India's Foreign Policy: a Transformation from 'Look-East' to 'Act-East'

Journal of Critical Reviews

ISSN- 2394-5125 Vol 7, Issue 11, 2020

INDIA’S FOREIGN POLICY: A TRANSFORMATION FROM ‘LOOK-EAST’ TO ‘ACT-EAST’

Ashish Chaturvedi1, Dr. Hari Prapan Sharma2*

1Assistant Professor, Institute of Business Management, GLA University, Mathura. 2*Assistant Professor, Institute of Business Management, GLA University, Mathura, Jyoti Nagar Mathura – Uttar Pradesh India. [email protected]

Received: 13.04.2020 Revised: 20.05.2020 Accepted: 11.06.2020

Abstract Foreign trade relations are a result of foreign policy measures adopted by a country. In this field, India has witnessed a rapid change after the economic reforms of 1991. The foreign policy which was previously west oriented has been replaced by a more inclusive and nuanced policy which propagates the improvement of trade, diplomatic and security ties with eastern countries. In this regard, ‘Look- East’ policy was implemented in 1991 which was transformed as ‘Act-East ‘in 2014. Through this paper, the authors attempt to explain the chronology of this shift in foreign policy. A brief historical summary along with the reasons and transformation from Look-east to Act-east has been attempted to explain. The recent developments and their possible impact have been attempted to cover in the study. The authors have attempted to provide a lucid understanding of a complicated element of India’ foreign trade and International relations policy which may act as a ready reference for scholars/ academicians and curious readers who wish to understand the nuances of the south-eastern foreign policy of India Keywords: Act-East, Look-East, Foreign Policy, Foreign Trade, International Relations.

INTRODUCTION advancement8. Countries located eastward to Asia Pacific regions When India got independence in 1947, a new foreign and such as Australia and New Zealand also displayed economic economic policy came into effect which was based on non- revival during the same tenure alignment and a mixture of capitalist and socialist tendency. The economic model was officially labelled as “mixed”, however, the Indian economic and foreign policy surprisingly ignored the tilt was heavily towards socialism1. The reasoning which was eastern parts of the world and kept focussing its stance, both in given in favour of the decision was that India was deliberately terms of opposition and support, towards the west; noticeably avoiding taking the side of any of the poles; USA or USSR, which the USA, Europe and USSR. Indian defence, atomic energy and emerged in the post-war world order. The careful mixture of the space mission were driven by the support of socialist USSR. In economic model was done to ensure the hostility of none. The return, the Indian government propagated the theory of balance, however, did not last long as in 1954” Mahalanobis socialism by encouraging protectionism, larger inclination Model” was implemented which practically meant the creation of towards the public sector and massive nationalization of the 9 a welfare socialist state2. The economic shift tilted Indian financial services sector . On the other hand, the relationship economic and foreign policy towards USSR and away from the with the USA was deteriorating. The nuclear test of 1974 USA. The situation changed dramatically after the Chinese worsens the relationship as the United States of America puts invasion and subsequent defeat of India in the year 1962. several sanctions on the country. However, India was heavily 10 Between 1962 to 1966, attempts were made to improve trade dependent on the USA for agricultural support . All these and policy ties with capitalist countries as well but the attempt changed dramatically after the crisis of 1991. did not last long as the regime under Indira Gandhi opted for absolute socialism in the decade of 1970s3. Even the word THE 1991 CRISIS AND SUBSEQUENT REFORMS “socialist” was added in the preamble of the Indian constitution. In the decade of 1980s, the trusted ally of India, USSR begins The decade of 1970s was the decade of economic turmoil to crumbling. As a result, the Indian economy started to face dire India. The war of 1971 distorted the budget by increased consequences. The current account balance, which was in expenditure and huge fiscal deficit which, along with massive surplus thanks to the support provided by the soviet faction, famine and drought, increased unemployment and inflation rate4. started showing a massive deficit. India was heavily dependent The economy was staggering at 2%-3% economic growth rate on USSR for its defence requirements as it was the major source continuously since the Independence which was paradoxical of affordable military equipment and arsenal. As a result, the since poor countries are expected to show a faster rate of growth. military expenditure as a part of GDP rose from an average of 11 The Indian growth rate was satirically labelled as the “Hindu 2.7% in 1980-81 to 1984-85 to 3.8% in 1985-86 to 1989-90 . growth rate” by several economists5. Since USSR composed around 20% of Indian export, the export growth of India deteriorated significantly (Table 1). Since the At around the same time, the East Asian countries were thriving Indian government in the past had announced a slew of planned for liberalization and open market reforms. Japan which was expenditure and several social welfare schemes coupled with devastated by the nuclear attacks of 1942 was quickly emerging high and economically irrational subsidies, the pressure on the as one of the fastest emerging economies of the world6. South current account was mounting. In the early years, the current Korea was benefitting from siding with the capitalist faction after account expenditure was cushioned by soviet support; however, the Korean War. The great revolution and renaissance of china the decline of USSR increased the expenditure pressure12. The which later resulted in the massive manufacturing surge also decline in investment in the massive public sector deteriorated started during the decade of 1970s7. In addition to all these the situation. events, ASEAN; which was created in 1967 by a group of 10 small East Asian countries, was also displaying a sign of rapid In addition to these events, the Middle East crisis and the subsequent gulf war of 1990 added to the woes. The invasion of

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INDIA’S FOREIGN POLICY: A TRANSFORMATION FROM ‘LOOK-EAST’ TO ‘ACT-EAST’

the USA over Iraq made the economic conditions highly volatile. permanent members of the Security Council. The primary Since Middle Eastern countries were the major supplier of crude objective of the first Indian prime-minister was to have an oil to India, the lack of supply coupled with a sharp increase in alliance of Asian countries, it is evident from his famous quote, the global prices of oil increased the oil import bill of India from and “The 20th and 21st centuries will belong to ASIA”. However, USD 2 billion to 5.7 billion in 199013. The war also acted as a all these optimism turned into a sense of mistrust and pessimism catalyst of mass migration of Indian immigrants from the Middle after the Sino-Indian dispute and subsequent war of 1962. China East to the native country which hampered the flow of was considered a major enemy and countries such as Japan & remittances which was a major source of revenue for the South-Korea were considered too close to the capitalist front of country14. Despite the economic turmoil, the government the United States of America17. continued the social expenditure by increasing its borrowing which led to an enormous increase in debt from USD 35 billion in The situation changed dramatically after the collapse of the 1984-85 to 66.5 billion in 1990-91 which was around 1/4th of the Soviet Union and the subsequent opening of the Indian economy GDP. All these factors led to a massive downgrade of Indian after the 1991 reforms. India was desperately in requirement of economy by credit agencies hindered the flow of debt liquidity new allies whereas the south-east Asian countries were deeply into the Indian economy which resulted in the famous” Balance apprehensive about the growing emergence of China. Since India of Payment Crisis” of 1991. was now a comparatively open economy and was having nuclear warfare capacity. The south-east Asian countries, especially Table 1: Performance of Export, Foreign Investment and ASEAN countries found it suitable to appease India through Exchange rates economic as well as defence co-operation to mitigate the risk caused by Chinese aggression. Taking advantage of the Indicators Average of 1990- 1991- dynamically changing geo-political scenario the erstwhile Indian 1985-90 91 92 government, under the prime-ministership of Mr.P.V.Narsimha Export Growth (%) 11.4% 9.0% -1.1% Rao, announced the Look-east policy which was designed to improve trade and diplomatic relationship with south-east Asian Foreign 279.2 103 133 countries18. Joint-naval exercises were conducted with Indonesia Investment(USD and Malaysia in 1991 and with Singapore in 1993 for the first Million) time; these exercises were to become a regular event later on. Exchange Rate ( 13.82 17.94 24.47 On the economic front also, India gained a lot from this new Rs/USD) policy. Although in the initial period the USA and Britain were the Source: Reserve Bank of India, 2001 major sources of Investment, Japan became the third-largest source of foreign investment in the period ranging from 1991- Table 2: Budgetary deficit of the Indian Government during 1994. All the major south-east Asian countries such as Hong the 1980s as % of GDP Kong, Thailand and Malaysia were among the Top 20 sources of Year Fiscal Primary Revenue foreign investment in India from 1991-94. Several Japanese and Deficit deficit deficit South-Korean firms such as Samsung, Hyundai, Toyota, Sony, LG etc. entered the Indian market at the around same time. 1980-81 to 2.6 1.8 -0.6 1983-84 The relationship took a setback during the late 1990s. In 1997, the famous Asian financial crisis took place which distorted the 1984-85 to 3.1 1.8 0.4 south-east Asian economy. As a result, Indian trade suffered a 1990-91 massive loss. During the crisis years; 1996-97 to 1998-99 Indian Source: Reserve Bank of India, 2001 export to ASEAN countries dipped from 8.5% to 4.7% of the total share of exports whereas the share of Japan and South Korea As a result, the Indian government decided to emulate the model declined from 6% and 1.5% to 4.7% and 0.8% respectively19. The suggested by the World trade organization and the International diplomatic relationship also suffered a massive blow as several monetary fund. Emphasis was given on “Fiscal discipline” and a countries of the reason objected to the successful testing of range of sectors were open for both private as well as nuclear weapons by Indian in 1998. Japan, being a vocal ally of international players. Several industries were removed from nuclear disarmament, criticized it very strongly and put several government monopoly and Industries such as financial services, sanctions on India20. Initially, Japan stated that sanctions would Electronic Media, Retail and several others were open for be lifted on the condition that India became a signatory of the competition. The reforms were later termed as “LPG Reforms” Non-Proliferation treaty, however, the careful diplomatic tactics where L stood for Liberalization, P for Privatization and G for of India were successful and the sanctions were lifted even Globalization. However, it has been claimed that these reforms without signing the treaty. came at the cost of geopolitical and economic sovereignty15. The decade of 2000 witnessed the rapid growth of the Indian At around the same time, the Indian prime-minister economy. India was labelled one of the fastest-growing implemented the Look-East policy which was aimed at improving economies in the world. The reforms of 1991 were paying a strategic and trade ties with countries located in the east of India dividend and India was becoming a major hub of foreign investment and economic activities. From the period ranging LOOK-EAST POLICY: A BRIEF BACKGROUND from 2003 to 2007, the Indian growth rate was continuously The look-east and the contemporary act-east policy have their above 7.5 % which was one of the highest in the world21. Seizing root in the broader ideology of “Asianism” which was propagated the opportunity, India-ASEAN free trade agreement named,” by Jawaharlal Nehru, the first prime minister of India. As ASEAN-India regional trade and Investment area”, was signed in mentioned in the book “Discovery of India”, the East Asian 2003 and was implemented from 1 January 2010. It was claimed countries have cultural and civilizational symmetry with India. that it is one of the largest free trade markets with more than 1.8 This is evident from the spread of Buddhism which originated billion people covered. and gained momentum in India and was later spread throughout East Asia. The great epics Ramayana and Mahabharata have However, the period of 2010-2014 was a troubled and turmoil several references about the eastern parts of the world16. To period in India with many critics claimed it to be a time of “policy 22 foster these age-old ties, India was the first country which paralysis” . The Indian GDP growth rate declined considerably supported the successful claim of China to be one of the from the range of 7.5-8.25% to 5.25-6%. The left to the centre

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schemes such as MGNREGA had increased the labour income important diplomatic success of India’s Act-East Policy with significantly but it also added to the government expenditure23. Japan is the signing of co-operation agreement for the peaceful The foreign direct investment decision in a single brand and use of nuclear energy. This agreement is a significant success as multi-brand retail was announced but was not implemented to Japan is perhaps the most vocal propagator of nuclear the fullest due to massive pressure from opposition parties and disarmament and India is not a signatory of comprehensive Test traders group. There were also serious allegations on the Ban treaty27. government of corruption and crony-capitalism. A massive number of projects were pending and were not able to seek Another major country with whom India is expanding its approval of ministries such as environment and labour welfare. relationship is South Korea. South Korea. In 2015, the two All these events led to the speculation of downgrading of the countries upgraded their relationship to ‘Special Strategic economy by credit-agencies. As a result the investment Partnership’. South Korea has always been considered as a sentiments of south-east Asian countries also dimmed down. miracle story with several political leaders of India establishing Finally, in 2014, a new government was formed in India under repeatedly that they intend to model the Indian economic the leadership of Mr.Narendra Modi, who was previously the development to the South Korean model and the country has chief-minister of Gujarat, one of the leading destinations of been categorised as an ‘Indispensable’ partner in India’s act-east 28 Investment in India, and was famous for its capitalist approach of policy . In the field of defence also, a military logistics minimum interference. Before becoming the prime minister, he agreement has been signed in 2019 between the two countries. had started “Gujarat Business Summit” in which several business From the events mentioned above, we may derive that Act-East is and political leaders of south-east Asian countries were regular not just a smart change in nomenclature but a significant attendees. Being the chief minister of the state, he had also transformation. While before 2014, the focus was only on trade visited Japan, Singapore and even China to seek investment and aspect after 2014 a more holistic approach has been followed business support in his state. As a result, the south-east Asian which has covered the defence aspect as well. The range of the leaders and business leaders were optimistic that there strategic countries has also increased exponentially with increased relationship with India will further improve. There hope cooperation in the entire Eastern Asia-pacific region. resonated reality as after becoming the prime-minister a new policy named,” Act-east” policy was announced which was CRACKS IN INDIA’S ACT-EAST POLICY designed to accelerate the speed of trade and diplomatic In 2019, India witnessed two important legislative decisions relationship between India and South-East Asia. which impacted foreign policy and international relations. In August 2019, Article 370 of the constitution which granted THE TRANSFORMATION FROM “LOOK-EAST TO “ACT-EAST” special status to the state of Jammu & Kashmir was scrapped. In 2014, the newly formed Indian government announced the Later in October, the parliament passed the controversial “Act-East” policy. While many critics have asserted that it is only citizenship amendment act. The development generated protest a tweak in the nomenclature. However, there is also a substantial of Islamic countries and had severe consequences on Indo- transformation in India’s policy towards the region. one major Malaysia relationship which had been one of the major partners change has been the accelerated push in improving military and in India’s Look East and Act east policies29. defence relations to the east beyond Asia24. Other than the south- east Asian countries, emphasise has been given to improve the In 2017, which was 60th year of diplomatic relationship between relationship with countries such as Australia. It has been India and Malaysia, the countries discussed investment worth 5 established by several experts that while “Look-East” policy was million USD. The trade relationship between the two countries primarily ASEAN specific, “Act-East” policy has covered a was on a rise due to the bilateral free trade agreement as well as broader range of countries located eastwards to India25. It is the India-ASEAN Free trade agreement. However the situation evident from the fact that in only two years after the changed dramatically after the change in the government of commencement in 2014, By 2016 India had already signed Malaysia in 2018 and Mahatir Mohammad, who was known for several trade, military and defence accord with countries such as his radicalized and anti-Indian stand was elected as prime Vietnam and Singapore. In addition to that, India succeeded in minister. The relationship began to deteriorate when the newly generating support of Australia in its peaceful nuclear elected prime-minister refused the extradition of Zakir Naik, an programme as in 2014, a historic nuclear deal agreement was Islamic preacher who was wanted in India for the charge of hate- signed between the two countries. The deal was a major mongering and money laundering. The situation became worst achievement and a feather in the cap of India’s “Act-East “ policy when the Malaysian government criticized India for the because to favour India, Australia deviated from its policy of scrapping of article 370 and passing of Citizenship amendment sharing nuclear resources only with the signatory of nuclear non- act. As a result, trade and diplomatic relationship between the proliferation treaty26. The deal will be of significant use to India two countries suffered miserably. Malaysia is the world’s second- as it plans to increase the capacity utilization to 63000MW by the largest exporter of Palm oil, a form of edible oil. India had been a year 2032. Cooperation with other eastern countries has also major market for Malaysian palm oil exports as it is the world’s been improving significantly under the policy. India has been largest buyer of edible oils. However, after the controversy, India successfully using its soft power and the fear of Chinese removed the Palm oil exports of Malaysia from’ free list’ and aggression to manoeuvre global world order in its favour. placed it into ‘restricted list’. As a result, palm oil futures decreased by 2.8% in 2019 which was the worst decline in more After the shift in policy, the Indo-Japanese relationship has also than a decade30. improved significantly. In 2015, the Japanese President Shinjo Abe announced an investment of 3.5 trillion Japanese yen by the Another decision which has impacted the ‘Act-East’ policy year 2020. Japan has also been investing heavily in Indian negatively is the refusal of India from signing the Regional infrastructure projects, specifically, the high-speed train project comprehensive economic partnership (RCEP) agreement. RCEP and the smart-city project. A technology transfer and training is a proposed free trade agreement between Asia-pacific programme has also been proposed by Japan which will assist in countries with ASEAN countries and its free trade partners, “Make in India” and Skill development programme of the Australia, Japan, India, China, South-Korea and New-Zealand. The government of India. Cooperation between the two countries has agreement was supposed to create the largest free-trade zone in also been extended in the defence sector after 2014 with the the world. However, citing the threat of manufacturing dumping signing of deals in the transfer of defence equipment and from China and fear of agriculture dumping, India opted out of technology in 2015, security measures for the protection of the agreement. The countries involved have decided to classified military information in 2015. However, the most implement the agreement even without India on board. This will

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