Archive for April, 2017

This article was originally published by the Centre for Landwarfare Studies (CLAWS), a Defense think-tank, on March 16, 2017 here. Republished in the Indian Defense Review on March 20, 2017 here.  

When Narendra Modi took oath as the 14th Indian Prime Minister in May 2014, he made an unprecedented diplomatic outreach to India’s neighbours by inviting their heads of government. The audacious move generated great euphoria and excitement, especially among the observers of South Asian politics and relations. It was the very first initiative of what later came to be known as the ‘neighbourhood first’ policy of the Modi government.

The day after his inauguration, Modi held bilateral meetings with the South Asian leaders and vowed to work towards making SAARC a strong regional block. He soon made his first foreign visit as Prime Minister to Bhutan, the Himalayan neighbour that has been India’s closest and time-tested ally. India’s foreign minister Sushma Swaraj too, made her first official foreign visit in the neighbourhood, to Bangladesh, where she laid the foundation for Modi’s visit that followed later on.

The diplomatic priority that Modi attached to the neighbourhood is evident from the fact he made a visit to all of India’s neighbours, except Maldives, and the numerous leaders hosted in New Delhi and meetings at other multilateral fora. With Bangladesh, the completion of the historic land boundary agreement, besides fresh initiatives in energy, connectivity and counter-terrorism, have catapulted the relationship to new heights. With Sri Lanka, the relationship has come back to normalcy after increased strain in ties during the Rajapaksa regime. Modi also made visits to the island nations of Mauritius and Seychelles, giving an impetus to India’s role as ‘net security provider’ in the Indian Ocean region.

According to foreign affairs analyst Dhruva Jaishankar, India’s neighbourhood first policy has four aspects. The willingness to give political and diplomatic priority to its immediate neighbours and Indian Ocean island states, providing them with support as needed, greater connectivity and integration, and to promote a model of India-led regionalism with which its neighbours are comfortable. Modi realises that his domestic agenda of development and rapid economic growth cannot be fulfilled without a stable and conducive neighbourhood. He has often emphasised that India cannot grow in isolation and that there is a lot to gain by mutual cooperation and shared prosperity in the region.

Besides the compelling economic logic, Modi is also watchful about growing Chinese penetration into South Asia. While Chinese presence in the region is not entirely avoidable or undesirable by India, there are some pressing strategic concerns that New Delhi has. China has been steadily building infrastructure, especially ports, at strategic locations around India which is often called as the strategy of encirclement or ‘string of pearls’. It has made deep inroads into most of India’s neighbours, besides emerging as an all-weather friend of Pakistan.

The proposed China Pakistan Economic Corridor, where Beijing plans to invest $46 billion in rail, road and gas pipeline projects, has raised concerns in India as it passes through Gilgit-Baltistan, which is part of Pakistan-occupied-Kashmir, a territory that India considers as its own. This issue also came up in the most recent round of strategic dialogue held in Beijing, where Indian foreign secretary S Jaishankar conveyed that China should respect India’s territorial sovereignty.

Further, the region as a whole ought to be wary of increased Chinese involvement as it could undermine the process of democratization in the delicate and mostly fledgling democracies of South Asia. India has always been at the receiving end of parochial nationalistic politics of some of its neighbours which derive strength from anti-India rhetoric. All countries, including India, would benefit if this is replaced by an atmosphere of mutual trust and cooperation where developmental politics takes the centre-stage. But China has no sympathy either for democracy or developmental politics. As S.D. Muni, an expert of South Asian affairs, opines, China prefers strong, assertive and centralised regimes at its periphery. This is evident from the fact that China never supported or encouraged democratization in any of its neighbours.

While the last two and half years and more have seen a number of ground breaking developments in India’s relations with its neighbouring countries, there have been huge challenges at the same time. Modi’s visit to Nepal, first bilateral visit by an Indian Prime Minister in over two decades, was received with huge fanfare and optimism. India was also the first responder after the Nepal earthquake, providing considerable assistance. Yet, Nepal’s constitutional crisis caused a serious setback in relations with India. Although New Delhi’s stance, that the interests of the Madhesis should be respected in the new Constitution, was in the best interest of both Nepal and India, there was a serious perception problem. India was criticised and accused of causing an economic blockade even though the blockade was actually on the Nepalese side of the border, enforced by the angry Madhesi population. Relations between India and Nepal, however, seem to have gotten back on track with the new government, led by Prime Minister Pushpa KamalDahal or ‘Prachanda’, in Kathmandu.

The biggest roadblock for India’s neighbourhood policy, however, has been Pakistan, a country which is not only serving as an epicentre of terrorism in the region but has also been quite unabashed in holding up regional integration and connectivity. Repeated cross-border terrorist attacks from Pakistan led to the cancellation of the SAARC summit scheduled in Islamabad last year, besides causing a meltdown of Indo-Pakistan relations.

These challenges, however, should not distract New Delhi from pursuing its agenda of greater regional integration and cooperation. The idea of ‘neighbourhood first’ need not include an errant neighbour like Pakistan, which can be dealt with separately. Even though SAARC has hit a roadblock, there are other institutional mechanisms such as the BIMSTEC, Mekong-Ganga cooperation mechanism, etc. where India can engage multilaterally. Even within the SAARC framework, India has been working on a ‘SAARC minus one’ approach. The Bangladesh-Bhutan-India-Nepal (BBIN) grouping has been one such example under which connectivity, energy and water management initiatives have been pursued. The common SAARC Satellite, which India has decided to go ahead with despite Pakistan’s objections, is another case in point.

The neighbourhood first policy has been one of India’s key foreign policy goals under the Modi government. It needs to march on, with or without Pakistan. Political engagement with the neighbours must continue to be prioritised in order to accelerate regional cooperation and integration which is the best interest of the region.

This article was originally published in DailyO on February 6, 2017 here.

Amid a multitude of expectations, finance minister Arun Jaitley presented the Union Budget 2017-18 in Parliament, one which was low on fireworks but high on pragmatic and incremental changes.

Expansion of the tax base by reducing tax rate in the Rs 2.5-5 lakh income bracket, special focus on agriculture and rural sector, push towards a digital economy, beginning the process of cleaning up political funding and increased infrastructure expenditure are among the key highlights of the Budget.

That the government did not deviate from the path of fiscal consolidation, despite the various pressures, is particularly noteworthy.

In the domain of the financial sector, there was one major announcement made, the decision to abolish the Foreign Investment Promotion Board (FIPB).

Foreign Direct Investment (FDI) flows into India in two ways, the automatic route and through government approval. FIPB deals with the latter. Housed in the department of economic affairs, ministry of finance, the FIPB is an inter-ministerial body, responsible for processing of FDI proposals and making recommendations for government approval.

Besides the chairperson, who is the secretary from the department of economic affairs, the body comprises of secretaries from the department of commerce & industry as well as the ministry of external affairs.

Decisions of the FIPB are taken on the basis of existing FDI policy, press notes and other related notified guidelines formulated by Department of Industrial Policy and Promotion (DIPP) in the ministry of commerce.

The finance minister, who is in charge of FIPB, would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs 5,000 crore. Whereas the recommendations of FIPB on proposals with total foreign equity inflow of more than Rs 5,000 crore (earlier Rs 3,000 crore) would be placed for consideration of the cabinet committee on economic affairs.

The sectors under the automatic route, however, require no approval from the FIPB and are subject to only sectoral laws. Over the years, increasing liberalisation of the country’s FDI regime has resulted in more and more FDI through the automatic route. The FIPB has lost its erstwhile pre-eminence and the discretionary power with its bureaucrats doesn’t inspire much confidence within foreign investors.

Over the last two years, the Narendra Modi government has taken up a number of reforms to liberalise the FDI regime. In November 2015, 15 sectors were liberalised for FDI. Then in June 2016, the government made sweeping amendments to the FDI policy in seven sectors, most importantly in defence, civil aviation and pharmaceuticals.

Earlier, in the defence sector, FDI up to 49 per cent was permitted under the automatic route and up to 100 per cent through the government approval route, but only for cases resulting in access to “state-of-the-art” technology.

This condition of “state-of-the-art” technology, which was somewhat vague and hard to quantify, was done away with. In the aviation sector, reforms paved the way for allowing overseas entities to own 100 per cent in domestic airlines, and 100 per cent FDI under the automatic route in both greenfield and so-called brownfield projects.

Further, the government has taken other kinds of measures such as relaxing FDI norms for NRIs, PIOs and OCIs – allowing their non-repatriable investments to be treated on a par with domestic investments and not be subjected to FDI caps.

The government has also decided to grant Permanent Residency Status(PRS) to foreign investors who meet some set criteria in respect of minimum investment and employment generation. It would be granted first for 10 years, with multiple entry, and could be extended for another 10 years.

Those granted PRS will also be exempted from the registration requirement and given the right to purchase one residential property to live in. Countries like Singapore and Hong Kong, which are favoured FDI destinations across the globe, offer residency status for foreign entrepreneurs in return for investment.

The liberalisation of FDI along with various other measures including those under the Make in India initiative have shown visible impact. According to the World Investment Report 2016 released by the UN Conference for Trade and Development (UNCTAD), India’s FDI inflows have increased to $44 billion in 2015 as compared to $35 billion in 2014.

But there is a lot of potential and they need to grow further. The net FDI inflows as a proportion of GDP have shown a sharp rise after the NDA government took office, but it is still 1.7 per cent, compared to 2.8 per cent of China or 4.9 per cent in the case of Vietnam – the highest among major developing countries.

The decision to abolish FIPB and come up with a new roadmap can therefore be seen as part of the larger strategy of the government to boost FDI inflows. The finance minister in his Budget speech pointed out that presently over 90 per cent of total FDI inflows are through the automatic route and that we have now reached a stage where FIPB can be phased out.

Earlier in the speech, he also said: “India has emerged as the sixth largest manufacturing country in world, up from ninth. We are seen as the growth engine of the world. We have moved from a discretionary administration to a policy-based administration.”

This is a clear message to investors that India is the best bet for assured and rapid growth in an otherwise uncertain global scenario. In the climate of increasingly inward looking and protectionist tendencies across the world, the abolishing of FIPB and the statement of intent to further liberalise FDI policy sends out an encouraging signal.

It is a move that would boost ease of doing business, reduce red tape and make FDI easier.