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Of global crisis & India's ties with US, China
Sheela Bhatt in New Delhi
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February 28, 2009

US Secretary of State Hillary Clinton's visit to China will unfold a new chapter in the history of US foreign policy.

The visit indicates not only an acknowledgement of China's economic strength, but also America's dependence on sharing closer ties with China to retain its economic power.

In this changing political backdrop, Habitat Centre in New Delhi arranged the Eminent Persons Lecture series on 'Geo-Political Consequences of Current Financial and Economic Crisis: Implications for India.'

In his keynote speech, Shyam Saran, Prime Minister Manmohan Singh's special envoy and former foreign secretary, spoke about the changes taking place around the world.

While talking about the economic crisis that has gripped the world, Saran  said something which is a huge departure from the way New Delhi used to think four years back.

"It is a crisis that originated in the United States and spread over the world. The Western dominance of the global financial markets and the global economy has been shaken to the core. It is possible that New York and London may no longer regain their undisputed status as the central financial markets of the world," he said.

Saran, who played a major role inking Indo-US ties in July 2005, said that with the economic crisis, "has come an intellectual crisis engendering an open questioning of the western espousal of the magic of the market place, belief in self-regulating market mechanisms and relentless retreat of the state from virtually all key areas of economic life.

"These twin crises are beginning to spawn significant and far-reaching political consequences. One relates to the redistribution of political power based on real economic strength. The other relates to perceptions, which are equally important, shaking confidence in market-based liberalism that has been the dominant dogma for the past two centuries and more."

Explaining the real reasons behind the crisis, Saran said, "In essence, it is the consequence of unsustainable imbalances in the global economy i.e. prolonged fiscal and trade deficits in the US matched by fiscal surpluses and astronomical foreign exchange reserves in China, but also smaller surpluses in other economies such as the oil exporting Gulf and Japan."

He offered a solution too. "These imbalances will need correction through a sizeable increase in saving and decrease in consumption in the US and associated Western economies. China will need to save less and consume more. China today saves over 40 per cent of its GDP. It seems to us that neither is likely to happen in the near future."

According to him, fiscal stimulus packages are merely temporary palliatives.

"The larger the deficits are today, the more significant and far-reaching subsequent adjustments have to be. Amid all this, China's saving rate, is likely to remain high", he said.

"Asians, including the Chinese, respond to difficult times, by saving more not less, particularly, where social security safety nets are absent.

"China has announced a large spending package for infrastructure, but this will only increase the significant excess capacity that already exists in infrastructure, whether these are highways, ports or building construction."

A senior Indian diplomat said, "The US and China have become joined at the hip over the past couple of decades."

While talking about the crucial Sino-US economic ties, Saran said, " The US will need to reduce its trade deficit through a deliberate and graduated decline in the value of the dollar. For, this will lead to the progressive decline in the value of China's vast dollar holdings.

China currently holds $ 1.1 trillion in US debt, including $652 billion in US Treasury debt -- it will have to acquiesce in this erosion of wealth rather than seek to significantly diversify its reserves.

"Will China play ball?"

A top functionary of the Prime Minister's Office talked at length about the country in question.

"China will need to resist the temptation to save its vast export industry from rapid decline and ruin, by devaluing its currency vis-a-vis the US dollar, or at least keep the current parity level', he said.

The US interest, on the other hand, will be to persuade the Chinese not merely to maintain the current value of the Yuan, but to revalue significantly. Can these two contrary interests be reconciled, he asked.

Saran thereafter went on to explain the present Sino-US equations.

"For its part, the US appears to be working on the assumption that dependent as China is on the health of the global and particularly the US economy, it will, in fact, be persuaded to do the unprecedented things.  For this persuasion to work, the US is embarking on an equally unprecedented diplomatic offensive to co-opt China in its economic recovery strategy."

The new US Secretary of State, Hillary Clinton, has echoed these sentiments by describing Sino-US relations as the most important bilateral relationship for the incoming Administration.

"China is being invited to participate in the fashioning of new global governance structures and have a major voice in the management, if not resolution, of major regional conflicts," Saran pointed out.

However, "China has not revealed its hand so far. It has certainly encouraged thinking in the US and the West that it holds the key to their economic recovery.

"This provides it with a significant leverage for achieving its foreign policy objectives even though on the ground it may be able or willing to do much less."

"China's role in global economic recovery may be more limited than is being envisaged in some quarters, although it is likely that China will emerge from this crisis -- relatively stronger," he stated.

"I would not like to leave behind an impression that only China is likely to be threatened by political and social unrest as a result of the global economic crisis.  This affliction may, in fact, be quite widespread, affecting even mature and politically stable societies."

While understanding fully the magnitude of the current affairs, Saran said, "This is, therefore, one of those rare occasions in history when predicting even the near future is fraught with deep uncertainty. The only sure thing is that the economic and financial crisis is putting all major countries and economies through a global shaker and it is not clear which way the dice will eventually roll.

"What can be predicted  with some degree of confidence is that the global landscape that will eventually emerge when the dust settles down, will be vastly different from what it is today."

Lastly, explaining what is in store for India, Saran said, "For India, this is not necessarily a negative thing. It creates for us greater strategic space."

Saran thought that "the current situation fits in well into our own instinctive preference for a multi-polar world, which includes a multi-polar Asia"

He recommended more energetic relations with countries like Russia and middle powers like Brazil, South Africa and Mexico, European Union and, in particular, France, Japan and Indonesia and 'nuanced diplomacy with China.'

However, he said India must remain fully invested with the US while being alert to the possible threat to India's interests.

"In Asia", he said, "we will need deeper engagement with Japan and Indonesia and a more nuanced diplomacy towards China.  We have several areas of convergent interest with China.

"Our positions on multilateral trade, climate change and several other global issues are similar. At the same time, we should acknowledge that there are competitive components in our relations, which will need to be managed with prudence but firmness."

He said, "In this context, the prospect of a Sino-US strategic convergence has caused some anxiety in India.  The situation is more complicated than it appears. China itself is hedging its bets by pursuing a number of parallel bilateral and regional strategies."

Where lie India's likely vulnerabilities?

Saran said, "At least for some time to come, the impact of the global crisis could well lead to diminished markets overseas and the revival of protectionist tendencies in those markets.

Similarly, there may be diminished prospects for attracting inward investment from major capital-exporting countries. In short, the global economic environment may not be as supportive of India's growth prospects as it has been during the past decade and a half.

"To the extent that our higher growth trajectory has been associated with the globalisation of the Indian economy, leveraging the liberal economic environment prevailing in major Western and other market economies, the downward pressure on our growth prospects may be unavoidable."

"Secondly, all major economies will end up being more regulated than before. There will be more State intervention, initially by default and eventually by choice. There is a real possibility that a new economic orthodoxy will emerge where the state will, once again, become not only a regulator but a major economic actor.

"The tendency in countries like India would uncritically slip into a similar mode of thinking. Our statistical legacy makes us particularly susceptible in this regard. We must guard against this."

What are the key messages for India in terms of the likely Geo-political Consequences of the Global Financial and Economic Crisis?

To this Saran had some sensational things to say, "Our diplomacy will need to gear up for a more diffused, decentralised and complex international landscape, populated by several major powers, with US enjoying a significantly diminished predominance."

Saran also recommended that since Indian economy will be less severely affected, it was time to expand and acquire assets abroad.

He said it was time to reduce the dependence on IT.

India should use the challenge of climate change to fundamentally shift the Indian economy from its reliance on depleting fossil fuels, to a significant use of renewable energy.

"We need to think in very unconventional ways to deal with a very unconventional crisis," he signed off.

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