Finding the Sweet Spot

Seeking linkages through trade, capital flows, and national security, India has to create “the sweet spot” in its interaction with other countries

Sudhir Kapadia,  is National Tax Leader, Ernst & Young and vice president of the Bombay Chamber of Commerce and Industry. This article is based on his views during the 13th Synergia Foundation webinar on 'Gated Globalisation and the post-COVID World'.

Sudhir Kapadia raised his concerns on the geopolitical and geo-economic implications of 'gated globalisation', particularly when referring to the five critical dimensions of interaction — trade, capital flows, people flows, technology, and national security. Several factors will determine whether India can successfully navigate these arenas. 

India has varying levels of interaction with countries in its neighbourhood and globally.  For example, India has a higher dependence on the U.S. in the dimension of people flows and Foreign Direct Investment (FDI); on Japan for capital inflow; and a higher dependence on China in the trade dimension. Given these dependencies on trade, it is important to de-risk them and instead form strategic connections with other countries in other blocs as well.

IDEAL BALANCE

While explaining the ‘optimal distance’ to characterise multi-dimensional interactions, Mr. Kapadia focused on locating an ideal distance between all axes of interaction with a specific country, terming it ‘a sweet spot’. This would translate into neither being too close to creating a position of leverage for the other country nor too far that India is unable to find common ground with said country. In this way, an ideal parameter of interaction is set. An example of excessive closeness would be India's dependency on China for the supply of Active Pharmaceutical Ingredients (API).

Achieving this optimal balance is a complex issue given India's current relations with China in the realm of national security, making it imperative to leverage relations in one dimension for gains in another. For example, Chinese investment in Indian unicorns and other startups, bringing in FDI and capital, can create leverage or pressure points in other arenas such as national security.   

Interactions between countries in the national security and military dimension, while complicating relations in other arenas, also provide opportunities for gaining influence.  India’s strategic partnership with the U.S., Russia, Japan and Australia could be bracketed under this.  Being interlinked, these relations evolve over time, and countries have to play a 'multi-dimensional chess game' strategising over time about how relations are going to evolve. To build up comprehensive national power, India has to operate successfully and influentially across all arenas of interaction.

The U.S., post-World War II, set up strategic institutions to create a world order based on U.S. national interests and strength. Now, with the threat of Pax Sinica looming threateningly, China is attempting a strategic face-off with the traditional superpower in an attempt to build an order favouring Chinese interests — a new-age colonialism based on strategic economic rather than outright political control. 

Mr. Kapadia provided specific assessments for capital and financial markets with gated globalisation. He highlighted the importance of localised fund management and the creation of infrastructure from a productivity perspective and business to business trust-based relations.  In addition, increasing private equity investment and widening of local and global capital flows,  both domestic as well as from friendly countries within gated communities, would benefit India.

ASSESSMENT

  • India should build strong partnerships with countries with similar goals, use checks and balances, and aim to diversify supply chains.
  • India should also develop a set of arrangements and hone existing relationships enabling the achievement of strategic national interests as well as strategic economic and financial goals.

However, first and foremost, India must put its own house in order and ensure that bureaucracy is a facilitator and not an obstruction to business. Regulations must be simple and not complex with the aim of befuddling the investor.

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