Diplomatic road to growth

As India seeks a greater share of world trade, G Parthasarathy examines the country’s course of economic diplomacy with its eastern and western neighbours

While the years of rule by the British East India Company (EAC) are regarded as years best forgotten in India, the period of British colonial rule is now viewed with greater understanding. It is estimated that India’s share in world income in the 16th century was over 30 per cent, as against Europe’s share of 23 per cent. India’s share of GDP fell to 3 per cent of the global economy in 1950, after three centuries of European domination. The nation’s share of foreign trade likewise declined to a mere 1.9 per cent of world trade in 1950. China witnessed a similar fall in its GDP and trade in the same period.

INFLUENTIAL: Prof. Harold Laski significantly shaped Indian economic thought during colonial rule
INFLUENTIAL: Prof. Harold Laski
significantly shaped Indian economic thought
during colonial rule

British colonial rule, however, led to the emergence of a number of Indian professionals and intellectuals who understood the importance and dynamics of democratic governance after centuries of foreign domination.But the one British national who significantly shaped Indian economic thought during colonial rule was Professor Harold Laski. Mahatma Gandhi held Laski in high regard for his support for India’s independence. Moreover, Laski’s leftist/communist inclinations profoundly shaped the economic thinking of India’s first Prime Minister, Jawaharlal Nehru, who was one of Laski’s students, and whose quest to build a ‘socialistic pattern of society’ in India largely reflected Laski’s thinking. Yet another of Laski’s students, K.R. Narayanan, became President of India after a long diplomatic and academic career.

With communist parties and ideology losing their appeal worldwide in recent years, there are now questions being raised about the wisdom of Laski’s economic policies, which India followed for the first four decades after independence. All the more so as the ‘green revolution’, which altered the landscape of rural India and made India self-sufficient in the production of food-grains, was achieved by encouraging relatively small private farmers to boost agricultural production. Measures to enhance this included increasing the use of fertilisers and pesticides, and the increased availability of rural credit for small farmers. This occurred at a time when state control of the production and marketing of agricultural products was having disastrous results in communist countries such as the Soviet Union, China and Vietnam. Today, India remains self-sufficient in meeting its requirements of food-grains.

While Indian agricultural production grew, the growth of industrial production in the country was relatively slow, with the public sector controlling theeconomy’s ‘commanding heights’, sheltered behind protectionist walls. This led to less than satisfactory economic growth, much like in China in the years preceding the reforms of Deng Xiao Ping. It was thereforms initiated by Deng in China and Indian Prime Minister Narasimha Rao in India in the 1990s which significantly raised the rates of growth in two of the world’s most populous countries.

But there is much that India still needs to do to increase its share of world trade, which is now barely around 2 per cent.  Trade in goods and services and the flow of investments will inevitably play a crucial role in accelerating economic growth in India.

The far-reaching economic reforms adopted since the 1990s have enabled India to become one of the fastest growing economies in the world, with an annual growth rate of around 7 per cent and a focus on achieving even higher growth in coming years. These reforms have also had a significant impact on India’s external relations, particularly across Asia. India is now focusing increasingly on building on the economic integration that it has achieved in recent years, with the fast-growing economies of East and South East Asia. The main interest is on increasing trade and investment ties with the members of ASEAN, China, Japan and South Korea, though concerns remain about the growing adverse balance of trade with China.

China’s Deng Xiao Ping (l) and Indian PM Narasimha Rao initiated effective economic reforms in the 1990s
China’s Deng Xiao Ping (l) and Indian PM Narasimha Rao initiated effective economic reforms in the 1990s

Having concluded a Free Trade Agreement with ASEAN and Comprehensive Economic Cooperation Agreements with Japan and South Korea, Indiais now set to move ahead in further strengthening economic ties across its eastern neighbourhood. There is, however, disagreement domestically on whether India should join the Regional Comprehensive Economic Partnership (RCEP), which extends its existing free trade agreements with ASEAN, Japan and South Korea to include China, Australia and New Zealand. A decision on this appears possible only after India’s General Elections in 2019. This is primarily because of concerns flowing from India’s already large trade deficit with China and what are regarded as Chinese non-tariff barriers on India’s exports.

While Indian agricultural production grew, the growth of industrial production was relatively slow

The situation in India’s western neighbourhood is more complex, given the tensions in Afghanistan and Pakistan and the sectarian and civilisational rivalries in the oil rich region extending from the Straits of Hormuz and the Gulf of Aden. India has carefully developed its economic ties with both Iran and its Arab neighbours.  Over six million Indians live in the Gulf Arab States, remitting back over $40 billion annually, with the UAE emerging as India’s second largest export market.American sanctions will inevitably disrupt oil imports from Iran, unless Iran accepts alternative payment arrangements which avoid use of American dollars. Tehran has such arrangements with China and Russia. In the meantime, it remains to be seen if US sanctions will apply to Indian investment in the development of Iran’s Chabahar Port, which is crucial for expanding India’s trade and aid to landlocked Afghanistan.

While India has, over the years, built strong trade and investment ties with the EU, particularly Germany and France, it remains to be seen how bilateral trade and investment with a post-Brexit UK develop. Across the Atlantic, the Trump Administration’s trade and immigration policies, including those involving India’s information technology industry, have been disconcerting. But President Trump’s ‘America First’ policies are a fact of life, which every US partner must unfortunately learn to live with. The US, in the ultimate analysis, remains India’s largest trading partner.


G Parthasarathy is a career Foreign Service Officer. He has served as Ambassador of India to Myanmar, High Commissioner of India to Australia, Pakistan and Cyprus, and Spokesman of the Prime Minister’s Office. He is currently Visiting Professor at the Centre for Policy Research in New Delhi 

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