India's Economic Diplomacy

by Ved Singh
January 15, 2015

Under the leadership of Prime Minister Modi, India is pursuing a policy of “economic diplomacy” centered on major domestic reforms and international outreach to attract foreign investment.

The success of Narendra Modi and his Bharatiya Janata Party (BJP) in India’s 2014 national elections marked a major change in the Indian political landscape. The election ended a 30-year era of coalition governments, which have been prone to indecision, dysfunction, and mismanagement. The BJP’s landslide victory provided enormous leeway to the Modi government to pursue its agenda to link revival of India’s economy with the country’s foreign policy. During the seven months that Modi has been in office, the government has announced a number of reforms and programs to address stagnant economic growth, while reaching out to the United States, China, Japan, Australia, and Southeast Asian countries to attract foreign investment. 2015 will be a significant year as the Modi government works to prove that it can follow through on structural changes to the economy.

The administration’s flagship initiatives include the “Make in India” campaign, which seeks to boost the country’s manufacturing sector; the easing of caps on foreign direct investment in the defense, insurance, and railway sectors; and a proposal to build one hundred “smart cities.” According to the International Monetary Fund, these reforms will lead the economy to grow at 5.6% this fiscal year. For the Indian economy to register the high GDP growth rate seen between 2005 and 2010, these structural changes will be crucial. A good marker of the government’s plan for 2015 should be its budget slated for February. Senior government officials have hinted that the budget will include a “whole set of second generation reforms” to boost economic growth.

The central tenet of Modi’s foreign policy is economic diplomacy—a vision to attract foreign investment while strengthening ties with other countries. Following on this theme, Modi has reached out to regional powers such as China, Japan, and Australia and has been promised over $55 billion in foreign investment over the next five years. One of Modi’s most talked about visits was to the United States, given that he had previously been denied a visa because of his alleged role in 2002 communal riots in Gujarat, which led to two thousand deaths. Modi’s readiness to not let the past cloud the possibility of better ties with the United States was significant. During his visit, he attended the UN General Assembly, addressed a packed crowd of largely Indian-American supporters at Madison Square Garden, met with President Obama, and addressed congressional and industry leaders.

2015 will begin on an even stronger note for U.S.-India ties, with President Obama arriving in India for a two-day visit as the chief guest for India’s Republic Day on January 26. This will mark the first time that a U.S. president has been invited as the celebration’s honored chief guest and will also make Obama the first U.S. president to visit India during both his terms.

Modi has made clear that a significant part of his economic diplomacy will focus on India’s immediate neighborhood. He invited leaders of Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka to his inauguration, made Bhutan and Nepal his first international stops, and resolved a seven-decade-long territorial dispute with Bangladesh in December. At the November summit of the South Asian Association for Regional Cooperation in Nepal, India backed three pacts to enhance connectivity and energy cooperation in the region. The agreements fell through when Pakistan dissented, but reports suggest that the rest of India’s neighbors are exploring the possibility of bilateral agreements with India.

Modi’s regional outreach is likely to expand beyond South Asia in 2015. He unveiled India’s “Act East” policy at the Association of Southeast Asian Nations (ASEAN) Summit in November. This is an evolved version of the “Look East” policy that India introduced over two decades ago and commits India to greater engagement and stronger trade ties with Southeast Asian countries.

Major challenges for the Modi government in 2015 will include managing the relationships with Pakistan and China. Heavy exchanges of fire along the India-Pakistan border in recent months have resulted in rapidly deteriorating relations that have effectively put the relationship on hold. With China, Modi will need to balance economic interests with national security concerns. Chinese incursions into Indian territory continue, with the most recent occurring during President Xi Jinping’s visit to India in September 2014. Despite India’s objections, it took two weeks after Xi’s visit to resolve the incident.

The high frequency of Modi’s international visits will likely be sustained in 2015, as such trips form a crucial element in his foreign policy that centers on economic diplomacy. Even as Modi spends considerable energy convincing international investors of India’s eligibility as a top global destination for their money, questions over the political will for economic reform in India persist. The success of Modi’s foreign policy will thus be tied to the degree to which he is able to implement structural reforms to revive India’s economy.

Ved Singh was a Trade, Economic, and Energy Affairs Intern at NBR in 2014.