INDIA’s DREAM

(Analysed and summarised by IDC.. For full text of foreign researcher's article Click Here)

Executive Summary

During the first decade of the new millennium, India dreams of becoming a regional and possibly a world power. In this decade, it is entirely possible that the US economy may experience a period of decline accompanied by an increasingly isolationist and protectionist stance. This will create the opportunity in Eurasia for other powers to establish themselves as regional powers or alternatives to the US –– China, Russia and Japan would appear to be the likely contenders.

The likely scenario for at least the first part of the decade seems to be that Russia will have to devote most of its effort to pulling itself together and China will have to focus on keeping itself from coming apart. Japan, if it can make the systemic changes in its economy that are required, would seem well positioned to increase its influence in the region and the world. India must solve the problem of Kashmir before it does anything else. Even with that, it lacks the resources and internal strength to become a regional power in this decade. For India, the dream must wait.

The Concept of Power

India has a dream. It aspires to become a regional power on par with Russia and China and even to become a world power. Power, in the international context, is projected in three ways - economically, politically, and militarily. The three legs of power are usually, but not necessarily, inter-related. Political power is required to forge economic ties. Military power is required to protect political and economic interest. If one or more pieces of the power equation are missing, they need to be compensated for in some other manner. The United States projects power around the world in all three areas. Japan projects global economic power and regional military power. The Soviet Union, before its demise, projected global military and political power. It is still a military power. Its demise was linked to its inability to develop the economic leg of the equation.

To examine the plausibility of the Indian dream, one must look at how India might address the power equation during this decade. To accomplish this, we must, in turn, include the direction of and relationships between, China, Russia, Japan, Pakistan and the United States.

The United States

America has been on a roll. It has enjoyed at least a decade of rapidly expanding economy and has become the unipolar super-power of the world. The big question is, of course, can the US continue this type of economic growth and how will other countries and regions react if the US political and economic climate changes? All of the factors for continued, long term growth appear to be present with the USA. It is blessed with a low population density so it has land area on which to grow. It is blessed with abundant resources. Its military might can provide expeditionary force in multiple theaters as well as preclude any thought of invasion. Its economic might is felt around the world. The USA has led wave after wave of change, cultural, political, and economic. America was at the forefront of mass production, it was at the forefront of the technology revolution, it has led the computer revolution and appears well set to lead the knowledge revolution. Through all this, worker productivity continues to increase. America has a culture that not only lends itself to quantum change but also seems to thrive on it. Nothing, however, continues uninterrupted forever. At the moment, the metrics of growth still seem positive. Capital formation continues. Productivity continues to increase. Interest rates and inflation rates appear to be contained. Some pessimists argue that the stock market boom is fueled by an irrational market in dotcom issues. These same people argue that this is very similar to the irrational rise in real estate values in Tokyo in the 1980s. But is it? Real estate is unchanging. It has useful but non-technical utility. The emerging knowledge wave has touched and transformed every facet of society, culture, politics, and economics. Investors are anticipating a change in the essence of the economic model, in the underpinning of the economy. The valuation of knowledge based technology is new and evolving. It can be reasonably argued that revenue will, at some point, follow. As recent perturbations in the market might forewarn, there will doubtless be corrections and shake-outs. Companies will flare to brilliance only to consume their fuel and die. As long as there is money from a growing economy and growing capital formation to pump into the markets, it is not difficult to see continued growth.

America, however, has an interesting demographic development in store that one must be aware of. Somewhere about the mid-point of this decade the baby boomers, the 1945-1950 babies, will reach retirement age. They, for the most part have done, and are doing, well. They are pumping large amounts of money into the market through 401k and retirement plans. The market is supported by a large and patient corpus. This has helped to restrain interest rates during a period of rapid expansion. These same boomers, however, are looking forward to enjoying the fruits of their labors in retirement and at some point will cease to provide input to the capital market and start to withdraw. As the boomers retire and sell their houses and take money out of the market, the impact has to be negative. When large negative forces appear, market investors tend to liquidate vulnerable assets and lock in value. This seems to be to be very ominous for the second half of the decade. When the market and the economy enter periods of possibly very steep decline, the impact ripples outward to many other areas of society. As we begin to look at what might change between America and the rest of the world, let us look at the political dimensions of a steep retreat of the economy in the US. American politics tend to follow some repetitive patterns. One of those patterns is that when times are good, people are relatively unconcerned with politics and political issues. In this year’s fall elections there are few, if any, core level issues that have caught much voter interest. The election is shaping up as more of a contest between personalities. State and local primaries earlier this year drew record low turnouts in many places  across the country. Conversely, when the economy is not in good shape, interest in politics and political issues is high and voters are willing to consider alternatives.

Times are good right now but we have seen in the past that when the US economy goes into decline, calls for protectionism raise to crescendo levels. In 2008, when it seems entirely possible that the economy will be in worse shape than it is today, protectionism will have a much more receptive audience. It happened in the late 1980s. It would seem entirely possible that in the latter part of this decade the US may move toward a much more protectionist/isolationist position. This will have many ramifications globally.

If the US were to withdraw from its current economically dominant position in Europe and Asia, some destabilization would have to follow. This would provide an opportunity for other great powers to attempt to challenge the US’s position. When major powers compete amongst themselves and with the US, a very fluid and unstable situation is created. It is hard to imagine that the US economy would suffer serious or long lasting damage but, for some period of time, a dangerous environment may well exist.

The decade forecast for the US, then, is for continued expansion and political stability for several more years with the potential for relative economic contraction and more volatile politics in the latter part of the decade. This may well be manifest in a more protectionist posture which will provide opportunity for other powers to attempt to establish their positions, particularly in Eurasia This will, in turn, create an unstable and potentially dangerous environment. The list of combatants in the potential regional and global tug of war later in this decade certainly includes Russia, China, and Japan.

The First Decade of the Millenium

In the decade ahead, as the US becomes increasingly isolationist, Russia asserts its sphere of influence to the borders of the former Soviet Union, friction increases with the US and with China. As Japan tries to build its place as the central Asian power in terms of both trade and political influence, it will increase friction with the other wannabes, China and Russia. The first decade of the new millenium, then, is likely to see the US as the still dominant force in the world with Russia trying to rebuild itself, China trying to keep itself from blowing apart, and Japan assuming a major role in Asia as an alternative to the US. Friction between the US and all three as well as friction between the three would seem a good bet to steadily increase as areas of interest overlap.

Viability of the Indian Dream

Against this potentially tumultuous backdrop, where and how does India pursue its dream?

Political. India wants to become a regional economic, political, and military power. Toward this end, politically, India is again pursuing what it calls its "Look East" policy. This is not a new concept, having been developed in the early 1990s when "Non-aligned" India found itself aligned with a suddenly collapsed Russia. Under the "Look East" policy, India is seeking to establish closer relations with such countries as Vietnam, Cambodia, Thailand, Indonesia, Singapore, and Myanmar. Leaders of Singapore, Indonesia, and Cambodia have recently visited Delhi. India has offered aid to Vietnam and Cambodia.

Economic. Economically, India is trying to leverage its $6 billion global presence in the IT industry along with a few other export industries such as gems and pharmaceuticals into regional economic power. India has also been exploring ways to increase economic cooperation with Singapore and Thailand. The idea is to present a regional alternative to the US, China and Russia.

Military. Militarily, India is expanding its Navy and attempting to increase the navy’s operational area as well as continuing development of its Air Force and land and sea based missile delivery systems.

Kashmir. There are, however, some major stumbling blocks along India’s route to becoming a regional power. Foremost among these are - the on-going conflict with Pakistan over Kashmir, insurrection in Assam, an economy that is crawling forward at best, a fiscal deficit that there seems to be no political will to contain, it’s own internal problems with poverty and illiteracy, rampant corruption and the latent political threat of the inwardly focused RSS agenda of Hindutva and Swadeshi.

The situation in Kashmir is very bleak. On the one hand, Pakistan seems to be putting itself in a solid no-win situation. Its economy is in tatters, the military rule the country, and Musharraf seems unable to control Islamic extremism, drug trafficking, and corruption. His governmental structure is heading toward dysfunction. The officer corps of the army is Punjabi and Musharraf is not which means he is on thin ice with his only support base. The army’s only reason for existence, as the officer corps views it, is to fight for their country. They seem to be looking for a fight and it is questionable whether Musharraf can contain them.

On the other side, India has increased its defense budget by $3 billion, roughly what Pakistan’s entire defense budget is. This is hardly an indication that India sees peace on the horizon. The Indian army has strengthened its positions and has been stepping up counter insurgency operations. It has also been equipping itself for fighting in the desert terrain of Rajasthan.

Pakistan, in response, has been reported to have made large purchases of high altitude fighting gear and snowmobiles. Additional troops have been posted in several sectors of the LoC including the Kutch area which may signal a threat to the industrial west coast of India from Gujarat to Bombay. Pakistan’s ISI is accused on a rather regular basis of attempting to destabilize India’s economy by smuggling in counterfeit currency notes and the number of insurgents infiltrated into Kashmir is reportedly increasing dramatically. With tensions running at very high levels, some analysts have gone so far as to suggest that India might even provoke Pakistan into a war.

Navy's Regional Presence. In addition to the increasing tensions with Pakistan, the Indian Navy has recently announced that it will be conducting exercises in the South China Sea. China claims this as its territorial area. If India expands its operational area, as it appears it intends to, it will, no doubt, cause a shift in the balance of naval power in the region. Relations with China, already strained over their support of Pakistan and a couple territorial issues, will further deteriorate. Along with the expanded operational area, India is expanding its naval force as well. There are reports of plans to supplement India’s only aircraft carrier, the INS Viraat, with a re-fitted Russian carrier and to build a carrier of its own. The Indian Navy recently launched a new guided missile frigate. It is also reported that India is nearing the launch of a Kilo-class submarine with ballistic missile capability. If India does put three carriers into operation, it will put India on a par with the UK in carrier force capability. Together with support resources, this would make India capable of extended force projection.

The potential presence of an Indian carrier force and missile capable submarines off its coast might well cause China to reconsider the level of support it provides to Pakistan, thus ratcheting the India-Pakistan tensions up a notch or two. China might also consider increasing its own naval capabilities. This would further increase India-China tensions. Because much of the Indian military equipment will come from Russia, Russia-China relations may also deteriorate.

At some point, this escalation becomes unsupportable by the Indian economy. If China can cause India to focus its attention on Pakistan, it will divert its attention from naval expansion. From China’s perspective this may appear advantageous but it also increases the probability of open conflict and brings to question the degree to which Pakistan and India might escalate that conflict.

Economic Growth. Quite aside from the strain on the economy that military spending is likely to impose, the NDA government seems unwilling and unable to contain the huge fiscal deficit. This will cause the economy to grow more slowly than it otherwise might. At all levels and in all areas of spending little is being done. The size of the government is approaching its all time high despite claims of downsizing. The new Budget 2000 announced cuts in subsidies but these were minimal and even those proposed are being restored under political pressure. The sale of Public Sector Units is announced every year and, every year, very little actually happens. It appears that will be the case again this year. Both Central and State governments have demonstrated that they cannot handle natural disaster time and again despite the outflow of a lot of money. Last fall’s cyclone in Orissa cost many millions of dollars. The current drought will cost more. The prospect of a below average monsoon will exacerbate a deteriorating fiscal picture.

Infrastructure. The lack of infrastructure in India is regularly cited as a major problem and a major hindrance to progress and growth. The country is chronically short of electrical power and very little new generating capacity is in sight. Nearly 50% of the power that is generated "disappears" (the polite word is, of course, transmission loss) thereby further reducing money available to increase capacity. Much of what is not lost is given away (a form of subsidy) for little apparent gain. The country is also critically short of water. The current drought merely highlights how little has been done in 50 years to develop and manage a vital resource. Roads are poor to non-existent in many areas and there is no national highway system.

Even in one of the few bright spots of the economy, the IT industry, there appears to be lack of vision and management. IT is a fast pace, rapidly changing business. India has done little to support this industry aside from passing some accommodating tax laws. Two years ago an IT task force identified 108 areas where government action was required to support and develop the industry. Two years later, 56 have been implemented. Many more have been identified and should, no doubt, be added to the list. Some of the un-addressed action areas are critical such as high speed, high bandwidth data transmission facilities and high quality internet access other than the government owned VSNL. The IT industry has grown so far because of exports. India itself must grow into the IT age or it will be left further behind by faster developing nations.

Foreign Direct Investment. India is highly dependant on foreign direct investment but is really doing little to make itself an attractive destination when compared to other potential destinations. In a recent financial survey, it slipped from 10^th to 11^th place as a favored destination for investment. Trade barriers and tariffs, the slow pace of reforms, slow and erratic bureaucratic processing, corruption, and lack of infrastructure are all negative factors for investment.

The RSS Factor. As if this weren’t enough, there is a potent force lurking in the background of the political scene. This is the Rashtriya Swayamsevak Sangh, the RSS which would have India focus inwardly politically and economically and create a Hindu state to the exclusion of all others. RSS has been trying to move steadily toward the forefront. If the economy does not improve rapidly and if education is not improved and progress made in the alleviation of poverty, India may well find itself changing course considerably on issues of globalization.

Indo-US Relations. The President of the United States visited India recently with a thousand or so associates. The Indian media proclaimed the visit a huge success. There can be no doubt that President Clinton turned on the charm and struck a responsive chord in the Indian government and public. The press proclaimed a grand new era of Indian – US relations, a desire which has been further butteressed by the Indian Prime Minister’s visit to the US.

In the cold light of day, however, little really has happened. Before the visit the US viewed India as a developing nation, albeit a large one. One would suspect that the US also viewed India as a potentially useful counter when dealing with China. Prior to the visit, the US’s major concerns were nuclear non-proliferation and the Kashmir conflict. When the President left, the perceptions and concerns remained unchanged. Other than a vague promise of future goodwill and a small amount of already agreed to business.

Solution to Kashmir? The first few years of this decade will be extremely testing for India. The key to India’s future is not the IT business or any other economic issue. It is finding and implementing a solution to Kashmir. Until this is resolved, India and Pakistan will remain locked in an increasingly dangerous confrontation. US concerns with Pakistan before the President’s trip were nuclear non-proliferation, curbing the export of terrorism and democratic and economic reforms. As with India, these remained the same after he left. Pakistan is bankrupt. Its sources of foreign funding have all but dried up. It will become increasingly difficult to equip and maintain an army in the field. China will, in all likelihood, provide continuing aid to Pakistan in order to keep India focused on Kashmir and Assam, buying time for it to consolidate its position and possibly strengthen its navy. The US may be forced to supply some aid to prevent Pakistan from reaching a critical point at which war is the lesser of evils. No one can afford to let Pakistan become isolated and desperate.

It seems entirely likely that the ongoing fighting will flare up periodically. India must resist the urge to attempt to "conquer" Pakistan. If it does that, it might force Pakistan to use their weapon of last resort which would be to no one’s advantage. The only solution is to reach some long term accommodation on Kashmir. This will require serious and committed diplomacy and some give by both sides. So far, both sides have demonstrated only intransigence. If the Kashmir dispute is not settled quickly, the ongoing war with Pakistan will continue to drain India’s resources and divert its attention from other very pressing issues. (For a possible solution to Kashmir, please see Forum)