A brief thrill passed through India in December 2016 when, for a moment, it seemed that India’s economy had overtaken that of Britain, for the first time since the 19th century. The story of an emerging market edging past its erstwhile colonial master was so stirring that even a minister tweeted it out, revelling in his country’s impressive growth story.
Perhaps predictably, the celebrations were premature: more accurate data showed that India was off by a trifling $70 billion or so. But it was symptomatic of India’s new confidence. That confidence will persist despite the economic and diplomatic turbulence that unfolded over the second half of 2016, and will carry through into this year. India’s rise will not be impeded, but there may well be seriously bumpy moments in 2017.
India’s economic horizons are marked, above all, by Prime Minister Narendra Modi’s radical – and, critics say, disastrous – experiment with so-called “de-monetisation”. On November 8, the world’s fastest growing major economy decided to withdraw every single 500 and 1,000 rupee note, amounting to 86 per cent of all currency in circulation, in a country where 95 per cent of transactions are cash-based.
The move, aimed at wiping out corruptly acquired stockpiles of what Indians call “black money”, caused chaos. There were huge lines for scarce replacement cash, economic activity was disrupted, and GDP forecasts for this financial year have been slashed even before taking this volatility into account. But many Indians supported the move as a bold form of shock therapy, which would have the happy by-product of encouraging a cashless economy.
The political impact of India’s radical economic policy is uncertain, but 2017 will present a series of major tests.
This year, five Indian states will hold elections. The most important of these, over seven phases in February and March, is Uttar Pradesh (UP), a massive northern state with a larger population than Brazil. Modi swept the state in national elections in 2014, but he doesn’t control the state’s parliament. If Modi’s Hindu nationalist BJP can wrest it from the Samajwadi Party, a regional socialist party with a young leader and strong caste-based appeal, it would help him take control of India’s upper house, making it easier to pass further reforms.
The result will also be taken as a key indication of the public mood after de-monetisation. Modi can take succour from some of the current polls, which point to a clear majority, but 2016 has done its part to instil caution.
This electoral backdrop also lends a particular edge to foreign policy, and particularly to India’s worsening relations with Pakistan. Following the eruption of protests in Indian-controlled Kashmir in the summer, India grew increasingly angry at Pakistan’s renewed efforts to put the dispute back on the world stage. India also believed Pakistan was fuelling the protests, as it had done in the 1990s, and struck back by highlighting human rights abuses on Pakistani soil.
In this febrile atmosphere, Pakistani terrorist groups, which have long received support from Pakistan’s powerful intelligence agency, repeatedly struck Indian soldiers across the Line of Control (LoC), inflicting the worst such attack on the Indian Army in over 20 years.
India struck back with an unprecedented, publicly-announced special forces raid, and succeeded in persuading Afghanistan, Bangladesh, and Bhutan to pull out of a regional summit due to be held in Islamabad. With a new army chief taking over in Pakistan at the end of last year, and no sign of Pakistan reining in terrorist groups on its soil, the chances of a repeat attack, and another Indian raid are high.
No Indian government can afford to look weak when polls are looming, and the popular acclaim for September’s retaliatory raid shows that the public responds well to muscle flexing. Expect, also, to see heightened friction in Afghanistan, where India is deeply concerned that the Pakistan-backed Taliban is gaining ground and even connecting with Iran and Russia, both friendly to India.
Making things even more complicated, American foreign policy is up in the air, and both India and Pakistan hope to persuade President-elect Donald Trump to side with them. Pakistan can boast of a comically fulsome conversation between Prime Minister Nawaz Sharif and Trump in December. For its part, India will be quietly confident that Trump’s anti-Islamist and China-sceptic instincts will bolster New Delhi’s case. Only time, and perhaps Twitter, will tell.
However, India will not want its diplomatic containment of Pakistan to come at the expense of its wider diplomacy. India’s greatest concern is the growth of Chinese power, manifest in increasingly frequent visits by Chinese submarines to ports in Pakistan and Sri Lanka, rapidly rising Chinese arms sales to India’s neighbours, and Beijing’s ambitious – to India, threatening – One Belt One Road (OBOR) scheme for regional connectivity.
Sino-Indian relations are deeply strained following China’s double veto on Indian membership of the Nuclear Suppliers Group, and a separate Indian effort to designate a Pakistani terrorist at the United Nations. A military clash is unlikely, and India realises it will take years to build up its military forces to adequate levels. But such friction with China does give added impetus to India’s diplomatic engagement with new friends in East Asia, including Vietnam, Australia, and, above all, Japan.
To its west, India is making steady progress with the Arab states that have historically leaned towards Pakistan. It is noteworthy that India’s chief guest for the Republic Day celebrations at the end of the month will be the crown prince of the United Arab Emirate (UAE).
There is also the tantalising prospect of a prime ministerial visit to Israel, which would mark the incredible growth of a relationship that only came into the open in the early 1990s.
Modi is a divisive leader, with a deeply controversial past, presiding over a party which has a record of appeals to anti-Muslim bigotry. But some of these qualities also make him well equipped for a more nationalist era.
He has built strong relationships with fellow nationalists like Japan’s Shinzo Abe, and it is not hard to see him bonding with Donald Trump. Modi’s tenure has seen a marked strain of intolerance and amplified culture wars – most recently, arrests of those failing to stand for India’s national anthem in cinemas – but such issues are becoming decreasingly salient in international politics, and certainly unimportant to the impending administration in Washington.
Even with the self-inflicted wound of currency turmoil, and the distraction of election season, India remains a geopolitical prize, courted by Washington, Tokyo and Moscow alike.