Fixing India’s Economic Diplomacy

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Fixing India’s Economic Diplomacy

To successfully defend its economic interests in the 21st century, India must rethink its approach.

Fixing India’s Economic Diplomacy

A worker walks past a container ship at Mundra Port in the western Indian state of Gujarat (April 1, 2014).

Credit: REUTERS/Amit Dave

The world stands on the cusp of a great technological and political shift. Radical shifts in production technology and processes are rendering the old global value-chains redundant and competitiveness is being re-defined. The post-World War II global institutional consensus and strategic alignments are shifting as the power-centers in western Europe and North America seek to contain the gains from liberalization even while dealing with increasing demands of protectionism from large sections of their population. The rise of India and China has led to intense competition for energy and resource security, and various tools of economic diplomacy are being used to create dedicated corridors to secure such resources.

With the largest single cohort of young people in the world, which represent both a resource and a challenge, India finds itself at a crucial juncture in its growth trajectory. India needs a strong policy road map for its economic and geostrategic priorities in order to be able to harness the creative energy of its massive working age population and emerge as a global power.

While these challenges raise the bar for India’s economic diplomacy abilities, the question remains whether India’s economic diplomacy establishment is ready to up its game. The old 20th century ways of engagement are increasingly ineffective. The focus is increasingly on execution over atmospherics, and on specifics supported by domain knowledge over generalities. This is definitely a concern from India’s traditional economic diplomacy establishment, primarily led by the Ministries of External Affairs (MEA) and Ministry of Commerce and Industry (MOCI), which while already being relatively under-staffed, compared to other major economies, allow little time for its key officers to spend enough time on a specific desk and develop domain knowledge. The systems for retaining and using institutional knowledge within these ministries are also quite weak.

The economic diplomacy objectives for India revolve around five key goals: to secure market access for its goods and services, ensure global labor mobility, develop physical connectivity that ensures energy and resource security, prevent restrictions on free flow of data, and ensure access to technology and knowledge for Indian industry. A brief discussion of each of these goals that follow clearly illustrate the need for domain expertise and long-term project based execution for ensuring successful policy outcomes.

New Models of Trade Diplomacy

There was a time when trade negotiations centered on simple tariff reductions and rules of origin issues. In a world where goods are produced through a network of manufacturers in many countries, and returns to technologies and brand names are several multiples of the returns to actual tangible inputs like materials and labor, tariffs have lost importance.

Trade negotiations today are about national laws that regulate the production and consumption of goods and services and the technical barriers to trade (TBTs) that such regulations give rise to. While tariffs have a seen a decline in most countries, the need to comply with product quality standards, environment protection, or even social responsibility legislation mandated by different countries often raises the costs of exporting well beyond many exporters’ reach. This is especially true of small and medium enterprises (SMEs) in emerging economies like India.

The design of trade agreements and negotiations has undergone a radical change, with the focus being on detailed sector specific regulations and rules that require substantive domain expertise. With increasing protectionist trends and appetite for overarching trade deals getting lower, traditional trade negotiations might need to be replaced with specific bilateral solutions; for example Indian officials might need to broker a bilateral agreement between the chemical sector safety regulator in Japan and its Indian counterpart to help Indian manufacturers of chemicals to get certified for sale of their products in Japan at a very low cost, thereby increasing their competitiveness vis-à-vis a competitor country that will not enjoy the same privilege.

International Mobility of Indian Workers

Aging populations in industrialized nations would need to import workers from developing countries to meet critical manpower requirements. India, with the world’s single largest cohort of young workers, should be a major beneficiary of these dynamics. However, security threats and fears about displacement of local workers in the short term have led to increasing restrictions on international worker mobility. For India, securing international worker mobility is an important objective since domestic opportunities alone might not fully optimize India’s work force, and remittances from expatriate workers are a major source of much needed foreign exchange.

But securing preferential access to global labor market for Indian workers would require out-of-the-box solutions. And these solutions would need to go much beyond India’s long-standing generic demand for liberalization of work visas in multilateral and regional trade forums, which has increasingly paid diminishing returns. The Indian state would have to invest in institutions and special agreements with key worker importing countries to address their legitimate concerns around security and illegal immigration. These agreements would have to address issues related to liability for overstay, punitive measures on illegal activities, and compliance with rules governing temporary employment of foreign workers. Such agreements might also call for relatively advanced protocols that make the Indian state legally responsible for some of the compliance, enforcement and monitoring of these rules.

A related challenge would be to ensure the well being and self-respect of Indian workers, and prevent any exploitation by the host country employers. In addition, the Indian government would have to ensure that Indian workers are not exposed to conditions that radicalize them, and they become a threat to India upon their return. All of these solutions require navigating a complicated set of legal and technical issues.

Physical Connectivity and Resource Security

There is an unprecedented scramble for resources under way today, being led primarily by China. China’s One Belt One Road (OBOR) and the China-Pakistan Economic Corridor (CPEC) are instruments of securing connectivity to critical natural resources across wider Eurasia: Central Asia, the Middle East, and Asiatic Russia. China has also invested heavily in the Greater Mekong Subregion (GMS) in Southeast Asia.

As China develops this infrastructure of connectivity, it also acquires the ability to deny access through these corridors. The country that is most vulnerable to these developments is India. Its import dependence on raw materials would mean that inability to access these natural resources due to China’s overwhelming leverage over such connectivity corridors would have serious ramifications for its economic growth. Over time, the falling costs of rail or multi-modal movement that combines road, rail, and sea will also make these corridors important to trade.

While unable to match the Chinese scale of investment and trade in the short run, the Indian response would still have to be effective. At the very least this would require two things. First would be implementation of existing infrastructure projects on alternative corridors such as the International North South Transport Corridor (INSTC) and multi-modal connectivity projects in BIMSTEC. Second, India would need a strategy to execute better agreements from energy and resource exporting trade partners, leveraging India’s rapidly increasing market size.

On both these fronts, India’s performance has been very poor to date. Execution of large infrastructure projects overseas requires the deployment of dedicated project management groups with both diplomatic and technical personnel. Negotiating longer-term mining and hydro-carbon agreements requires coordination among public and private sector interests and specialized expertise to support diplomats on the ground. Sustained progress in this areas cannot be achieved through ad hoc efforts that are based on the individual dynamism of a few diplomats.

Ensuring the Flow of Data Across Borders

The success of the Indian IT and IT-enabled services industry was built on the fact that various forms of data, including financial and individual consumer related data, could be transferred from countries like the United States, United Kingdom, or Singapore to offices based in Bengaluru or Gurugram in India. This industry is the catalyst behind the urban middle-class revolution that India has been witnessing since the late 1990s. Such free flow of data across borders needs to continue if India is to create opportunities for its large number of young workers trained in data processing and computing skills. Serious disruption to this model would create a potentially existential threat to the Indian IT and IT-enabled services industry and the millions employed in these fields in India.

However, an increasingly large number of countries are putting in place laws that prevent transfer of different types of data across borders. The issues of cybersecurity and data privacy being compromised are the stated reasons for such controls. But in many cases such regulations are a hidden form of protectionism to control the offshoring of data management and data processing jobs.

Once again, India would need to create out-of-the-box solutions that allow it overcome such current and future restrictions, while not compromising genuine concerns over security. One solution would be to negotiate bilateral agreements that assures key data origin countries of a strict liability regime, with the Indian state guarantying and certifying firms or institutions that handle foreign data. But such a solution would require developing domestic laws and institutions that can credibly provide such assurance to data origin countries, and a diplomatic push to convince key stakeholders in such data origin countries that India is indeed a safe destination for data processing.

Creating such an assurance would not just be a state-to-state exercise, but would require multi-dimensional opinion building with regulators, consumers, firms, influential technology commentators, and civil society groups working on data security issues. A necessary prerequisite for carrying out such an exercise would be government coordination with industry for lobbying in target markets and building alliances with non-state actors in these countries. Only a project-based approach and a diplomatic team that integrates personnel with requisite technical and legal skills can successfully undertake this exercise.

Access and Acquisition of Technology

With the coming new phase of automation and industrialization, the returns to technology intensive capital and labor will increase exponentially, while returns to less skilled and less technology intensive labor and capital will decline. This has significant implications for the global political economy, and the relative shifts in economic power.

Access to technology is increasingly playing an important role in strategic equations. The wars of the future will be technology intense. Air and sea dominance would only be possible for militaries that have incorporated substantive of sophisticated hardware. Communication-centric warfare, where military units use advanced networking platforms and robotics, is not a sci-fi scenario, but effective reality.

Thus, the ability to access technology, indigenize technology developed in other countries, and develop and innovate upon existing technology is a key economic and strategic objective.

Acquisition and access to the world’s best technology would require several different policies. Some of the more important interventions would include better use of India’s defense offset policies and large defense spending to ensure the transfer of military technology, which has enormous industrial spillover. It would also require the state to invest in an industrial and academic ecosystem that can attract the best talent, by offering Indian as a base for low cost but quality industrial innovation and academic research.

Facilitating negotiations and engagement with key science and technology stakeholders in other countries would be needed to support the investments made by the state in creating a better ecosystem for attracting innovators and technology start-ups to India. It would also mean that India takes the lead in developing new systems of global innovation and technology diffusion that leverage local talent in developing societies and help scale up and commercialize grass-roots innovation effectively.

Achieving all of these ends require multi-sectoral engagement with different sets of stakeholders in domains across business, defense, grass-roots innovators, academics, and even the non-resident community of Indian technologists and scientists.

Generalist and Transactional vs. Specialist and Program Specific

For each of these thrust areas, core teams would have to be built. But coordination and management and sustained progress would have to be conducted by senior bureaucrats who have domain knowledge and remain at their desks for longer periods of time. In other words, they would be specialists with a program-specific approach. India’s usual transactional approach and short-termism would have to end. The traditional pattern of “grand announcements” that remain on paper is a by-product of the current approach.

This not to undermine the great tradition of Indian diplomacy or its achievements, or to suggest that Indian Foreign Service (IFS) and Indian Administrative Service (IAS) cadres from which the leadership of MEA and MOCI is drawn from do not have exceptional officers who have made stellar contributions to India’s foreign policy goals. India’s ability in having successfully defended its interest in multiple global forums is testimony to their capabilities. But the future is very different from the past. Other G20 economies have been preparing for this brave new world and investing in the diplomatic institutions and personnel that can meet its challenges. India cannot be left behind.

There is an urgent need to revisit the existing model of economic diplomacy and reorient it to meet future priorities that require a large number of domain specialists and a clear focus on substantive implementation and follow through as opposed to just atmospherics. India’s political leadership would have to take note and set the ball rolling to bring in effective change to the existing structure and integrate specialist experts drawn from industry, academic, military, and technology sectors, among others, with traditional bureaucratic cadres to make India “future ready” to negotiate the deals that will make or break India’s economic priorities.

Pritam Banerjee is Senior Director, Corporate Public Policy, Deutsche Post DHL Group, responsible for South Asia. The views articulated in this article are his personal opinion and do not represent that of his employer in any manner.