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4 SPEAKING
FREELY Security: India loses its grip By
Zorawar Daulet Singh
power. But it is hard
power - the possession of resources - that enables
a state to gain leverage on other international
actors to influence and ensure conformity to its
own national interests. Foreign-policy autonomy
can only exist with a balanced possession of hard
power. And India's weakness stems from the
structural imbalance in its
hard power. Specifically, Indian military strength
can no longer conceal its economic weakness.
Interdependence is an economic phenomenon
that takes place within "orders that are
politically contrived and maintained", not
surprising given the anarchic character of the
international system. In such a global web of
economic "asymmetric interdependence", the
inequality among several dependent states and the
few independent ones, India's position is fairly
clear.
India is not a global provider, or
indeed even a regional provider, but rather a
dependent state. Its unfavorable relative economic
position is underscored by the fact that, from
energy supplies to financial capital to
manufactures, India is an importer of all. A major
aspect of public policies of several states deals
with alleviating such similar positions. If
development strategies of other transition
economies are observed, one would see the glaring
failure on India's part.
China by
comparison has over the past decade managed to
transform such a dependent position with regard to
FDI with remarkable success. Its FDI strategy was
closely linked to an export-driven growth model
that capitalized on its abundant labor resources
to emerge as a leading hub and provider of
manufacture and consumer goods.
The FDI
that came in also had an incentive to create a
"parallel" infrastructure in the emerging coastal
regions of the east. Today China accounts for 55%
of Asian exports, which are then rerouted to
Western markets via China. But simultaneously,
Chinese policymakers continue to expand the share
of the state-owned enterprises (SOEs) in total
output, which provides employment to millions of
Chinese.
China's State-owned Assets
Supervision and Administration Commission, which
was set up to reform the state sector and refocus
SOEs toward their core businesses, today oversees
161 companies, which control the most powerful
sectors of the economy.
Over the past
three years, profits from these SOEs have soared
to the current $125 billion. Such a dual feature
of the Chinese economy has provided it with a
remarkable degree of autonomy and has at least
partially insulated it from a potential slowdown
in US markets, since Chinese macroeconomic
managers would, when confronted with exports
slowdown, be able to switch to domestic levers to
raise aggregate demand.
Moreover, the
world is yet to witness the domestic demand
strength of China fully. The emerging middle
class, 300 million to 400 million, with rising per
capita incomes, will lead to a more internally
driven economy. Additionally, China's relentless
accumulation of foreign-exchange reserves (current
stock of more than $1 trillion, growing at 20% per
year) since the Asian financial crisis of 1997-98
has provided it with a powerful instrument in its
foreign policy.
To all the above can be
added the huge monopsony (buyer) power of China as
the leading buyer of global commodities and raw
materials. China's geo-economic leverage stems
from this reality.
Contrast this with
India's economic structure. India's economy is
more integrated, with the implication that the
public-sector units (PSUs), which have
historically been the providers of key "public
infrastructure" goods, are intrinsically linked to
the post-1991 liberalized private sector.
Therefore, any PSU inefficiencies or
inadequacies seep into the performance of India's
industrial activity. Since the export-driven model
was not promoted as aggressively as in China, and
governance and policy environment (ie, effective
special economic zones, labor reforms) were
lacking, India was unable to receive the FDI to
spur manufacturing-sector growth.
Over the
past 20 years, India's self-reliance in the
production of machine tools has fallen from 80% to
the current 20%. Today the manufacturing industry
accounts for only 17% of GDP. Consequently, India
has adopted a more gradualist approach to trade
liberalization, combined with a more indigenous
service-sector-oriented growth, which for the most
part is characterized by its non-tradable feature.
And most tragically, the agricultural
sector, which accounts for 20% of aggregate income
and more than 70% of employment, has remained
stagnant. Such a pattern of economic development
has meant that India possesses marginal influence
in its geo-economic relationships.
On the
other hand, India's software sector and other
outsourcing activities, which are less
capital-intensive and not reliant on core "public
goods", have flourished, as have certain high-end
