Israel and India: From a Chill to an Embrace?

Last week, Prime Minister Narendra Modi of India concluded a three-day visit to Israel. His visit was genuinely historic as he was the first Indian prime minister to ever undertake such a trip. Indeed, the visit may well signify an entirely new phase in the Indo-Israeli relationship. Though India had recognized the state of Israel in 1950, it was only in 1992 that it had finally accorded the country full diplomatic status. Why has it taken the two states decades to finally arrive at a stage where they can enjoy a cordial and indeed close relationship? The answer to this question is complex and has complex historical and ideological roots.

India had formally voted against the United Nations Partition Plan for Palestine in 1947. In considerable part, its opposition had stemmed from India’s anti-colonial history and the sympathies that its principal nationalist leaders had for the Palestinian cause. Even a letter from Albert Einstein pleading the Israeli cause had left the most prominent exponent of Indian nationalism, Mahatma Gandhi, India’s most noted nationalist leader, unmoved. Not surprisingly, India’s first prime minister, Jawaharlal Nehru, chose to maintain a studious diplomatic distance from the nascent state. His successors, while accepting clandestine military support from Israel during India’s wars with Pakistan in both 1965 and 1971, nevertheless did little to enhance ties with the country.

Their decision to maintain the diplomatic reserve stemmed from three sources. First, it emanated from what institutional economists refer to as “path dependence.” Once organizations embark upon a certain policy direction only significant shocks, from within or without, lead them to fundamentally change course. India’s foreign policy establishment proved to be no exception to this principle. Second, India’s policymakers convinced themselves that India’s substantial Muslim population would take umbrage with an open embrace of Israel. Even though there was no clear evidence to this end, the belief alone was so strong that none within the political leadership dare chose to challenge its veracity. Ironically, at the end of the Cold War, when India chose to finally extend full diplomatic recognition to Israel, there was barely a whimper of protest from India’s vast Muslim community. Third, it had also shied away from closer ties with Israel for fear of a backlash from the Arab world. However, at the Cold War’s end, with a general re-appraisal of India’s foreign policy orientation, it became easier for the political establishment to accord Israel full diplomatic recognition.

Since then, the relationship has undergone a fitful, but dramatic transformation.  Previous governments under the tutelage of the Indian National Congress (INC), because of their inheritance of the legacy of the nationalist movement, had been somewhat circumspect about openly embracing the Indo-Israeli relationship.  Nevertheless, they had gradually expanded the scope and dimensions of existing ties. As a consequence, there had been considerable growth in diverse areas ranging from trade to military cooperation. Much of this expansion, however, was carried out without any great fanfare because the INC remained wary about alienating a key domestic electoral constituency and was also concerned about not troubling India’s Arab partners.

Similar misgivings do not appear to concern the current, right-of-center, Bharatiya Janata Party (BJP) regime of Prime Minister Modi. It has concluded that it can cede much of the Muslim vote to the INC and still achieve electoral success both in national and most state level elections. No doubt, it has also concluded that the divisions in the Arab world as well as India’s enhanced global stature ensures that improvements in relations with Israel will not lead to any significant diplomatic costs being imposed on India.  More specifically, it needs to be borne in mind that long before assuming the premiership, Modi had successfully sought to attract investment to his home state of Gujarat from Israel. Consequently, he could draw on his prior ties to the country as he planned this path-breaking visit.

Apart from the obvious symbolic significance of this visit, what exactly was accomplished during it? Even prior to the visit, Israel had emerged as a significant defense partner for India. For example, in April of this year, India had placed an order amounting to $2 billion to acquire various forms of high-technology weaponry, including drones, from Israel. There is every reason to believe that in the wake of this visit defense cooperation will only be enhanced further. Also, as of 2016, bilateral trade, which had once been of trivial importance, was approaching nearly $5 billion.

More specifically, during the visit, the two sides signed seven different agreements that will lead to greater cooperation in such areas as space, water management, energy, and agriculture. They also agreed to set up a five-year joint technology fund. Beyond these particular accords, they affirmed their existing commitment to counterterrorism cooperation—a matter of no trivial significance to either country.

Since by all accounts the trip was both a substantive as well as a symbolic success, what could possibly trouble the relationship in the likely future? The issue that the two leaderships seem to have deftly avoided is India’s robust diplomatic relationship with Iran. Despite public professions about long-standing civilizational links, the bilateral diplomatic warmth is based upon cold, hard calculations. India needs Iran for access to hydrocarbons especially natural gas, for an alternative route to Afghanistan (given the state of the India-Pakistan rivalry), and to ensure the political quiescence of its very substantial Shia minority. Consequently, it can ill-afford to distance itself from Iran. Israel, for various national security concerns, on the other hand, remains deeply wary about the country, its causes, and its goals.  

This is an arena where the budding Indo-Israeli relationship will no doubt diverge. The task for policymakers in both Tel Aviv and New Delhi will be to build upon the significant convergence of interests and not allow this issue to disrupt an emerging partnership that could prove beneficial to both states, especially since it has taken so very long to come to fruition.

Sumit Ganguly, a Senior Fellow at the Foreign Policy Research Institute, is a professor of political science and holds the Tagore Chair in Indian Cultures and Civilizations at Indiana University, Bloomington.

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Of Modi and Trump: A Case of Continuity?

Indo-U.S. relations, despite some inevitable vicissitudes, had been mostly on an upswing since the second Clinton administration. After dramatic progress on multiple fronts during the two terms of George W. Bush, it had briefly appeared to be in the doldrums during the first Obama administration. Two issues in particular had vexed New Delhi. The administration had been overly solicitous of India’s long-standing and long-term adversary, the People’s Republic of China (PRC) and had sought to link the Kashmir dispute with Pakistan with the U.S. role in Afghanistan. India had responded coolly toward the first overture and had expressed outright hostility toward the second. The administration, after its initial flirtation with the PRC did not play out well, changed tack. Also, faced with a blunt and unyielding stance from India on the other matter, it backtracked from linking the two issues.

Indeed following Obama’s visit to India in October 2010, the relationship had undergone a significant course correction. Among other matters, Obama was the first U.S. president to publicly, if in a qualified fashion, endorse India’s quest to join the United Nations as a Permanent Member. This gesture, though hedged with suitable qualifications, was of extraordinary significance to the Indian foreign policy elite, for whom the goal is of talismanic dimensions.

President Trump’s assumption of office came as a surprise to India’s policymakers. To compound matters, Trump had railed against the India’s use of the H-1B visas during the campaign—an issue of no trivial significance to India’s multi-billion dollar information technology industry. Apart from this populist rant, he had expressed scant interest in India and shortly after getting elected had lauded the Prime Minister of Pakistan, Nawaz Sharif, in a phone call. Subsequently, earlier this year, Trump had publicly accused India of seeking billions of dollars from advanced industrial countries in exchange for its support for the Paris climate change accords.

All these statements had been of cold comfort to India’s foreign policy establishment. Nor had the administration sought to reassure India that it would pursue policy continuity in other areas such as defense cooperation or regional security through high-level diplomatic contacts. In fact, the only official of any consequence who visited India was the National Security Adviser, H.R. McMaster. Based upon press reports, much of his time in New Delhi had been devoted to discussions about the future of Afghanistan.

Consequently, as Prime Minister Modi’s visit to Washington, D.C. loomed, many within India’s foreign policy circles fretted about how Modi’s first state visit to the United States following Trump’s election would play out. Fortunately, for the most part, press reports and the detailed joint communiqué suggest that the Indo-U.S. relationship is in no imminent danger of being derailed. What are the indicators that the visit was at least a modest success and that it presages continuity in American policy toward India? Also, might there be any possible pitfalls that still lurk over the horizon? Are there issues that were left unaddressed that could come back to disturb the seeming bonhomie that the two leaders have established?

At the outset, it might be desirable to highlight what most Indian foreign policy commentators deem to be the achievements of the trip. Virtually all of them have taken note of the decision of the Trump administration to declare well-known terrorist, Syed Salauddin, the leader of the Hizb-ul-Mujahideen, as a “Specially Designated Global Terrorist.” Under the terms of this label, any of his financial assets in the United States will be subject to seizure, and no U.S. citizen can have contact with the individual. The practical consequences of this listing may be limited as Salauddin is unlikely to possess significant financial resources in the United States, and few Americans would be desirous of establishing contact with him anyway. That said, the designation is nevertheless important as it helps India put pressure on Pakistan, his base of operations.

Barring this decision, even a casual glance at the joint communiqué reveals that a number of subjects that had been under consideration under the Obama administration will still be pursued. In the defense arena, the previous administration had granted India the status of a Major Defense Partner. Under its aegis, India was granted access to a range of dual-use technologies. The joint statement affirmed India’s status and revealed that the U.S. has now offered India new drone technology. It has also emphasized the significance of on-going bilateral naval cooperation and an interest in its deepening and expansion.

Also, in a striking departure from past precedent, India affirmed American efforts to curb North Korea’s nuclear and missile pursuits. Previous Indian regimes had shied away from taking such bold and unequivocal stances on matters that did not directly impinge on India’s national security concerns. Similarly, without explicitly alluding to the PRC, the statement underscored the importance of the freedom of navigation in the Indo-Pacific. In many ways, these are important signs that India now envisages a wider role for itself on matters of regional security across Asia.

Some potentially contentious issues, however, seem to have been set aside. There is no mention of the nettlesome issue of H-1B visas; the matter of divergent views on climate change seem to have been mostly papered over; and there is no reference to Iran’s role in the Gulf. The final issue deserves a bit of discussion. India, for a variety of compelling reasons seeks to preserve a cordial relationship with Iran. Among other matters, it has a very substantial Shia population in northern India and values their political quiescence. It is also dependent on Iran for access to natural gas. Finally, it has invested much in the development of a port facility at Chabahar in Iran to counter the PRC’s growing presence in Pakistan and to obtain land access to Afghanistan. Consequently, it would be loath to dilute this critical relationship.

The Trump administration with its fixation on Iran is no doubt aware of India’s ties to Iran. The fact that this issue in a concluding public statement has been neatly sidestepped suggests that it is not an area where there is mutual understanding. Nevertheless, it is not a matter that can be swept under a rug. At some point, the two sides will be compelled to grasp this particular nettle and not allow it to damage the overall fabric of the relationship.

A few analysts in India have suggested that the visit did not yield significant new achievements barring the U.S. decision to isolate Syed Salauddin and to nudge forward the process of defense cooperation. Such a characterization, though seemingly accurate, misses a critical point. Modi’s visit and Trump’s affirmation of a range of past policies suggests that there is no rupture in the relationship. With the significant ballast that it has acquired over the past decade and a half, the absence of any dramatic turns under the Trump administration demonstrates that it can withstand a significant shift in the overarching orientation of U.S. foreign policy.


Sumit Ganguly is a Senior Fellow at the Foreign Policy Research Institute in Philadelphia and holds the Rabindranath Tagore Chair in Indian Cultures and Civilizations at Indiana University, Bloomington.

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Modi Flexes His Muscles: India’s Cross-Border Raid into Myanmar

June 16, 2015

Last Tuesday, India launched a punitive raid into Myanmar.  Seventy commandos from the Indian 21 Para (Special Forces) Battalion crossed India’s eastern border to strike two militant bases.  The commandos quickly overran the bases and killed between 20 and 40 militants.  The raid was prompted by the ambush of an Indian army patrol about 110 km south of Imphal five days earlier.  Eighteen Indian soldiers were killed and another 11 were wounded in what was the deadliest attack on Indian security forces in decades.  According to some Indian officials, Myanmar’s government consented to the raid, though Naypyidaw later claimed that the raid occurred on the Indian side of the border.

India Myanmar Raid

Whatever the case, the raid was remarkable.  It reflected Indian Prime Minister Narendra Modi’s willingness to not only use military force, but also take decisive action.  As soon as the ambush on the Indian army patrol occurred, Modi directed National Security Advisor Ajit Doval to coordinate an Indian response.  Within five days, India successfully planned, resourced, and executed the two cross-border missions.  That required not only military, but also diplomatic coordination, if India really discussed the matter with Myanmar.

Modi is surely a different kind of prime minister than India has had in the past.  He demonstrated that when he visited China in May 2015.  He directly communicated to Chinese Premier Li Keqiang “the need for China to reconsider its approach” on issues that hold back their relationship, particularly the territorial disputes between their two countries.  Modi’s predecessors had consistently shied away from such frank discussion, typically sticking “to uninterrupted pledges of friendship and good relations.”[1] While Modi’s visit to China yielded no breakthroughs on the border issue, it was clear that China should take note.

Modi has also embarked on active diplomacy around the world.  Toning down India’s traditional adherence to non-alignment, he has edged close to Australia, Japan, and the United States.  He is clearly interested in having India play a greater role not only in South Asia, but also beyond it.  His ability to act decisively will make that a more likely prospect.

[1] Benjamin Haas, “India’s Modi tells China to ‘reconsider’ approach,” Agence France-Presse, May 15, 2015.

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Decline in Oil Prices, Currency Pairs, and National Power

Last autumn, headlines began to declare national “winners and losers” from the precipitous drop in oil prices over the second half of the year.[1]  They contended that the United States and its friends would benefit from the fall in oil prices; and that its most strident adversaries would not.  While largely true, the headlines did not capture the whole story.

Since international prices for oil are quoted in U.S. dollars, the exchange rate between the U.S. dollar and another country’s currency (a currency pair) also matters when calculating the real impact of a change in oil prices on that country.  Take Russia for example.  Much has been made of the fact that half of Russia’s government budget is based on revenues from oil.  One might suppose, because oil prices have fallen about 50 percent over the last six months, that Russia’s government budget would be pinched by about 25 percent (reflecting the 50 percent fall in oil revenues on half its budget).  Such a contraction would be catastrophic for the Russian government and Russia’s economy, given its high dependence on government spending.  That might lead Western policymakers to believe they can easily wait out Russian President Vladimir Putin’s aggressive designs.

But one must remember that the Russian government does not pay for domestic goods and services in U.S. dollars, but rather in Russian rubles.  Any drop in the value of the Russian ruble against the U.S. dollar allows Russia to reap more rubles for its dollar-based oil revenues.  (Even so, a sudden devaluation in a country’s currency can still wreak havoc on that country’s wider economy, because it fails to let people adjust to the benefits of devaluation, before they feel its negative impacts.)  Given the devaluation in the Russian ruble (which has fallen in tandem with oil prices), the real impact of the fall in oil prices is closer to only 8 percent, rather than 25 percent. While that is still a big challenge for the Russian government’s budget, it is a lower hurdle for Putin to surmount.

Similarly, one might expect that Japan, a key American ally in Asia, to unreservedly benefit from the decline in oil prices.  As a country completely dependent on oil imports, any decline in oil prices should boost its economy.  Given that oil prices have fallen about 50 percent over the last six months and that Japan imported about 1.6 billion barrels of oil in 2014, one may naturally assume that Japan is now saving a vast sum that would act as a fiscal stimulus to its economy, making it a stronger country and one better prepared to cope with a rising China.

That has happened, but not to the degree that the halving of oil prices would suggest.  That is because the value of the Japanese yen against the U.S. dollar has fallen too.  During the second half of 2014, the yen devalued about 15 percent, as a result of the Japanese central bank’s quantitative easing policy.   That shaved one-fifth off the benefit from the decrease in oil prices to 40 percent in yen terms.  Ironically, the lower energy input prices had made it more difficult for the Japanese government to achieve its 2 percent inflation target, which Tokyo believes will help lift the country out of its decades-long deflationary economic stagnation. 

As the cases of Russia and Japan have shown, changes in currency exchange rates can make a real difference on the impact that changes in oil prices have on a national economy, whether they are net oil importers (those shaded in blue in the chart below) or net oil exporters (those shaded in red).

Effect of Exchange Rate Movements on the Decline in Oil Prices in Local Currencies

 

As a region, Asia has benefited from the drop in oil prices.  Almost every country in the region is a net oil importer.  Chief among them is China, whose slightly appreciating yuan against the U.S. dollar, has allowed it to fully benefit from the lower oil prices.  In fact, Beijing has taken advantage of them to less expensively fill its strategic petroleum reserve.[2]  But not far behind have been India and Indonesia.  The currencies of neither country have devalued by more than 6 percent, allowing them to realize almost all of the benefit from the decline in oil prices.  That, in turn, has allowed their central banks to cut their interest rates to spur their economies without having to worry as much about inflation.  Lower oil prices have also enabled Indian Prime Minister Narendra Modi and Indonesian President Joko “Jokowi” Widodo to slash fuel subsidies, which had been draining government coffers in the past, without a public outcry.  That has freed up resources that they can devote to infrastructure and defense, as both national leaders have promised.

However, the fall in oil prices has also pinched some American allies.  One such country is Australia.  Though it is a net importer of oil, Australia has ambitions to become among the world’s leading exporters of liquefied natural gas (LNG).  But LNG prices, which are often linked to those of oil, have followed oil’s prices downward.  That has put into jeopardy Australia’s new round of offshore LNG development.  According to the Australian government, it will likely miss out on about AUS$750 million in petroleum resource rent tax over the next four years—about the cost for one of the new diesel-electric submarines that its navy wants.  The situation would have been even worse had the Australian dollar not devalued by 13 percent against the U.S. dollar.[3]

Finally, some countries, like Venezuela, whose currencies are effectively pegged to the U.S. dollar, have felt the full impact of the decline in oil prices.  Unfortunately for Venezuela, it imports most of its consumer and industrial goods—including food, clothing, machinery, vehicles, etc.—and it holds debts mainly denominated in U.S. dollars.  Thus, any devaluation of the Venezuelan bolívar to temper the impact of lower oil prices would also cause the costs of goods to soar and make its U.S.-dollar debts crushing.  To avoid a financial crisis, Venezuelan President Nicolas Maduro has travelled to China this week.  In the past China has agreed to oil-for-loan agreements, in which China provides immediate financing to Venezuela in exchange for future deliveries of Venezuelan oil.  Already existing deals with China have begun to squeeze out Venezuela’s ability to use its oil to bring Latin American countries into its orbit.  Rather, new deals are more likely to move Venezuela close to China’s orbit.[4]

By the first week of January 2015, the benchmark prices for Brent and West Texas Intermediate crude oil had fallen to $51 and $48 per barrel, respectively.  As long as these conditions persist, oil-exporting countries will suffer and oil-importing ones will benefit.  But to really understand whether these countries are weakening or strengthening to the extent that the decline in oil prices suggest, one would be wise to also consider the trajectories of their national currencies.

[1] “Winners and Losers,” Economist, Oct. 25, 2014.

[2] Abheek Bhattacharya, “China’s Petroleum Reserve Builds Shaky Floor for Oil,” Wall Street Journal, Sep. 3, 2014.

[3] Australia is considering a Japanese submarine design for its next-generation submarine fleet.  The most recently launched Japanese Sōryū-class submarine cost $540 million and AUS$750 million converts to $615 million at today’s exchange rate.  John Hofilena, “Japan launches newest submarine Kokuryu amid party atmosphere,” Japan Daily Press, Nov. 04, 2013, Eric Yep, “Falling Oil Spells Boon for Most of Asia’s Economies,” Wall Street Journal, Jan. 4, 2015; Max Mason, “Oil price plunge sends petrol to four-year lows as Australia feels it at the pumps,” Sydney Morning Herald, Dec. 22, 2014; James Paton, “Plunging Oil Threatens to Spoil Australia’s Next Gas Boon,” Bloomberg News, Nov 27, 2014.

[4] Eyanir Chinea and Brian Ellsworth, “Venezuela’s Maduro to visit China, OPEC nations amid cash crunch,” Reuters, Jan. 5, 2015; Nicole Hong and Kejal Vyas, “Oil Shakes Venezuelan Debt to Its Foundations,” Wall Street Journal, Dec. 22, 2014; “Inside U.S. Oil,” Thomson Reuters, Aug. 22, 2014, pp. 7-8.

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Contested Border: China, India, and the Asian Century

Chinese President Xi Jinping’s three-day visit to India last week was supposed to have breathed new life into ties between Asia’s two giants, China and India.  It was the first visit to India by a Chinese president in eight years.  Many hoped it would reboot what was once heralded as the “Asian Century.”  Implicit in that hope was the belief that good relations between the two countries would have to develop to realize the potential of such a century.  On that score, Xi assured his host, Indian Prime Minister Narendra Modi, that China believed its neighbors would be vital to its wellbeing, after all “a warlike state, however big it may be, will eventually perish.”

That assurance was needed, because during Xi’s visit to India, Chinese troops twice crossed into territory that India claims as its own.  One incident began near Chumar about a week before Xi’s arrival.  Chinese forces brought heavy construction equipment and workers into the area with the intention to build a new road there.  Indian troops confronted them and a standoff ensued.  Meanwhile, another incident developed at nearby Demchok, where over a hundred Chinese nomads gathered to protest India’s construction of an irrigation canal that they believed was on Chinese soil.  Thirty Chinese soldiers accompanied the protesters.  Local Indian authorities dispatched 70 border policemen to the scene.  That created a second standoff.  Both then escalated during Xi’s visit.  At their height, about 800 Chinese troops and 1,500 Indian troops were deployed to the areas.  No doubt, the incidents gave Modi something to talk about with Xi during their time together.

China India Asian Century - Border Dispute over Chumar and Demchok

In public, however, Modi and Xi tried to downplay the border incidents.  For Modi, the visit was a chance to attract Chinese investment into Indian infrastructure and manufacturing projects.  For China, it was an opportunity to pry India away from the overtures of Japan and the United States.  A number of agreements were signed.  The two sides agreed to jointly study improving India’s railway system, ease the trade imbalance between them, and cooperate on developing a new economic corridor through South Asia.  China pledged that it would invest $20 billion into India over the next five years, of which $6.8 billion would go into building two new industrial parks in Gujarat and Maharashtra.  In a speech at the end of his visit, Xi contended that “only when the China-India relationship develops, will a real ‘Asian Century’ emerge.”

Nevertheless, many issues still split the two countries.  Their disputed border is only one of them, albeit a particularly thorny one.  In the first nine months of 2014, India recorded 344 Chinese border incursions.  Seventeen rounds of negotiations between the two governments since the 1990s have done little to settle the issue.  But even without the border dispute, there were still other instances of friction between the two countries in just the last week that would have taken some of the shine off of Xi’s visit.

On September 15, India agreed to extend to Vietnam a $100 million export credit for defense equipment that Hanoi has been busily acquiring to counter China.  As if that was not enough, India’s state-owned national energy company, OGNC, signed an agreement with its Vietnamese counterpart, PetroVietnam, to expand their cooperation in oil and gas exploration in the South China Sea, most of which China claims as its maritime territory.  That prompted China’s foreign ministry to warn India against entering into any deals that infringe on China’s territorial claims in those waters.

Similarly, India remains suspicious of Chinese intentions regarding its neighbors in South Asia.  Over the last decade, China has financed and built a string of major port and airport infrastructure projects in places like Gwadar in Pakistan, Hambantota in Sri Lanka, and Kyaukpyu in Myanmar.  Now, China has announced its “Maritime Silk Road” initiative in the region, which echoes its “New Silk Road” effort in Central Asia.  Indeed, prior to arriving in India, Xi was pushing the new initiative in Sri Lanka and the Maldives.  India has naturally grown concerned that China might challenge it as the dominant power in the region.  Last week, the Maldives only fanned those concerns when it gave a highly lucrative contract to manage its international airport to a Chinese company, after taking it away from an Indian one in 2010.

During Xi’s visit, Modi suggested that their two countries should put the past behind them.  Unfortunately, the present looks little better than the past.  The twenty-first century may well be remembered as an Asian one.  But one should not assume that an “Asian Century” will necessarily lead to prosperity and renewal, as Xi implied.  Europe dominated the eighteenth and nineteenth centuries.  Both were known as much for the conflicts and rivalries among European powers as for their economic development.

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