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India and Global Economic Policy Making

Arvind Subramanian
September 3, 2007

Lord Meghnad Desai put a dampener on India's global aspirations when he recently prophesied that "China will be a great power, but India will just be a great democracy." Indians will chafe at this prognostication. But one key question is this: suppose, as Indians will no doubt hope, that the future is unkind to the Desai prophecy. How then should India prepare itself for being an important and influential player in current and new global economic policies and institutions? In other words, what should India's attitude and approach be when it gets-literally and metaphorically-a seat, even if not the head place, at the table?

Start first with India's historic role. In the post-war period, what was India's role in three of the most important global economic institutions-the International Monetary Fund (IMF), World Bank and the GATT that subsequently became the World Trade Organization (WTO)? There have been important differences in India's role in the Bank and the Fund compared to the WTO.

India has been a more important and influential player in the trade institution than in the financial institutions. This was in part an inherent consequence of the fact that in the financial institutions creditor nations have more power than borrowers, while in the WTO power stems from market size; while India has always been a borrower in the Bank and the Fund, it has been a relatively attractive market despite the closed nature of its policies. As a result, India has been more actively involved in issues of a systemic nature in the WTO than in the financial institutions. One manifestation of this has been the fact that the quality of Indian representation, which has been variable at best in the financial institutions, has always met a decent standard of competence and effectiveness in the GATT/WTO.

Notwithstanding these differences, the underlying objective of Indian participation has been similar across all three institutions-the jealous, zealous safeguarding of India's sovereignty; in Strobe Talbot's description, India was a "sovereignty hawk." Whether in regard to conditionality associated with borrowing from the Bank and the Fund or trade rules in the GATT/WTO, India has tried its best to minimize having to do what it would otherwise not want to do. In the trading system, for example, India took upon itself the role of leader of the Group of 77 developing countries that lobbied hard and strong throughout the 1960s, 1970s, 1980s, and even some of the 1990s, to preserve the right to protect its economy through tariffs and quotas. Sovereignty, in this arena, was equivalent to protecting or preventing the imposition of rules and obligations that would deprive India of this freedom. Of course, this objective flowed from an economic ideology that saw, at first, liberalization and market opening as unhelpful to India's interests; and later, that started to recognize the benefits of liberalization but still as something to be undertaken at India's pace rather than dictated by trading partners.

But the last two decades are seeing a change not just in economic ideology but also in Indian perception of its interests, a change that will only accelerate further in the years ahead. The foundation of this turnaround is rapid economic growth and the rapid opening of its economy, which in turn has made the world take notice of India and start considering it a serious player in global economic policy making.

A number of specific changes should and will influence the way India sees itself in the future. First, the Indian economy, especially its dynamic services sector, is highly reliant on foreign markets for its survival and growth. Thus, foreign policies toward Indian exports will matter a lot more than in the past. The more that populist, protectionist views such as those of American TV personality Lou Dobbs gain legitimacy, the more threatened India's economic prospects will be.

Second, India is not only becoming a large exporter of goods and services. It is, in an unprecedented development, becoming an exporter of managerial and entrepreneurial capital, illustrated most significantly in the purchase of the Dutch steel group CORUS by the TATA Group. Indian multinationals, operating globally (especially in OECD country markets), could well be an important future reality. Not just Indian goods and services, therefore, but also Indian capital will be at the mercy of foreign policies.

Third, global warming will have especially significant adverse consequences for India. India, therefore, has a keen stake in getting global cooperative action to try and prevent or postpone global warming or at least to minimize its worst consequences. India will need to persuade other countries, including the industrial countries and China, to undertake action that they might otherwise not be willing to take.

What these examples highlight is simple: preserving sovereignty can no longer be the exclusive, or even predominant, concern for India because India's interests and fortunes will increasingly be affected not just by its own policies and actions but those of its trading partners and others. This calls for a pretty radical change in the Indian mindset in its approach toward global economic policy-making.

This is a change at the level of strategy. The tactical implications of this are likely to be more complicated. When preserving sovereignty is the paramount concern, a country can afford to have a pretty undiscriminating approach (mostly having to say no) in its dealings with other countries across the spectrum of issues and institutions. But when sovereignty becomes an asset or a coin that needs to be traded or partially ceded or pooled, a much richer and more sophisticated menu of options presents itself. Who should India deal with? Should they be the same across economic issues or should they vary? Is multilateralism preferable to regional or bilateral relationships? India will have many more cards to play.

Consider the following example. When the right to protect was the sole imperative for trade, India frowned upon all regional agreements and dealt exclusively in the multilateral trading system. With India becoming a more global player, with major interests in knowledge exports and exports of skilled labor, it is no longer obvious that multilateralism remains the exclusive option. There are good, or at least plausible, reasons to believe that bilateral agreements with prominent partners such as the US might have as much, or more, to offer than the WTO, as Aaditya Mattoo (see "Jagdish Bhagwati and India's Trade Strategy Today") and I have argued. So a natural question is whether and how India should forge bilateral trade relationships?

On financial issues, the governance structure of the World Bank and the IMF and the process of appointing the heads of these institutions are now an historical anomaly: they seem to be unrelated to current economic realities, especially in not giving adequate weight to the current interests and importance of Asian countries such as India and China. But this antiquated state of affairs is one that industrial countries seem extremely reluctant to correct; the readiness and willingness to offer aid is matched by an equal resistance to ceding power. In this context, should India persist with multilateralism or should it seriously contemplate alternative arrangements, such as a closer Asian monetary union, either for their own sake or at least as a credible threat to rouse industrial countries into meaningful reform of the IMF and the World Bank?

On global warming, there is some confluence of interests and ideology between China and India which could be harnessed in discussions with industrial countries on burden-sharing in the context of determining the ecological fate of the planet.

So on economic issues, India's place in the world will likely be very different from what it is today. Its rapid economic growth and growing economic entanglement with the world has seen to it that India is no longer a peninsula unto itself. A fundamental change in mindset is essential to shape the new reality; from shedding its obsession with sovereignty-a legacy both of colonial rule and India's poor economic performance for the first three decades after independence-to determining how engagement, even if it means ceding sovereignty, can best maximize India's long-term interests.

Arvind Subramanian is Senior Fellow at the Peterson Institute for International Economics, Washington D.C., and author of India's Growth and Globalization: One of a Kind? (forthcoming, Oxford University Press).

 


India in Transition (IiT) is published by the Center for the Advanced Study of India (CASI) of the University of Pennsylvania. All viewpoints, positions, and conclusions expressed in IiT are solely those of the author(s) and not specifically those of CASI.

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