The India-US 2+2 strategic dialogue in Washington took place under rapidly shifting sands of global power. The Russia-Ukraine war has altered the architecture of the world order.
The first quarter of the 21st century will prove decisive. Russia will be a diminished but unpredictable power. China will continue to rise, but there are danger signs ahead for Beijing. The geopolitical focus of the United States will be divided between a destabilised Europe under constant military threat from Russia and China’s inexorable ascent despite economic, demographic and social challenges.
Where does that leave India? In the enviable position of swing power. As the virtual summit between Prime Minister Narendra Modi and US President Joe Biden demonstrated, Washington needs India to counter China in the Indo-Pacific and Indian Ocean Region (IOR). Beijing in turn seeks to persuade India to maintain a position of strategic autonomy — at arm’s length from the US-led coalition of democracies.
What are India’s geostrategic strengths and weaknesses? India is already the world’s third-largest economy by purchasing power parity ($8.9 trillion) and the fifth-largest at current exchange rates ($3.3 trillion). India’s consumer market is the world’s second-largest by volume and the third-largest by value. It is not a market US corporations can ignore. Walmart acquired Flipkart for $16 billion in 2018. Its valuation has since more than quadrupled to $70 billion (Rs 5.30 lakh crore) ahead of a planned IPO in 2023.
India’s vulnerabilities? Critics point to the flight of foreign capital from the Indian stock market in 2021-22, signifying an underlying weakness in economic fundamentals. In a column in The Economic Times on 8 April, Ashok Desai, an economic advisor in the finance ministry during the Narasimha Rao-Manmohan Singh economic reforms, wrote: “The exchange between Shashi Tharoor and Nirmala Sitharaman in Parliament was over too quickly to provoke much interest. Sitharaman did not quite answer the question — what the government plans to do to reverse the trend of foreign investors pulling out funds. Tharoor’s question related to foreign investment. According to him, Rs 1.14 lakh crore of foreign investment left India during 2021-22. Of this vast tranche, Rs 48,000 crore was foreign portfolio investment (FPI).”
Foreign investors have indeed withdrawn money from the Indian equity market. But they have done so from most emerging markets as well for two obvious reasons: One, the US Federal Reserve’s accelerated taper programme that could see US treasury interest rates climbing six-fold to three per cent by year-end; and two, inflation fears stoked by the spike at the price of crude oil due to the Russia-Ukraine conflict.
India’s current total stock market capitalisation is $3.21 trillion (Rs 245 lakh crore), the world’s fifth-largest behind the capitalisation of stock markets in the US, China, Japan and Hong Kong and ahead of British and French equity markets. The withdrawal of foreign investment of Rs 1.14 lakh crore is a barely noticeable speck of 0.25 per cent, spread out over a year, from the total equity market capitalisation of listed Indian stocks. Both Desai and Tharoor’s misgivings are misplaced.
For Washington, India’s large economy, growing stock and consumer markets and vital new free trade agreements (FTAs) with leading global economies are not its only attractive geopolitical assets. India’s rising military capability to police the Indo-Pacific and IOR in conjunction with the Quad’s US, Australia and Japan and middle naval powers like Britain and France make India a pivotal power in the arc from the Gulf of Aden to the Malacca Strait. In Beijing too, there is a belated realisation that it has under-estimated India’s military resolve as the standoff in eastern Ladakh extends into its third year.
Beijing’s options have meanwhile narrowed. The Russia-Ukraine war has set back its plans to expand the Belt and Road Initiative (BRI) to central and western Europe. The European Union (EU) is furious at China’s support of Russia. The economic and infrastructure partnership painstakingly built by Beijing in Europe has suffered a blow.
China’s struggles with COVID-19, its ageing workforce, a slowing economy, the steady drift of global supply chains away from China, and financial defaults by the real estate sector, which accounts for over 25 per cent of China’s GDP, have unsettled the Chinese Communist Party (CCP) ahead of its 20th National Party Congress in November 2022. President Xi Jinping is seeking an unprecedented third five-year term. Headwinds in the economy and rising social tensions have cut China’s overall growth prospects, complicating Xi’s aggressive agenda.
The Russia-Ukraine conflict has demonstrated that even a military superpower like Russia faces reverses in overcoming a much smaller but determined country. A successful Chinese military invasion of Taiwan — in the absence of a peaceful reunification with the Chinese mainland — is now beset with serious doubts.
Washington wants to wean India away from dependence on Russian defence equipment but recognises that 70 years of military cooperation cannot end overnight. That is why it has trod carefully over India’s acquisition of Russia’s S-400 air defence system. Sanctioning India is neither sensible nor desirable for Washington.
But other pressures on India continue. In the short term they revolve around the US-led West’s determination to isolate Russia economically and diplomatically. And yet, to America’s frustration, India remains the last major economic power that has not directly condemned Russia’s invasion of Ukraine or stopped rupee-rouble trade.
The US has publicly conceded that India buys only 1-2 per cent of its daily requirement of 4.5 million barrels of crude oil from Russia while Europe continues to buy Russian oil and gas in large quantities. Hungary last week became the first EU member to break ranks and announce that it would not reduce its purchases of Russian energy.
Since 1947, the US and Britain have followed a pro-Pakistan policy in South Asia. Islamabad remains a major non-NATO ally — which India is not. Throughout the 40-year-long Cold War, US foreign policy tilted in favour of Pakistan.
If the geopolitical architecture has changed today, it is because US priorities have changed. But in the evolving new world order, as the 2+2 strategic dialogue and Modi-Biden talks underscored, India is fast emerging as the pivot on which the balance of global power will turn.
The writer is editor, author and publisher. Views expressed here are personal.