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Op-ed

India and Its Economic Entanglements

by Arvind Subramanian, Peterson Institute for International Economics

Op-ed in the Business Standard, New Delhi
March 28, 2008

© Business Standard


"China will be a great power, but India will just be a great democracy," pronounced Lord Meghnad Desai. Suppose that India wants to defy Lord Desai's prophecy and acquire Great Power status. Suppose too that acquiring it has four prerequisites: economic size (comprising a large and dynamic economy), military might (including an arsenal of nuclear weapons), some form of "soft" power, and global economic integration. And suppose finally that India is on its way to meeting the first three prerequisites. Becoming a Great Power could then come down to global economic integration: How should it be achieved and managed?

Start first with the history and India’s role in three of the most important global economic institutions: the International Monetary Fund (IMF), World Bank (together constituting the IFIs), and the GATT (now the WTO).

The underlying objective of Indian participation has been similar across all three institutions—the jealous, zealous safeguarding of India's sovereignty: In Strobe Talbot's phrase, India was a "sovereignty hawk." Whether in regard to conditionality associated with borrowing from the Bank and the Fund or trade rules in the GATT/WTO, India has tried its best to minimize having to do what it would otherwise not want to do.

Sovereignty, in the trade arena, was the freedom to protect or to prevent the imposition of rules and obligations that would deprive India of this freedom. Of course, this objective, in turn, flowed from an economic ideology that saw, at first, liberalization and market opening as unhelpful to India's interests, and later, that started to recognize the benefits of liberalization but still something to be undertaken at India's pace rather than dictated by the outside world.

But the last two decades are seeing a change not just in economic ideology but also in Indian perception of its interests, a change that will only accelerate further in the years ahead. First, the Indian economy, especially its dynamic services sector, is highly reliant on foreign markets for its survival and growth. Thus, foreign policies towards Indian exports will matter a lot more than in the past. The more that populist, protectionist views such as those of TV personality Lou Dobbs gain legitimacy, the more threatened will be India's economic prospects.

Second, India is not only becoming a large exporter of goods and services, it is, in an unprecedented development (the "precocious India" phenomenon), also becoming an exporter of managerial and entrepreneurial capital. Indian multinationals, located and operating across the globe, could well be an important future reality.

In this light, preserving sovereignty can no longer be the exclusive, or even predominant, concern for India because India's interests and fortunes will, increasingly, be affected not just by its own policies and actions but also by those of its economic partners. The strategy towards global economic policymaking will have to change.

This change at the level of strategy opens up a variety of tactical options. When preserving sovereignty is the strategy, a country can afford to have a pretty undiscriminating approach (mostly having to say no) in its dealings with other countries across the spectrum of issues and institutions. But when sovereignty becomes an asset or a coin that needs to be traded or partially ceded or pooled, a much richer and more sophisticated menu of options presents itself. Who should India deal with? Should they be the same across economic issues or should they vary? Is multilateralism preferable to regional or bilateral relationships? India will have many more cards to play.

Consider the following example. On trade, when the right to protect was the sole imperative, India frowned upon all regional agreements and dealt exclusively in the multilateral trading system. With India becoming a more global player, with major interests in knowledge exports and exports of skilled labor, it is no longer obvious that multilateralism remains the exclusive option. There are good, or at least plausible, reasons to believe, that bilateral agreements with prominent partners such as the United States might have as much, or more, to offer than the WTO as Aaditya Mattoo and I have argued. So, anatural question is whether and how India should forge bilateral trade relationships.

In the IFIs, India, like many emerging-market countries, goes through the motions of active participation, but its real attitude is changing to one of growing disinterest. In part, this reflects frustration at the unwillingness of the major players to change the governance structure and the process of appointing the heads of the IFIs, which are now antiquated and fail to give the new powers, such a China and India, their rightful due. In greater part, though, it simply reflects India's reduced need for official borrowing.

But disinterest can become a short-sighted long-term strategy. The need for international monetary and exchange rate cooperation will not disappear because India is no longer a net borrower from the IFIs. Moreover, as India, like China, starts to become a provider of aid and to increase its dealings with poorer countries, it too will need mechanisms for channeling and coordinating this aid and these relationships. Even more importantly, India will have to think hard about whether and how to change the World Bank from an aid agency to an international cooperative engaged in the financing and provision of global public goods, some of which could prove vital for India.

Similarly, India has an enormous stake in getting global cooperative action to prevent or postpone global warming or at least to minimize its worst consequences. India will need to persuade other countries, including the industrial countries and China, to undertake action that they might otherwise not be willing to take. How should this be done?

India is no longer an island, or rather a peninsula, unto itself. It has to shed its lifetime addiction to sovereignty—the result of the legacy of colonial rule, dirigiste ideology, and India's lacklustre economic performance for three decades. Entanglement entails engagement. How much and how effectively it engages could determine if and how quickly India can claim to be a Great Power.

Of course, there is always the alternative route to the same destination: growing at 10 percent a year for the next 30 years.


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