Indian Politics and ROK-India Relations in 2018 and Outlook for 2019

 

Current Issues and Policies No. 2018-22

December 18, 2018

Dr. Choi Yoonjung

Research Fellow, the Sejong Institute

yjchoi@sejong.org

 

1. Indian Politics and Economy in 2018

India in 2018 has elevated its position as an economic powerhouse based on democracy and market economy principles and a leading country among the middle powers by participating in key security and economic consultative bodies including the Indo-Pacific strategy and the Regional Comprehensive Economic Partnership (RCEP).

India enjoyed a prosperous year in 2018. It has become the world’s 6th largest economy and positioned itself as an alternative to China which has declined in economic growth and mired in hegemonic competition with the U.S. - whereas India ascertained 7 percent economic growth this year with the 8.2 percent growth recorded in the third quarter. India has no apparent enemy in its rhetoric. While maintaining the non-alignment orientation, it rallies the third world countries in accordance with strategic interests and raises its diplomatic and security standing at the global stage as a leading country among the middle powers by flexibly participating in several economic and security consultative bodies. 

The five years under Prime Minister Narendra Modi has recorded high achievements. The Hindu-nationalist Bharatiya Janata Party (BJP), led by Prime Minister Modi and heading the National Democratic Alliance (NDA), won against the United Progressive Alliance (UPA) led by the Nehru family led Indian National Congress (INC) at the 2014 general elections. As a result, the BJP took control of the Lok Sabha (House of the People), the lower house, for the first time in 30 years. Prime Minister Modi, the former governor of Gujarat, adopted substantial reform measures with emphasis on the eradication of corruption, investment-led economic growth, fostering of manufacturing industry, etc. In November 2016, the Modi government introduced currency reforms aimed at expanding the tax base and flushing out cash flow in the underground economy and integrated the value-added tax different at the state level into unified taxation of goods and service tax in July 2017. This caused the economic growth to fall below 7 percent in 2017, the first time during Modi’s term; but the economic growth swiftly recovered in the next year above 7 percent with a positive assessment from the market - that it improved the fundamentals of the economy. Confirming their support in state elections in Gujarat and Karnataka, the BJP-led NDA held power in 21 out of 29 states as of May 2018.

However, the unstable currents began to surge from the second half of 2018. Despite its efforts to grapple with the rise in oil prices and U.S. interest rates such as raising interest rates 0.5 percent twice in June and August and sold foreign reserves, the Indian government was unable to prevent the devaluation of Indian rupee - the Indian currency was devalued to 70 rupees for a dollar for the first time on August 1, 2018 (c.f. USD1=65 rupees in April 2018) and has not recovered since. Moreover, as inflation rate centered around agricultural products is predicted to hike due to an 8.3 percent reduction of Winter harvest caused by the insufficient rainfall during the monsoon season this year, hence, policies such as pork barrel subsidies and debt relief to rural areas could also be introduced. The International Monetary Fund (IMF) announced 2019 economic forecasts for India as 7.5 percent, a slight decrease from the previous 7.8 percent.¹⁾

There are also signs of social unrest. Recently, demonstrations have been witnessed in various places due to the rise in oil price, and the dissatisfaction accumulated among those marginalized in the economic growth, the farmers, low-income workers, and unemployed youth have begun to be expressed in society.²⁾  According to the living standards surveyed by the Gallup in 2018, the quality of living fell from 4.4 points to 4.0 points out of 10 points. Despite the fact that the Indian economy recorded continuous growth since Prime Minister Modi was sworn in in 2014, the average household income stagnated around 17,300 rupees per month.

That is not all. As the Hindutva (Hindu-centric ideology) movement emerged as a backlash of growing proportion and political influence of Muslims in India, religious affairs have become a major issue in politics. Prime Minister Modi and BJP have initiated a campaign to erase Islamic culture, beginning with the Islamic custom of ‘triple talaq’ - divorce is legally valid when the husband declares divorce three times. The idea to rename geographical locations such as Ahmedabad and Hyderabad, the largest cities of Gujarat and Telangana, is also to remove the remnants of the Islamic history. ³⁾ As such, Hinduism, emboldened since the BJP rose to power in 2014, has sparked a backlash from 200 million Muslims, 14 percent of the Indian population.

Eventually, the BJP lost desperately in state legislative elections in November 2018 in five states, failing to win majority seats in any of the five - a barometer to check the public view of political alignment. In November 7, the state assembly elections were held in Madhya Pradesh, Rajasthan, Telangana, Mizoram, and Chhattisgarh. Particularly, of the five states, Madhya Pradesh (230 seats), Rajasthan (199 seats), and Chhattisgarh (90 seats), being the ‘Hindi Belt of north-central India’ are considered as BJP’s turf. In fact, Prime Minister Modi paved his way to victory winning 62 out of 65 seats allocated to these three states in the general elections in 2014. However, in these elections, BJP only matched evenly against the INC in Madhya Pradesh (109 seats vs. 114 seats); the BJP only won 73 seats and 15 seats in Rajasthan and Chhattisgarh respectively, lagging way behind the INC (or the INC coalition) which won 100 seats and 68 seats respectively. The regional parties, Telangana Rashtra Samithi (TRS) and Mizo National Front (MNF), took control of the majority in Telangana and Mizoram.

 

2. Indian Politics and Foreign Policy Outlook in 2019

The Modi-led NDA will likely to retain power in 2019 after the general elections. However, the BJP will have to coordinate its policies with the junior coalition parties and the opposition as it is predicted to grasp an overwhelming majority.⁴⁾

India is scheduled to hold the 17th general elections in April and May 2019. Prior to the general elections, the Modi government have promoted the achievements of economic reforms until now. On August 15, 2018, Modi, delivering the Independence Day speech, stressed that as the red tapes are replaced with red carpets (in terms of ease-of-doing business), the international commentators say that the once ‘sleeping elephant’ has woken up and is running. And re-declaring the ‘New India by 2022’ vision, New Delhi is promoting an ever stronger India. It is evaluated that Prime Minister Modi, having resuscitated and elevated the Indian economy, will probably serve another term. Above all else, no one in the opposition seems to have the capability to vie for power against Modi, even including INC President Rahul Gandhi.

Nevertheless, as the local election results suggest, the BJP is unlikely to win the majority at the general elections in 2019 as different classes neglected in the development process will have resentments; BJP will need other parties within the NDA to claim the majority seat in the Lok Sabha - signifying policy adjustments to negotiate. Especially, it may burst open the fissures within the NDA, between the Hindu-nationalist BJP and Islamic and other non-Hindu-related parties, draining the Modi government’s political stability and policy momentum not experienced during Modi’s first term. However, as it will assume control of the Rajya Sabha (Council of States, the upper house) from 2020, the NDA coalition will have a bigger say in the decision-making process. In pursuant to the custom that one-third of representatives, voted by the state legislature, are replaced every two years, the NDA will be likely to hold majority seats in the Rajya Sabha.

Marking the 75th year of independence in 2022, India plans to present an advanced version of itself at the global stage. At the same time, it will orientate toward a more inclusive economic growth and practical diplomacy.

‘New India by 2022’ is an attractive slogan. New Delhi intends to project a stronger India in 2022, the 75th anniversary of its independence from Britain. It already has set deadlines for key policies such as ‘Make in India,’ the project to make India a global manufacturing power, by 2022. The Indian government successfully gained the approval to host the G20 summit in 2022 by the member states. ‘New India’ particularly bodes well with Hindu nationalists. Nevertheless, this slogan seems irrelevant to 14% of the Indians (Muslims) as well as other people who have difficulties making their ends meet. To overcome these shortcomings, the Indian government in 2019 is predicted to expand its campaign to raise national pride, enhance support base from the neglected class, and rally the existing support base.

In the same vein, the government that takes office after the general elections will be utmostly faced with the task of elevating people’s quality of living such as rural development, provision of housing and medical service. It will accelerate the ‘Make in India’ policy, aimed at creating 100 million jobs through the development of the manufacturing sector, and public-private partnership (PPP) projects to urge the construction of infrastructures, which have impeded economic growth. While the government will continue to make efforts to improve the business climate, it will have limitations in grappling with sensitive issues such as land acquisition and reform of labor law.

In terms of foreign policy, the BJP’s alignment will adhere to ‘strong India.’ The Modi government’s Act East policy differs from the predecessor Manmohan Singh government’s Look East policy in the target region and objective. It broadened the target countries from some Southeast and Northeast Asian countries to key countries in the Indo-Pacific region and emphasized balance, peace, and stability in the region. Particularly, mindful of the U.S. Indo-Pacific strategy, China’s expansion strategy, and its Act East policy, India has emphasized the freedom of navigation in the South China Sea and the Indian Ocean and encouraged the countries concerned including South Korea to participate in the establishment of new norms.

Boosting its relations with the U.S. will be more crucial to India, as the two countries share the common interest of containing China’s influence. Nonetheless, the trade dispute between the two countries may also expand, factoring in the ‘America first’-proclaiming Trump administration’s trade policy. Moreover, while it makes efforts to expand cooperation with China in practical terms, the cozy ties between Beijing and Islamabad, enduring India-China border dispute, China’s expanding presence in India’s neighbors, etc. Leaves the seeds of conflict with China. Thus, the bilateral relations of the two most populous states in the world will be unlikely to improve in the near future. Rather, India will build up relations with other economic and military powers, Japan, Russia, etc. to cement its supporting countries at the international stage to counter China’s widening stretch.

Meanwhile, India will not be able to lessen its trade deficit of $70 billion. Amid the U.S.-China trade war, the side-benefits that India gains by the accessibility to its largest export market, the U.S., will be negated when India engages in trade dispute with the U.S. Furthermore, the increase in oil prices forecasts from the latter half of 2018 around $70 per barrel (Brent crude) - which remained low throughout 2015 to 2017 around $40-50 per barrel - bodes gloomy days for the Indian economy which depends more than 20% of oil on imports. At this juncture, if the BJP-led coalition retains power in the next year’s general elections, India will pursue more practical foreign policy. To attenuate the exporters and farmers’ discontent, it will have to impose trade barriers for protection as well as policies to expand exports.

3. ROK-India Relations in 2019

India will hope South Korea to serve as a actor more involved in establishing the regional order in Asia as well as a genuine special strategic partner that provides substantial benefits to the Indian people.

Pursuing a stronger India with active Asia strategy, New Delhi will hope Seoul to become an actor more involved in the regional society, while consolidating the bilateral relations. The political relations between the two countries have made significant progress. Since the establishment of diplomatic relations in 1973, South Korea and India have expanded exchanges in various domains encompassing politics, economy, culture, and society, and signed the Comprehensive Economic Partnership Agreement (CEPA, akin to FTA) in 2009. Furthermore, the summits in 2010 and 2015 have been the occasion to elevate the bilateral ties to ‘strategic partnership’ and ‘special strategic partnership’ respectively.

In addition, the Moon Jae-in administration announced the New Southern Policy, pursuing the diversification of its foreign policy and market and designating India as one of the key countries for southern cooperation along with ASEAN in November 2017. President Moon Jae-in visited India in July 2018 and agreed to bolster relations based on the principle of ‘three-Ps plus (people, prosperity, peace, and future),’ recognizing the common ground between South Korea’s New Southern policy and India’s Act East policy. India especially welcomed that South Korea’s New Southern policy promotes India to be a key partner in its foreign policy and that it aims to elevate the relations on par with the four neighboring countries and hoped the bilateral relations to become genuine special strategic partners for each other. Indian government officials and academics agreed on the people-first New Southern policy and proposed the bilateral cooperation to encompass diverse areas including coordination in regional issues such as Indo-Pacific strategy and economy.⁵⁾

As such, the politically-mature ROK-India relations should spread to other domains. Of India’s trade volume of $742.8 billion, its trade with South Korea only accounts for 2.7 percent - $20 billion. The CEPA review, which is bound to finalize soon, South Korea should concentrate on smoothening the bilateral exchanges and widening opportunities of economic cooperation and businesses rather than opening additional markets, considering India’s domestic and surrounding environment. Along with these, the South Korean government should support its corporations to sufficiently make use of the CEFA and offer a prospective guide for alternative markets in the case of steel and chemical products, the items that the Indian government is likely to introduce trade safeguard measures.⁶⁾

The year 2019 is high time to actualize the special strategic relations based on the principles of New Southern Policy - people, prosperity, peace, and future.

A new strategy is required in trade and investment. India now imports electronic goods mostly from China, once South Korea’s main exports to India. Also, the exports of telecommunication apparatus and parts (HS8517) had a brief moment of a rapid surge for three years thanks to India’s expansion of its telecommunication grid and wider use of smartphones, but the imports plummeted in 2018. This was replaced by Chinese and Vietnamese goods. While Samsung and Kia Motors began or will begin construction of production plants in Noida and Anantapur respectively, it is difficult to predict that the investment will drive an increase in exports like the current situation. Demanding strongly the use of parts made in India, the Indian government have raised tariffs for the parts and the low-cost substitutes from China and Vietnam could fill in the void caused by higher tariffs.

Seoul should pour in more efforts to build cooperation that substantially benefits the Indian public. It could engineer measures to cooperate in 25 sectors, including electronics, semiconductor, food processing, shipbuilding, automobile, textile, etc., that the Make in India initiative covers and seek practical measures to participate in infrastructure construction in India linking trade finance and its Economic Development Cooperation Fund (EDCF). Based on the principle of peace and future, the two countries could also prospectively seek cooperation in military, security, energy, and science and technology. The cooperation in defense acquisition with India, being one of world’s top arms importers, will bear meaningful fruits. As South Korea pursues to diversify its diplomacy portfolio, it should review positively measures to shore up cooperation with India in various mechanisms such as Indo-Pacific strategy. India has plans to reduce dependence on oil imports from 82.8% to 10% by 2022 and supply the shortage of electricity with renewable energy sources (175GW) and South Korea also intends to increase the supply of renewable energy from 6.2% to 20%. The two countries established ‘Korea-India Future Strategy Group’ to respond jointly to the fourth industrial revolution using the inter-compatibility of the two countries’ science and technology. I hope the new Presidential Committee on New Southern Policy established after President Moon’s visit to India will institutionalize the cooperation channel with India and translate the momentum for bilateral cooperation into a fast-track toward a genuine special strategic relationship.

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1) The Modi government is known to have demanded the Reserve Bank of India (RBI) to remove the hurdles for national banks to provide loans and various economic stimulus packages. Hence, the RBI will authorize more space for loans, lowering the statutory liquidity ratio from 19.5% to 18%, 0.25% per quarter from January 2019. Meanwhile, after the RBI Governor Urjit Patel’s sudden resignation, the RBI’s independence have been in question as pro-Modi Shaktikanta Das, a former minister of finance, was appointed on December 11.

2) According to the Centre for Monitoring Indian Economy, the unemployment rate was 6.62% in November 2018, risen compared to the last year’s numbers.

3) Park Young-sun. November 12, 2018. “India likes to change geographical names.” KOTRA Trade Office Report.

4) Time. December 12, 2018. “Why Narendra Modi's Ruling Party No Longer Looks Invincible in 2019 Indian Elections.”

5) Choi Yoon Jung. 2018. “New Southern Policy and ROK-India Special Strategic Partnership.” Sejong Policy Brief 2018-26. The Sejong Institute.

6) Currently, steel and chemical products that rank among top South Korea’s exports to India have continued to encounter obstacles from India, a target for anti-dumping tariffs.

 

 

 

 

This article is based on the author’s personal opinion and does not reflect the views of the Sejong Institute.

 

*Translator’s note: This is an unofficial translation of the original paper which was written in Korean. All references should be made to the original paper.