Making the case for urgent fiscal consolidation, the Kelkar Committee report notes how almost all important economic indicators are “flashing red”: faltering growth, embedded inflation, a turbulent global economy making external financing of deficits difficult, higher energy prices and an aspirational demographic bulge at home that demands higher growth.
Intriguingly, it has three sentences that connect fiscal policy to India’s geostrategic autonomy that are not fleshed out elsewhere in the report: “There is yet another strategic consideration for us now. It is imperative that as a responsible nuclear power, India pursues a responsible fiscal policy. This will enable us to retain our strategic autonomy.”
Understated as it is, this is a very important point — geoeconomic weakness can undermine geopolitical strength. The components of national power are fungible, as Kautilya recognised when he argued that a sovereign’s might arises from the treasury and the army. The net geostrategic effect of an unsustainable fiscal deficit is a loss of autonomy in foreign policy that India’s nuclear arsenal enables. As India’s power relative to other states diminishes, we will find ourselves constrained in our capability to act in the national interest.
Since the Kelkar report does not go into further details, we can examine how this might come about. If a large fiscal deficit is not offset by private surpluses, it leads to a current account deficit that must be plugged with foreign capital flows. Borrowing from other countries is one way to do this. Even if one is able to shrug off the humiliation this involves, such loans come with explicit or implicit strings, following the adage that he who has the gold makes the rules. Remittances from the diaspora are unreliable and in any case unlikely to be of the necessary scale.
The other way is to go to the International Monetary Fund (IMF). When India approached the IMF for assistance in the early 1990s, the big Western powers called the shots. Today, the IMF is in the midst of a shift in the balance of voting power, with China poised to be its third-largest member-country. India, too, is among the top 10 shareholders, but will be vulnerable to conditions insisted upon by Beijing, if it can carry some others along. China’s recent behaviour suggests it can exploit its position in multilateral agencies to gain an advantage in bilateral issues. For instance, in March 2009, China objected to the Asian Development Bank funding a water-management project in Arunachal Pradesh.
According to University of Pennsylvania’s Devesh Kapur, “China does not have the wherewithal to bring other important shareholders to join it in influencing the IMF on country lending decisions. In the foreseeable future, as long as the United States and West European countries are reasonably favourably inclined towards India, China’s influence on a hypothetical IMF loan to India would be quite limited.” Ergo, a worsening fiscal position will require India to act in such ways that the West remains favourably inclined.
More From This Section
Even without Chinese pressure, as Professor Kapur notes, “since the root of our (potential) macroeconomic crisis lies in our fiscal imbalances, the IMF will have no option but to ask us to reduce our Budget deficit. Even if we assume that it does not specify what expenditures we should cut, the government will first cut capital expenditures rather than revenue expenditures. The former entails investments and capital equipment purchases for the armed forces. The latter is mainly salaries and subsidies. It does not take much to surmise that given our politics we will cut the former and preserve the latter”.
That said, would fiscal deficits really subtract from the benefits provided by a nuclear arsenal enough to cause a state to lose its strategic autonomy? For a long time, the US did quite well despite yawning deficits. It owes China more than a trillion dollars now, but the effect on its strategic autonomy is marginal even if it is tangible. The Soviet Union, on the other hand, collapsed in part due to the consequences of its fiscal deficits.
Pakistan is a special case: the combination of an empty treasury and nuclear weapons actually gives it a bargaining power it wouldn’t have enjoyed if it lacked either. Its fiscal weakness increases its utility to the US, China and Saudi Arabia, while its nuclear arsenal ensures that they cannot ignore it. It can thus play upon the risks of its nuclear weapons falling into the wrong hands, and also the whole country falling into China’s camp, if the US doesn’t address its demands. An irresponsible nuclear power can afford not to worry about fiscal deficits.
As my colleague Narayan Ramachandran says: “for credible nuclear deterrence and bargaining power, you have to be either a strong state like China or an almost failed state like Pakistan, but not a weak state.”
Ultimately, as Professor Kapur puts it, for India “the fundamental economic roots of state power lie in a healthy fiscal balance. Lose that and you lose any pretensions of national power”.
Anything short of full implementation of the Kelkar Committee’s recommendations risks puncturing India’s geopolitical standing. What we actually need is an urgent measure of Kelkar-plus.
The author is founder and fellow for geopolitics at the Takshashila Institution, an independent public policy think tank