Event ReportsPublished on Nov 13, 2019
Economic diplomacy is now core component of India’s foreign policy

Recognising that economic diplomacy has become a core component of India’s foreign policy, S Swaminathan, former Indian envoy to Iceland and Brazil, provided an overview of how economic diplomacy has become a very effective tool to achieve various national objectives.

Participating in a seminar in Chennai on “Foreign Policy, Trade and Investments” on 21 October 2019, organised by ORF, the Madras Management Association and Konrad-Adenauer-Stiftung,  Swaminathan said moving from engaging merely in trade diplomacy, economic diplomacy today is looking at new dimensions of attracting investments and technology through new projects in India. For example, Skills India, Make in India, Digital India, and Smart City. For successful execution, such projects have an external element in the form of a foreign partner, FDI, or technology transfer, he pointed out.

He said other forms of economic diplomacy include Engineering Procurement Construction (EPC) projects, and negotiations on food security and oil security. As an example, MEA worked with ONGC in Brazil to secure a 10% sharein BC-10, and helped Bharat Petroleum secure shares in seven oil wells in northern Brazil as well.

Swaminathan emphasised that foreign policy is an enabling framework, and recalled a circular from the Ministry of External Affairs (MEA) which read: “India’s foreign policy is guided by the objectives of enhancing national security, promoting and facilitating India’s economic transformation, strengthening our mutually beneficial partnerships and building influence in international forums.” He added that foreign policy has now transcended subjects such as science and technology, investments, and railways, with an expectation that diplomats should be experts on diverse subjects.

Massive achievement

The veteran diplomat referred to the large development cooperation programmes which has linkages with trade and investments. The Government of India, for instance, provides lines of credit to partner countries – $ 10 billion for Africa, $ 4.5 billion in Bangladesh, $ 0.5 billion for Vietnam. A corpus of Rs. 500 crores has been allocated for creating manufacturing hubs in CLMV countries, namely, Cambodia, Laos, Myanmar and Vietnam.

The Centre has also initiated the “Brihad Sampark Yojna” programme. Swaminathan said this was “a remarkable achievement” with many investments as a result of such engagements. The Informal Summit between Prime Minister Narendra Modi and Chinese President Xi Jinping in Mahabalipuram in October 2019 also resulted in the establishment of a High-Level Economic and Trade Dialogue mechanism further strengthening economic diplomacy. In context, he noted that the Kashmir issue showcases India’s strength as an emerging nation as there have been no sanctions or boycotts by other nations.

Swaminathan finally provided an overview of how our embassies and consulates could assist Indian entrepreneurs to attain their objectives in overseas ventures. Most embassies and consulates have a dedicated commercial and economic wing to assist Indian businessmen and entrepreneurs, and provide services such as identifying new products to trade, assisting in speeding up approvals etc.

As an example, he shared his experience while working in Brazil, where the embassy helped a pharmaceutical company get concessional financing and other reductions. He reiterated that the Government has realised the need to work with industry and civil society to achieve maximum benefit of its economic activities.

He shared observations of linkages between Chennai and Latin America. Noting that the city is usually referred to as the automobile hub in the country, he pointed out that Mexico is the number one market for India’s car-exports, while Colombia is the third largest market for Indian motor-cycles. He further added that there is an enormous demand for second-hand cars and components within the Member States of the Southern African Development Community.

Unlocking the potential

Building on the above and emphasising his view as an “outsider”, the other key speaker, The Hindu Business Line editor, Srinivasan, stressed the need to view the direction of India’s external diplomacy by placing it in the context of that period. For example, the Nehruvian era saw the development of the Panchsheel. There was a realisation in the post-reforms era, that to unlock India’s potential, a great deal of investment from external partners would be needed.

In addition, the leader influences economic diplomacy and the political leadership sets the tone. For instance, PM Manmohan Singh was a strong proponent of economic diplomacy. Yet a trade agreement with ASEAN under the Look East Policy under his leadership was damaging for the country since it was pushed early and India did not get services access. Similarly, in today’s context, it is important to understand PM Narendra Modi’s view of India in the world.

PM Modi would like a seat at the table of powerful nations of the world. He has reached out personally to many nations. After the re-election, he visited Nepal and despite that recent discussions between China and Nepal on the road and rail links might affect India economically. The RCEP negotiations currently under PM Modi might be progressing too fast without adequate consultations with all. Areca nut farmers have shared their concerns of Malaysian areca being dumped on India.

PM Modi has focused his efforts on increasing the growth rate, sharpening FDI, and improving manufacturing, including through Make in India as a counter to China. The key question to assess this is to understand if these efforts have paid off. Today, there is a synchronized global slowdown and businesses are not taking major bets. Therefore, the outcomes do not match the aspirations of the political efforts. Despite this, the global community of investors is impressed with PM Modi’s efforts and is looking at India with greater attention. There is a general sense that the Ease of Doing Business ranking is becoming an obsession for the country.

It is critical to ensure that companies do not worry about political changes after elections that affect medium and long-term bets. For instance, the current Andhra Pradesh Government is overturning agreements, and businesses and governments of countries such as South Korea and Japan have expressed concern. A greater consultation with states by the centre will help, and tax breaks can be discussed to achieve a balance in cooperative federalism.

Risks and challenges

There are several other issues that need to be addressed, according to Srinivasan. He highlighted how car components crossed borders over 240 times and these were subject to many different duties. Different stakeholders need to identify the risks and challenges associated with such trade. Indian businesses need to understand foreign exchange risks, country risks, and the level of realistic support that the government can provide.

Citing that India did not impose retaliatory duties on the U.S .after they imposed duties on Indian steel and aluminium, Srinivasan suggested that the pivot towards the U.S. could perhaps be a concern for India, especially since the U.S. does not support India’s trade interests at the WTO and the current bilateral trade deal is tilted towards the U.S. He remarked that India might not have the “muscles to flex” as a country even though the leadership might think the country does. He also stressed the need to consult India’s neighbours more, if the government expects to be consulted especially on matters related to China.

This report was prepared by Arjun Bhargava, Research Associate,  Observer Research Foundation, Chennai

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