Strategic Autonomy: India needs to trade with China, not pushed into a war with it
India’s imperative is trade with China, not war. India (6%) has no option but to trade with China (18% of global GDP), US (16%), EU & Japan (15%)
What is strategic autonomy?
Some have defined it as preserving the capacity to make your own independent choices in the face of great power rivalry. In practice, it could be the ability to join one group or the other, based on the issue involved: climate change could see you aligned with the third world, Afghanistan could see you aligned with US + Russia + Iran; you can even think of trade where you might align with China to preserve access to the Asian market; or there is QUAD, an arrangement for balancing against Chinese hegemony.
Such autonomy is fine if yours is a largely insular economy, with no great need to trade abroad because your domestic economy itself provides you with full employment, and a decent life for your people. In such a case, your security strategy is geared to preserve the status quo, and you make do with the minimum force level you need to deter other aggressive players.
However, India is none of these. As the world's third largest economy, accounting for roughly 6.7% of the global GDP, we cannot retire into a corner and pretend we don't matter. Even if we wished nobody any harm, people will not leave such a significant power alone. In the international arena, if you are not with us, we have to assume you are against us. That is the rule of hard strategy. There is no such thing as neutrality for a significant power.
But more than that, about 55% of our people are without jobs, some 25% are desperately poor, stuck in Malthusian traps, from which unassisted escape is impossible. Our annual per capita income is barely 1900 Dollars, putting us in the lowest quartile globally.
The minimum goal of all our planning must therefore be
[a] jobs for all which takes our labor participation rate from 48% currently to at least 65 to 75% range, and
[b] lift all those below the poverty line above a daily consumption level of $5 per day, by fostering growth that creates jobs for all.
(Note most of our trading partners already have labour participation rates in excess of 60%, and per capita incomes 5X times our level.)
Our present gross savings, that include about 3% of GDP as FDI plus portfolio flows plus external borrowings, cannot generate non-inflationary growth beyond 6% maximum. The most we can expect, given current dynamics, is 4 to 6%. Any incremental growth must come from export production, financed by external savings.
We need 30 million new jobs per annum, for which we need to increase exports from 450 billion to 1 trillion. Generating 500 billion in incremental GDP requires $2.5 trillion of new investment, over and above the existing level. If we set a 10-year target, this means an FDI level of 250 billion per annum, over and above the current level of $60 billion. So, unless we are willing to forget our poor and unemployed, the option of not engaging vigorously with the world doesn't exist for us.
Having ruled out the neutral kind of strategic autonomy as impossible, given our economic imperatives, what then is our strategic autonomy? Real strategic autonomy is always defined in relation to our national imperatives. It is not an imperative by itself. It is a means to achieving our national imperatives. Once you have sorted out the concept in your mind, the situation becomes crystal clear.
Trading Access vs Preferred Access
China is 18% of the global GDP, the US is 16% of the GDP, and Japan and EU put together make up another 15%. Between these three, we are at 50% of global GDP. Given our need for export markets to provide jobs for our people, the first and foremost imperative is to preserve preferred access to the markets of China, US and EU. Under no circumstances can we afford to lose access to these markets.
Note preferred market access is different from opportunistic trading access based on price. The latter is like tramp shipping where a ship competes only on price, often going idle for lack of opportunity. Preferred access is like a conference line, with regular ports of calls and schedules, where rates are long term and stable. Preferred access means your exporters build relationships and marketing partners for distribution, even have a brand name, and are committed to supplying the market regardless of price. This makes exports more stable, more profitable, and attracts investment from large players. It is a virtuous cycle you need to create for export led growth.
So, the first order of business should be to repair trade relations with RECP. We should sort out our faulty exchange rate mechanism that inflates the value of the INR making protectionism necessary to shelter domestic producers. Local producers must be assured that adequate level of protection will be assured to them through exchange rates, come hell or high water. A high-powered committee in RBI with industry representatives must be put in charge of exchange rate management, along the lines of MPC, and this committee should be tasked with ensuring that exchange rates stay as close to REER as possible.
The Central Govt must provide the RBI with budgetary support to manage the exchange value of the INR, regardless of ups and downs in FDI and portfolio flows. Exchange rates must become a more important tool of economic management, just as the interest rate, under a new policy regime. And RBI's claims of relative productivity gains vis--vis our 3 main trading partners should be subject to detailed scrutiny, using an independent panel of economic and industry experts, every 5 years.
Once you fix your exchange rates at appropriate level, detailed planning, industry by industry should commence, to ensure there are no disruptions, and everybody is on the same page. Agriculture, dairy farming, fishing, … everything must come under the new policy regime. All export subsidies must be eliminated with the exchange rate ensuring that exports are not only viable, but also profitable, in local currency terms.
This will ensure we join RCEP without any disruption. This will also sort out our trade dispute with the US, and restore our MFN status. This is not something new. A similar exercise was undertaken at the time we joined WTO. The model is available for use. There is no alternative to such an exercise. It is a strategic imperative.
15% of the global cotton textile market
Once we have repaired trade relations with China using RCEP, and the US, economic diplomacy must go in high gear to open up world markets for textile exports, as demand for cotton explodes due to climate change. We should go the whole hog - from the best seeds, the best varieties of cotton, target the best acreage, build godowns, modernize spinning and weaving mills, and switch to a full VAT in the textile sector to eliminate conflict of interest.
We should also discipline monopolists in synthetic yarn, by allocating an export obligation on pro-rata basis [using capital employed as the base] so that they can either reduce monopolistic margins, or buy from the small garment manufactures for export. The idea is to get big names into exporting. Our goal should be to capture 10% to 15% of the global market.
Armed with this, we should approach the US/EU with an offer. Remove export quotas on textiles for our exports because we have 50% of our workforce idle. In return for your open access, we commit to buy X number commercial planes, Y number of 6th generation EU fighters, and Z number of subs. We are open to joining partnerships at design & development stage. The same offer should be made to US as well. Do one such deal, and the world will open up respectfully for you. It is not difficult, and time for such strategic deal making is just right.
Strategic autonomy is always with respect to an overall strategy that makes achievement of your goals as its center piece. Defined this way, it then becomes a way to protect the national imperatives, within a range of outcomes that one cannot always control. Nevertheless, such an exercise is not blind. It can provide for a realistic assessment of what other players will do, and cater for that in your strategy.
China, US & threat of a new cold war
Start with the main vector that will drive the global dynamic; the rise of China, and the way the world, such as US and its allies, reconfigure to live with a rising China, without necessarily, in fact preferably, going to war with it. None of them will want an overt war for it benefits neither.
The US aim is not so much to prevent a China rise, as to limit its peak power, such that it cannot become the only dominant player. It is its eventual dominance that the US and allies will seek to contain. China cannot be allowed to become the world's only superpower. Nor is such a goal feasible for China. So, the game is largely a sort of power play, and signaling to each other on what each can do, backed by real commitment, not bluff.
That said, it becomes clear that the US will not let China break through the Pacific Ocean to its shores. The entire US grand strategy is based not having to defend the homeland, by keeping actual conflicts as far from its shore as possible. Once its forward defenses are pierced, its capacity for global hegemony ends, because then it has to allocate substantial forces for home defense like everybody else, and has so much less for forward deployment. Thus, there is no scenario in which China is allowed to breakout to its west, across the Pacific Ocean, to directly threaten the US on its continent. AUKUS is about thwarting such an effort by China.
China on its part needs many more years before it can confront the US and its allies with a credible naval force, to force its way past the line of defence that the US has drawn, stretching from Japan to Australia. Nor will China want such a confrontation so long as Taiwan remains outside its ambit. China, so long as it is allied with Russia, will also respect its landmass.
So how does China expand its access to resources and secure them till it is ready with a westward expansion? Obviously eastward; where there is a middle power like India, many smaller powers in central Asia, and potential allies like Iran, Iraq and Pakistan. Hence India must assume that China will expand its sphere of influence eastwards, with or without India's acquiescence. What are India's options?
India cannot prevent China's expansion eastwards, with or without US backing. We should be realistic. Our imperative is trade with China, not war with it. The US was in Afghanistan, and well placed there, to limit China's expansion eastward. Instead, it has vacated Afghanistan, explicitly telling China that it will not come in its way. India was unwilling to put boots on the ground in Afghanistan, perhaps for good reason. Whatever the case, the way has now been opened for China to flow through eastwards. Sensing a trap, China will move cautiously, but move it will.
China's immediate aim is likely to lie in consolidating a partnership with Iran and Pakistan, as also Afghanistan. India has something to gain from such an outcome. For example, access to Iranian gas and oil via pipelines that are sure to be built. India should recalibrate its approach to BRI and CPEC. The more China builds infrastructure in our midst, and the more dependent it becomes on it, the more leverage we get.
We are too large a player for China to smash through. We can defend our interests. So, the better option is to participate in the infrastructure building - it is way of owning it -and to use such an opportunity to settle border disputes with both China and Pakistan, in that order. In short, it is a good time to settle issues with China, on realistic terms; rather than concede piecemeal, when pushed into a corner.
Our future lies with the US and its allies as a democracy, and not with an authoritarian China. So, it is obvious that for the long haul, we should ally with the US, especially as China is more likely to go to 25% of global GDP, while US goes to 20%, while we move up to 10%.
The numbers over the next few decades mean we will be much better off aligned with the US in terms of leverage and utility. Also, an authoritarian China is unlikely to win any lasting cold war. China may have already peaked under a despotic Xi, though momentum can see it carry on for a decade or two.
Strategic autonomy in the modern world is about transparency, and open and clear red lines. We should openly embrace an alliance with the US, without the ill-concealed subterfuge that everybody can see through anyway. Be open and transparent. Our alliance need not be open-ended. It can be structured carefully but transparently. We will for instance limit our high-tech access to the US or EU. We will buy arms from their camp. We will seek military help in intel etc. from the US. Enhance joint operability in IOR. Wherever we can add value to the alliance, we should openly list our obligation as also those of the US. And tell China that while we are open to trade and settled borders with you, besides cooperating with your infrastructure building, and sharing it, but these are our red lines with respect to our self-defense. We have no aggressive designs of our own.
China cannot want a war with India except as the very last option. Nor should we let anybody push us into that corner. Such a war will cripple us, and end China's bid for global hegemony prematurely. Between the two, lies an opportunity to settle bilateral issues with China, and cement a mutually beneficial alliance with the US and the West.
China, India & Pakistan
We have repeatedly allowed Pakistan to blind-side us, first by pushing us into the wrong side in the old cold war, and then again by letting Pakistan cloud our relations with China, US and even Russia. Pakistan has achieved what it wanted since the 1970s - a complete and near total hegemony over Afghanistan. In doing so it risks sinking in the same quagmire that has trapped greater powers than it. Pakistan doesn't have the economic surplus to sustain a central government in Afghanistan. The latter's terrain and tax system are tailor made for warlords. Sooner than later Taliban will need brutal means to retain control, and Pakistan will not escape the blowback that results.
We can therefore safely keep Pakistan busy in Afghanistan for as long as it takes. All we need is a few allies like Russia, Iran, and the US. The latter needs to be convinced that the time is right for Baluch independence, and an eventual federation with a Pashtunistan, that gives it an independent access to the sea. Such a development would greatly help diminish the pivotal geographical pole position that Pakistan enjoys, by splitting access to the sea, in two different countries.
The US might see an intervention in Baluchistan as an effective way to checkmate China's eastward expansion. It is time the world brought home the true cost of terrorism as a strategy under a nuclear umbrella to Pakistan. As long as China is allowed free access to Iran, it might not be averse to shrinking the threat that jihadis in Pakistan and Afghanistan pose to it in Xinjiang. Which is not to say we should launch into such a strategy if the option of settling things amicably is available. Though my feeling is Pakistan will need to experience some pain before it comes to its economic senses.
My point really is that somehow India makes its strategic choices without grounding them in what her people need; jobs and a decent income.
So, look at the current scenario from that perspective. Our growth rate has been shrinking for 4 years. It is capped at 5 to 6% maximum because our merchant exports have stagnated at $300 billion for the last decade. Yes decade. We can neither create jobs nor push up growth without a quantum jump in exports.
In such a bleak scenario we are pursuing an autarchic economic strategy, protecting oligopolists with protectionist tariff walls, that keep us from joining trading blocs or FTAs. We are out of RECP. We have no MFN with the US. Our exports are low-level and opportunistic. We are caught in a vicious cycle of lower growth, and hence lower leverage, with friends and foes alike. And we equate strategic autonomy with the ability to buy S-400 from Russia, or lease a nuke sub from it. We don't understand that opportunistic purchases of hardware condemn us to getting the worst of both worlds, in price and quality, because our allies cannot count on our orders to spread unit development costs, and therefore price them in while dealing with us. That's foolishness, not strategic autonomy.
Strategic autonomy instead is the means to create that ideal world, in which you can grow your economy at 10% p.a., create enough new jobs to employ at least 70% of your people in productive jobs, and to be able to use your economy as the globe's growth engine in return for the 2.5 trillion in investment that you need to grow at 10%. It isn't an impossible goal, and the foreign policy choices we make must be informed by such goals, and not some abstract notion of "strategic autonomy", which does nothing to bring a better life to our people.
(The writer is an independent commentator. Views are personal)