international analysis and commentary

Why India’s “Act East” policy is no longer about frugal engineering


There is a famous (and infamous) word in India: jugaad. In Hindi, it roughly means “to make do”. While this jugaad attitude has been celebrated as the Indian spirit of “frugal engineering”, it also exemplifies the poor quality of goods made in India and the lack of focus on improving quality – often due to too much corner cutting.

This is not the sort of reputation sought by a country aiming to break into the top 100 countries in the World Bank’s Ease of Doing Business rankings (India has climbed 30 slots to hit 130 in the last 12 months). It doesn’t quite go with Prime Minister Narendra Modi’s famous “Make in India” slogan. No one, after all, would want to make in India, if India doesn’t make very well.

This is one of the critical places where the Modi government believes the Regional Comprehensive Economic Partnership of Asia and the Pacific (RCEP) will help. The RCEP is a free trade agreement between the 10 members of ASEAN (Association of South East Asian Nations) and the six other countries with which ASEAN already has trade deals (including China). The hope, in India, is that it will push better manufacturing standards. Glancing at the list of member countries one can see where this idea of quality transfer via association comes from. RCEP includes Singapore, Japan and South Korea – three of the most respected manufacturing hubs in the world, especially in terms of quality controls. China adds to this mix a scale that nobody else could.

The RCEP success is one of the cornerstones of India’s Asia policy – which has moved from “Look East” to “Act East” – because it brings together the five biggest economies of the region. With a third of global GDP at stake, this is a pivotal play.

In this, India also takes its cue from its “natural ally”, the US. It is closely observing America spearheading the Trans Pacific Partnership (TPP), a trade agreement encompassing 12 countries, 800 million people and 40% of global trade, but which does not include India. The government in Delhi has embraced for RCEP the logic that US President Barack Obama has used in relation to TPP: because more than 90% of “customers” of American companies live outside US borders, Washington cannot allow countries like China to determine the ebb, flow and rules of global trade. This is why India demanded a detailed American briefing on the TPP, after which the Commerce Minister asked rhetorically – can India afford not to be part of such an agreement?

So India wants more customers outside its borders. But without a much-awaited surge in “Make in India” that is impossible. The country also needs a balancing act vis-à-vis the TTIP (Transatlantic Trade and Investment Partnership) on goods and services between America and Europe – currently being negotiated amid significant difficulties. The freer that movement the greater the fear that it will negatively impact the demand for goods and services from countries like India. This makes RCEP even more critical for India.

Prime Minister Modi’s party has just lost a major election in a large Indian state barely 18 months after his big national victory in 2014. There is a feeling that the Prime Minister overpromised and that he has been slow in delivering – especially in terms of jobs. Modi came to power on the back of his reputation as a ruthless economic reformer, a man geared to foster growth. His relentless international trips to push India’s case have brought record levels of foreign direct investment but the economy still remains in the doldrums. Domestic investment has not picked up at the rate many had hoped. CEOs have been complaining that red tape has been cut all too slowly. At least one major land reform law and a much awaited taxation reform are stuck, and some are beginning to question if the Prime Minister still has that edge.

All this means trade policy is no longer the distant, slightly vague issue that it usually is in national politics – Modi needs effective trade policy successes to push his growth agenda off the ground.

India’s trade with the RCEP bloc of countries has increased steadily in the last 15 years. As India is not part of APEC (the 21 Pacific Rim nation group) or the TPP, it needs new networks, more markets, more deals, more efficiency in business at home and abroad. Therefore, RCEP takes special place in the Indian trade imagination. It is the one place where it can show that world that it is Acting East. Not just merely chatting up the East.

However, these are not good times to talk about regional cooperation in India. In spite of a high profile overture by Prime Minister Modi to deepen ties with Nepal, that critical bilateral relationship is in a mess over Nepal’s new constitution that its vast Indian-origin Madheshi population says discriminates against them. With blockades threatened and local violence, the relationship between Nepal (for all practical purposes a client state of India) and India is going through some of its roughest phases. This does not augur well for Modi, who counted Nepal among his foreign policy successes. With an insouciant Kathmandu starting to purchase fuel from China for the first time in its history as blockades imposed by India starved it for oil, the Modi government needs fresh progress on other fronts. Embracing new trade agreements like RCEP will give it that fillip.

It could also give India’s industry its longed-for quality and convince it to finally give up on jugaad.