Chief Editor

The Financial Express

India

　

 India has been an integral part of the waters surrounding it for millennia. It had maritime links with the Persian Gulf, the islands spread in all directions, south-east Asia, East Asia and Africa. It is not surprising; therefore, that when European seafarers arrived in these waters they chose to name it the Indian Ocean. Historical evidence suggests that India maintained extensive but peaceful contacts with the entire Indian Ocean littoral and had extensive commercial contacts.¹ In his panoramic study of India's maritime history K Sridharan says.

　

 In his monumental study of the economic history of the 15^th to 18^th centuries, the distinguished French historian Fernand Braudel has also recorded the important position Indian enjoyed in the maritime economy of the Indian Ocean and its links with the Arab world and the Persian Gulf, on the one hand, and Indo-China and the Malacca Straits, on the other. Braudel observes:

 This structure of India's maritime links with Asia only reflected, quite naturally, its economic size and interaction with the region. When Europeans arrived in the Indian sub-continent the region represented a major economic entity. According to a historical study undertaken for the Organisation of Economic Cooperation and Development (OECD) by the British historian Angus Maddison, the Indian economy accounted for a good 22.6% of the world national income in 1700. The OECD study is based on available historical information on standard of living, levels of consumption and development of agricultural and manufacturing activities as well as trade and finance. The study shows (Table 1) that China and India had economies of similar size, barely 300 years ago, and that the two together accounted for almost half of world income. India's large share of world income would also have manifested itself in an equally large share of world trade, at the time, and this trade was either along the land routes to its north-west or the sea lines of communication along the Indian Ocean rim. Table 1 shows how this structure of the world economy altered over time, relegating India to a lowly position by the beginning of the 20^th century.⁴

　

 After Independence India pursued a more inward-oriented industrialisation that reduced its economic engagement with the outside world. India's share of world trade was nearly 2.0% in 1950s, but came down gradually to 0.5% by the late 1980s. India's "inward-oriented" industrialisation and reduced engagement with the world economy was partly a response to 200 years of colonial rule and partly a response to the current thinking at that time that late industrialising economies must pursued import-substituting industrialisation and support local industries against competition from abroad. While this strategy had the positive effect of developing indigenous enterprise and encouraged industrial development in many sectors, and also created the technological, social and economic infrastructure for development, it reduced India's engagement with the global economy and hurt the competitiveness of local enterprise.

　

 In recognition of these weaknesses India altered the course of its economic policy in the early 1990s, after facing a major balance of payments and fiscal crisis in 1990-91. The new turn in Indian economic policy has increased India's economic growth rate (Table 2) and its interaction with the world economy (Table 3). As a result of trade and investment liberalisation in the 1990s, India's share of world trade increased from 0.5% in the late 1980s to 0.8% in the late 1990s. The Indian government has set a target of 1.0% for 2005.

　

 The growth acceleration of the Indian economy has encouraged the Planning Commission to set a target rate of growth of 8.0% for the Tenth Plan period (2002-07). India's growth rate is expected to exceed that of China in 2004-05 with growth projected at 7.0%. A recent study of the global financial company Goldman Sachs has projected the emergence of four major new industrial economies by the year 2020 with Brazil, Russia, India and China (BRIC) exceeding the existing G-7 economies in size. Current growth projections show the Indian economy emerging as the third largest economy, in purchasing power parity terms, after the United States and China by the year 2020.

　

　

 India has increased its trade interaction with the world in the last decade and will continue to do so. India's share of world trade increased from 0.41% in 1992-93 to 0.67% in 2000-01 and is expected to reach 1.0% by 2005. In terms of its "trade openness", the share of external trade in national income, the degree of trade openness has almost doubled with exports accounting for 13% of national income in 1990-91 and 21 % in 2000-01. In terms of the direction of trade too there has been a significant change, with Asia and Oceania, covering eastern regions of the Indian Ocean and the western shores of the Pacific, increasing its share in Indian exports from 30% in 1990-91 to 39% in 2000-01. Africa's share too has doubled from 2.61% in 1990 to 5.5% in 2000-01 and is expected to grow to 7.5%. On the import side too Asia, Oceania and Africa are likely to see their shares increase along a similar pattern due to increased sourcing of energy and manufactured goods from these regions. Within Asia, India has seen a dramatic increase in its trade with China (86% growth in 2002-03) and Hong Kong as well as with ASEAN and Korea. While Japan's share had declined in the 1990s, it is expected to increase again in the next decade with increased Japanese FDI in India.⁵

 What these above trends in trade show is that India is going to be more actively engaged in the maritime activity around its seas. It is partly on account of this increasing trade interaction with other Asian and African nations that India has actively participated in several regional economic partnerships. While progress in regional economic cooperation within a South Asian framework has been tardy on account of Pakistan's reticence till now to extend to India the multilateral obligation of an MFN (most favoured nation) status, and its unwillingness to pursue trade liberalisation within the framework of the South Asian Association for Regional Cooperation (SAARC), there has been considerable progress in forging bilateral trade agreements with other neighbours. India has a free trade agreement with Sri Lanka and Nepal and is presently finalising an agreement with Bangladesh. India and Thailand have begun talks on a free trade agreement and India and Singapore have a Comprehensive Economic Cooperation Agreement. While there has not been much progress in regional economic cooperation in SAARC, there has been considerable progress within the new group called BIMST-EC (Bangladesh, India, Myanmar, Sri Lanka and Thailand Economic Cooperation) and in India's bilateral relationship with the Association of South East Asian Nations (ASEAN).

　

 This entire gamut of regional cooperation increases the importance of trade in the Indian Ocean region from India's perspective. In the first half century of India's independence it was not as actively engaged in trade with this region as it is today and is likely to be in the future. This alone increases the importance of peace, stability and security in the Indian Ocean region for India's future economic growth and prosperity.

　

 Going beyond trade, foreign direct investment (FDI) has emerged as a major area of activity for India. India's share of global FDI has been very low till recently. For example, in 1988-93 the share of inward FDI in India's gross fixed capital formation was a mere 0.4%, compared to a global average of 4.1% and Asian average of 4.3%. However, this has increased sharply in the 1990s and by 2000 this had gone up to 2.5%. This is still low, compared to an Asian average of 11.6% and China's average of 10.5%. Interestingly, while Japan's share in FDI approvals declined from 4.7% in 1995 to 2.2% in 2000, that of South Korea increased from a mere 0.9% in 1995 to 12.9% in 1999.

　

 India will pursue policies to attract more FDI. According to analysts, while China is still a more attractive destination for inward FDI, India has been able to improve its appeal too. There are essentially three motives driving inward FDI into large economies, namely, resource-seeking, market-seeking and efficiency-seeking. Resource-seeking FDI goes in search of raw materials. Market-seeking FDI is aimed at the domestic market of the country in which the investment is being made. Efficiency-seeking FDI is aimed at using the destination as a base for export-oriented global production bases. China rapidly evolved along this curve in the 1980s and early 1990s. India was till recently attractive only for resource-seeking and market-seeking FDI. Most Japanese investment into India has come in for these two reasons. However, recent evidence suggests that India is becoming an attractive destination for efficiency-seeking FDI also. Several Japanese and Korean companies are exporting from their production bases in India. India has also become a major data processing, information technology enabled services (Ites) and software services hub for globalised firms. India is being viewed as a production base for East Asian multinational firms that wish to export to African, Arab and Central Asian markets. Korean and Japanese manufacturers find that it is easier and cheaper to export automobiles, home appliances and other manufactured goods from locations along the Indian coast to markets in the Persian Gulf, Africa, Central Asia and even Europe. Indian investments in rail lines in Iran that reach into Central Asia make it an attractive base for export-oriented investment. Each of these countries then, both the home country of the multinational company as well as the host country and the country to which goods are destined have a stake in the security of the Indian Ocean region. Japan also depends on the Indian Ocean for access to food imports from the region.

 The increased trade flows between India and its east and south-east Asian neighbours, including Japan, Korea, ASEAN and China, will increase the importance of ocean security for the region's economy. The industrial development of Asian economies will increase the importance of maritime security for all countries in the region. Given India's location it will have to be actively engaged in a regional cooperative security framework for the Indian Ocean.

 The importance of Indian Ocean security for Japan's trade and investment cannot also be over-emphasised. Studies show that Japanese companies intend to continue to invest in the Asia-Pacific region. Apart from China and ASEAN, India is also an important emerging destination for Japanese investment. As Samaddar has concluded in his study, "There are remarkable opportunities to combine resources and energies of the two countries to the mutual benefit of the economies."