The geopolitical storm is closer than we think; why India must prepare for the worst

Storm clouds are gathering over the Indian political economy, both internally and externally. The external clouds are more obvious - from rising energy prices due to two unending wars, and the US effort to browbeat India over buying Russian oil looming large, to name just two - but internally too we could see a policy/reform slowdown as one more election cycle is upon us, this time including the all-important state of Uttar Pradesh. The fierce opposition to the Chief Election Commissioner Gyanesh Kumar will also heat things up politically. This means that any tough decision that will impact voter sentiment may be avoided, and we can expect one more round of unaffordable freebies to come in the coming months. While both centre and states are trying hard to deregulate the economy in order to provide a fresh burst of entrepreneurial energy, this is not going to deliver an immediate bang for the buck.

The external shocks are difficult to ignore and will need more than just short-term fiscal and supply side management. This was done efficiently when the US-Israel-Iran war broke out towards the end of February, and the fuel and cooking gas shortages were quickly handled through fiscal and supply side measures. But if the war widens, and even Saudi Arabia is caught in its vortex, India’s problems in sourcing crude will accelerate, especially since the US may now impose higher tariffs using the excuse that India is buying a lot of Russian oil.

While it is possible that the punitive tariffs may be less than what the headline figure of 100 percent suggests, there is little doubt that the US will use this threat to squeeze either a better trade deal that will be unwise politically for India, or otherwise make things hotter for India geopolitically. India is caught in a pincer, where the US has built a bipartisan consensus to use the Russia-Ukraine war as an excuse to impose higher tariffs on India (among others), and China has not relented much in terms of settling the border issues, some positive noises notwithstanding. Historically, it is neighbours who ought to trade more with one another the most, but India has been dealt a particularly bad hand. There is a China-Pakistan nexus now posing a military threat which makes more trade difficult at a time when India anyway faces a huge trade deficit with China. Ideally, the Chinese trade surpluses should have found investment avenues in Indian projects, but the unsettled border makes easing Chinese investments a bigger security risk for India. 

While India also faces a large trade deficit with Russia, and should theoretically be more open to Russian investments in India to offset this imbalance, more India-Russia trade collaboration may not go down well with the western powers as long as the Ukraine war continues. Facing an unwinnable war in West Asia, which is domestically unpopular, the US Deep State is trying to refocus public attention on cornering Russia - and India’s economic interests may become collateral damage. 

Hard decisions are, therefore, unavoidable. There is a limit to how calmly we can take continued US bullying and irrational behaviour from Donald Trump. While China has more leverage than India in handling US bullying, it is time for us to think of legislating provisions for counter-measures against nations that create economic or security problems for us.

Let’s call this the Coercive Economic Actions (Optional Countervailing Measures) Act. Or, if you want something more benign, the Protection of Indian Economic and Security Interests Act. This law would enable the central government to impose tariffs, focused sanctions, or other measures to safeguard Indian interests and impose costs on those countries trying to impose costs on us. This could include any future Trump tariffs, but also any Chinese restrictive activities that target India’s manufacturing buildup or subvert security.

Having such a law also means that we must be ready for negative internal political and economic consequences. For example, if we impose new taxes on tech giants in retaliation for any tariffs on us, this could curtail the flow of investments to the country. If the US starts raising the costs for our pharma and software services companies, we must have a ready plan to deploy the software talent now facing headwinds in the US to build our own tech strengths. This can be a plus for us in the long run, but there will be pain in the short term

In theory, we could do all this even without such a new law - as we have done with anti-dumping duties or Press Note 3 - but we need wider legal powers to act when the world goes against us. If the US and EU can choke Russian exchange reserves and force other nations to stop trading with Russia or Iran or North Korea, we too must have the same powers available to our government, even if their use must be practical and not choke our own attractiveness as an investment destination.

The time to act would be if fresh tariffs are imposed on us by Trump, or if other restrictions are placed on our economic lifelines, including services exports to the US. It is also worth noting that the US is behaving no different from a rogue state, where it can assassinate the entire top tier of a government, or kidnap a head of state. So let us not assume that the US (or any other hostile power) will act against our interests only through tariffs; it can delay fighter aircraft engines, insert damaging viruses into our key space, defence or banking networks, and foment internal civil war using our own faultlines. 

We already know how out-of-control artificial intelligence (AI) agents have illegally hacked into some websites, but increasingly these could be designed to hack into systems of countries that refuse to toe the US line. Also, a lot of our citizen data - which is often held in mixed databases that could be housed anywhere, including the US - will be accessible to Uncle Sam. We need legal protections that will mandate action against any company that holds Indian data and shares them with foreign governments without an explicit authorisation from India of its judiciary.

Apart from legislating a law to impose costs on those messing around with our national interests, we need policy changes that will reduce our over-dependence on the US market for exports, whether it is goods or services, and imports of critical defence equipment. While we are reasonably diversified in terms of our overall defence sourcing, the US is directly responsible for delaying our Tejas fighter programme by failing to supply the GE 404 engines in time. We have only their word for it when they claim the delays are due to supply chain issues. Unfortunately, we have extended this folly by signing up with GE to supply the 414 engine for upgraded versions of Tejas and even the Advanced Medium Range Combat Aircraft (AMCA) that the private sector is supposed to build by 2035. While a new engine is supposed to be developed along with Safran, this is far away right now. 

This implies that defence strategy must also be reoriented as we are going to be short of fighter aircraft and some other critical equipment in the foreseeable future. As the nature of warfare has changed with the use of drones and missiles, we have to reckon with the possibility that Pakistan may now consider using these kinds of weapons to inflict economic damage on us - as the Ukrainians and Russians are doing to each other, and Iran has been doing to the Arab states, including by using proxies like Hezbollah, Hamas and the Houthis. The next war with Pakistan may be all about drones and missiles, and defending against these with 100 percent accuracy will be near impossible. Even the US, with its high-end radars, and Israel with its Iron Dome, have not found a complete answer to Iranian missiles and drones.

The two immediate areas where we need maximum change are in defence strategy and preparations and energy sourcing and supplies. 

It is clearly taking too long for the armed forces to shift to theatre commands, when the political decision was taken seven years ago. The final decision will, thus, have to be politically imposed on an armed forces used to operating in silos.

Second, we cannot have just one strategy to deal with Pakistan and China. Pakistan is constantly thinking about what damage to do to India on any given day, but we are still thinking what we must do over the long term (AMCA, nuclear subs, theatre commands, satellite surveillance, cyber and information warfare) and not much on what we will do if war breaks out next week. If Pakistani terrorists manage to outrage us once again, what will be our response? Will we again use missiles, as we did during Operation Sindoor, when this time the Pakistanis may be better prepared to inflict economic damage in Gujarat (which is our key manufacturing hub and from where our two most ambitious businessmen operate), or land missiles in populated areas to create panic? Or, do we need to tweak the Modi doctrine, which holds that any act of terrorism will be seen as an act of war? 

Look at how the US and Israel have been given a bloody nose by a much weaker power like Iran, which has no air or sea power worth the name. Should we be thinking about more actively backing insurgencies in Pakistan and upping our cyber and information warfare game instead of just lobbing missiles on terror hubs, thus encouraging Pakistan to launch Iran-style drone wars on us? When we have more to lose in war that causes economic damage, we must think out of the box. In diplomacy, should we be more active in defusing the Ukraine war, when the west is using it as an excuse to pile on economic pressure on us?

While we have moved quickly to create more renewable energy sources, especially in solar, this power is not available 24x7 without batteries to hold excess supplies when the sun is shining. Once again, China holds the high cards in battery technology, making our solutions more China-dependent than earlier. Our exports also depend a lot on Chinese imports of components and sub-assemblies. How soon can we localise some of these supplies, when capacities will take years to build in each of them. Clearly, China is key to the development of our own manufacturing abilities, while the US is key to exports. Sooner than later we have to choose which devil - the US or China - we work with more.

The deck is stacked against India in a world that is fragmenting politically and economically, and the two hegemons, US and China, have developed a congruence of interests in slowing us down. Maybe we should be talking less about how India is the fastest-growing large economy, and more about whether we can remain one against the backdrop of a deteriorating external environment.

We must plan for the worst, and prepare our population to be ready for difficult times.