), have been considered governments business in most countries. However, this argument does not apply to business in competitive, well-functioning markets (e.g.  metals, hotels). Thus it partially contradicts a couple of election speeches in which it was said, that “Government has no business to be in business.”

      Every economic model is constrained by political reality. Government decisions are based not just on its economic philosophy and beliefs but also on the political constraints it faces at any given time. These constraints arise from pulls and pressures inside the party, from allies, and the opposition. It is naïve to expect all actions to be consistent with economic philosophy. One hopes that the government is able to overcome the political constraints that keep it from acknowledging and acting on the empirically evidence that government cannot accelerate growth through ownership of business that operate in competitive markets.

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A version of this article appeared in Swarajya on May 21, 2015  at http://swarajyamag.com/economy/does-modi-government-have-an-economic-model/

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