Some dramatic Indian shifts amid changing geopolitics

India’s geo-economic and geopolitical ambitions are growing, and with it has come a shift that challenges long-held, time-tested positions and alignments that have been built during the Nehruvian era and have been strengthened over the first 75 years of the republic. This change in India’s positions is probably best seen in the growing closeness to the Israeli regime of Benjamin Netanyahu which has been accused of a continued and relentless genocide in Gaza. There isn’t much consensus on this deep policy change internally in India.

The need for consensus is probably less felt in areas of foreign policy, geopolitics and geo-economics, all of which aren’t the hot topic of discussion in the country. The average citizen or student isn’t typically engaged in the nuances of foreign policy, trade relations or political leanings and their interplay with economics. Yet, the significance of this shift needs to be underlined, as also a lack of debate or consensus in India on the realignment that is distinctly underway. This comes at a difficult time in global affairs.

Consider that the RBI Annual Report for 2023-24 released last month has emphasised escalating geopolitical tensions, rising geo-economic fragmentation and the inefficiencies that this brings in a world where globalisation appears to be in retreat. “Geopolitics” and “geo-economics” as terms appear 16 times in the RBI annual report dated May 30, 2024 (Part I: Assessment and Prospects, more than the number of times seen in the previous year), a pointer to how economics is being constrained by politics in the context of the demands and exigencies of geopolitics. The emphasis (or overemphasis as some might call this) tells us that an entire gamut of issues, like the external sector which comprises trade, capital flows and currency movements, crude prices and their movement, global financial markets, global inflation and the foreign exchange market, are so deeply interwoven globally that any retreat from the principles of globalisation into an era of deglobalisation will bring big new and serious economic challenges.

Yet, these challenges are coming in a world riddled with rising tensions and the potential threat of closing of borders, a reinforcement of national agendas, and priorities of a strong nation-state as a force against globalisation and multilateralism. As the RBI report noted: “Global financial conditions tightened amidst heightened volatility in response to synchronised monetary policy tightening as well as aggravating geopolitical conflicts.”

We see that already “trade and investment flows are being redirected along geopolitical lines,” according to the first Deputy Managing Director of the IMF, Gita Gopinath. In her May 2024 speech (‘Geopolitics and its Impact on Global Trade and the Dollar’) at the Stanford Institute for Economic Policy Research, she noted that China’s share in U.S. imports declined by eight percentage points and the U.S. share in China’s exports dropped by about four percentage points between 2017 and 2023 following a flare-up in trade tensions. Direct trade between Russia and the West collapsed following the conflict with Ukraine and subsequent sanctions on Russia.

Geopolitical tensions are of course not new; they surfaced during the World Wars and resurfaced during the 1970s in the form of a Cold War between the then superpowers, USA and the Soviet Union. The economic consequence of this manifested in the patterns and directions of foreign trade, cross-border capital flows, currency movements and migration of labour. The collapse of the USSR, the emergence of China as a new economic power, the formation of the European Union, the emergence of USA as a hegemon and most recently, new questions on the Israel-Palestinian conflict that is increasingly being seen as genocide has resulted in a paradigm change in the world political and economic order, threating multilateral co-operation and multilateral systems of economic governance.

These developments have consequently posed a threat to international peace, security and political stability. The world economic order faces a transformation from public expenditure on developmental and welfare-oriented programmes to a higher level of defence expenditure.

The term “geo-economics” was first used by Edward Luttwak in 1990. Luttwak argued that cold war ideological rivalries have been replaced worldwide by economic competition, in which trade and finance overshadows military power. Geo-economics as a branch of knowledge emerged from geopolitics as international economic relations are guided by political relations. To quote the old English proverb, “trade follows the flag and the flag follows the trade”, which was first used in the context of colonies when it was coined by E. Cobham Brewer in 1894, but is now used to highlight a co-movement of politics and economics. Yet, as some will argue, the underlying baggage of colonisation is unchanged, with global business as the new occupying force in which India, too, wants a share of the pie!

Among the BRICS countries, China has emerged as a new economic power and geopolitical force, giving us the IMF classification of blocs as USA-leaning countries, China-leaning countries and non-aligned countries. China has occupied a position for itself in geopolitics. Reflecting this, the Chinese currency Renminbi has been included in the basket of currencies by IMF. Besides, the foreign currency reserves of China stood at US$3.2trillion (April 2024), an indication of its growing financial muscle in the global order.

Russia with crude oil reserves (geo-economic leverage) and a strong military base (geo-political leverage) is geo-politically sensitive. India’s position in the context of geo-politics is its commitment to maintain a harmonious economic and political relationship with both USA and Russia. This is evident from the revival of Rupee trade with Russia. With regards to USA, India’s total foreign trade during 2022-23 accounted for 24.44% of the total (17.41% share in exports and share in 7.03% imports). India’s trade with China accounted for 17.18% of the total foreign trade (3.39% share in exports and 6.47% share in imports).

Broadly, in the blocs as mentioned above, where does India stand? Is it USA-leaning, China-leaning, non-aligned or ready for partnerships everywhere and anywhere? The official stance is that India’s foreign policy objective is to move to multi-alignment from the conventional non-alignment leaning.

This is corroborated by India’s foreign trade data during 2022-2023, as published by the RBI. Excluding USA and China, India’s foreign trade to other countries accounted for 58.38% of the total foreign trade during 2022-23, of which the share of the European Union in foreign trade was 21.70%, and OPEC countries 33.4%. As against this, a decade ago (2013-14) the share of total foreign trade excluding USA and China, was 83.3% of which the share of the European Union in foreign trade was 13.24%, and OPEC countries 31.26%. As it may be seen, over the decade, India’s trade relations with USA and China have grown to 41.62% in 2022-23 versus 16.7% in 2013-24, indicating a tilt.

In sum, efficiency gains from trade specialisation and globalisation are under threat from retreating globalisation. As the IMF notes: “While rebuilding trust is difficult and may take time, it is critical to avoid the worst outcomes in a rapidly fragmenting world. It is well-worth it to preserve some of the enormous gains from economic integration that have made the world more prosperous and more secure”.

India is working to rediscover itself in this phase and the shifts we see are nothing short of dramatic.

BY R K Pattnaik

editor@thebillionpress.org

(Dr.R.K.Pattnaik is a former central banker and Professor at Gokhale Institute of Politics and Economics, Pune. Views are personal) (Syndicate: The Billion Press)