Home Economy The limits of India’s coercive economic power

The limits of India’s coercive economic power

Ritesh Kumar Singh
Simply limiting access to its large domestic market cannot be an effective geopolitical and foreign policy tool for India
Chief Economist of Indonomics Consulting and Former Assistant Director of the Finance Commission of India
The world map depicting China and India

Many Indians opine it is time the world’s fifth-largest economy used its steadily growing economic power to discipline difficult neighbours such as China and Pakistan. Both have been critical of its policies – for example, on citizenship rights or the reorganisation of its states; and there is often tension (and the occasional scuffle) at the borders.

There is an argument that using economic clout will be like speaking in a language “Beijing or Islamabad will understand”, and that “it will hit them where it hurts”. 

After all, India is the second largest buyer of defence equipment and mobile phones globally. It is a major importer of crude oil, palm oil, solar panels, and parts and components used in conventional and electric vehicles. With a population of almost 1.4 billion people and an estimated $1.2 trillion in annual retail spending, India also provides a large customer base for internet giants such as Amazon, Walmart, Facebook and Google.

This gives India immense leverage and potentially coercive power over countries and corporations. Thus, denying access to its large and growing market can be a strategy choice, and can be a crucial foreign policy tool at a time the country is faced with multi-pronged challenges from geopolitical rivals that want to stall its rise as an economic and military power. 

So goes the argument. Is it a good one?

Market access as a strategic tool

The use of market power cannot substitute nuanced public diplomacy as New Delhi has learnt the hard way. Besides, walking down this path is not without challenges – it can increase operating costs for multiple local industries, slow the country’s digital economy, invite retaliation from trade partners and also trouble at the World Trade Organization.

India has a large population and is the world’s fifth largest economy with a GDP of $2.9 trillion, but its per capita income of $2,100 is low compared to China’s $10,217. This caps India’s purchasing power, and in turn, its ability to punish adversaries by denying them access to its domestic market. It is also difficult for local businesses to achieve economies of scale without accessing global markets.

Moreover, the beating of this drum is ill-timed as the Indian economy is in the midst of a serious slowdown. India’s GDP is expected to have contracted by 8% in the last fiscal year to March 2021. With COVID-19 making a deadly comeback, things are not looking good in the current fiscal year as well.

India may be an aspiring economic superpower, but its growing economic clout has limited applicability as a foreign policy tool as its economy is constrained by import dependence in critical industries, a slowing economy and low bargaining power for most of its exports. It has a long way to go before it can successfully flex its economic muscle.

Using market access as a strategic tool may work against smaller countries whose economies rely heavily on the export of a few commodities – for example, Saudi Arabia, Malaysia or Indonesia; or in instances where India is a major buyer of a product or commodity and there are enough alternative suppliers. It is hard to see this approach being effective otherwise. And existing free trade pacts with the likes of Indonesia and Malaysia further impose limits on India’s coercive economic power.  

India can, of course, put economic pressure on some other immediate neighbours. It has provided unilateral duty-free-quota-free (DFQF) to all 47 least-developed countries including Bangladesh, Myanmar and Nepal. India could threaten to suspend DFQF provisions to make these countries fall in line if it wants to.

Economic diplomacy will be counter-productive

While it isn’t difficult to ban Chinese apps that can easily be replaced by indigenously developed alternatives, blocking the import of goods is another matter.

Imports of goods such as solar panels or parts and components used in electric vehicles, including batteries, will run counter to India’s goal of promoting clean energy, for instance. Similarly, Chinese Active Pharmaceutical Ingredients hold the key to India’s generic pharmaceuticals industry as the country supplies as much as 70% (90% in case of antibiotics) of India’s requirements.

Labour-intensive industries, particularly the troubled hospitality and tourism, real estate, apparels and retail industries, are likely to witness a substantial rise in their operating costs if they’re denied access to Chinese materials and supplies. It will be difficult to pass these costs on to buyers at a time consumer demand for all kinds of discretionary goods and services is weak, particularly as the country’s policymakers remain bereft of ideas about how to rein in the pandemic.

The list is endless.

Denying access to competitively priced Chinese electronics will slow India’s digital economy, one of India’s top job creators. There aren’t many alternative suppliers that can match China in terms of scale, speed or pricing at present. In contrast, products India exports to China—mostly raw materials such as cotton or iron ore—can easily be sourced from other countries.

Similarly, restricting Chinese investments will deprive Indian tech startups of a steady source of risk capital, especially at a time when private investment remains muted despite low interest rates and the halving of corporate taxes. Indian banks are not inclined to funding startups due to the high risk involved and initial cash burn issues. It is therefore not surprising that the Indian government is relaxing curbs on Chinese investment.

There is an argument that using economic clout will be like speaking in a language “Beijing or Islamabad will understand”, and that “it will hit them where it hurts”. So goes the argument. Is it a good one?

The real test of India’s market power as a coercive tool lies in its approach toward China. This will play out if and when India decides to close its doors to Chinese network gear companies such as Huawei and ZTE from participating in its 5G roll-out.

Amid an all-out American attempt to make it difficult for Chinese tech companies to tap the global 5G market, getting India on board could be a major achievement for China. At the same time, its denial by India may invite retaliation and that could explain why the Indian government hasn’t shut Chinese companies out yet.

Banning Huawei also translates to additional costs. And financially distressed Indian telecom companies such as Vodafone-Idea or Bharti Airtel will be forced to offer expensive 5G services in a brutally cost-conscious market, capping its use. Open radio access network is a possible alternative but has its own challenges.

Time to get real

India’s increasing inward orientation and trade protectionism will come into conflict with its intention to use its economic clout to coerce and extract concessions from neighbours and trade partners. If a country chooses to limit imports in the first place, it is hard to see how its threats to import less from certain countries will have any real additional impact.

The effectiveness of India’s coercive economic diplomacy will only be a function of how open or closed it remains to foreign goods and investment, and how fast its economy grows. These factors will determine its economic clout. 

Moreover, China can weaken India’s market leverage over its trade partners by offering them improved market access (for example, Bangladesh), or aid and investment (for example, Iran). China, with its rare earth resources, or the US, with its semiconductor monopoly, can use export controls to potentially coerce adversaries into submission; it isn’t something India can do as easily.

India may be an aspiring economic superpower, but its growing economic clout has limited applicability as a foreign policy tool as its economy is constrained by import dependence in critical industries, a slowing economy and low bargaining power for most of its exports. It has a long way to go before it can successfully flex its economic muscle. 

Instead, it should first get its own house in order.

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Chief Economist of Indonomics Consulting and Former Assistant Director of the Finance Commission of India

Ritesh Kumar Singh is a business economist and currently the CEO of Indonomics Consulting Private Limited, a policy research and advisory startup based in India. He was a former assistant director of the Finance Commission of India.

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