India Transformed

by Rakesh Mohan

  2.25

  15.91

  2010–11

  2.20

  15.70

  2015–16

  1.75

  13.90

  Source: Ministry of Finance, Economic Survey and Union Budget papers

  Government of India (various years).

  The spike in defence spending in the mid-1960s and in 1971–73 was in the context of the India–China and India–Pakistan wars of 1962, 1965 and 1971. The spike in the 1980s was partly because of the Sri Lanka campaign. However, a significant factor that contributed to an increase in the mid-1980s was the decision to undertake a major programme of defence modernization.1 Hence, the increase in public spending translated itself into increased imports. The sharp increase in gross fiscal deficit of the central government as a percentage of GDP from the Sixth Plan (1980–85) average of 6.3 per cent to 8.3, 9 and 8.1 per cent in 1986–87, 1987–88 and 1988–89 respectively was at least in part due to increased defence spending, especially defence imports.2

  While many analysts, including the authors of the ministry of finance’s annual Economic Survey, would refer to rising defence spending as a factor contributing to higher deficits and government debt in the 1980s, the paucity of data and lack of closer attention meant that few would draw pointed attention to defence spending as an important contributor to the fiscal and balance-of-payments crisis of 1990–91.3

  It was left to Amit Bhaduri and Deepak Nayyar to observe in their critical review of the policy initiatives of 1991: ‘The problem [of government deficit] was aggravated by a spending spree on defence, particularly in the second half of the 1980s. According to the International Peace Research Institute at Stockholm, during this period India topped the list of developing countries (including oil-rich countries like Saudi Arabia and Iraq) in defence spending.’4

  Interestingly, in his lengthy and historic budget speech of 24 July 1991, the then Finance Minister Manmohan Singh devoted considerable time to justify reduced spending on various subsidies and explain the importance of fiscal rectitude, but made no mention at all of the problem of defence spending and his decision to bring it down. However, in effect he did. As Table 1 shows, the share of defence spending in GDP and total central government expenditure was kept at levels significantly below those recorded in the preceding two decades.

  While Singh did not explain his decision to the Parliament, he did make one interesting remark at the end of his long speech. The policies of the Narasimha Rao government, he claimed, would ensure ‘the emergence of India as a major economic power in the world’.5 To view power in economic, rather than military, terms was an important shift in the perception of national security and strategy that the 1990s brought about. This thinking was, of course, necessitated by the fiscal crisis and the consequent shortage of funds for defence.

  However, its intellectual lineage was impeccable. The relationship between sound fiscal management and responsible defence spending was captured in Kautilya’s Arthashastra, over 2000 years ago, wherein Kautilya observed, ‘from the strength of the treasury, the army is born’.6 All translations into English use the word ‘strength’ rather than ‘size’. The ‘strength of the treasury’ is what later-day economists would term ‘fiscal empowerment’ or ‘fiscal stability’. Defence spending is a necessary but insufficient condition for national security. Given that it is dependent on the ‘strength of the treasury’, fiscal prudence along with high economic growth becomes the precondition for national security, enabling the fiscal empowerment of the nation.

  In his analysis of the economic foundations of power, historian Niall Ferguson7 defines the ‘square of power’ as being constituted by four elements, namely, a tax-collecting bureaucracy; a representative Parliament; a national debt; and a central bank. Fiscal and monetary policies define the economic foundations of a country and its ability to project power. The focus of macroeconomic and fiscal management in 1991, and immediately thereafter, was, therefore, on bolstering the ‘strength of the treasury’. Funding the army, so to speak, would have to wait.

  Indian defence analysts have long argued that given the relatively high defence expenditure to GDP shares of China and Pakistan (over 5 per cent in both countries in the 1990s), India’s long-term average of less than 3 per cent was inadequate and the National Security Advisory Board (NSAB) recommended in 1999 that the government should maintain an annual average share of at least 3 per cent in the medium to long term, for India to keep pace with the defence spending of its adversaries.8 In the event, actual defence spending has been well below 3 per cent of GDP. While it remains at fiscally manageable levels, two views may be taken on the issue.9 It can be argued that the benchmark figure of 3 per cent of GDP was constructed in the 1990s, when Indian GDP was still growing at close to 6 per cent per annum, while in the period after 2003, the rate of growth was higher, at an average of over 8 per cent. The below 3 per cent spending still represented higher allocations in absolute terms. On the other hand, the critics of this view argue that if the government had set aside 3 per cent of GDP for defence spending, then more funding would have been available in the 2000s.10 Much the same could be said for spending on other priorities such as education and health, where too spending has been below 3 per cent of GDP.

  II. 1991 Lessons from the Cold War

  The macroeconomic policy shift was also aided by the fact that in the debate on ‘guns vs butter’, or ‘defence vs development’, the verdict of the Cold War was that countries that had invested in butter and development had emerged as more secure nations than those that had invested mainly in guns and defence.

  Even before the implosion of the Soviet Union had become inevitable, the rise of Germany and Japan as ‘geoeconomic’ powers—if not geopolitical players—also showed that military might was a condition neither sufficient nor necessary for political stability and economic well-being. The socialist economies of Eastern Europe and Eurasia had invested heavily in defence and nuclear capability. Yet, none of the militarily powerful states were able to survive the challenge posed by their economic and political weaknesses.

  On the other hand, post–Mao China had, under the guidance of Deng Xiaoping, opted for a different course, opening up the economy and focusing on economic development. Deng blew the dust off Zhou Enlai’s ‘four modernizations’ of 1963 and launched, in 1978, his own revolution for the modernization and transformation of China. The modernization of agriculture, industry, national defence, and science and technology were Deng’s four priorities. Deng’s assumption of power was preceded by a rapprochement between the People’s Republic and the United States of America. This altered the Cold War balance of power across Eurasia and the Asia-Pacific region. Not only had India’s strategic environment been altered, but Indian attitudes towards nation-building and modernization began to change too.

  Economic policy analysts in India have not paid adequate attention to the impact that the collapse of the Soviet Union and the rise of China have had on India’s views on economic and national security policy. The Nehruvian economic model of state-supported, import-substituting industrial development was hugely influenced by the Soviet experience.11 India’s export-pessimism derived from this worldview. When some of Asia’s smaller nations began to rise on the basis of an export-led model of industrialization, Indian policymakers often took the view that the experience of ‘city-states’, such as Hong Kong and Singapore, and small nations, such as Taiwan and South Korea, were not relevant for a large continental economy like India.

  China’s switch to the Dengist economic model of more outward-oriented industrialization and the emphasis on international trade and the development of comprehensive national power began to change attitudes in India. In his televised national address on 9 July 1991, after his announcement of the first round of trade liberalization, Prime Minister P.V. Narasimha Rao said:

  India has much to learn from what is happening elsewhere in the world. Many countries are bringing in far-reaching changes. We find
major economic transformation sweeping large countries like the Soviet Union and China … There is a change in outlook, a change in mindset everywhere. India too cannot lag behind if she has to survive, as she must, in the new environment.12

  The change in thinking on the role of external economic relations in national development reflected a more fundamental change in thinking about the idea of ‘self-reliance’, national security and global interdependence. Most postcolonial nations in Asia, Latin America and Africa viewed external economic relations as imposing a burden on their developmental aspirations. This thinking defined the views of the ‘Dependency School’ in development economics. Across the developing world, the strategy of inward orientation was defended on the grounds that it preserved the independence of newly liberated nations, reduced dependence on colonial and imperial powers, and afforded a free economic and political space within which these new nations could grow. In social sciences literature, this spawned such radical schools of thought as the ‘Dependencias’, influenced by the work of Raúl Prebisch, Andre Gunder Frank, Immanuel Wallerstein and Samir Amin. The ‘dependency theory’ viewed the global economy as an integrated system in which countries at the ‘centre’ or the ‘core’—the developed OECD economies—derived undue benefit from their economic interaction with the countries on the ‘periphery’—the developing economies. The underdevelopment of the latter was intrinsically linked to the development of the former. It was a zero-sum world.

  The new view on economic policy shifted the focus from the idea of ‘dependence’ to that of ‘interdependence’, and insisted that such economic interdependence offered greater national security. Increasingly, the view held was that several newly industrializing economies, including large economies such as China, had been able to increase their political leverage in international affairs, both in bilateral relations and in multilateral forums, by increasing their share of world trade, particularly their trade relationship with the United States and other major OECD economies. Economic relations acquired a new political dimension in the age of pragmatism in foreign policy. No country has been able to demonstrate the power of commerce in diplomacy better than Dengist China. India followed with a lag.13

  While India has been slow to re-integrate with the world economy, it has, to its credit, moved consistently in that direction. India’s share of world merchandise trade went up from 0.5 per cent in 1990 to 1.5 per cent in 2015. More importantly, India’s average applied tariffs on manufactured goods went down from 145 per cent in 1990 to 10 per cent in 2014 and on all goods from 144 per cent in 1990 to 13.5 per cent in 2014. Consequently, the share of trade (exports and imports) in goods and services in GDP increased from 17 per cent in 1990 to 54 per cent in 2014.

  III. Quantifying National Power and Security

  Taken together, these developments influenced thinking at the highest levels on national security planning. By the end of the decade, in 1999, the ‘Economic Security’ chapter of the Strategic Defence Review (SDR) prepared by the NSAB of India would open with the proposition:

  Economic power is the cornerstone of a nation’s power in the contemporary world. The economic size of a nation matters and is an important element of national security. Low economic growth, low productivity of capital and labor, inadequate investment in human capital and human capability and a reduced share of world trade have contributed to the marginalization of the Indian economy in the world economy. The economic security challenge for India is to pursue above average national income growth at the annual rate of at least 7 per cent to 8 per cent so that India’s share of world income is commensurate with her population size and a larger economic base can more truly reflect India’s global status.14

  This shift in focus away from a narrow view of national security, defined by military spending and defence capability, to a wider economic perspective was also in step with the new thinking on ‘comprehensive national power’ (CNP) popularized by the China Academy of Social Sciences (CASS). CASS developed a measure of CNP, defining it as a weighted average of military, economic, scientific and technological capability. The eight variables used were: natural resources (weight of 0.08), domestic economic capability (0.28), external economic capability (0.13), scientific and technological capability (0.15), social development (0.10), military capability (0.10), government capability (0.08) and foreign affairs capability (0.08).15

  The Chinese CNP indices calculated for the year 1985 showed the United States at the top, followed by the Soviet Union; China was seventh and India in eleventh place (see Table 2). The Chinese CNP index had a profound influence on strategic thinking in India and spawned several attempts at constructing similar indices.16

  Based on this idea and drawing on the thinking of the NSAB’s SDR 1999, analysts at India’s National Security Council Secretariat developed the Indian National Security Index. The SDR defined the concept of economic security thus:

  It implies political and economic sovereignty and autonomy of decision-making, albeit in an increasingly inter-dependent world characterized by the ‘globalisation’ of economic activity. It implies the assurance of economic well-being and social justice as reflected in particular by generalized access to food, clothing, shelter, education and employment. It implies the acquisition of skills and knowledge aimed at acquiring technical and technological capabilities required for sustained and self-reliant economic development and assured defence capability.17

  Table 2: Index of Comprehensive National Power

  Country Rank

  Country Name

  1

  United States

  2

  USSR

  3

  Japan

  4

  Germany

  5

  UK

  6

  France

  7

  China

  8

  Canada

  9

  Italy

  10

  Australia

  11

  India

  Source: P.K. Singh et al. (2013), p. 46.

  The SDR summed up the new thinking thus:

  National security encompasses more than national defence and internal security. Its foundation must rest on the social and economic well-being of the people. A socially fractious, economically backward and politically divided nation is unlikely to be militarily secure. Military security is a necessary, not a sufficient condition for national security.18

  These ideas have since been taken forward by the National Security Council (NSC) and the Ministry of Finance. The NSC commissioned the construction of what has been termed the National Power Index (NPI).19 The NPI was constructed as a weighted average of six quantifiable variables: economic capability (25 per cent), military capability (25 per cent), population capability (15 per cent), technological capability (15 per cent), energy security (10 per cent) and foreign affairs capability (10 per cent). That the national security establishment had internalized the idea that economic, technological and human capabilities taken together ought to have a weighting of at least 50 per cent in the NPI, compared to 25 per cent for military capability, stands testimony to the change in thinking on national security in India.

  The construction of the NPI spawned several attempts to arrive at a definition of what constitutes national power and sovereignty in a globalized world of increasing interdependencies. At the ministry of finance, Chief Economic Adviser Kaushik Basu led a research team that constructed what has been called the Index of Government Economic Power (IGEP).20 The IGEP, composed of four variables, namely, government revenues, foreign currency reserves, export of goods and services, and human capital, is based on the idea that ‘the power of a government is its economic power’.21

  Basu et al. claim, ‘These variables broadly reflect aspects that contribute to a government’s economic clout, voice and negotiating leverage by capturing elements like its ability to raise resources, its creditworthiness and credibility in international financial markets, its influen
ce on global economic activity and its potential in terms of human resources.’ Arguing that the idea of ‘economic power’ gained greater importance following the end of the Cold War and the advent of globalization, the authors of IGEP lay particular emphasis on the importance of government intervention and support in post-crisis economies.

  The global economic crisis witnessed governments playing a crucial role in stabilizing financial markets and managing to coordinate responses in order to prop up the world economy. In the wake of the crisis, governments continue to play a vital role in terms of economic management and welfare oriented activities. Governments also play a critical role as agents of redistributive equity and development. Therefore, the economic power of governments is a matter of great significance.22

  Country-wise index numbers were estimated for the years 2000 to 2009 and ranking was done for 100 countries. The United States remained at the top, both in 2000 and 2009. China replaced Japan in second position over the decade, while India moved from the eighth to the fifth rank (see Table 3).

  Geopolitical developments in the post–Cold War era have only underscored the point that competition between nation states is increasingly in the economic realm and the idea of national power is increasingly linked to economic rather than military power. Military conflict has not been able to resolve any major geopolitical contest, while the global balance of power is increasingly being determined by geoeconomic phenomena.23

  Table 3: IGEP Country Rankings, 2000 and 2009

  Country Rank

  Country Name

  2000

  Country Name

  2009

  1

  United States

  United States

  2

  Japan

  China

  3