The Foreign Economic Policy of A Rising India

“

Liberalism is the trust of the people tempered by prudence. Conservatism is distrust of the people tempered by fear.
~William E. Gladstone

Preamble

The economic and strategic interests of a country are often inextricably intertwined. In the modern world, no country can ignore its economic interest and growth since they also have a bearing on its strategic interest. A revolution in technology and communication has led to rapid changes in the world economy. As a result, “the world has become a smaller place”, and the order of the day hinges on economic cooperation among nations. “Globalisation” is leading to a proactive association amongst nations as countries look to maximise economic gains.

Thus, it becomes necessary for every country to have a proactive foreign economic policy. As economic cooperation amongst countries increases, unified global progress also takes root.

Global engagement essentially has certain advantages:

• As nations become interdependent economically, hostile interactions tend to decrease in general, and peace is likely to prevail.
• As countries develop resources, they access technologies, and this has a multiplier effect on the economy as well.
• There is a positive effect on the developmental cycle, allowing nations, societies, regions, and sectors to develop.

“Globalisation” is leading to a proactive association among nations as countries look to maximise economic gains. Thus, it becomes necessary for every country to have a proactive foreign economic policy.

Foreign economic policy of India post-independence – A background

Post-independence, India started to follow a mixed economy model. This combined the features of capitalism and socialism. However, the policy had social leanings for obvious reasons. Industry and infrastructure were virtually nonexistent. The government had to intervene in business by walking a tightrope. The emphasis was on encouraging exports and controlling or substituting imports.

The liberalisation effort of 1991 was led by a balance-of-payments crisis that led to a severe recession. India’s efforts to secure loans from the IMF and the World Bank required a precondition that it undertake structural adjustment programs.

Thus, India adopted a more liberal and free market policy and opened its economy to the world in 1991. Government controls through licensing policies were also liberalised, leading to a gradual opening up of sectors, industries, and countries. The Indian government’s EXIM policy was also tweaked, and products on the open list went up while the restricted items came down. India also started actively trading with countries on the SAARC and WTO blocks.

These reforms led to the Indian industry becoming competitive, and growth was achieved and visible in sectors like auto parts, telecommunications, software exports, pharmaceuticals, and biotechnology. Foreign investment increased, and Indian capital markets also matured to attract foreign investors. The over-reliance on agriculture started to come down, and total goods and services trade to GDP almost doubled.

Post-independence, industry and infrastructure were virtually nonexistent. The government had to intervene in business by walking a tightrope. The emphasis was on encouraging exports and controlling or substituting imports.

Foreign Economic Policy of A Rising India

Fast forward to 2014, India has moved on from the earlier non-aligned strategy. Now, we have a multi-aligned approach that prioritises “India’s interests” to remain relevant and compete in a multi-polar world. India’s assertive approach has led to a boost in bilateral relations with key trading partners. India continues building closer economic ties with countries like the US, Russia, and China. However, that being said, it is also positioning itself as a leader of emerging economies at multilateral forums. India’s economic prowess, stability, and potential are finally recognised as the world looks at a “China plus one” policy.

Years of good growth in the Indian economy have led India to become the world’s fifth-largest economy. Undoubtedly India’s stock has risen and it is now being recognised. The key to India’s recognition on the world stage as an economic powerhouse is the government’s investment of time and energy in promoting India’s international relations and global image. India now sees itself as a global player, and not just a sub-continental mover and shaker.

Register your Interest in studying at ISPP

India, in recent times, has been looking to follow a policy of neoliberalism in its foreign economic policy. India is in favour and advocates free trade and no protectionism. It is looking to boost trade through free trade agreements (FTAs) and is in the process of signing FTAs with many countries. India has already negotiated or signed FTAs with more than 30 countries as of today. These interactions would create a web of economic interdependence, which in turn would lead to an era of greater mutual understanding and harmony.

Increased Chinese ascendancy in the region could and would loom as a major security and economic threat to India. This would result in a shift in geo-political equations and make life difficult for India with the security threats on the borders. To counter the dominance of China, India has to continue to grow at a fast clip and thereby hold its own.

With a growing population that has recently overtaken that of China, it is imperative to have a robust and capable foreign economic policy. It is given that Foreign Trade would be crucial for India’s economic development and could make a significant contribution to the economic welfare of the people. India by itself does not possess the adequate infrastructure and raw material resources for the production of goods and services that it consumes. While the concept of Make In India and Atmanirbhar Bharat is a long-term step aimed at India’s self-reliance, economies of scale and international specialisation could be derived through scientific and technological progress. This could only be achieved through foreign trade.

As India opens up further through trade liberalisation, it would fuel India’s economic growth and also contribute to its increasing influence abroad. At the end of the day, the larger target of becoming a 5-trillion-dollar economy is the silver lining on the horizon.

India has moved on from the non-aligned strategy followed earlier. The recognition of India’s economic prowess, stability, and potential is finally recognized as the world looks at a “China plus one” policy.

What is India’s role in global trade agreements?

India’s active participation in global trade agreements is a critical pillar of its foreign economic policy. By engaging in these agreements, India seeks to secure better access to international markets, promote its exports, and protect its national interests.

Here are some key aspects of India’s role in global trade agreements:

• SAARC (South Asian Association for Regional Cooperation)

As a founding member of SAARC, India plays a leading role in promoting regional economic cooperation. Through SAARC agreements, India works to reduce trade barriers, enhance connectivity, and improve trade relations with its South Asian neighbours, contributing to regional economic growth and stability.

• WTO (World Trade Organization)

India has been a vocal participant in WTO negotiations, advocating for fair and equitable trade practices that benefit developing countries. India’s efforts in the WTO have focused on securing better terms for agricultural exports, protecting its food security interests, and promoting industrial development through trade.

• Bilateral Free Trade Agreements (FTAs)

India has negotiated or signed FTAs with more than 30 countries, including key partners such as Japan, South Korea, and the ASEAN nations. These FTAs enable India to reduce tariffs, boost exports, and foster closer economic ties with its trading partners. India is also negotiating new FTAs with the European Union, the United Kingdom, and Canada, which will further enhance its access to global markets.

These trade agreements not only open up new economic opportunities for India but also help it build strategic partnerships that bolster its standing in the international community.

Technological advancements and India’s economic growth

Some of the most impactful technological advancements include:

These technological advancements have enhanced India’s competitiveness in the global economy, attracting foreign investments and enabling Indian firms to expand into new markets.

India’s strategic shift to neoliberalism and its global impact

India’s foreign economic policy has undergone a significant shift towards neoliberalism, characterised by a greater emphasis on free trade, market liberalisation, and reducing governmental intervention in economic affairs. This shift is enabling India to integrate more effectively into the global economy and positioning it as a leader among emerging markets.

Some key aspects of this neoliberal shift include:

By adopting neoliberal policies, India is not only accelerating its domestic economic development but also enhancing its global economic integration.

Challenges to India’s foreign economic policy

While India’s foreign economic policy has achieved significant success, several challenges remain that could hinder its future progress.

Key challenges include:

Environmental sustainability

As India continues to industrialise and expand its economic activities, it faces the challenge of balancing economic growth with environmental sustainability. Rapid urbanisation, deforestation, and high levels of industrial pollution are putting pressure on the country’s natural resources. India needs to develop policies that encourage green technologies and sustainable development practices to address climate change while maintaining its growth trajectory.

Global trade uncertainty

Geopolitical events such as the U.S.-China trade war, Brexit, and the rise of protectionism in many parts of the world create uncertainty in global trade, which could impact India’s export-driven sectors. India must navigate these global shifts carefully, building strategic alliances and diversifying its trade partners to mitigate risks.

Border tensions with China and Pakistan

India’s foreign economic policy is also shaped by its geopolitical relationships with neighbouring countries, particularly China and Pakistan. Persistent border tensions with these two nations pose significant challenges to India’s economic security, trade, and foreign policy initiatives.

• China-India border tensions: The Sino-Indian border has long been a source of friction, particularly along the Line of Actual Control (LAC) in the Himalayan region. The 2020 Galwan Valley clash, in which both sides suffered casualties, highlighted the potential for border disputes to escalate into military conflicts. These tensions have a direct impact on India’s foreign economic policy, as China is one of India’s largest trading partners. While both nations rely on each other for trade (especially in sectors like electronics, pharmaceuticals, and raw materials), the ongoing military standoff has led India to restrict Chinese investments in sensitive sectors and ban numerous Chinese apps. This has strained economic ties and complicated India’s efforts to balance economic cooperation with national security concerns.

• Pakistan-India relationship: The longstanding border conflict with Pakistan, particularly over the Kashmir region, has further complicated India’s economic aspirations in South Asia. While formal trade relations between India and Pakistan have historically been limited, the volatile security situation, frequent ceasefire violations, and cross-border tensions impact India’s ability to expand its economic influence in the region. The instability in Pakistan also limits regional connectivity initiatives, such as the South Asian Free Trade Area (SAFTA), which could foster stronger trade links between South Asian nations.

• Regional security implications: Border tensions with China and Pakistan not only raise the risk of military confrontation but also divert India’s financial resources towards defence spending. The Indian government has had to increase its defence budget significantly to modernise its armed forces, which has the effect of diverting funds away from critical areas such as infrastructure development, healthcare, and education. This strain on public finances limits the scope for economic reforms and hampers India’s efforts to emerge as a global economic power.

Skill gap and workforce readines

While India’s population is its greatest asset, the mismatch between the skills possessed by its workforce and the demands of a modern, technology-driven economy poses a challenge. It is essential for India to fully leverage its human capital in the global economy to address the skill gap through education reform, vocational training, and reskilling initiatives.

India’s response to geopolitical tensions with China

India’s foreign economic policy is also shaped by its geopolitical concerns, particularly its tense relationship with China. As China continues to expand its influence across Asia and the Indo-Pacific, India has taken proactive steps to counterbalance China’s dominance and protect its own economic and strategic interests.

Key strategies include:

By adopting these strategies, India is positioning itself as a key player in the Indo-Pacific region while protecting its own economic and security interests.

Global economic recovery post-pandemic: India’s role

India’s contribution to the global economic recovery following the COVID-19 pandemic has further elevated its status as a responsible and influential global player. As one of the world’s largest producers of vaccines and essential medical supplies, India played a pivotal role in mitigating the impact of the pandemic on both health systems and economies worldwide.

Key contributions include:

India’s leadership in global health and its commitment to economic recovery have reinforced its role as a responsible and influential member of the international community.

The Indian School of Public Policy (ISPP)

The Indian School of Public Policy (ISPP), incubated by India’s leading public policy think tank – Centre for Civil Society (CCS) was established by the world’s leading experts, policy-makers, and influencers. ISPP has encouraged the youth to critically analyse, inquire, and comprehend the principles of sound policy, and continues to inspire young minds to promote and achieve social change through public policies.

With a year-long, Postgraduate Programme in Public Policy, Design & Management is ISPP’s flagship programme for postgraduates looking to make an impact in the public policy domain. The one-year course trains students by taking them through a rigorous programme divided into 5 terms of 10 weeks each. Additionally, ISPP PDM Programme offers various access to professional forums, career and placement support, and networking opportunities.

With a year-long, Postgraduate Programme in Public Policy, Design & Management is ISPP’s flagship programme for postgraduates looking to make an impact in the public policy domain.

FAQs

Check Infographics