The geoeconomic implications of the upheavals in the Middle East

A summary of discussions at the Friends of Takshashila Geoeconomics Roundtable in Singapore on 26th March 2011

Why is this important?
India is much more linked to the global economy today than it was a decade ago. As compared to 2001, today a majority of India’s manufactured output is exported. External demand drives exports and newer exports like services and engineering goods have a higher demand elasticity. If global economic growth is hit, investment, income from exports and remittances will be impacted, hurting India’s own economic growth.

In such a situation, an Indian government will face the need to cut its expenditure. It is more likely to cut down on capital spending (infrastructure) than on revenue spending (entitlements and social programmes). This, in turn, will not only cause macroeconomic problems (like inflation) to worsen in the short term, but also constrain the sustainable growth prospects of the Indian economy.

There is, therefore, a greater need for India’s policymakers to pay attention to the economic implications of the developments in the Middle East.

It’s the Gulf that matters more
So far, other than Bahrain and Yemen, the political unrest has largely taken place in North Africa and the eastern Mediterranean. These have limited oil and host relatively fewer Indian expatriate workers. If, however, the unrest spreads to the Gulf Cooperation Countries—Saudi Arabia, Kuwait, Oman, Abu Dhabi/UAE—and Iran, the implications will be of an altogether higher degree of seriousness. While the United States is unlikely to encourage regime change in the GCC countries—which are among the biggest purchasers of US arms—there is a risk that the Saudi-Iran dynamic could take a destabilising turn.

These developments impact India directly and indirectly through their effect on the global economy, through three main channels: by affecting the oil price, investment and remittances.

Oil price
Even if a Gulf state undergoes regime change, it will still have to continue to export oil and gas. However, the risk of unrest, potential increase in demand in Japan and speculation are likely to continue to cause oil prices to rise further. Rising oil prices affect India by hurting the balance of payments, worsening the fiscal deficit (due to oil subsidies) and by damping global economic growth.

(According to one estimate, visible and hidden oil subsidies would amount to between 2.2% of GDP to 3.6% of GDP at crude oil prices of $100/barrel and $120/barrel respectively. )

A closer economic relationship with Russia might be a way to manage the oil-price related risks emanating from the Middle East.

Lower global growth is likely to hurt inward investment. However, some participants also felt that India could buck this trend if the Indian government carries out measures that can convince investors of India’s long-term growth potential. This calls for the urgent and bold introduction of the so-called second-generation reforms. (Prime Minister Manmohan Singh’s statement at the Business Standard awards ceremony were mentioned in this context, although his ability to carry these out remains in question.)

The move by some GCC countries to provide fiscal handouts to their citizens, in an attempt to stem the unrest, could turn out to be a positive for India. Some of it will translate into revenues for Indian exporters and some into higher remittances by Indian expatriate workers. Also, to the extent that Gulf sovereign wealth funds have lower sums to invest in a discretionary manner around the world, it is to India’s benefit.

India is one of the world’s largest recipients of remittances, a significant fraction of which originate from the Middle East. However, to the extent that the unrest does not affect the GCC countries, remittance flows will not be significant impacted.

The relationship between oil price and remittances suggests that the “sweet spot” for India is when the oil price is around $50/barrel. At this level, there is robust economic activity in the GCC countries and a corresponding robustness in the remittances to India. But this equation falters when oil prices go upwards of $90/barrel, after which the impact on economic activity and remittances turns negative.

Impact on India
First, the primary risk to India is of political upheavals in the region causing a global economic slowdown and, in consequence, slowing down the pace of India’s economic growth. According to one estimate, these events could reduce India’s GDP growth rate by up to 2 percent. This is likely to disproportionately hurt the poorer segments of society, especially in urban areas, more than others.

Second, the evacuation and resettlement of Indian expatriates might not be smooth and could generate some short-term political problems. This would be harder to manage if there is a surge of evacuation as a result of a precipitate crisis, the risk of which is estimated to be low. Also, the return of Indian expatriate workers could turn out to be beneficial in the medium- and long-term due to the infusion of new ideas, skills and innovation.

Open questions
Three questions were raised: To the extent that the rise of Islamic radicalism and militancy is, in part, backed by money from the GCC countries, would a sustained increase in oil prices and fiscal measures by their regimes lead to an increase in funding for extremist groups operating in India?

What would be the impact of lower remittances on Pakistan’s domestic politics, and how might that affect India?

What might be the relative impact of these geopolitical developments on India, China and the United States?

Announcing the Takshashila Hyderabad Roundtable 2011

March 6th, 2011, Hyderabad

After the successful launch of the Takshashila Roundtable Conclave programme in Bangalore in December 2010 (see event report), the next stop in our nationwide rollout is Hyderabad. Here’s the blurb:

The Takshashila Roundtable conclave programme aims to create a shared understanding of India’s national interests that can serve as the intellectual bases for public policy. The programme will bring high-quality, cutting-edge discussions on strategic affairs, national security and governance to cities and towns across India, creating a platform for dynamic individuals to connect with each other and to the wider policy-making circles.

The Roundtable will have two parts. In the first segment, it will have focussed discussion sessions on emerging policy issues: from geopolitics to geoeconomics, from national security to social capital. Takshashila Fellows will be present to share their research and insights. The second segment moves beyond discussion: participants will brainstorm, develop and commit to their own personal action plans on how they will engage in public affairs in the year ahead.

Among the distinguished guests expected to join us at Hyderabad are B Raman, one of India’s most perspicacious commentators on national security, Bibek Debroy, professor at Centre for Policy Research and Ajit Ranade, chief economist at Aditya Birla Group. Takshashila Fellows expected are Sushant K Singh, Rohit Pradhan and Jhelum Chowdhury. This is a tentative list as we expect a few more distinguished guests & fellows to confirm their attendance over the next few days.

We will also be making an important announcement in the run-up to the Roundtable.

If you would like to participate, please express your interest at Takshashila’s event page.

Scrap offsets and foreign investment caps

Galvanising military modernisation requires radical changes to the procurement mindset

Sushant K Singh, head of Takshashila’s national security programme and an editor of Pragati has an op-ed in the Wall Street Journal’s Asian edition, commenting on the Indian government’s new, more-of-the-same, defence procurement policy. Excerpt:

The defense ministry in New Delhi won’t admit it, but the turn-around is not just a tacit acknowledgment of India’s limited capacity to absorb offsets, but also an indictment of the offsets policy itself. If the policy is to succeed, the foreign vendor should want to operate in a country where it actually derives commercial benefits from partnering with locals. But in India, the poor quality of the state-run defense units and ordnance factories rules them out as partners. The country simply does not also have a large enough private defense manufacturing sector that a Boeing or Lockheed could buy parts from or invest in.

The final nail in the offset coffin is India’s FDI policy. Which among the decrepit public-sector companies or near-absent private ones would Boeing choose from to invest in? Or, rather, which local manufacturer does it trust enough to share its proprietary technology with? A joint venture could be trustworthy, but because of the FDI cap, a local firm will have to put up 74% equity—no small potatoes in an industry where contracts easily total $100 million and upward. This is why over 10 years the 26% FDI regime brought in only $150,000 of investment.

If the Indian government wants to use offsets as an interim measure to bring in foreign manufacturers, it should do away with the FDI cap. Higher stakes in companies could help add value to the offsets policy: Boeing’s purchase of 34% of Aero Vodochody, a Czech firm, as an offset deal in 1998 is a good example.

The FDI regime has wrecked such opportunities. A proposal last year by India’s Ministry of Commerce to increase the FDI cap in defense manufacturing was rejected outright by the defense ministry. By both sheltering local firms from real competition and yet requiring foreigners to invest in them with offsets, the government wants the best of the old socialist way of nurturing its infant industries and the new capitalist way of acquiring foreign know-how. So far it has failed to secure either. [WSJ]

Pragati January 2011 – Securing Our Ocean

The January 2011 issue (No 46) is out. The highlight of this month’s issue is India’s relationship with its extended neighbourhood: first, we focus on maritime matters and second, we debate what role India ought to play vis-a-vis its neighbours. Featured are two book review essays, on the Indian Ocean and on the problems with military modernisation.

The Takshashila Institution launched its nationwide roundtable conclave programme in Bangalore last month, and you’ll find a report of what was discussed there.

Also in this issue: on the importance of ideas in politics, on corruption being “kicked upstairs, on human trafficking and on a new phase in the international nuclear non-proliferation regime.

Download the digital community edition in PDF format (3MB). Full articles are also available on Pragati’s website.

Plus: The wonderful people who run Quill Media have reduced the price they charge to bring you a printed copy. It’s Rs 50 per copy or Rs 500 per year (12 copies). Do sign up to receive our magazine in print each month, and take out gift subscriptions to introduce your friends to Pragati.

Takshashila’s Year Zero

Why, what and what next

India’s problems are scaling faster than the attempted solutions. In every country there is a governance gap—between the economy and its governance—but in our country, the problem is severe, acute and worsening. From telecommunications to finance, from education to agriculture, every sector of the economy needs both specialist domain expertise and management skills. To the extent that India is unable to inject these in its government agencies, it is obvious that we will continue to suffer not only poor governance, but also corruption and injustice.

At Takshashila, we have made it our mission to change this. We are acutely aware that the race we are running is marathon, that we will have to run it for decades and the chances that we will succeed are uncertain. Yet, it is a race we have to run.

We want to build one of the best schools of statecraft in India. It will be school that is as rooted in India’s civilisational values as it is global in its outlook. It will aim to bring together the best minds in public policy to impart customised, high-quality education to the most promising graduate students. That’s the vision. We have a sense of how to get there, but we do not want start the school tomorrow morning. Since it is to be a school rooted in the Indian experience, we want to scan the length and breadth of the country and build the body of knowledge first.

Yes, this is an audacious project for a bunch of people most of who did not even have greying temples when we started out (and most do not have them even now). So we want to earn our stripes—build credibility even as we validate our own assumptions—by establishing Takshashila as a networked think tank. This is the first step towards realising our vision of an outstanding Indian school of statecraft.

It is far more effective to connect talented individuals passionate about changing India for the better into a networked community, than to attempt to hire them and put them in the same building. We do not have the budget for it, and even if we did, we would still stick to the networked model, because we believe it is far more suited to the twenty-first century. [See the Takshashila website for more details]

Thanks to a substantial initial donation from Rohini Nilekani, chairperson of Arghyam, we could start much faster than we otherwise could.

So that’s the preamble. This year was our year zero—the year we got off the ground.

We launched our policy research programme and by January 2011, we expect to have more than a dozen fellows. A number of bright younger people have joined us as research associates. Fellows and research associates are spread across the globe, have day jobs and collaborate with each other over the Internet.

Our Executive Programme on Strategic Affairs (TEPSA) was got off to a start in December 2009, with a full-day programme for senior defence officials, in partnership with the National Maritime Foundation. TEPSA partners educational institutions, think tanks and private companies to train executives on public policy subjects. We will be doing more of these in 2011.

We inaugurated our Roundtable Conclave programme last month. Here the idea is to engage civil society by moving high-quality public policy discussions out from New Delhi into the towns and cities of India. We started in Bangalore, and intend to take the programme into other places over the next several months. The idea is to connect individuals who are interested in public affairs to be part of an informed and influential national community.

All this, of course, is in addition to our online initiatives at the Indian National Interest (INI) platform of blogs and on twitter. From the time we started, popularity and site traffic has never been our objective. We just wanted to put out the most credible, non-partisan opinion on what we think is in India’s national interest. And we will continue doing so.

Pragati – The Indian National Interest Review, a monthly magazine we started in April 2007, and which Rajeev Mantri’s Quill Media has been distributing print copies of since October 2009, is now into its 46th issue. Like at Takshashila and INI in general, Pragati has attracted a fantastic team of energetic, passionate and committed individuals, and great set of contributors, all working pro bono. From the editorial team to individual contributors, nobody gets paid. Yet Pragati has become one of India’s most well-regarded publications on strategic affairs, public policy and governance. In 2011, we want to increase the circulation of both the digital PDF edition and of the printed copies.

Since August 2010, I have personally been working on the Takshashila initiative on a full-time basis, thanks to a good friend’s personal sponsorship. I have been fortunate to receive encouragement from a number of people who saw value in what we are trying to achieve. Even so, such a step would be impossible if not for both the support and reality checks imposed on me by my wife…and well, by my children.

Takshashila needs your help in every one of the areas I’ve written about. We need financial support to build our endowment fund so that we can hire the best graduate students to work on cutting-edge policy research. We need organisers and volunteers across the country to help organise our roundtable conclaves. We need you to subscribe to Pragati, take out gift subscriptions and in general spread the word around.

It’s about building an institution that will last. It’s about being a lighthouse that will provide direction to all ships that are willing to navigate by its beacon. Two-and-half millennia ago Takshashila was the intellectual fountainhead not only of Indian statecraft but indeed of all walks of human endeavour. It’s about creating one for modern India.

Announcing the Takshashila Roundtable Conclave – Bangalore

December 19th, 2010 — Bangalore

The Takshashila Roundtable conclave programme aims to create a shared understanding of India’s national interests that can serve as the intellectual bases for public policy. The programme will bring high-quality, cutting-edge discussions on strategic affairs, national security and governance to cities and towns across India, creating a platform for dynamic individuals to connect with each other and to the wider policy-making circles.

The Bangalore Roundtable will have two parts. In the first segment, it will have focussed discussion sessions on emerging policy issues: from geopolitics to geoeconomics, from national security to social capital. Takshashila Fellows will be present to share their research and insights. The second segment moves beyond discussion: participants will brainstorm, develop and commit to their own personal action plans on how they will engage in public affairs in the year ahead.

Mrs Rohini Nilekani will inaugurate the Roundtable. Distinguished Guests include Ambassador Leela Ponappa (former Deputy National Security Advisor), Niranjan Rajadhyaksha (Managing Editor, Mint), Vivek Dehejia (Carleton University) and others. Several Takshashila Fellows and Research Associates will also be present.

Note: For non-members, participation at the event is by invitation only. If you’d like to come, please request an invitation here. As we have only a very small number of seats left, and want to have a healthy diversity of participants, let me apologise in advance if we are unable invite you for this session.

Restoring order in Jammu & Kashmir

A new Takshashila discussion document charts out a thirteen point plan

You can download Takshashila fellow Sushant K Singh’s 13-point plan here (185 KB, PDF).

The immediate goal for New Delhi and Srinagar should be to restore peace and security in the violence-affected districts of Jammu & Kashmir so that normal activity can resume. This has to be done by suppressing violence, arresting ring-leaders of protesters and actively countering separatists’ plans to direct the pace and scope of social, economic, political and religious life by issuing protest calendars.

The political process in the Valley can only be reactivated fully once the security situation has been brought under control. However certain steps can be initiated to restart the political process immediately. These will have to be undertaken at many levels simultaneously within the state. [Takshashila publications]

Premature militarisation

Until we know what the game is about, cyber strategy must be stewarded by the civilian authorities

George F Kennan, whose views shaped US foreign policy towards the Soviet Union in the aftermath of the Second World War had this to say in 1996.

“My thoughts about containment were of course distorted by the people who understood it and pursued it exclusively as a military concept; and I think that that, as much as any other cause, led to [the] 40 years of unnecessary, fearfully expensive and disoriented process of the Cold War. [CNN/John D Clare]

Around the same time, the US Strategic Air Command acquired tremendous influence over nuclear weapons policy, and believing that these new weapons worked the same way as the conventional munitions they were so used to, ultimately ended up building mindnumbingly large arsenals. The Soviets followed suit. If there was ever a risk of total annihilation of the world it was (and still is) due to the United States and the Soviet Union (now Russia). It was only in the 1980s that the Cold War superpowers realised that the utility of nuclear weapons lay not in warfighting, but in deterrence. But there was a time when both countries were designing warheads for battlefield use—including, at one point in the form of artillery shells. [See my review of Richard Rhodes’ book in Pragati]

The story of the Cold War and nuclear weapons holds an important lesson for us as we behold the advent of cyberweapons. It is this: do not let the military establishment take control of policy before it is clear what the game is all about. In the case of cyberweapons, as we discussed at yesterday’s Takshashila roundtable, there is a lot that we do not know. Cyber strategy is in its infancy. The conceptual framework is not clear—are cyberweapons similar to conventional weapons, chemical & biological weapons, nuclear weapons or in a class by themselves? What are the moves available to players in the game? Who indeed are the players? Is the concept of cyberwarfare overhyped, as Bruce Schneier argues? As fundamental as the questions are, there are few satisfactory answers.

Handing over cyber strategy to military establishments at this stage is not a good idea. In the United States, the Obama administration risks repeating the mistakes of the Truman and Eisenhower administrations. It is all very well to say that the US Cyber Command is responsible only for “dot-mil” domains, but given its budget, clout and operational mandate, the military establishment is quite likely to dominate cyber warfare policy-making. Unfortunately, over in China, the United States’ primary strategic adversary, it is the People’s Liberation Army that is in charge of cyber warfare. That raises the risk of a perhaps avoidable cyber arms race between the two.

There is no doubt that the Indian government must ensure that India’s interests are protected in an age of cyber warfare (See Takshashila’s new discussion document, and Pragati articles by Rohan Joshi and Srijith Nair). This requires the pushing of intellectual boundaries—to develop a new discipline of cyber strategy—as much as it requires instituting competent authorities to develop, implement and oversee policy.

While the Indian armed forces must equip themselves with the knowledge, skills and equipment required to engage in cyber warfare, for the time-being, it is prudent to avoid letting the military establishment dominate policy-making. India did well to prevent the undue militarisation of its nuclear weapons policy. That experience should inform New Delhi’s moves in the domain of cyber strategy.

My talk at the Bangalore International Centre

The New Himalayas and the Global Raja-Mandala

Do come and listen to my talk on how India might promote its interests in the geopolitics of the 21st century. It’s next Wednesday 16th June at the Bangalore International Centre.

Synopsis: Despite fundamental differences in the way India and China view international relations, the high Himalayas prevented large-scale military conflict between the two civilizations for nearly two millennia. While the Himalayas are no longer the physical barriers they used to be, the presence of nuclear weapons in both countries makes war unattractive and unrewarding.

The India-China context has, instead, shifted to other domains: in and around the Indian Ocean, in cyberspace, and for access to resources and markets.

The talk will discuss how India might pursue its national interests on this Global Raja-Mandala. It will argue that the nature of the game requires India to adopt an interdisciplinary approach to foreign policy, which not only calls for greater co-ordination among government departments, but also requires the private sector & civil society to engage more deeply in international affairs.

Ambassador C V Ranganathan, former Indian ambassador to China, Ethiopia & France will preside.

Date: Wednesday 16th June 2010 at 6:00pm (Tea will be served at 5:30pm)

Bangalore International Centre
Auditorium, TERI Complex,
4th Main, 2nd Cross, Domlur II Stage,
Bangalore 560 071

To register:
Phone: 98865 99675

For directions: SMS TO BIC to 90088 90088

Takshashila’s first discussion document

Allow greater foreign direct investment in the defence industry

Takshashila’s policy research programme has its first output—Sushant K Singh, Fellow for Defence Policy at Takshashila and an editor of Pragati has written a discussion document calling for raising or removing the caps on foreign equity in India’s defence industry.

Get the paper here.

You are welcome to discuss it in the comments section.