India’s bargaining power with China and US will grow in post-Covid world

If India fails to action key reforms, its geopolitical leverage will reduce and it will be forced to ally more closely with the US on less favourable terms.

Illustration by ThePrint Team

Covid-19 is likely to accelerate the competition and confrontation between the US and China, and simultaneously reduce the global authority of both by eroding their absolute power and legitimacy. The relative power scale can tilt in either direction. 

India and other middle powers are likely to enjoy greater bargaining capabilities with both US and China. Smaller powers are likely to fall in line with any side that provides them the required capital. 

India’s geopolitical stance depends on actioning key domestic reforms, failing which India’s leverage will reduce and it will be forced to ally with a major power on less favourable terms. 

If India’s relative power vis-a-vis China and the US improves, India can become a swing power for both the US and China led groupings. If India’s relative power declines, India will have to align itself more closely with the US. 

Impact on India 

In our 2017-18 analysis, discussing a “Race to the Bottom” scenario, we wrote: 

‘High inequality and unemployment [may] lead to demands for social justice. Populism and security are the dominant themes of discourse. Simultaneously, India is wooed by both superpowers to join their blocs or provide market access. If handled delicately, there could be major payoffs by playing off the superpowers.’ 

These are likely to hold true in a post Covid-19 world, though much depends on how India responds to the pandemic and what welfare and healthcare systems will be put into place in the coming years. Rebuilding broken social harmony will be a key imperative for building strength. 

An extremely cautious approach will need to be adopted to interact with the superpowers, and bold reforms will be needed to improve all citizens’ quality of life in the midst of a recession. 

The India growth story will continue to require free flows of capital, labour, goods and services. In this world where distrust over China increases, India can be a part of multiple economic webs and gain from them. 

India’s interests in the post Covid-19 world 

Global flows of labour and capital were key determinants of India’s economic power in the pre Covid-19 world. 

In a “Race to the Bottom” world, global labour flows will become restricted. Capital flows are likely to thin out. 

India needs another engine of growth in such a world. Large-scale manufacturing offers one such opportunity. China beat India in this game in the pre Covid-19 world. But in a new world where China is distrusted, India can be part of more economic webs and build its own strength. 

Domestic policy reforms for the post Covid-19 world  

India’s geopolitical stance depends on actioning key domestic reforms, failing which its leverage will reduce and it will be forced to ally with a major power on far less favourable terms. 

Phase 1: Responding to the pandemic (2020-21) 

The limited economic policy objectives in this phase are (i) to help low-income groups tide over lockdowns with cash and food support through existing schemes leveraging DBT through JAM; and (ii) Keep enterprises alive through a mix of monetary actions (greater regulatory forbearance, etc.) and fiscal actions (tax support for maintaining employment, etc.). For details of the Phase 1 response, check our work here. 

Phase 2: Reconstruction (2021-24) 

The focus should be on a large-scale fiscal stimulus, coordinated with a monetary stimulus, focused on infrastructure building. 

Focus on infrastructure 

1. Deliver the infrastructure pipeline of ₹ 100 lakh crores. 
2. Undertake financial sector reforms to attract infra financing, including developing the bond-currency-derivatives market, increasing the depth of markets for InVITS, TOT etc.  
3. Ensure that bottlenecks to infrastructure are removed easily. Create special tribunals, build regulatory judicial capacity and undertake judicial reforms to ensure that dispute resolution on infrastructure (e.g., in land acquisition, environmental clearances etc.) are completed in a timely way.  
4. Build new cities centred around universities and medical centres. Invite some of the best foreign players in these markets to set up for the Indian market. 
5. Build large scale transport and logistics hubs that can also cater to India’s immediate neighbours.

Provide support for a private sector investment revival 

1. Recapitalise and reform banks and NBFCs including a TARP/ bad bank for stressed assets 
2. Create credit guarantees for MSMEs to revive investment

Provide a large-scale monetary stimulus

1. Keep monetary policy stance accommodative across interest rates. The RBI should be advised to reduce CRR, SLR and the repo rate. 

2. The RBI should inject liquidity in the system by pursuing an aggressive asset purchasing strategy through open market operations. 

3. Transfer RBI reserves to the government as per the norms of the Bimal Jalan committee.

Complement with non-traditional external financing 

1. Create a government-guaranteed special purpose vehicle (SPV) for long-term large infrastructure expenditure that is equity- funded by sovereign and pension funds around the world. Target sovereign wealth funds of countries which want to diversify from oil, like Saudi Arabia and Norway. 

2. This can be further leveraged by low interest rate development capital from countries like Japan. 

Phase 3: Towards a post Covid-19 world (2024 and beyond) 

The Government should focus on building an industrial economy i.e., India as the factory of the world, with high quality infrastructure, and a deep economic integration with the US-led web, as well as possibly the China-led web. 

Transition to a low import duty regime 

Reduction in import duties will allow manufacturers moving away from China to continue buying from across the world while manufacturing in India. To Make in India, we need not restrain buying from abroad. Signing a trade agreement with the US, Japan, and ASEAN can be another way to lower import tariffs. 

Create a free trading zone with Bangladesh 

Bangladesh is a fast-growing economy and a potentially big market for Indian manufacturing. A free trading zone with Bangladesh can create wealth on both sides. Opening up can imply cheaper textiles and other goods into India, but it would also give an opportunity to export higher value goods. In time, extend the Free Trading Agreement to other economies in the subcontinent. 

Reduce the risks of investments 

Arbitrary judicial interventions and failure to protect corporate interests deters global companies from investing in India. Setting up special tribunals for projects moving out of China will assure companies that grievance redressal is faster. 

Follow the Global In-house Centre approach (GIC 2.0) 

In IT/BPO sectors, India has allowed global MNCs to set up Global Inhouse Centres that follow the insourcing model. This model can be replicated in manufacturing: create a ring-fenced zone where global manufacturing companies can easily acquire land, build plants, and send expats to work in India etc. 

Grab new opportunities in the services sector 

With the norms of social distancing, the demand for services that can be delivered remotely will increase. India can play an important role in providing telemedicine services. There should be a push to export complementary and supplementary services to school and college education that can be delivered online. 

Business consultation, data processing and data analytics, marketing, and even accounting can be done remotely and India can offer these services competitively in the world. A stable, reliable, and economically viable telecommunication sector is key to achieving these goals. 

Foreign policy outlook for the post Covid-19 world 

Increasing India’s geopolitical leverage 

Increasing India’s economic power can help ensure favourable relations with many other poles of the dynamic post Covid-19 global economic landscape. However, US-China competition will continue, and this will influence India’s choice of economic partners as well as the security decisions it needs to make. The following actions can help ensure a degree of strategic autonomy irrespective of the actions of other players: 

1. Reform defence to shift focus from Manpower to Firepower, Continental to Maritime, Conventional to Sub-Conventional, and Kinetic to Non-Kinetic. Expand technological capacity especially in the new domains such as cyber & space. Reduce dependence on other powers for key defence equipment. 

2. Create parallel multilateral institutions and strengthen presence in select existing ones. e.g., a new FTA in the Indian subcontinent; expanded presence in the IMF; a world body for governing the internet; coordinating global capital flows and monetary policy; reforming the WHO for global public health. 

3. Strengthen the Quad grouping. If India remains as a swing power, then strengthen the Quad WITHOUT explicitly making it a military alliance. Convert it to a formal military alliance and expand it, if India chooses to align with the US. 

Choosing a geopolitical pathway 

Some choices, however, depend on the actions of other powers. Some potential pathways, and the conditions under which India should embark on them, are outlined below. 

Two potential geopolitical stances for India are: 

1. To be a swing power for both the US and China-led groupings 
2. To align itself with the US

The choice between these two stances depends upon: 

1. India’s relative power vis-a-vis both the US and China 
2. Willingness of the US and of China to make concessions to India on BOTH geopolitics and economics

When should India choose to be a swing power? 

• India’s economy does well, and is an attractive investment and trade partner for both China and the US 

• China shows willingness to make the following concessions:
o Settle the border dispute with India
o Cede the subcontinent to the Indian sphere of influence in exchange for India agreeing to not balance China
o China opens up its own consumer market for India
o China invests significantly in a rebooted BRI in India 

When should India choose to align with the US?

• India’s economy slows, and it lacks the power to balance China 
• China is unwilling to make the concessions above, while the US is willing to do the following:
  o Free trade agreement with India, and actively invest in shifting supply chains to India, and providing currency swap lines 
• o Formal military alliance with India, and military support to emerge as the predominant power of the Indo-Pacific. 

Pranay Kotasthane is Research Fellow, Anirudh Kanisetti is Research Associate, Anupam Manur is Assistant Professor, and Akshay Alladi is an alumnus of GCPP course at the Takshashila Institution. Views are personal.

This is an edited excerpt from the authors’ document ‘India in the Post Covid-19 World Order’, published as Takshashila Discussion SlideDoc in May 2020. Read the full document here.