Published On : Tue, Jan 6th, 2015

How China’s economy and an unstable neighbourhood will isolate India in 2015


2015 is the year that India can.

There’s a new, wants-to-do government. Stalled infrastructure projects are being revived, jobs matter again, ecologically sustainable business models are being considered, technology—in private and public enterprises—is on the rise. And unexpected savings from falling oil prices are likely to do good to the fiscal deficit.

Meanwhile, a proactive foreign policy has raised India’s profile. Economic diplomacy has re-ignited investor interest, even as a free trade agreement with ASEAN moves towards fulfilling the “Acting East” promise. New Delhi is also securing the neighbourhood with active diplomacy and aid, with an eye on ensuring stability in South Asia.

So what can change this promising picture?

In a word, China.
At every step, India will come up against the great wall of China—to its benefit, or to its detriment.
Check or charm?

Like India, China too is in high gear.
Regionally, it is an economic and geopolitical aggressor. Its giant $9 trillion economy has plateaued, forcing it to expedite its move towards an open economy. The world’s factory is now focused on becoming a consuming economy, and technology imitation is giving way to genuine innovation.

The question is: will China’s adjustment be orderly, or disorderly?

China has gigantic exports but its massive aid now dominates financing in Asia, Africa and Latin America—sometimes more than that of powerful multilateral agencies like the World Bank or bilateral agencies like the US Exim Bank.

It’s acquiring energy assets across the world, and securing a place in space, beyond the moon to Mars. The People’s Liberation Army has aggressively advanced influence into Central Asia, Pakistan, Nepal and is adventuring beyond. Its navy already asserts itself in the South China Sea and is now seeking parity in the Indian Ocean with other naval powers.

These ambitions require varied levels of adjustment by China, a tuning that is already evident from the slowing of its economy. This is natural, as a developing country stabilises and moves to more advanced levels.

The question is: will China’s adjustment be orderly, or disorderly?

A methodical realignment will require Beijing to rein in its extravagant public spending by instituting prudent lending by its banks and reduced foreign aid and acquisition programmes. A disorderly slowdown will disrupt the financial system, perhaps causing damage to domestic banks, property prices to crash and manufacturing to slow. In turn, this will impact China’s domestic employment and wages, and global trade and financial linkages.

From the Indian perspective, two determinants will influence world affairs in 2015. China, as explained above, is the dominant one. The second is stability in its neighbourhood; in particular, security risks emanating from Pakistan and Afghanistan.
Another Mumbai-style attack in India, a military coup in Pakistan, the resurrection of the Taliban in Afghanistan, the resumption of anti-India terrorist groups in Bangladesh, and rising inequality and resident insurgencies in India—these can all destabilise South Asia.

Energy, which until now, would have competed as a determinant, is no longer a risk for India in 2015—barring geopolitical shocks or natural catastrophes in the producing regions.
Starting 2015, these two determinants—China and the neighbourhood—will intersect, leading to four possible scenarios for India.

Scenario 1

A stable South Asia that intersects with an orderly slowdown in China will strengthen the rise of the global South and its effort to create an alternate political and economic architecture that more accurately reflects its own conditions and global heft. Forums like BRICS will lead the way.
Impact on India: India and China will have a more equal voice in creating alternate global governance structures.

Scenario 2

An unstable South Asia that overlaps with an orderly Chinese economic slowdown will strengthen Beijing’s authority in new institutions, even as it increases its influence in the existing world order. China will be on course for parity with the United States, resulting in a G2.
Impact on India: India will be sidelined, as it will no longer be required as the swing power. The US and China will be making the global decisions, not necessarily in India’s interest. India might find itself excluded from new global trade agreements like the Trans-Pacific Partnership (TTP) and the Free Trade Area of the Asia-Pacific (FTAAP).

Scenario 3

If both South Asia and China are unstable—South Asia because of security, and China because of its economy—then the US will consolidate its power and retain its unipolar dominance. Co-operation with Pakistan for a tidy draw-down of troops from Afghanistan is on the cards, as is a surrender by India on trade and climate change negotiations. The dollar strengthens with the US exercising “exorbitant privilege,” using the advantage of printing its currency to finance growth without significant devaluation. BRICS and G20 will recede in importance, and the World Bank and IMF will call the shots again. The Voice of America will be gospel.
Impact on India: The US will become India’s godfather—pre-eminent arms provider, with pressure mounting to assist the US in military interventions in West Asia. The US will disregard IPR issues and promote its multinationals. It will be back to the 1970s, when India leaned on the US for capital, technology and innovation.

Scenario 4

A stable South Asia combined with a disorderly Chinese economic slowdown will reinforce the idea of democratic dividends—The vibrancy of private sector-led entrepreneurship, public participation in political processes, adoption of business models that serve both stake-holders and shareholders, and framing of equitable policies.

Impact on India: Achhe din, for sure. The Focus will turn away from counter-insurgency and law-and-order issues, as the world looks to India as a reliable alternative to China for goods and services—giving us room to grow, sustainably.
India eclipsed

Our analysis indicates that in 2015, China will eclipse India.

China will likely see an orderly slowdown, even as the security and stability of India’s neighbourhood will deteriorate, negatively impacting India’s ambitions. China will outgrow BRICS, and the precipitous decline of Russia will propel its enjoining the high table with the US.

The G2—US and China—will make global decisions, bypassing India especially on new global, US-led trade agreements like the Trans-Pacific Partnership and the Free Trade Area of the Asia-Pacific. Beijing will be on course for parity with Washington.

India can use the isolation to pursue internal reforms, and strengthen relations with other powers.

Under these circumstances, India will have to seek the beneficence of America as protector and indispensible arms provider, with pressure to assist in US military interventions in West Asia. India will surrender on trade and climate change negotiations—a constant thorn in the bilateral relationship.

India’s hope of leading an alternate global political and economic architecture that reflects own conditions and global heft, will be in retreat in 2015.

But never waste a good crisis.

India can use the isolation to pursue internal reforms, and strengthen relations with other stagnant powers like the EU, Japan and actively-excluded Russia. Thus better prepared, India can hope for an equal voice in world affairs come 2016.