Is India Ready to Face China on Equal Footing? Not without boosting its Economy.

While border skirmishes between India and China last month sent commentators rushing to
Google Maps to locate obscure mountainous places, the Himalayan jousting may prove to be
a geopolitical inflection point. New Delhi and Beijing have long been at loggerheads on
geopolitical matters, but the former has attempted a tightrope walk to cozy up to the West
without alienating the communist regime. In the wake of the brutal killing of at least twenty
Indian soldiers by Chinese forces carrying a medieval mixture of stones, clubs and nail-
studded rods, India may be forced to rethink its long-standing strategic hedging policy.

It All Comes Down To Economy

Yet the impact of last month's high-altitude encounter on foreign policy will turn less on
India’s diplomatic and defence manoeuvres than on simple domestic economics. India's
ability to project influence internationally, defend her homeland, and create and maintain
lasting alliances depends on India's political leaders' ability to get their economy back on
track quickly and competently. The Foreign policy crisis confronting Indian Prime Minister
Narendra Modi 's government in the wake of the border clash — as true and raw as it may be
— cannot be resolved unless India addresses its economic emergency first.

The strict coronavirus lockdown PM Modi imposed on India's 1.3 billion population by the
end of March incurred significant economic costs. HSBC India estimates that this fiscal year
the gross domestic product of India will fall by 7.2 percent. But perhaps more worrying is the
bank's assertion that trend growth in India has slumped to a mere 5 percent from as high as 7
percent just three years ago.

In other words, even if India emerges quickly from the shadow of the coronavirus (this is a
major if, considering that its caseload is unlikely to peak until August), the pre-existing
conditions of the economy would hinder the momentum forward. Even before the pandemic,
India was in the midst of a protracted economic slowdown, with growth shrinking in the
quarter ending March 2020 to an 11-year low of just 3.1 percent. And even this meagre figure
is probably overstated itself, India's former chief economic advisor Arvind Subramanian has
argued that the growth rate of India's GDP could be exaggerated by as much as 2.5
percentage points.

India has struggled to overcome a knotty twin balance-sheet crisis for the better part of a
decade. Infrastructure and natural resource firms (such as those engaged in construction and
mining) have been saddled with a noxious debt hangover, while public sector banks' accounts
have been filled with an alarming share of non-performing assets (NPA). The shadow
banking sector, with access to credit choked, rushed in to fill the void, only to find itself beset
with the same dodgy lending charges.

Driven by government spending and private consumption, the economy hobbled along. Those
twin engines run on fumes now. The overall fiscal deficit in India is about 10 per cent of
GDP. Owing to the patchy rollout and confusing nature of the Goods and Services Tax (GST)
and a controversial corporate income tax cut, government revenues plummeted. Consumption
has also gone for a toss; leaked government data in 2019 showed consumer spending to
plunge for the first time in more than four decades — leading the government to junk the
report in an attempt to hide bad economic news. Exports have sunk as global trade headwinds
have worsened, booming during India's heady years of the 2000s.

The Way Forward

How can New Delhi get the economy back on track? First, India must ensure that the
economic downturn is not further dragged into a humanitarian crisis by extending access to
the food safety net, growing health spending, and resolving the desperate situation faced by
tens of millions of domestic migrants fleeing big cities.

Second, India should be taking aggressive steps to clean up the legacy of toxic assets that
encumber private investment. The government's flagship Economic Survey recommended the
creation of a bad bank in 2017 to ease the NPA burden on banks; this idea is finally under
consideration three years later. A study of asset quality of largely unregulated non-banking
financial companies will follow.

Third, the Modi administration needs to rediscover the pledge it first sailed to power in 2014:
maximum governance, minimal government. The last six years have seen little progress on
administrative reforms; in a weak state like India, the goal is not to shrink government per se,
but to shrink paperwork from government. Some state governments' recent decision to
overhaul out-dated labour laws reflect positive intent, but they must not equate the abolition
of stifling hiring and firing practices with the elimination of basic protections for workers.

India’s people are being repelled by China’s latest provocation, which is the culmination of a
series of expansionist steps that have marginalized even the most credible China backers in
New Delhi. Although India's foreign-policy mandarins are discussing a reorientation of the
country's strategic position, priority attention is requested from the economy. Over all, as a
famous refrain goes in India, 8 per cent growth is the best foreign policy.