Pathankot, Charsadda and the Curse of the Sorcerer’s Apprentice

Image 2The complexity of South Asia’s security dynamics once more came into full view last month.  The new year was barely more than a day old when a group of Pakistan-based jihadis slipped into a major Indian air base at Pathankot and engaged in a multi-day firefight that left at least seven security personnel dead and wounded about 20 more.  The attack came less than a month after U.S. Deputy Secretary of State Antony Blinken warned of the possibility of “an unintentional conflict” between New Delhi and Islamabad sparked by a terrorist strike.

New Delhi places blame for the assault on a militant outfit called Jaish-e-Mohammad (“The Army of Mohammad”), which is also thought to have played a role in the brazen December 2001 terrorist attack on the Indian parliament – an event that in turn ignited a months-long military confrontation between India and Pakistan.

Two weeks after the Pathankot attack, another jihadi band snuck across the border from Afghanistan and massacred least 20 students and teachers at a university in Charsadda in the northwestern part of Pakistan close to the country’s tribal belt, a notoriously lawless area festooned with all kinds of extremist organizations.  Responsibility for the attack was claimed by a faction of the Pakistan Taliban that had carried out the horrific December 2014 slaughter of some 140 children at a school in nearby Peshawar that is managed by the Pakistani army.

Both attacks this month were conducted at widely-separated locations by two different jihadi networks with distinct agendas.  JeM, which benefits from links with Pakistani’s security services, is focused on wresting control of the Indian portion of Kashmir away from New Delhi. The Pakistan Taliban, on the other hand, directs its energies to attacking the institutions of the Pakistani state.

But both groups share a few similarities.  First, they find shelter in cross-border sanctuaries, effectively placing them beyond the retaliation of the aggrieved countries.  JeM has been officially banned in Pakistan since 2002 but nonetheless maintains an open presence in the country’s Punjab heartland.  Indeed, Pakistani authorities have attempted in recent years to build up the organization in an attempt to diminish the Pakistan Taliban’s ideological appeal and lure away its foot soldiers.

In contrast, the Pakistani army has mostly driven the Pakistan Taliban out of that country.  But the group has found refuge in Afghanistan, in connivance with Afghan officials seeking to pay Islamabad back for its patronage of the Afghan Taliban.  A senior Pakistan Taliban leader recently conceded to a Western journalist that “In Pakistan we can hardly operate anymore.  In Afghanistan, we have no problem going anywhere.”

A second similarity between JeM and the Pakistan Taliban is that they are manifestations of what can be called the “Sorcerer’s Apprentice” problem.

Read the full essay at Fair Observer.

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The Desi Factor in U.S.-India Relations

Indian Prime Minister Narendra Modi’s visit last month to the San Francisco area highlighted a signal immigration story: The great prominence of Indian-born entrepreneurs and executives in Silicon Valley and the key role they play in America’s technological dynamism.  But an equally important, if under-noticed, tale was also at play: How the increasing stature of Indians in U.S. society has changed the way all Americans think about India and the resulting impact on U.S. foreign policy.

Read the full essay at Foreign Policy‘s website.

This piece is cross-posted at Monsters Abroad, my blog on U.S. foreign policy.  I invite you to connect with me via Facebook and Twitter.

China and India Not So Different After All

Whether the economic tumult in China in recent weeks represents an overdue market correction or a more significant inflection point is a matter of debate.  But one clear message is just how profoundly wrong is the long-running argument that China enjoys a decisive “autocratic advantage” while India is excessively burdened by a “democratic disadvantage.”

The most basic lesson of the Chinese and Indian cases does not turn on the differences between political systems.  Rather, it is about the common difficulty of enacting systemic reforms in large, complex countries outside the crucible of intense crisis.

Indeed, the danger now in Delhi is that the current growth pickup will permit official hubris to crowd out good policy intentions.  One detects more than a whiff of overconfidence when Jayant Sinha, the minister of state for finance, declares that “It is India’s moment” or boasts about India being on the verge of leaving “China behind as far as growth and development matter.”  These statements are not only at odds with the more somber sentiments of the Indian business community, but are all too redolent of the easy talk about the coming “Indian Century” that the Singh era specialized in.

Read the full essay at Asia Sentinel’s website.

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Pakistan’s Evolving Nuclear Weapon Posture: Impact on Deterrence Stability

This essay provides an overview of the ongoing quantitative and qualitative changes in Pakistan’s nuclear arsenal and their impact on deterrence stability vis-à-vis India. Prominent among these trends is a major expansion in fissile material production that enables the manufacture of lighter and more compact warheads optimized for battlefield missions; the development of cruise missiles and shorter-range ballistic missiles possessing dual-use capabilities; and a greater emphasis in doctrinal pronouncements on the need for strike options geared to all levels of conflict. Although these trends pose problematic ramifications for the risks of unauthorized and inadvertent escalation, deterrence stability in South Asia is not as precarious as many observers fear. The challenges of fashioning a robust nuclear peace between India and Pakistan cannot be lightly dismissed, however, and policy makers would do well to undertake some reinforcing measures.

Read the full essay in a special issue on “Nuclear Stability in South Asia” published this week in The Nonproliferation Review.

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Foreign Companies Catch Sight of “The Tomorrow Ahead” in India

Make in IndiaThis analysis is cross-posted on the website of Geoskope, a business intelligence firm focused on key emerging markets, at which I serve as chief knowledge officer.

The previous issue of Datapoints explored just how difficult the politics of economic reform are in India.  This point underscores one of Geoskope’s core messages about the country: The business climate is challenging to say the least.  It’s no surprise, for example, that a just-released survey by the World Economic Forum ranks India as one of the worst places in the world for small business owners.

Ditto for the judgment expressed last month by Gurcharan Das, a former CEO of Procter & Gamble India, that “India remains a hostile place to do business.”  Or that the World Bank’s country director for India stated just today that “the stark reality is that India remains a difficult place to do business.”

But it’s also worth noting that a number of high-profile foreign businesses in recent weeks have expressed confidence about India’s long-term opportunities.  Their example highlights another of Geoskope’s basic messages: Companies in search of future sources of growth cannot afford to overlook India.  As the global CEO of Roche, the giant Swiss pharmaceutical company, put it a few days ago: “We always keep India on our radar.  The country is so big that you cannot ignore it.”


Leading the parade is Amazon, which is determined not to repeat its experience in China, where the online retailer failed to move fast enough and has now been crowded out by home-grown companies like Alibaba.  India, which has a booming e-commerce sector, is Amazon’s second biggest investment country after its U.S. home market, and Diego Piacentini, the company’s global consumer business chief, calls India key to its future success.  He states:

We need to look at the long term. The kind of massive infrastructure and partnerships we are building in this country is huge. The US and Europe after some point will have a different growth trajectory.

Jeffrey Immelt’s, GE’s chairman & CEO, seconds the thought, stating that “India is a growth engine for Asia, and we see huge potential for the country in the manufacturing space.”  GE has doubled its investment in the country over the past five years and is looking to do even more.

Virginia Rometty, IBM’s CEO, declares that “the 21st century will be the Indian century and will have technology at its heart.  I’m very optimistic about the tomorrow ahead and this is a fact-based optimism.”

CNBC quotes emerging markets guru Mark Mobius as saying “GDP will go higher in coming months; India will probably achieve what China did 5-8 years ago.”

And the head of the Indian unit of LG, the South Korean electronics giant, believes “there is huge potential that India can take business away from China and export products to other countries.”


Confidence in the long-term future is reflected in surging levels of foreign direct investment.  Nomura, the Japanese brokerage, estimates that India will receive nearly $35 billion in FDI flows in the current fiscal year (April 2015- March 2016), a more than 60-percent jump from the previous year.  Much of the FDI funds have gone into the ecommerce and manufacturing sectors.

According to the global consulting firm Bain & Company, private equity investors channeled $9.5 billion into the ecommerce sector in the first half of this year.  Bain’s India chief states the inflow is “primarily because investors believe that India will get back on the growth cycle again and it represents an attractive destination compared to other large emerging markets.”

Amazon is reportedly pouring in an additional $5 billion to broaden its presence in India, after pledging an initial $2 billion just a year ago.  And the company last week announced that it has opened seven new fulfillment centers to help the sellers on its online platform in India stock products that are shipped to customers through the company.  With the addition of these new facilities, Amazon now operates 20 such centers spread across 10 states in India.

Baidu, the web services company that dominates the internet in China, is also making a concerted effort to raise its profile in India.  The company, which is often called the “Google of China,” says the number of its users in India is one of the highest outside of its home market.  One of its executives notes that “India is important to us, given its 1.25 billion people, 19-percent internet penetration, and government policies that are favorable to promoting internet penetration.”

The Business Standard newspaper reports that the ecommerce boom has just put four young-ish entrepreneurs into India’s billionaire club.  And a leading business association last month released a study projecting that the start-up sector, including online ventures, will likely produce at least a dozen billionaires and score of millionaires by 2020.


The tech manufacturing sector is also receiving lots of foreign attention, with many companies taking advantage of the investment incentives offered by the “Make in India” initiative that New Delhi has set up with the aim of making India a global manufacturing hub.

Leading the way on this front is Foxconn.  The Taiwanese company, which is the world’s largest electronics manufacturing service provider, made its name assembling Apple gear in China.  It now has big plans for India, where it says it intends to set up 10-12 plants and employ a million workers by 2020.

Terry Gou, the company’s founder, stated in a recent interview that “India is so big.  Maybe in 10 years, we can have a factory in every” of the country’s 29 states.  He added that “We are not in India only for assembling, but we want to be in the whole supply chain, key components and technology transfer.”  Foxconn envisions the country as an export platform to Southeast Asia, the Middle East and Africa.

The company is one of the most aggressive foreign investors in India, pumping billions into the ecommerce and solar power sectors (see here and here).  Last month it announced a $5 billion investment to set up a semiconductor manufacturing facility in western India that would employ some 50,000 workers.

Xiaomi, the giant Chinese phone maker that is sometimes called the “Apple of China, signaled last month that it would launch, in partnership with Foxconn, a new smartphone plant to in southern India.  India is the world’s fastest-growing smartphone market and has rapidly become Xiaomi’s largest market outside of China.  Xiaomi’s India head, a former Google executive, says that India “will someday be as big as China.  We are coming into India with full force.”

Lenovo, a prominent Chinese tech company, announced plans to establish an assembly facility in eastern India that will produce up to six million smartphones a year and employ 1,500 workers.

Even Phicomm, a minor Chinese smartphone maker, is getting into the act, with plans to invest $1 billion over the next few years.  A senior executive explains that outside of China, “India is our second largest potential market and that’s the whole reason why we have decided to come with a full-fledged plan.”

And Sony, after a decade of relying on imports, has begun local manufacturing of Bravia televisions.  The company ended local manufacturing in 2004 when it concluded that the existing size of the Indian marketplace did not justify a production facility.


Big things are happening in the auto manufacturing sector, too.  With its growing consumer class, India is expected to become the world’s third-largest car market by 2020.  Companies are also increasingly attracted to the country’s low-cost but skilled manufacturing workforce.

General Motors has signaled its plans to invest $1 billion over the next few years to turn India into a global export hub.  The company’s international operations chief says, “With this investment we plan to tap India’s potential as a market and as a low-cost manufacturing base for the future.”

U.S. auto company Ford is making India an export platform and plans to export over 200,000 cars by 2020 to countries in Europe, the Middle East, Africa and elsewhere in Asia.

The Swedish company Volvo announced plans to begin exporting buses to Europe by the end of 2015.

The Economic Times, an Indian business newspaper, reports that Mexico, which is itself an emerging global hub for auto manufacturing, has become the largest export market for the Indian auto industry.  Volkswagen, Europe’s largest carmakers, ships some 55,000 vehicles a year from India to Mexico, while General Motors sends some 45,000 units.

According to the Society of Indian Automobile Manufacturers, auto exports have doubled from 1.8 million units in 2009-10 to 3.57 million in 2014-15.

European car makers Mercedes Benz, BMW and Audi also have sharply ramped their sourcing of Indian-made component parts.  Per the Automotive Component Manufacturers’ Association of India, component exports have grown from $4.2 billion in 2009-10 to $11.2 billion in 2014-15.


In related manufacturing news, Boeing announced earlier this month plans to markedly increase its sourcing of India-made products.

And Siemens, the German industrial conglomerate, unveiled plans to invest an additional one billion euros in India over the next few years and add some 4,000 jobs to its existing Indian workforce of 16,000.

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Hamid Gul and Pakistan’s Schizophrenia

The recent passing of Hamid Gul, the Pakistani general who served as head of the powerful Inter-Services Intelligence (ISI) agency in the late 1980s, elicited a good deal of media commentary about the instrumental role he played on several fronts: the collapse of the Soviet Union; the jihadization of Afghanistan and Pakistan; and the destabilization of the Punjab and Kashmir regions in India.

But Gul also exemplified the oscillations within the Pakistani military establishment between anti-India paranoia and the desire to stabilize relations with Delhi.

The example of Hamid Gul and his successors illustrates what is a basic frustration for Indian leaders: Any rapprochement with Pakistan can only come about via a military establishment that swings between paranoia and pragmatism.  The anti-India fixation receives much focus these days.  But officials in New Delhi would also do well not to lose sight of the desire to find equilibrium in relations.

Read the rest of the essay on Fair Observer‘s website.

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Is India really the “New China”?

In vivid contrast to just a few years ago, when Jim O’Neill, who came up with the BRICs concept, wanted to drop the country from the acronym in favor of Indonesia, India has now emerged as the undisputed queen of the emerging markets.  Along with this development comes a new mantra: “India is the New China.”

But how true is this assertion?  Like everything else related to India, the answer is complicated and equivocal.

Given the stark economic problems in other major emerging markets, India is looking good in comparison.  It has now displaced China to assume the mantle of the world’s fastest-growing major economy.  The stock market is outperforming those in the other BRICS nations.  India also received $7.1 billion in private equity funding for the first half of this year, 38 percent more than the same period in 2014.  In volume terms, the number of deals jumped 62 percent vis-à-vis the corresponding period last year.

The CLSA brokerage and investment banking agency encouragingly reports that:

Our recent meetings with investors in Singapore and Hong Kong reveal that India continues to be a ‘favored’ market among regional investors.  While some investors have reduced India weight, most investors believe in sharp 2HFY16 earnings recovery and focus on the long-term structural positives, retaining their overweight.

And a number of foreign companies have recently shown their faith in India’s prospects by announcing major expansion plans. I’ll have more to say about these in the next issue of Datapoints, but the logic driving all of them was pretty much summed up by a Mumbai-based entrepreneur and investor quoted in the Financial Times: “India is the last billion-person market left.”


But because the politics of economic reform are much more challenging in New Delhi than in Beijing, India will never be able to replicate China’s meteoric economic rise over the last 30 years.  The past few weeks have offered ample illustration of this statement.

There is no denying that last summer’s hopes that Narendra Modi’s landslide election as prime minister would jump-start a quick economic renaissance have now faded.  The hype overlooked two key points: 1.) The country does not do rapid transformational change; and 2.) the “I” in India stands for “incremental.” 

Mr. Modi can claim that he brought about major changes in the northwestern state of Gujarat where he wielded unchallenged political authority during his long tenure as its chief minister.  The experience earned him accolades from the global business community and engendered a good deal of hubris on his part, such as when he confidently declared following his May 2014 election triumph that “ten years is all that is needed” to modernize the country.

But the dynamics of economic reform play out very differently on the national stage, given the growing fragmentation of the Indian political system.  And Modi has now run headlong into a truth that Montek Singh Alhuwalia, the distinguished economist and policy official, advanced many years ago:   The norm in India is “a halting process of change in which political parties which opposed particular reforms when in opposition actually pushed them forward when in office. The process can be aptly described as creating a strong consensus for weak reforms!”

This is an insight into the reform process that every entrepreneur and investor, not to mention prime minister and Cabinet official, should never cease bearing in mind.  Indeed, the just-concluded summer session of the Indian parliament demonstrated it in spades, as the Congress Party, the main opposition party, stalled progress on two key items on Modi’s economic reform agenda.

The first item is replacing the fragmented system of indirect taxes the central government and the states currently levy at different stages of the supply chain with a nationwide goods and services tax (GST), India’s version of the value-added tax.  The measure would help create a more unified market in India, increase productivity and enable higher GDP growth. UBS bank recently estimated that “The introduction of the GST is a key reform measure that could have immense macro implications for India’s growth potential.”

But consideration of the measure was shut down in the parliament’s upper chamber, which is controlled by the Congress Party and its political allies, even though the party supported the measure when it controlled the central government just a short time ago.  As ironically, Mr. Modi and his political party, the Bharatiya Janata Party (BJP), opposed the legislation when it was then out of power but now lines up foursquare behind it.

The BJP now decries the disruptive tactics employed by Congress though they are the same ones the BJP used when it was in the political wilderness.  Indeed, the feisty Sushma Swaraj, who is currently Mr. Modi’s foreign minister, was a major thorn in the side of the Congress Party when she led the BJP caucus in parliament’s lower house.

Another causality of the partisan bickering was Modi’s effort to simplify the lengthy and legally-convoluted process of acquiring farmland for much-need infrastructure projects and industrial projects.  The prime minister wants to amend the land acquisition act passed by the previous central government two years ago, which is widely judged to have substantially increased project development costs.

Political machinations surround this issue, too.  The BJP cynically supported the 2013 land legislation since it wanted to court India’s vast reservoir of rural voters in the run-up to last year’s parliamentary elections.  Once in office, however, Prime Minister Modi has expended much political capital on revising the legislation but so far to no avail.

I noted in a recent issue of Datapoints that Modi was close to abandoning the effort and this point appears now to have been validated.  Anxious to avoid being tagged as “anti-farmer” in the run-up to important state-level elections in Bihar, Tamil Nadu, West Bengal and Kerala, the prime minister and his BJP colleagues have punted on the issue.  Four months ago, Modi’s finance minister declared that the land reform bill would “determine a very large part of the progress India makes.”  Now he’s taken to encouraging individual state governments to move forward in lieu of action by the central government.

This is a tacit but clear acknowledgement that Modi’s momentum is dissipating.  The prime minister’s Independence Day address on August 15, delivered two days after the parliamentary session ended, said it all: Unlike last year’s speech, which brimmed with confidence and energy, his remarks last week were tepid and defensive.  Reuters quoted an unidentified member of the prime minister’s inner circle as saying that Modi was “upset about failing to further his reforms agenda and decided to ‘keep his head down’ and focus on improving performance.”

The GST reform is not dead, though if enacted in the next year or so it will likely be in a much diluted form that erodes the economic jolt it delivers.  The land reform effort, on the other hand, is in a deep coma.  At a minimum, it will take several years for the politics to line up with meaningful movement on this issue.

The past weeks underscore two key, reinforcing lessons about the politics of economic reform in India: 1.) The election season, and thus the political pandering to certain voter blocs, never ends; and 2.) There is no national consensus on the imperative of economic modernization.

In a report last month Moody’s Analytics pegged India’s true annual growth potential at near 10 percent.  It cautioned however that the “jury is still out on Prime Minister Modi, but the government’s failure to deliver on promised reforms is a major impediment to a broader economic growth momentum in the country.”  This week Moody’s warned that it might need to lower its growth forecast for India:

One main risk to our forecast is that the pace of reforms slows significantly as consensus behind the need for reform weakens once the least controversial aspects of the government’s plan have been implemented.

This analysis is cross-posted on the website of Geoskope, a business intelligence firm focused on key emerging markets, where I serve as chief knowledge officer.

I invite you to connect with me via Facebook and Twitter.