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SEPTEMBER 18, 2017

Reading the tea leaves

  • More often, there are trend lines of slow-moving geopolitical changes which come together at a particular moment in time resulting in an inflexion point.

Two trend lines

  • The two slow moving trend lines clearly discernible since the Cold War ended a quarter century ago are the shift of the geopolitical centre of gravity from the Euro-Atlantic to the Indo-Pacific region and the rise of China.
  • Most of the rivalries are being played out in the crowded geopolitical space of the Indo-Pacific, and Asian economies now account for more than half of global GDP and becoming larger in coming years.
  • China’s rise is reflected in a more assertive China. According to President Xi Jinping’s ‘two guides’ policy announced in February, China should guide ‘the shaping of the new world order’ and safeguarding ‘international security’.
  • China has suggested ‘a new type of great power relations’ to the U.S. Its assertiveness in the East China Sea with Japan and in the South China Sea with its Association of Southeast Asian Nations (ASEAN) neighbours sends a signal that while multipolarity may be desirable in a global order, in Asia, China is the predominant power and must be treated as such.
  • Even though China has been a beneficiary of the U.S.-led global order, it is impatient that it does not enjoy a position that it feels it deserves, especially in the Bretton Woods institutions. During the last five years, it has set about creating a new set of institutions (the Asian Infrastructure Investment Bank and the New Development Bank) and launched the Belt and Road Initiative (BRI) to create a new trading infrastructure that reflects China’s centrality as the largest trading nation.
  • The BRI is also complemented by a growing Chinese naval presence in the Indian Ocean. Beginning in 2009, the PLA Navy started rotating three ship task forces through the Indian Ocean as part of the anti-piracy task force off the Somalia coast. Visits by nuclear attack submarines to littoral ports began to take place. In addition to Gwadar, China is now converting the supply facility at Djibouti into a full-fledged military base.

Accelerating the trends

  • Recent developments have accelerated these geopolitical trends. The first was the outcome of the U.S. elections last year. By invoking ‘America first’ repeatedly, President Donald Trump has made it clear that the U.S. considers the burden of leading the global order too onerous.
  • Recent nuclear and long-range missile tests by North Korea have added to South Korean and Japanese anxieties. Japan has been particularly rattled by the two missiles fired across Hokkaido.
  • Another significant development was the Doklam stand-off between India and China that lasted from June to August.
    • The Chinese playbook followed the established pattern — creating a physical presence followed by sharpened rhetoric, together becoming an exercise in coercive diplomacy. This worked in pushing the nine-dash line in the South China Sea with the Philippines and Vietnam even as China built additional facilities on reclaimed land in the area. India, however, chose to block China and a few hundred soldiers on the plateau maintained their hostile postures even as Prime Minister Narendra Modi and President Xi attended the the G-20 summit in July amidst heightened rhetoric recalling the 1962 war.
    • Differences with China did not begin with Doklam. It was preceded by the stapled visa issue for Indians belonging to Arunachal Pradesh and Jammu and Kashmir, growing incidents of incursions along the disputed boundary, blocking of India’s bid to join the Nuclear Suppliers Group last year, ensuring that no language relating to Pakistan-based terrorist groups found mention in the BRICS summit in Goa and preventing the inclusion of Masood Azhar from being designated as a terrorist by the UN Security Council by exercising a veto.
    • Since 1988, India has followed a consistent China policy based on putting aside the boundary dispute and developing other aspects of the relationship in the expectation that this would create mutual trust and enable a boundary settlement. However, the gap between India and China has grown, both in economic and military terms, and with it has emerged a more assertive China.



A new strategic landscape

  • It is against this backdrop that Japanese Prime Minister Shinzō Abe’s visit to India took place last week. Japan was invited to join in the Malabar naval exercises and a Joint Declaration on Security Cooperation was concluded.
  • A singular achievement was the conclusion of the agreement for Cooperation in the Peaceful Uses of Nuclear Energy last year. Under negotiation for five years, this was a sensitive issue for Japan given the widespread anti-nuclear sentiment (though Japan enjoys the U.S. nuclear umbrella) and (misplaced) faith in the Nuclear Non-Proliferation Treaty; it would not have gone through but for Mr. Abe’s personal commitment.
  • To deepen strategic understanding, the two sides initiated a 2+2 Dialogue involving the Foreign and Defence Ministries in 2010.
  • A memorandum on enhancing defence and technology/security cooperation was signed and talks on acquiring the amphibious maritime surveillance ShinMaywa US-2i began in 2013.
  • Trilateral dialogue involving both the U.S. and Japan and covering strategic issues was elevated to ministerial level in 2014.
  • Japanese participation in the Malabar exercises, suspended because of Chinese protests, was restored in 2015.
  • Once the agreement for the 12 US-2i aircraft is concluded with a follow-up acquisition as part of Make in India, the strategic relationship will begin to acquire critical mass.
  • However the strategic partnership needs stronger economic ties. Today, India-Japan trade languishes at around $15 billion, a quarter of trade with China while Japan-China trade is around $300 billion. Therefore, the primary focus during the recent visit has been on economic aspects.
  • The Mumbai-Ahmedabad high speed rail corridor is more than symbolism, in demonstrating that high-cost Japanese technology is viable in developing countries and that India has the absorption capacity to master it. Completing it in five years is a management challenge but the bigger challenge will be to transfer the know-how of best practices to other sectors of the economy.
  • Another major initiative is the recently launched Asia-Africa Growth Corridor to build connectivity for which Japan has committed $30 billion and India $10 billion.
  • Ensuring effective implementation and setting up mechanisms for delivery will align Mr. Modi’s Act East policy with Mr. Abe’s Free and Open Indo-Pacific Strategy. This alignment sets the stage for the reordering of the Asian strategic landscape.

Time for caution


  • Last week, the current account deficit (CAD) widened to a four-year high of $14.3 billion in the first quarter of the current financial year, standing at 2.4% of gross domestic product, compared to 0.1% last year. The widening CAD was driven by a greater increase in merchandise imports than exports. A strong capital account surplus, however, has helped the country pay for its import bills without much trouble.
  • Foreign investors starved of yield have been stepping up their investments in India, which remains one of the few places offering higher yields. Compared to last year, net FDI almost doubled to $7.2 billion in the first quarter, while net portfolio investment jumped about six times to $12.5 billion. The strong inflow of foreign capital has also led to a significant increase in foreign reserve holdings, thanks to the Reserve Bank of India which has been busy buying dollars to weaken the rupee. Forex reserves were at an all-time high of $400.7 billion for the week ending September 8, while the rupee has appreciated by over 6% against the dollar this year. Low global oil prices over the last two years have also helped contain a good portion of its import bills.
  • All this might change with the impending tightening of monetary policy by the U.S. Federal Reserve and other central banks. After all, emerging Asian markets have been the biggest beneficiaries of loose monetary policy in the West, so any change in stance would most definitely affect them.
  • Indian companies, for instance, have aggressively tapped into the market for rupee-denominated foreign debt, which can work against them if the flow of foreign capital turns volatile. The RBI has been regulating the amount and quality of such borrowings, so it may seem like things are under control for now.
  • Further, India’s total external debt declined by 2.7% during the financial year 2016-17, standing at $471.9 billion, driven by a fall in external commercial borrowings and deposits by non-resident Indians.
  • The World Bank, in fact, has said that India’s external dynamics remain very favourable given the size of its economy and foreign reserve holdings. But a prolonged period of unfavourable trade balance when combined with volatile international capital flows can lead to unsavoury macroeconomic situations.
  • According to a report by India Ratings & Research earlier this year, a 10% depreciation of the rupee combined with a 50 basis point interest rate hike can severely affect most Indian borrowers. It added that as much as 65% of foreign debt exposure of Indian companies may be unhedged. As the world looks to withdraw from an era of historically low interest rates, it would be wise for India’s policymakers to be ready with an emergency plan to tackle a period of significant volatility.


Confrontational path

  • Bangladesh’s Parliament raised the stakes in a stand-off against the judiciary last week by passing a unanimous resolution to take “proper legal steps” over a Supreme Court verdict nullifying the Constitution’s 16th amendment.
  • The amendment, passed in 2014, had empowered Parliament to remove judges of the Supreme Court found incompetent or guilty of misconduct, based on a two-thirds majority. This amendment had in a way restored the power of Parliament to impeach judges and was in line with the original Constitution of 1972. The Supreme Court had in July this year scrapped the amendment, suggesting that it was antithetical to the independence of the judiciary and restored the Supreme Judicial Council, headed by the Chief Justice, with powers to remove errant judges.
  • The Parliament, dominated by the Awami League, not only resolved to reverse the Supreme Court’s decision, but also found fault with Chief Justice S.K. Sinha’s comments in this regard. He had said that the Constitution was a product of the collective will of the people and not just one individual, which was interpreted as an affront to “Bangabandhu”, Sheikh Mujibur Rahman, by the ruling Awami League. The largest party in opposition, the Bangladesh Nationalist Party, is not represented in Parliament as it had boycotted the elections held in 2014. The BNP had welcomed the Supreme Court decision but its position seemed to be guided more by schadenfreude and less by a clear-cut position on the judiciary’s independence.
  • The Supreme Court’s contention is that Bangladesh’s political system is unlike the parliamentary systems in the United Kingdom and India, for example, where legislators are empowered to impeach judges. Bangladeshi MPs do not have the freedom to vote on conscience on issues including impeachment, bound as they are by Article 70 that prevents legislators from voting against their party’s decision on any matter. This prevents a dispassionate deliberation over any prospective impeachment, giving political parties, and those in the executive undue influence over appointments in the judiciary. Instead of taking a course of confrontation against the judiciary, Bangladesh’s parliamentarians and its attorney general would be better off proceeding with a review petition to the Supreme Court and presenting their position dispassionately.
  • The Supreme Judicial Council might have had a legacy connecting it to the country’s authoritarian past, but the arguments of the Supreme Court that it is seeking to protect judicial independence from the executive in light of other laws that bind legislative work in Bangladesh need to be contested by the government point by point — not by a mere resolution.