The Illusion of India’s Size | Enterprise standard column


PROVIDENCE: Russia’s invasion of Ukraine has upended the liberal international order, forcing India to reassess its security and economic strategies. Government decisions will be shaped by its assessment of the country’s military and economic strengths, but it should resist the temptation to equate them with India’s size.

Certainly, the Indian economy is undeniably large. According to the International Monetary Fund, India is the world’s third largest economy by purchasing power parity, with a GDP of $10 trillion, behind China ($27 trillion) and the United States ( $23 trillion). At market exchange rates, its $3 trillion GDP makes it the sixth largest economy, behind the United States, China, Japan, Germany and the United Kingdom.

But India’s economic size has not translated into commensurate military strength. Part of the problem is simple geography. Bismarck would have said that the United States was bordered on both sides by weak neighbors and on both sides by fish.

India, however, does not enjoy such splendid isolation. Since independence, it has been confronted on its western border with Pakistan, a heavily armed, chronically hostile and often military-ruled neighbor.

More recently, India’s northern neighbor China has also become aggressive, repudiating the territorial status quo, occupying disputed lands in the Himalayas, reclaiming territory to the east and establishing a large military presence along borders of India. So India may have fish for its neighbors along its long peninsular coast, but on land it faces major security challenges on two fronts.

Despite these challenges and its considerable economy, India has struggled to generate adequate military resources. Defense spending is notoriously difficult to estimate, especially for China and Pakistan, which have opaque political systems. But the combined annual defense spending of India’s two adversaries is likely to be three times the $70-75 billion spent by India. And the actual gap is likely even larger, because India’s political emphasis on military manpower has crowded out spending on military technology. In short, India may have a great economy, but dangerous geography and domestic politics have made it militarily vulnerable.

The question then arises of the size of the market. As Shoumitro Chatterjee of Pennsylvania State University and one of us (Subramanian) have shown, India’s middle-class consumer market is much smaller than the overall figure for the GDP of $3 trillion, as many people have limited purchasing power while a smaller number of wealthy people tend to save a lot. In fact, the effective size of India’s consumer market is less than $1 trillion, far smaller than China’s and even smaller compared to the potential global export market of nearly $30 trillion.

But you wouldn’t know that from India’s current economic strategy. As we have pointed out elsewhere, India has in fact turned inward in recent years, raising tariffs, subsidizing favored firms and staying out of regional integration deals in Asia, the part the most dynamic in the world economy.

Surprisingly, this withdrawal was not the result of economic failure. Since the 1990s, when trade was liberalized, the Indian economy has grown on average by 6.5% per year, propelled by an average annual increase of 13% in exports of goods and services in dollars, a rate surpassed only by China and Vietnam. . But that success proved orphaned, abandoned in favor of a tried and tested policy that (in a more extreme form) failed miserably for three decades after 1950.

One possible explanation for the government’s decision is that it succumbed to the illusion of size. He has repeatedly asserted that India’s economic promise is based on the ‘3Ds’: democracy, demography and demand. And he concluded that domestic and foreign investors can tap into this ever-elusive demand through subsidies and protection.

The temptation to size also manifests itself in the realm of security, where India has refused to explicitly condemn the Russian invasion of Ukraine, despite the humanitarian tragedy it unleashed. This created an awkward irony: Democratic India has implicitly aligned itself with an authoritarian axis, two members of which, China and Pakistan, are hostile neighbors. But India has calculated that, because it is indispensable in dealing with the rise of China, its position towards the Russian-Ukrainian conflict will not have serious consequences for its relations with the West.

In reality, however, India’s response to the Russian invasion is more a reflection of weakness than an expression of independence. If India were truly free to choose, it would maintain the inviolability of territorial sovereignty, especially that of weaker countries.

Finding a way out of this unenviable situation will take considerable effort. Clearly, India will have to depend less on Russia for arms supplies. Russia itself will be too damaged and too dependent on China to want to remain a reliable and trustworthy supplier. More subtly, it will have to increase its defense resources by encouraging faster economic growth and maximizing the value of military spending. The latter will require addressing key shortcomings such as the inefficiency of national defense manufacturing, the paralysis of procurement decision-making since the scandals of the 1980s, and the imbalance in resource allocation that favors personnel versus sophisticated equipment.

Economically, India should look beyond its borders and aim for the global market – and recent developments present it with a unique opportunity to do so. The Russian-Ukrainian war will increase investors’ sensitivity to the nature of the political regimes of the countries where they operate, which will intensify existing pressures to move production out of China. India is in a unique position to seize this opportunity, if only the country would pivot to seize it.

India must accept and act in accordance with its current status as a middle power. Over time, rapid and sustained economic growth could make India the great power it aspires to. Until then, it must overcome the illusion of size and come to terms with strategic realities.

Arvind Subramanian is a Senior Fellow at Brown University and a Nonresident Distinguished Scholar at the Center for Global Development. Josh Felman is Principal of JH Consulting

Copyright: Project Syndicate, 2022

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