The article highlights some of the short and medium term objectives of India’s economic diplomacy and provides game-theoretical setup in a few major areas outlining different players, their pay-offs and best-responses, and India’s potential strategies.

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32 EXTRAORDINARY AND PLENIPOTENTIARY DIPLOMATIST Annual Edition 2014
Objective-Driven Geo-Politics
Leveraging Foreign Policy for India’s Economic Gains
Abhay Gupta highlights some of the short and
medium term objectives of India’s economic
diplomacy and provides game-theoretical setup
in a few major areas outlining different players,
their pay-offs and best-responses, and India’s
potential strategies.
R
ecent years have seen many significant changes in the geo-
political landscape. These shifts offer important lessons for
Indian foreign policymakers and diplomats. By understanding
the background of these shifts in balance of power and the trends
these shifts will trigger, India can recalibrate its strategies. The
first step will be to identify the underlying (demographic &
economic) forces and mechanisms at work in different regions
of the world. The next era of inter-country relationships will be
driven more by strategic requirements than ideologies. India needs to assess its short and
medium term objectives of its economic diplomacy like ensuring supply of raw materials
for domestic manufacturers, meeting growing demand for oil and energy, deeper
integration into global value chains, attracting foreign direct investment in infrastructure
projects, achieving balance between technology transfer and intellectual property
rights regime, and shielding itself from the adverse effects of various bilateral trade deals
around the world. An objective-driven approach will help in determining the trade-offs
in situations with two or more conflicting interests (for example: whether to support
US sponsored sanctions on Iran and risk losing a significant oil supplier). This essay
highlights some of these objectives and provides game-theoretical setup in a few major
areas outlining different players, their pay-offs and best-responses, and India’s potential
strategies.
Evolving Global Mechanisms
The unprecedented growth of the Chinese economy was already affecting global
alliances when the financial crisis of 2008 hit US and Europe. Not only did it reduce
the economic bargaining power of the developed world, the crisis also had a broader
impact on people’s ideological leanings. In the affected countries (US, Western Europe,

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Japan etc.), the voters started questioning their blind belief in the power of markets and
became more accepting of the increased role of government. The huge increase in the
number of unemployed and the inability to generate robust growth had made these
countries inward-looking and sceptical of the benefits of uncontrolled globalisation.
Greece and Portugal saw anti-German protests and in recent EU elections, many
nationalist (and anti-immigrant) parties won a record number of seats. In the wider
world (developing countries in Latin America, Asia, Eastern Europe and Africa), this
unexpected and widespread financial crisis has changed public opinion regarding the
benefits of capitalism vs. socialism with many commentators often citing it as a failure
of the capitalist system. Chinese authorities managing the crisis (at least so far) will have
also acted in tilting the debate.
These shifts have already changed the dynamics for India. The old grouping of G7
has given way to G20. India is an active participant of the monetary policy coordination
meetings of G20. IMF and World Bank are discussing ways to increase the role of
emerging economies like India and China and therefore, acknowledging the reduced
importance of the developed countries. However, this recognition of India’s importance
on the global scene is going to be a long term phenomenon and Indian diplomats have
their work cut out for them to manage various dynamics in India’s favour. At many
of the international multilateral discussions, the debate will not simply be between
the developed and developing countries, but among different blocks of countries
promoting competing interests. On different fora, India may find itself arguing with and
arguing against the same country. Indian diplomats need to understand the rationale
for these seemingly inconsistent positions and defend them by keeping the focus of the
international community on underlining priorities.
Borrow from Friends or Make New Friends
In the months since becoming prime minister, Narendra Modi has focussed on
ensuring that the world knows about India’s intentions. A single-minded focus on
generating inclusive economic growth sends a strong message that India’s foreign policy
will be driven by economic diplomacy. In particular, the rich nations know that India
IMF and World Bank are discussing ways to
increase the role of emerging economies like India
and China and therefore, acknowledging the
reduced importance of developed countries

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34 EXTRAORDINARY AND PLENIPOTENTIARY DIPLOMATIST Annual Edition 2014
needs huge investments in its infrastructure. Usually,
the countries with deeper economic ties are less hostile
towards each other. The causality, though, may exist
in the other direction as well; i.e. less hostile countries
form stronger ties. If a country has invested hugely in
India through direct FDI or infrastructure loans, it has
incentives to support a stable and prospering India.
Thus strategically, India has a choice between
strengthening existing ties by borrowing from current
donors like Japan and creating new ties by signing
up new partners like China for various infrastructure
projects. There is a point of view that strategically India
has leverage over US since the US wants to see India as a
competitor to China in the region. This is only partially
true. US will be as opposed to a multi-polar world (US,
China, India) in future as it is to a bi-polar world now
(US, China). The calculations must be done carefully to
evaluate the sunk costs vs. the value of outside options
for each potential partner.
In addition to FDI, India can also create strategic ties
with a country (US vs. China) through its allocation of
foreign reserves. Even though the RBI is independent
and should make that decision based on economic
cost-benefit analysis, many recent incidents suggest
that it has political dimensions. For example, the
US Treasury has been reluctant to label China as a
currency manipulator fearing that one of the possible
repercussions could be China shifting its foreign reserve
allocation away from the US dollar.
Outward FDI: Protecting India’s Interest
Elsewhere
Despite all the criticism regarding import substation
policies of the 1970s, one positive outcome has been
the emergence of big Indian companies. In a globalised
world, size does matter because of economies of
scale and various other factors. Indian companies
already have state-of-the-art technologies and world
class workforces and are becoming more confident
players in international markets. In the last few years,
they have started making significant investments in
other countries. Even though the motives for these
investments are not altruistic, India can benefit if this
trend is streamlined with the help and support of Indian
diplomats in those countries.
Indian economists and policymakers have berated
these outward FDI as opportunistic moves, but they
overlook the several benefits of outward FDI. There
are depressed assets in many European economies
in several sectors. If Indian companies buy assets in
France or UK, those countries are less likely to vote for
a policy in the international arena (e.g. climate change
talk) that may harm Indian interests. That’s because any
trouble to Indian companies creates the risk of them
curtailing or shutting down their foreign operations. For
India to have that leverage over foreign countries in future,
Indian foreign policy needs to support India Inc’s foreign
expansions now.
Deploying Foreign MNCs towards India’s
Advantage
The service sector has been the driver of growth in
the Indian economy. In particular, export-oriented, high-
tech companies in sectors like ICT, IT-enabled services,
bio-tech and pharma have done particularly well. Indian
economic diplomacy in the past has focussed on ensuring
this channel of growth continues. However, there have
been two developments that haven’t received enough
attention of Indian diplomats. Many foreign-based
companies have recognised the competitive advantage
and scalability of India’s educated workforce and have
set up big offices in India. Similarly, with the rise of the
middle class, India has become a crucial source of growth
for another set of foreign based companies (mostly in the
consumer goods sectors).
These foreign based MNCs like IBM and P&G
have vested interests in India and thus can influence
policymakers in their countries through direct lobbying
or through lobbying by their shareholders. We would
never know whether the nuclear apartheid of India would
have ended sooner, had India used the leverage it had on
US-based MNCs, because of their workforce or market
shares. This cost-benefit analysis equation is constantly
changing and so are the pay-offs for the foreign country
in going one way or the other with India. Many of the
parameters are unknown to us (for example, the influence
of MNCs on their politicians), so Indian diplomats
should start exploring this dimension in their negotiations
to assess the strength of these leverages.
Compete vs. Collaborate: Proper
Positioning of Make in India Initiative
India’s internal security in the next few decades will
depend on whether India can create enough unskilled
jobs to keep its young population employed. The ‘Make
in India’ initiative focussing on manufacturing, including
low-end and mass-scale production, is the engine that can
generate the required number of jobs. Again, the role of
the foreign policy is crucial in ensuring its success. India
needs foreign impetus in terms of export demand and
relocation of production bases. With US, Europe, Japan,
Korea and almost every other country planning to rely on
exports to jumpstart their economies, this is not going to
be easy.
India needs to carefully examine the existing global
value chains and determine the weakest linkages. Indian
diplomats can try to offer India as a replacement for those
weak relationships. For example, a trade in intermediate
goods (e.g. auto parts) from China going to Japan,
which manufactures a value-added final product (e.g.
cars) is susceptible to political problems between those
two countries. If India offers itself as a viable alternative
to such a link, Japan would happily make the switch.
The other area to explore can be the competition in
different product spaces. If a Chinese company intends to
compete in building high speed railways with European
companies, the European companies should not make
that competition sustainable by using Chinese suppliers.
If they move to Indian suppliers, Chinese suppliers will
lose significant revenue and thus, will not be able to invest
as much in R&D that will lower the competitiveness of
Chinese railway companies.
Being Assertive Without Appearing
Arrogant: G20, WTO and UN
If recent multilateral discussions on climate change
and the WTO agreements are any guide, India is not
doing a good job of communicating its position to
the Western media. India has unique requirements on
these forums and it will become increasingly harder
to get other countries to support India’s position. It is
true that India doesn’t need to worry about appeasing
developed countries anymore, but in the longer term,
people’s perception and popular sentiments do matter.
Indian diplomats need to deploy a wide set of resources,
including Indian-origin academics whose opinions are
regarded more neutral to explain the rationale behind
India’s actions.
India can try the approach often used in US domestic
politics of bundling policies preferred by other countries
in the same package as its preferred policy. That would
A single-minded focus on
generating inclusive economic
growth sends a strong message
that India’s foreign policy will be
driven by economic diplomacy

4. India’s Economic Diplomacy & Global Connect
35EXTRAORDINARY AND PLENIPOTENTIARY DIPLOMATIST Annual Edition 2014
avoid India being painted as only a hold-out. For example,
the issue of agricultural subsidy vs. public procurement
and support prices could be combined with the issue
of market access to GMO seeds. On G20 and OECD’s
initiative on reducing the tax-arbitrage among countries,
India is in general agreement with the majority position.
The recurrent theme of recent climate change talks has
been the shifting nature of the discussion and alliances.
As India tries to increase the share of manufacturing
in GDP, the emission levels are going to rise. The gains
from energy efficiency and carbon pricing will probably
be offset by an increase in industrial output. India has
to stress that it has more poor to move out of poverty
than any other country and thus, from consumption and
production point of view, the current levels should not be
used as a baseline for determining binding targets.
Balancing IP Commitment with Domestic
Strategic Needs
In the last couple of years, India had been getting
labelled as a country reneging on its obligations under
trade-related aspects of Intellectual Property Rights
(WTO TRIPS). Politicians in both the US and Europe
have made official statements criticising India for various
actions in its domestic pharmaceutical markets. This is not
only a PR issue. If this image of India becomes ingrained
among Western CEOs, they will shy away from entering
India. In addition to losing potential FDI, this issue can
also lead to restriction on technology transfer and loss of
human capital accumulation (learning by doing channel).
Indian policymakers should realise that almost 60
percent of the developed world’s exports are in sectors
relying on patent or copyright protections. They would
rather lose the Indian market than set up a precedent
of allowing a country disregard their IP rights. Indian
diplomats are better suited to engage with foreign
companies when it comes to explaining the need for these
interventions than bureaucrats working for domestic
Indian companies already have
state-of-the-art technologies and
world-class workforce and are
becoming more confident players
in international markets
regulators. Again, assessments need to be done to find
how much the companies value access to the market,
their sunk cost, and the direct and indirect implications of
aspects like compulsory licensing in each particular case.
Natural Resources: Keep the Engine
Running
One of the things that Indian diplomats can learn from
Chinese expansion in the last decade is China’s strategic
focus on its requirements. China has created significant
ties with Latin America and Africa by investing in various
projects related to exploration and extraction of natural
resources. Like China, India also has a large population
and does not have proportional natural resources
(raw materials and oil) on its soil, at least in terms of
known reserves. Indian companies like ONGC have
been working on creating similar relationships with the
countries around the world that would ensure long term
supply of oil and gas. As India moves towards becoming a
manufacturing power, there will be a need to ensure that
Indian companies are not left to fend for themselves in
case of shocks in commodities’ supply-chains.
Many of the resource-rich countries in Africa and
Latin America do not have strong institutions and
thus, Indian diplomats are crucial during not only the
project sign-up and development stage, but even in later
operation stages. India already has a good relationship
with many countries in West Asia, but it faces the trade-off
between diversifying its supplier base and strengthening
the leverage it has in existing partnerships. One additional
parameter to consider may be their relationship with
Pakistan. Since Indian companies may have only partial
views and may be inclined to make decisions based
on short term parameters, Indian policymakers and
diplomats need to convince them about the benefits
of investing in these strategic ties. In fact, the sharing
of various scenarios and their likelihoods envisioned
by Indian diplomats with Indian companies may help
in correct estimation of net-present-value of these
investments or in running stress tests (for Indian banks
with exposure to projects requiring raw materials supplied
by politically unstable countries).
Regional Dynamics: Trans-Pacific, Trans-
Atlantic and other Trading Blocs
Perhaps the most crucial and certainly the most
immediate component of Indian economic diplomacy is
to predict, analyse and pre-empt on-going bilateral trade
agreements between countries and regional blocs around
the world where India is not involved. The production
process has shifted from being organised by countries to
being driven by MNCs and global value chains. The US is
leading the effort to sign major trade agreements on both
sides of its continent: Trans-Pacific Partnership (TPP)
with countries in Asia Pacific rim including Australia and
Japan; Trans-Atlantic Trade and Investment Partnership
(TTIP) with the EU. There are many ways that India
can be left out. If major economies around the world
agree on some product or labour market standard that
is incompatible with India’s current standard, that would
put India at a disadvantage. The impact of trade diversion
effects can be significant given the size of these treaties.
The details of these discussions are kept under wraps
until consensus emerges but Indian diplomats can use
their resources to find out the broad outline and identify
any areas of concerns for India. Even though India cannot
induce any of the countries to walk away from these
agreements, it can certainly try to change the details of
the final agreement. For example, when details of an
investor protection clause empowering US MNCs to sue
EU governments were released to the media, there was a
serious pushback from voters as well as politicians.
Bill Clinton famously said, ‘it is the economy’ that
voters most care about. With globalisation and rise of an
aspiring middle class in many countries, this has become
true for international diplomacy as well. Even though
the economic aspects should not be the only criteria
driving the actions of Indian diplomats, they help in
providing a more tractable and objective way of decision
making. India is at a transformational stage and the proper
placement of the Indian economy in the evolving global
chain can ensure that India can soon move to being
a middle income country. India’s diplomats can have
significant impact in this journey by charting the least
difficult route and reassuring the international community
about India’s ultimate destination.
Abhay Gupta is Chief Economist at Empirical Foresights where he works
on a wide range of issues with regard to world economy. His expertise lies
in applying theoretical advances to real world problems faced by businesses
and policymakers. His academic research focusses on productivity growth,
technological change, industry linkages, global value-chains, intangible assets
and international finance.