[Analytics] Indian economy as an instrument of the eastward expansion

Prime Minister Narendra Modi speaking on Independence Day at the Red Fort in Delhi (India Today). Sketched by the Pan Pacific Agency.

In cooperation with the Far Eastern Federal University

India is one of the youngest nations of the world and it has both dramatic and encouraging history. The period of the British colonization has established an economic system typical for most colonies of the Western colonial powers. This implied the presence of monopoly capital of the metropolitan states, the absence of the local industry, underdeveloped farming, weak handicraft production, and the lack of a national financial system. After gaining independence on August 15, 1947, the Indian Union has faced all the “delights” of the colonial model of the economy inherited from the British. Dmitry Shelest specially for the Pan Pacific Agency with dedication to the Celebration of India’s Independence.

This explains why India did not have enough time to make alternative decisions to address its economic problems. The country was building a new economic system, which has prioritized public sector and government regulation of the economy to eliminate colonial stigmata. These efforts allowed to integrate national economy, to bring together domestic market, to increase employment, to coordinate access to the international markets, and to stabilize the financial system. This was ensured by one of the articles of the Indian Constitution of 1950, which institutionalized a significant government’s role in the economy. The establishment of the Planning Commission also came out naturally, which enabled launching five-year plans since 1951. The share of government spending on the development has grown from a low 4.1% of GDP in the 1950’s to a high 15.8% in the 2000’s while the presence of the government in the national economy has increased to 30%. At the same time, this method has also contributed to the development of cooperative societies from 180.000 in the 1950’s to 249.000 in 2003.

Despite the initial effectiveness, this system started to demonstrate its outdated character in the 1980’s, which among other things has contributed to an economic crisis in the early 1990’s. A military conflict in Jammu and Kashmir, a corruption scandal in the Gandhi family, a rise of Sikh separatism, as well as diplomatic failures in Sri Lanka have also contributed to India’s list of problems. New Prime Minister Narasimha Rao have announced changes in the economic course and economic liberalization following his replacement of Rajiv Gandhi who was assassinated in 1984. The new economic policy has implied partial privatization of the state property, corporatizing of a number of public sector enterprises in order to boost their efficiency and to increase financial revenues of the national budget among other things. From this perspective, a course announced by the head of the cabinet was continued in a foreign trade strategy titled Look East Policy (LEP). In fact, this approach was innovative for Delhi at that time as it has defined a vector of its economic and political orientation of the country for the following decades. Analyzing the events of the past it would be appropriate to assume that India could have had the fate of a political dwarf for many years if the national leaders would not both begin addressing existing problems and determine the future of the nation for decades to come. If the average GDP growth rate per annum before Narasimho Rao’s reforms between 1981 and 1991 amounted to 5.6%, then it has increased from 1.3% in 1992 to 5.9% in 1993, and up to 7.8% in 1997.

As a result, India has approached the beginning of the 21st century as a country with a sufficiently powerful economy. This affected the evolution of the nation’s foreign trade. Exports of traditional “colonial” goods such as tea, spices, jute, cotton, and other similar products has decreased from 61.5% in the 1960s to 6.4% in 2005 while the export of general farming products has decreased from 44.3% to 10.5 %. At the same time, the share of finished products in exports has increased from 45.3% to 73.7% while the exports of products of mechanical engineering and the chemical industry has increased from 1.8% to 32,1% (Source: Economic Survey 2005-2006. Government of India. New Delhi, 2006, p. 82-84.) The main importers of the Indian goods in the Asia-Pacific region were Argentina, Canada, China, Malaysia, Singapore, the USA, Thailand, Chile, Sri Lanka, and Japan. The volume of exports for the 2004-2005 fiscal year has amounted to 79.2 $ billion US dollars, and imports to 107.9 billion US dollars. Russia accounted for only 0.78 billion dollars in Indian exports and 2.31 billion dollars in Indian imports.

At the turn of the century, India has promoted its foreign trade by joining a series of international trade agreements. The Japan-India Global Partnership in the 21st Century Agreement was signed in Tokyo in 2000. The Treaty of Friendship and Cooperation between India and ASEAN was signed in October 2003. In 2004 India has joined a framework agreement that has created a free trade zone within the Gulf of Bengal (BIMSTEC) together with Bangladesh, Bhutan, Nepal, Myanmar, Sri Lanka, and Thailand. In 2005, India has signed an economic agreement with Myanmar, Singapore, and Thailand. In view of the foregoing, it is quite natural that the State Committee India Vision 2020 Report in 2004 has declared that, “India will be much more integrated with the global economy and will be its major player in terms of trade, technology and investment.”

The Look East Policy concept in one way or another was visible in the economic strategy of the country’s leadership during the tenure of the government of Manmohan Singh from 2009 to 2014. It should not be forgotten that Singh was the Minister of Finance in the cabinet of Narasimha Rao and was directly involved in the development of reforms and the aforementioned foreign economic course. In 2010, India’s export has amounted to 370.9 billion US dollars while its import has amounted to 426.8 billion US dollars. In 2014, which was the last year of the Singh cabinet, Indian exports has raised to $ 318 billion and imports to $ 459 billion with a visible decline after the peak of 2013. The trade turnover of India and Russia at the end of this period has amounted to 3.17 billion US dollars of Indian exports and 6.34 billion US dollars of Indian imports. During this time, the volume of trade with the states of Northeast and Southeast Asia has continuously increased. The Free Trade Agreement was signed with ASEAN countries in 2010, which led to commodity circulation of about 74 billion US dollars in the financial year 2013/2014. The Free Trade Agreement signed with Tokyo in 2011 has helped increasing trade with Japan. Intensification of relations with China has made this country India’s largest trading partner in the financial year 2013/2014.

After the Bharatiya Janata Party’s victory in the spring of 2014, the new government has initiated a series of programs to stimulate the country’s economy. It came out naturally that the key tenets of the of Narendra Modi Act East Policy voiced in November 2014 had a direct reference to Look East Policy. When the such programs as Smart cities, Financial Inclusion Plan, Make in India, Skill India and Startup India were launched, they were quite consistent with the foreign policy aspirations of New Delhi. As noted by an Indian researcher Sachin Chaturvedi, all these initiatives were pushed “… at time when industrial development appeared difficult, particularly in the face of a sluggish world economy.” In his inauguration year, Prime Minister Modi has visited Australia, Brazil, Germany, Canada, Nepal, Singapore, the USA, France, and Japan. This year came to an end with a visit to India of the Russian President Vladimir Putin. At the same time ASEAN countries still had their high prominence for New Delhi, which according to Modi who expressed his opinion at the organization’s summit in 2016 in Laos, were the basis for the implementation of the Act East Policy.

By the 72nd celebration of its independence, India has the largest number of labor resources in the world and spends 4.8% of GDP on modernization of its infrastructure. Indian economy has reached GDP growth of 7.2% at the end of 2017, overtaking China by this indicator. According to the IMF prognosis, the economic growth of India will remain at a level of astonishing 8% annually all the way until 2030. This notion is supported by the India’s foreign trade output for the financial year 2018/2019, which amounted to 483.92 billion US dollars for the exports and 577.31 billion US dollars for the imports. Even a brief look at these figures shows that India, which aims at both internal development and geostrategic stability, can achieve its goals in the Asia Pacific alone. This implies that New Delhi’s next steps in the political and economic spheres will also be focused on the nations of the Asia Pacific.

If the average GDP growth rate per annum before Narasimho Rao’s reforms between 1981 and 1991 amounted to 5.6%, in 1992 it has increased to 5.9% in 1993, and up to 7.8% in 1997.

Dmitry Shelest is the Deputy Director of the FEFU Center for Expertise and Analysis. English editing by Ivan Pisarev

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