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India in Transition

Flexing Economic Muscle

Rishika Chauhan
June 19, 2017

A momentous task awaits Prime Minister, Narendra Modi and the newly elected Prime Minister of Nepal, Sher Bahadur Deuba. The two prime ministers have to maintain the momentum of the India-Nepal relationship (revived by former Prime Minister, Pushpa Kamal Dahal) and alleviate the bitterness that had crept in during Dahal’s predecessor, Khadga Prasad Sharma Oli’s term. While several reasons can be cited for the plummeting of India-Nepal ties during Oli’s tenure, his accusation of India initiating an economic blockade against Nepal is noteworthy.

Oli blamed India for blocking crucial border points, maintaining that it was unimaginable that Nepal could face a “blockade in the 21st century.” While many believed that a Nepali ethnic group called the Madhesis had initiated the roadblock, there were others who implied that New Delhi had a role to play—terming the incident India’s “unofficial blockade” of Nepal. Though New Delhi denied its involvement, the accusation itself was not surprising; Modi had been sympathetic to the Madhesi concerns, persistently asking the Nepali government to redress their grievances. Moreover, it seemed unlikely that a transport disruption of that magnitude and duration could be caused without India’s backing. At international forums, India might have censured the West’s use of economic coercion, but in the past, New Delhi has itself used economic muscle for political purposes. The Nepal blockade seems an illustration of the way India makes strategic use of economic pressure to pursue political ends. 

Considering the ethnic and cultural proximity of Nepali Madhesis to the people in the Indian provinces of Bihar and eastern Uttar Pradesh, New Delhi’s involvement was not unforeseen, nor was the use of economic statecraft to achieve the end. Through the use of economic instruments such as embargoes, economic blockades, and financial sanctions, India has, in the past, sought to promote its interests or support core policy issues in other countries. Yet, compared to the West, India has only selectively spoken about its economically coercive policies, acknowledging them only when the fear of international condemnation is low and possibility of domestic appeasement high. Nepal, South Africa, and Pakistan are important cases in this regard.

International Condemnation and Domestic Appeasement
In the case of Nepal, India extended its support to the Madhesis without formally admitting it. Acknowledging aiding an economic blockade that was causing scarcity of essential supplies in Nepal would have tarnished India’s image abroad, especially since it shares a special relationship with the Nepali people. Meanwhile, Nepal raised the issue of India’s “trade blockade” at the UN in October 2015. During this time, the fear of international condemnation loomed large over India, which, ironically, often uses a moralizing tone in its diplomacy. In the event, accepting initiating, or even aiding the blockade would have been implausible for India.

However, there have been cases when India not only made explicit declarations of using economic coercion but also lobbied for similar international action. The Indian government used economic coercion against South Africa from 1946 to 1993 when it found the actions of the South African government discriminatory and detrimental to the interests of the Indian diaspora living there. Commencing pre-independence, the measures continued post-independence with renewed fervor. On its website, the Indian High Commission in South Africa, states, India “was the first country to sever trade relations with the apartheid Government (in 1946) and subsequently imposed a complete embargo on South Africa.” Shortly before independence, Viceroy, Lord Wavell, recounted the domestic pressure, “I do not believe any counter-measures we can take will be effective but Indian public opinion is set on taking them.”

In December 2001, India imposed restrictions on Pakistan, which would have economic effects. When Jaswant Singh, then the External Affairs Minister, unambiguously spoke about the restrictions, arguing that “the Government of India has no option but to take the steps,” domestic constituencies were certainly on his mind. Following the suicide attack on Indian Parliament, India had traced the links of the terrorists to Jaish-e-Mohammed and Lashkar-e-Taiba, two organizations believed to be operating out of Pakistan. Hence, Singh’s statement was about demonstrating resolve not only to Pakistan but also to audiences at home.

The Indian Approach
While the leaders of several Western states (and even emerging powers like Brazil and Iran) have articulated their approach to economic coercion, Indian leaders have often shied away from the subject. Yet, there seems a general awareness in the foreign policy establishment that India has employed such policy instruments, which are still available to pursue policy goals. References and acknowledgments about economic coercion by the Indian foreign policy establishment however, have been uncommon and abstruse. In a candid interview in 2012, the then Minister of External Affairs, Salman Khurshid made an allusion on being questioned about China’s use of economic coercion on Vietnam, remarking, “don’t we all use economic muscle?”

Moreover, Indian officials and leaders have often only discussed the subject while reacting to economic coercion used by Western states. In the last few years, India, individually as well as a part of multilateral forums like BRICS (Brazil, Russia, Iran, China, and South Africa), has taken a strong stand against unilateral economic sanctions imposed on Russia and Iran. Maintaining that it supports sanctions imposed by the UN, New Delhi has emphasized that unilateral sanctions hurt the global economy. Notwithstanding its obvious opposition to the West’s use of economic coercion, several past and recent actions by India seem to fall in the general bracket of economic coercive measures.

Like China, India has not formalized economic coercive measures through legislation or explicit regulations and statements, as the U.S. and European Union have done. Speaking in New Delhi last year, Ambassador Robert D. Blackwill, recognized the need for “policymakers in both India and the United States to strengthen the instruments of economic diplomacy.” While New Delhi acts on the advice, it must exercise caution, given the humanitarian cost and limited success rate of West’s economic coercive measures. While using economic coercion, it is imperative that India thinks strategically and keeps its mind on three factors. First, India should ensure that while employing economic pressures, collateral damage is minimized. New Delhi must try to focus on the ruling elite when and if it deliberates the use of its economic might to coerce other states or entities.

Second, for effective use, India should understand the complexity of the target state’s international relationships. While imposing sanctions on Iran, the U.S. understood this caveat well and devised an intricate sanctions regime wherein primary sanctions were placed on Iran and secondary sanctions penalized states and non-state actors that transacted with Iran. Similarly, in the case of India and Nepal, apprehensions that New Delhi’s blockade would make Nepal seek China’s support were not baseless. Finally, India should think about the costs involved. Besides a monetary cost, the state that employs economic coercion can also suffer a loss of reputation in the target country, like in the case of India and Nepal. Shortly after the initiation of the Nepal blockade, Oli invoked anti-India rhetoric, making Indian officials apprehensive. Such reputation loss often cannot be ameliorated through public diplomacy, at least in the short run.

Though Deuba’s previous terms have proved to be largely productive for India-Nepal ties, New Delhi must draft its future Nepal policy prudently. With China’s influence growing in the region, India should think strategically, while flexing its economic muscles in the neighborhood.

Rishika Chauhan is a Visiting Scholar at the Centre for India Studies in China West Normal University, China. She can be reached at

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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