Indispensable India? Don't let confidence turn into complacency

For decades now, India’s dealings with the outside world have been suffused with the confidence of a country sure that it is on the cusp of greatness. But today, perhaps, we should all begin to be a bit concerned that this confidence is shading into complacency.

To be clear, I am not talking only of the government here. Politically, a government must reflect the demands of its citizens, and Indian voters have been led to expect this country will take a leading role in the world. This may be true more of the current administration than most, but no member of the political class can afford to sound less than confident about India’s global stature. And it goes beyond politicians and officials: even the private sector has a tendency to assume that India is the only game in town.

Is India indeed indispensable? We should not be as sure as all that.

There are three different domains along which we should objectively evaluate exactly how vital we are to outsiders. First, as a destination for investment. Second, as a market for global companies. And third, as a geo-economic and geo-political partner.

As an investment destination, India seems to be doing satisfactorily at first glance. In the fiscal year 2021-22, inflows of foreign direct investment or FDI reached $85 billion, its highest ever number. Is this enough? Perhaps not, as it does not quite reach the level of flows that have in the past transformed other economies. When normalised against gross domestic product or GDP, FDI looks less impressive: it has hovered essentially between 1.5 and 2.5 per cent since 2010. As a comparison, in China’s transformative years between 1990 and the mid-2000s, FDI was between 4 and 6 per cent of its GDP. High levels of FDI are essential to turn a country into a trading power: by the end of that period, the Chinese government estimated that half of the country’s trade came from enterprises wholly dependent upon foreign investment.

Illustration: Ajay Mohanty

In other words, this level of FDI is not quite enough, and we need to work harder. Can we be satisfied, as many are following good news from big producers like Apple, that we will be the default “China plus one” option in the rebalancing of global supply chains? I am not sure. Countries like Vietnam, which are part of multiple trading blocs, are certainly better positioned in terms of linkages. Physical and human capital endowments and potentials elsewhere may be more attractive in the coming years. For example, Southeast Asia has better physical infrastructure than India; in East Africa, women represent half the labour force while in India they are but a quarter. Finally, the fact is that owners of capital in the global north are going to be exposed to many productive and lower-risk opportunities for investment at home in the coming years thanks to changed government policies, an infrastructure push, and domestic green transitions. India is not quite prepared for these headwinds that may limit investment flows in future years; we are accustomed to thinking of ourselves as the only attractive growth play in the world, and that may no longer be true.

Yet, surely, some private sector entities will always be interested in India thanks to the size and future growth of its market? India’s sheer numbers mean, surely, that companies must continue to have an India growth strategy if they are not to miss out on a sizeable chunk of their potential future growth. As a consequence, in sectors from tech to services to defence we treat foreign companies with disdain — forcing them to tie up with locals, part with their intellectual property, avoid global arbitration, or accept covertly discriminatory rules. This is, again, complacency — and, if anything, less warranted than our overconfidence about investment. Companies expect to make reasonable returns on a foreseeable time-scale and they fear catastrophic loss of their investment. The case of Amazon in India is instructive: they have invested about $6.5 billion into their India business, and are yet to see a paisa in profit, according to a widely circulated report from the research group Bernstein. Indeed, their regulatory and competitive prospects have if anything dimmed as they commit more money to the market. To top it all off, India’s consumer demand is not easy to predict, and the size of its middle class today and in the future is a constant matter for debate. What can be said for certain is that most companies’ guesses from 10 or 20 years ago about the size and affluence of the Indian middle class in 2022 will have turned out to be overestimates. Beyond a certain point, India will have to deliver general prosperity and not just promise it if it is to continue to be seen as the market of the future.

Certainly, sectors that are the focus of government subsidies like electronics and handset manufacturing will continue to see global corporate interest. But it is far from certain that other sectors will be attractive to companies in the absence of a level playing field or basic administrative and judicial reform. Consider cement: the Swiss company Holcim sold up and exited India earlier this year, giving up on the growth prospects of a country supposedly on the brink of an infrastructure and building revolution. Defence is another example: global companies are constantly told they will have to not just shift their entire supply chain here but be prepared to effectively surrender their intellectual property, even without committed purchases from the Indian military.

Still, even if India does not outperform as an investment destination or a market in the coming decade, surely it will continue to be wooed, or given special treatment by the governments of other countries? Whether as a democratic counter-weight to China or as an indispensable part of a new order in the Indo-Pacific, India considers itself indispensable in strategic terms, at least.

Yet here, again, we have been a potential partner for too long without actually committing ourselves to delivery. It will have escaped nobody’s notice that, far from participating in larger efforts to contain China at a time when Taiwan is under threat, India is going in the opposite direction and seeking to minimise China’s own pushes along the border. The modernisation of India’s military is long delayed; it is still playing both sides in conflicts like Ukraine; and it is uncertain whether, at multilateral locations, it is a member of a developing-world bloc that includes China or a “like-minded” bloc with the West. Meanwhile, its soft power as a democracy is, like it or not, diminished by growing internal polarisation and an increasingly illiberal political climate. Countries like Japan and Germany are abandoning decades of history to step up as net security providers in an uncertain world. Strategic planners are not going to wait forever for India to follow suit.

Every Indian has grown up in a country with great potential as an economic and strategic power. At least some of us would like to live, someday soon, in a country in which that potential has become reality in the eyes of the world.

The writer is head of the Economy and Growth Programme at the Observer Research Foundation, New Delhi