Foreign Trade Relations of India

India's financial sector has undergone a remarkable shift in recent years. It has evolved as a significant power in the international political and economic system, despite years of inward-looking economic rules. Beginning with economic reforms launched by the administration led by the Indian National Congress (INC) in the early 1990s, the country has gradually opened its borders to foreign firms. Indian firms were also permitted to expand their operations and invest in global markets. The speed of economic changes accelerated under the leadership of Atal Bihari Vajpayee of the Bharatiya Janata Party (BJP). After a hiatus of ten years in economic reforms during the INC government headed by Mr. Manmohan Singh, the BJP returned to power promising economic reforms. The BJP government headed by Mr. Narendra Modi initiated reforms starting with a big push to implement the unified tax regime for the whole country called the Goods and Service Tax (GST). He has also taken a number of initiatives to bolster trade with other countries. This paper will focus on the initiatives by the Narendra Modi government to improve trade relations with India’s neighboring countries and the resulting impact.

The paper will focus on the initiatives taken by Mr. Narendra Modi to improve relationships with neighbors. It will then shift to the reasons behind the differences in relationships with neighbors. The suggested future roadmap will be put forth before concluding the paper.

Introduction

Narendra Modi is one of the most charismatic leaders in the world now (Datta, 2008). He also very popular in India due to the economic development he brought to India’s western state of Gujarat. His popularity is rivalled by only one other leaders of modern India, viz. the first female prime minister of India Indira Gandhi. Narendra Modi came to power promising change and a restart of economic reforms that were stalled when the INC government headed by the Mr. Manmohan Singh came to power in the year 2004. As a result of the stalling of economic reforms, the GDP growth of the country came down to below 5 percent per annum by the year 2012.

Even after Narendra Modi came to power in the year 2014, he could not initiate any major economic reforms as his party did not have a majority in the country’s upper house. Instead of entering into an agreement with the opposition parties, Narendra Modi preferred to improve areas of the economy which did not require the passage of major legislations in the parliament. Some of these initiatives included solving the bad debts problem of Indian banks, improving the outdated infrastructure of the country, and improving trade relations with the neighboring countries of India. Despite attempts to improve trade with western countries and trading blocs like EU since the early 1990s, India has mostly neglected its immediate neighborhood. Many of India’s neighbors including China have grown very fast in the recent past. However, India’s trading relationship with these countries has not improved at the same rate.

India has a troubled history with many of its neighbors due to a number of reasons. It always had strained relations with countries like Pakistan and China over border disputes. Moreover, India’s smaller neighbors like Nepal and Sri Lanka have always accused it of meddling in its internal affairs. In view of these differences, India had a number of stumbling blocks in improving its relationship with its neighbors. Mr. Narendra Modi took a new initiative called ‘Neighborhood First’ to improve trade relations with India’s neighbors. This paper will first briefly deal with the economic history of India and then follow it up with the new initiatives taken by Narendra Modi and its impact on India’s foreign trade.

India’s Economic History

A confluence of factors like India’s tropical climate and its rich natural resources have traditionally made India one of the richest country of the world. According to the estimates of many economists, India always had the highest GDP in the world during most of the ancient times. The country’s wealth has attracted settlers and colonizers from all over the world. People from Europe and Central Asia have made India their home for centuries. Invaders and colonizers like England have benefited by making India a captive market for their products through colonization.

After gaining independence, India was attracted to the socialist policies propounded by thinkers like Karl Marx and followed by countries like USSR. The result was decades of slow growth and poverty. Millions of Indians were struck in poverty forever and had little opportunity to better their lives. A severe Balance of Payments crisis during the early 1990s has forced the then Indian government to initiate economic reforms. Economic reforms opened the country to global competition for the first time in centuries. Economic reforms resulted in rapid economic growth and the lifting of millions of Indians out of the poverty trap. The economic reforms were continued by the governments led by reform minded prime ministers like Mr. Atal Bihari Vajpayee. In the second round of reforms under Mr. Atal Bihari Vajpayee, a number of public sector businesses were sold to private players.

Research Questions

India has changed by leaps and bounds since the introduction of economic reforms during the early 1990s. The new found economic confidence also resulted a market shift in the way it conducted business with its neighbors. While the Look East policy initiated in the early 1990s, redefined the country’s foreign policy priorities, the Neighborhood First policy started by the country’s current Prime Minister led India to focus on its immediate neighborhood and assert its position as a regional power.

In this scenario, the current paper focuses on understanding the impact of this new policy on the country’s external relations with the following research questions:

Did the Neighborhood First policy marked a major shift in India’s relationship with its neighbors?

Was India able to boost its image with the new foreign policy initiative that is exclusively targeted at its neighbors?

Hypothesis

The current paper is based on the following hypothesis:

The Neighborhood First policy marked a major shift in the way foreign policy is conducted by the previous governments and the new Narendra Modi government. But more needs to be done for India to emerge as a regional superpower.

Narendra Modi’s Foreign Policy Initiatives

Right from the time he came to power, Narendra Modi’s government has taken a number of foreign policy initiatives with the objective of strengthening the power of India. His first two of years after coming to power in 2014 were mostly spent in relentless globetrotting. Narendra Modi visited China, UK, Japan, and Australia with the objective of strengthening the relationship between India and these countries.

One of the most significant initiatives taken by Narendra Modi is to get close to USA and other western powers. India has traditionally allied itself with USSR as its founding fathers believed in socialism. This policy did not change significantly even after the former Soviet Union crumbled. India continued to stay away from USA continued making most of its defense purchases from Russia. Being a right wing leader, Narendra Modi wanted to change this and get closer to USA. He invited the president of USA, Mr. Barack Obama to be the chief guest of India’s Independence Day celebrations of 2016. Obama accepted the invitation and visited India in January 2015 (BBC, 2015). Departing from the protocol, Mr. Narendra Modi himself went to the airport to receive Mrs. Obama. During this visit the two countries decided to put the baggage of cold war aside and focus on building a new relationship between the world’s two biggest democracies. After Obama’s visit, Narendra Modi too has visited USA to further strengthen the relationship between the two countries.

Narendra Modi has also worked relentlessly to improve India’s relations with Pakistan. He gave a go ahead to restart the long stalled peace talks between the two neighbors. In December 2015, Narendra Modi made a surprise visit to Pakistan while returning from Afghanistan (Haider, 2015). Narendra Modi’s IAF flight touched down in Islamabad and he had breakfast with the prime minister of Pakistan, Mr. Nawaz Sharif. The visit to Pakistan by Narendra Modi was the first for an Indian Prime Minister in over a decade. During the talks held at the time of the visit, Narendra Modi asked Mr. Nawaz Sharif to focus on trade and development and curb terrorism that was deteriorating the relationship between the countries for long. The efforts made by Narendra Modi to improve the relationship between the neighbors were appreciated by many world leaders and political analysts. The talks initiated by Narendra Modi did not progress far after militants attacked an Indian Air Force base in the Indian state of Pakistan. However, the visit led to a thaw in the relations between the two countries after years of distrust on each other.

Narendra Modi has also visited China and Japan to request their support for a permanent seat to India in the UN Security Council. His foreign policy initiatives were not just limited to the rich countries. Narendra Modi also tried very hard to build relationship with many African countries with the objective of gaining energy security to India.

Narendra Modi’s Neighborhood First Initiative

After experiencing a period of rapid economic growth in the post reforms period, the growth rate of India’s GDP started to lag by early 2010s. The main reason for the faltering of the country’s growth rates is the halting of economic reforms under the government headed by Dr. Manmohan Singh. As the government headed Dr. Manmohan Singh did not have a full majority in both the houses of India’s parliament, he could not initiate any tough economic reforms. The privatization policy of the earlier governments too was stalled. As a result, the incomes of people in the country continued to decline and unemployment rate rose. Frustration with the declining standard of living of people ultimately led to the defeat of the INC in the 2014 national elections.

The new Prime Minister of India, Mr. Narendra Modi who came to power in the year 2014 promising growth and reform initiated reforms immediately after taking over power. But the lack of majority in the upper house of India’s parliament did not make it possible for him to initiate tough reform measures like a new land acquisition system which makes it easy for businesses to acquire. As Narendra Modi did not like bargaining with the opposition parties to pass reform bills in both houses of the parliament, he preferred to wait till his party got a full majority in both the houses of parliament. Instead, he started focusing on other reform measures like easing the bad debt problems of banks, increasing the spending on country’s infrastructure, and bettering trade relations with other countries and trading blocks.

As part of this agenda, one of the major initiatives taken Narendra Modi’s government is the Neighborhood First policy. Under this policy, India would work for improving trade relations with its neighbors. Many of India’s Neighbors including China have grown very strong during the 1990s after economic reforms were rolled out by the political establishments in those countries. Narendra Modi wanted to take advantage of these changing circumstances in India’s neighborhood to grow India’ foreign trade.

In order to gain stronger ties with India’s neighbors, Narendra Modi initiated a new foreign policy initiative branded as ‘Neighbourhood first policy’. The new policy had its roots in another foreign policy initiative called ‘Look East Policy’ that was introduced two decades earlier by India’s former Prime Minister Mr. Narasimha Rao in the year 1991. When the Look East Policy was introduced, India was just rolling out its economic reforms. But China has already rolled out the economic reforms and gained the position of a regional superpower.

The main objective of the Look East Policy was to cultivate closer economic and strategic relations with in Southeast Asian countries. By forging a closer relationship with the countries in Southeast Asia, India wanted to ultimately gain the position of a regional super power and counter the growing power of China in the region. The Look East Policy marked a major shift in India’s foreign policy as the country stopped looking at Russia for guidance. The Look East Policy is considered a great success and many political analysts opine that it helped in solidifying India’s big brother image in the region. Rather than seeing China just as an adversary, India also tried to build a good relationship with it. But India’s attempts to build closer relations with Taiwan has brought certain tensions in its relationship with China. As part of the initiative, India played a vital role in developing multilateral organizations like BIMSTEC and Mekong-Ganga Cooperation. The Look East Policy also led to an improvement of India’s trade with the region. But it still trailed China in influencing countries in the region. Due to the success of the initiative, it was vigorously pursued by the successive governments led by Atal Bihari Vajpayee and Manmohan Singh.

The Neighborhood First policy of Narendra Modi took the Look East Policy a step further and focused on the country’s neighbors. The country’s foreign minister, Sushma Swaraj too has helped Mr. Narendra Modi in framing and implementing the policy. The main objective of the Neighborhood First policy was to deepen diplomatic and economic relations with country’s neighbors and thereby solidify the position of India in Asia. The roots of the Neighborhood First policy lie in the first Independence Day address of the Prime Minister after coming to power. In the speech, Narendra Modi emphasized the need and benefits of focusing on the country’s neighborhood rather focusing on distant places. Media has since called the new policy ‘Neighborhood First’ policy.

As part of the policy, Narendra Modi and Sushma Swaraj have chosen several neighborhood countries for their first bilateral visits. During the first one-hundred days of his prime ministership, Narendra Modi has made state visits to Nepal and Bhutan. The country’s Foreign Minister Sushma Swaraj too has made independent state visits to cover as many countries as possible in the shortest possible time. All the heads of the South Asian Association for Regional Association (SAARC) were invited to his swearing in ceremony in the year 2014. In meeting, Narendra Modi emphasized that most of the countries in South Asia share a similar history of colonialism and oppression. He stressed the need to break out of the old age conservative thinking in order to emerge as leading international group akin to the EU.

Achievements of the Neighborhood First Policy

A significant difference between the Neighborhood First policy and other foreign policy initiatives of other countries is that, Narendra Modi’s government has taken a ‘proactive foreign policy’ in its neighborhood. Rather than waiting for its neighbors to take the lead, India itself invited other countries for bilateral talks and tie-ups. By following a proactive foreign policy, India aimed to no longer remain a mute spectator to the events that were unraveling in Asia. India wanted to shape the events and thereby control its own destiny. A total of 24 out of the 37 foreign trips made by Narendra Modi in the first year of his tenure as the country’s prime minister were to Asian countries. As a result of this change in the way things are done, India made a number of foreign policy achievements.

Some of the changes in India’s foreign policy as a result of the Neighborhood First policy and the resulting changes in its relations with its neighbors is discussed next.

Relations with Pakistan

Pakistan on one country with which India always had a complicated relationship. While it shared a common culture and heritage with the country, India has been a victim of state sponsored terrorism by Pakistan. After winning the election, Narendra Modi invited Pakistan’s prime minister for his swearing in ceremony. Later, Narendra Modi proposed to his counterpart to solve the age old border disputes between the two countries. Peace talks were reopened between the two countries. The surprise stop of Narendra Modi on his back to India from Afghanistan in Islamabad gave a further boost to the dialogue between the two countries. However, subsequent border firings and terrorist attacks on Indian military establishments have again strained the relationships between the two countries leading to the suspension of peace talks between the two countries. However, Narendra Modi expressed confidence in a media briefing that he would put all the required efforts to improve the relationship between the two countries till the end of his tenure.

As part of reframing the relations between the two countries, India wanted to deepen trade relations between the two countries. Conventionally India had a lot of trade surplus with Pakistan. While India exported US$ 3.99 billion worth of merchandise to Pakistan each year, it imported US$ 0.72 billion worth of merchandize. Moreover, the informal trade (trade conducted through illegal channels) between the two countries was twice to that of formal channels (Jain, 2016). One of the main reasons for high informal trade between the two countries was that nearly 1,209 items that are actively traded between the two countries on the negative list. As part of initiatives under this Neighborhood First policy, the items in the negative list were reduced. Now, Indians consume a number of goods that were manufactured in Pakistan. For example, India imported Wheat and Onions on a large scale in the years 2016 and 2017 when the domestic production was insufficient to meet the local needs.

Relations with China

China is another country in India’s neighborhood with which India always had a love hate relationship. India has a border dispute with China since the time India became independent. India lost a war with China when Jawaharlal Nehru was the prime minister of India. The resulting occupation of vast swathes of Indian Territory by the Chinese resulted in both the country’s looking at each other with suspicion since then. Another reason for the strain in the relations between the two countries was the ballooning trade deficit with China. As China became a manufacturing power house during the second half of twentieth century, most of the electronic goods consumed in India were produced in China.

Narendra Modi made China one of his first stops in the foreign visits made by him during the first few days of his tenure. During the visit, Narendra Modi stressed the importance of the two countries to work together to further their mutual interests. Narendra Modi also called for a dialogue to solve the border dispute between the two countries. Narendra Modi requested the Chinese companies to invest in India as part of the Make in India campaign started a few days before his visit. During his visit, business agreements worth, US$ 22 billion were signed between the two countries. As part of the agreements, Chinese companies like Xiaomi would invest in India to manufacture goods directly in the country. Direct manufacturing of goods in India was expected to reduce the trade deficit of India with China.

Later, Narendra Modi’s government also expressed a willingness to establish a military hotline between the armies of the two countries and extend the E-Visa facility to Chinese national who visit India (Roche, 2017). The Neighborhood First policy of Narendra Modi has significantly contributed to the improvement of relations between the world’s next two superpowers.

Relations with Sri Lanka and Nepal

Nepal and Sri Lanka are two small neighbors of India with which India had tough relations between each other. The two countries have always alleged that India continues to meddle in their internal affairs. After the rise of China as a regional super power, both Nepal and Sri Lanka drifted towards China. Both the countries looked forward for greater economic support from China. The foreign policy of Narendra Modi under the Neighborhood First policy was mostly directed at improving its influence on these two countries.

As India could not provide the economic and infrastructural support needed by these countries, Narendra Modi’s government focused on providing support to solve the internal ethnic problems with its minorities. For example, India has helped Sri Lanka to mend its relations with the Tamil minority. Similarly, India has also helped Nepal to draft a new constitution after the end of its civil war. India has also used both carrot and stick approach in its relations with smaller neighbors like Sri Lanka and Nepal. When the former prime minister of Sri Lanka, Mr. Mahendra Rajapaksa was seen to be allying with China and posing a threat to India in the Indian Ocean by allowing the Chinese military to freely operate in its ports, the Indian government got the local government replaced with the aid of is spy agency RAW (Research and Analysis Wing).

Relations with Other Neighbors

India failed to improve its relationship with other smaller countries in its neighborhood. Failure to balance the relationships between Myanmar’s powerful military Junta and its democratically elected government resulted in India losing its reputation and influence in the country. International activists have accused India of siding with Myanmar’s military rulers by neglecting its progression towards democracy. Myanmar too has gravitated closer to China due to India’s limited expertise in building infrastructure.

Narendra’s Modi’s new Neighborhood First policy has also made great strides in improving the relations with another big Islamic country in its Neighborhood, viz. Bangladesh. After suffering from poverty for a longtime, Bangladesh is now poised to become an exporting superpower. By shunning religious extremism and focusing on a few manufacturing industries like garments, Bangladesh was fast overtaking Pakistan. New initiatives taken by the Indian government resulted in Bangladesh agreeing to permit India to use its rivers to build hydroelectric plants that can power India’s industries in the east. Narendra Modi’s government also completed a land swapping deal with Bangladesh under which both the countries agreed to swap disputed land and ended the woes of people living in those places. India tried to attracted Bangladesh with its huge domestic economy which can be a good market for Bangladesh’s booming garment industry.

Improvements in India’s Foreign Policy under Narendra Modi’s Neighborhood First Policy

All the initiatives taken by Narendra Modi’s government under the Neighborhood first policy marked a significant change in the way the country conducted its foreign policy since it gained independence. Due to the economic and political insecurities faced by India since the time it gained independence, India was always dependent on aid from foreign countries. As a result, it could not assert its influence on other countries. Most of the foreign policy initiatives of India were prompted by the then major powers in the world. For example, the Indian government under Mrs. Indira Gandhi interfered in the affairs of Sri Lanka when it was seen getting closer to USA. The soviet government asked the Indian government to intervene in the affairs of the country and replace the local government. The resulting intervention by India in the internal affairs of Sri Lanka resulted in a chaotic civil war that caused a lot of trouble for both the countries. But the new found confidence of the country after the economic reforms implemented in the early 1990s, made the then Indian governments to change their foreign policies. By the time Narendra Modi became the country’s prime minister in the year 2014, the benefits of the economic reforms started bearing fruits.

The Neighborhood First policy that was implemented resulted in drastically boosting the image of India as a matured power. Countries like China now consider India as their partner rather than as an inferior neighbor. India also started to claim superiority over its smaller neighbors like Pakistan. For example, India has recently refused to negotiate with Pakistan directly as it no longer considered it to be an equal partner and asked USA to mediate in the affairs between the two countries.

As India started taking decisions on its own regarding its interventions in other countries, it started taking a more responsible view of the internal affairs of other countries. After the new policy of Narendra Modi was implemented, India stopped directly intervening in the internal affairs of its smaller neighbors. Instead, it started playing a leadership role by supporting them in nation building activities. For example, India supported countries like Nepal in building domestic institutions and regulators like the Institute of Chartered Accountants of Nepal (ICAN) (ICAN, 2011). Indian government also supported democracies and helped budding democracies like Myanmar to conduct free and fair elections.

The Neighborhood First policy of Narendra Modi had a lot of fundamental differences with the foreign policy initiatives under the former Prime Minister Manmohan Singh. Under the previous Prime Minister, India did not assert its economic and political powers among its neighbors. The country was a mute spectator and victim of the problems plaguing the country. During the tenure of Manmohan Singh, India suffered from a lot of terrorist attacks. But the government did not respond to the attacks. However, after Narendra Modi came to power, the new government made it clear that it would not be mute victim to any such future attacks and would retaliate swiftly. This carrot and stick approach towards its neighbors was one of the major changes in India’s new foreign policy.

India started to a firm position in its relations with other countries to protect its own interests. When it came to protecting its interests, the Indian government did not hesitate to support the military rulers of Myanmar even though it resulted in criticism from pro-democracy activists. Despite Narendra Modi’s firm belief in democracy, the support of authoritative regimes to further its interests is akin to the policies followed by other major global powers like China and America. America has supported dictators in the middle-east during the second half of the 20th century in order to protect its energy interests in the region (Yom, 2016).

Despite the marked changes in the way India conducts its foreign policy, more needs to be done to increase its sphere of influence and grow as a regional super power. The mission of the new Narendra Modi’s government to radically redefine India’s foreign policy is still a work in progress (Pal, 2016). The country needs to become an economic power if it wants to further increase its sphere of influence.

Conclusion

From the above analysis, enough evidence can be pointed out to the fact that Narendra Modi’s Neighborhood First policy has lived up to its expectations right from the time it was rolled out. The new policy rejuvenated the image of India as a responsible regional power. With the new policy, India also sent a clear message to its neighbors that it will continue to believe in the strengths of mature diplomacy in the place of arm twisting tactics. The benefits of the Neighborhood First policy has also resulted in giving a major boost to India’s trade. The country’s total trade with its neighbors has grown substantially since the Neighborhood First policy was rolled out.

Going forward, the Narendra Modi’s government wants to again focus more on the country’s foreign policy for the remaining two years of his term. After his successive wins in the assembly elections conducted in some of the most important states of India like Uttar Pradesh, Narendra Modi’s government again wanted to focus on foreign policy (Roche, 2017). It is advisable that Narendra Modi’s government continues to emphasize on its immediate neighbors in promoting its foreign policy. A further boost in the country’s foreign trade as a result of the Neighborhood policy will be of great benefit to India’s new ‘Make in India’ Policy’. Better trade relations with the country’s neighbors will create new markets for the products manufactured in India. Relentless focus on improving the relations with the country’s neighbors can result in the emergence of India as the next regional super power. In view of the bewildering cultural and political differences plaguing the South Asian region, it can be said that the new foreign policy initiatives of Mr. Narendra Modi remain a work in progress. In order to catch up with the influence wielded by China in the region, India needs to further sharpen its foreign policy initiatives.

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