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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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.”

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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.”

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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.

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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.

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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.

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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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India-Pakistan Relations: Everything Old is New Again

Midnight’s Furies, Nisid Hajari’s new book about the violent division of the British Raj in India, has garnered much praise for its focus on how the decisions taken by Mohammad Ali Jinnah and Jawaharlal Nehru in the 1946-1948 period embittered India-Pakistan relations right from the very start.  But one of the volume’s under-noticed contributions is highlighting how bilateral security issues with plenty of modern-day resonance were also present in spades at the creation.

Read the rest of the essay on Asia Sentinel‘s website.

One of the issues I examine in the essay is the peril of catalytic war — that is, the danger of freebooting non-state groups mounting operations aimed at provoking inadvertent conflict between New Delhi and Islamabad as a way of advancing their own interests.  I argued in a post last month that a number of militant attacks illustrate this menace, and the Indian government seems to be believe that this week’s terrorist attack in Gurdaspur in the Indian state of Punjab may yet another example.

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Connecting the Dots in India’s Business Portrait

The notes and observations below about India’s business climate are cross-posted at the website of Geoskope (geoskope.org), an intelligence company focused on key emerging markets, where I serve as Chief Knowledge Officer.

The following media items caught my attention this week, since they underscore two of Geoskope’s core messages about India: 1.) The country is a exasperating place to do business but also a potentially rewarding one if you are prepared to put in the effort; and 2.) There’s no substitute for getting out and seeing what is happening on the ground in India.

The first truth was expressed in an article in the New Delhi-based Business Standard about the lessons expatriate managers have garnered from their time in India.  It quoted the president of Panasonic India as saying, “One of the things that I have learnt while working in India is the virtue of being patient and having a sense of humility.”  An executive at the Indian subsidiary of Altran, the French technology consulting company, added that though the challenges are bigger than in Europe so are the opportunities: “You always have this feeling that everything is possible.”

Toronto’s Globe and Mail carried a good overview of the export opportunities for Canadian businesses in India.  Among other things, it stressed that patience and persistence were needed in order to capitalize on them.  It quoted the CEO of a Canadian software provider as saying that success requires a long-term commitment and that “Companies have to think in terms of years, not quarters.”

Part of the reason for this, according to Export Development Canada’s chief representative in India, is that the country has a “family-oriented” culture which places high value on personal relationships.  As a result, foreign companies have to spend time in the country to show local players they’re serious, all the more so now that India has once again become an emerging market darling.  The representative emphasized that “This is a hot market and Indian companies have lots of choice.  They are not going to answer your emails.  They are going to want to meet with you three or four times through the year.”

Reinforcing this last point, the Business Standard has a good article about the continuing prominence of family-run companies in India.

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New Delhi’s municipal government reports that per capita income in India’s capital rose 13.5 percent in the April 2014 – March 2015 period and that income levels there are three times higher than the national level.  Economic data issued by Indian government agencies are a bit suspect these days.  But the figures about New Delhi jibe with new projections by Oxford Economics.  According to the consultancy, Delhi will be the fastest-growing urban economy in Asia over the next five years and that overall five Indian cities will occupy places in the top six of the rankings.  All the more reason to focus on the Indian marketplace despite its many challenges.

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The importance of regional differentiation is another core Geoskope theme when it comes to the vast and variegated Indian marketplace.  Hindustan Unilever, the country’s largest fast-moving consumer goods company, has underscored this point by adopting a new strategy aimed at “serving many Indias.”  The approach segments the domestic market into 14 consumer clusters.

On a related note, McKinsey last year issued a good report on “Understanding India’s Economic Geography.”

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Speaking of the sensitivity to on-the-ground conditions in IndiaA Financial Times article about how transplanted Western business models have not fared well in the Indian ecommerce sector quoted Shailendra Singh, India managing director for US-based venture group Sequoia, as saying:

In India, clone businesses tend not to work well. What India needs are mutants, meaning businesses with the same underlying DNA as those that have worked elsewhere but which come with extra powers and abilities, or entirely new species suited to local conditions.

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Acquiring land in an efficient manner and at a reasonable cost has long been a huge challenge for many foreign companies with India ambitions, as IKEA’s on-going experience demonstrates.  A Forbes article on the problems dogging the Swedish retailer’s big plans for the Indian market quotes an executive: “Buying land has proved to be more difficult than we initially predicted…” The company has been forced to bring on more people in order to focus on complex real estate issues.  As things stand, IKEA believes it will take another two years before it can open its first store in the country.

Reform of the land acquisition process is key to Prime Minister Narendra Modi’s grand plans to resolve India’s vast infrastructure challenges and make the country into a global manufacturing powerhouse.  But his land reform legislation has stalled in parliament and in a recent media interview he seemed to signal he was done expending political capital on the issue: “This is not a matter of life or death for me. And neither was it the agenda of my party or the government. The initiative was in response to a demand from the states, and being a federal structure it was my duty to respond.”

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Another bane to Modi’s “Make in India” manufacturing initiative is New Delhi’s infamous red tape.  For years, surveys of business people rated India as having the worst bureaucracy in Asia and the World Bank’s Ease of Doing Business index ranked India this year at 142 out of 189 countries.  (For a more amusing perspective, see here.)  Modi has taken some steps to improve things and says he wants to do more.  But then the Indian commerce minister reports that 25 government ministries have their hands in “Make in India” policymaking.  Good luck with that.

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Speaking of choking red tape….

India is in a start-up frenzy.  Innovation guru Vivek Wadhwa wrote recently that “India is about to experience an entrepreneurship boom that will make America’s dot-com boom seem lame.”  And Indrajit Gupta, founding editor of Forbes India and a good friend of Geoskope, writes about the remarkable growth of entrepreneurship among India’s young people.

But here’s the bad news: Indian tech startup are moving overseas, mainly to Singapore and the United States, due to concerns about domestic regulatory burdens.  The Hindu newspaper quotes a Facebook executive as saying that the $22 billion acquisition of WhatsApp, the instant messaging firm, in the US was easier to do than last year’s $10 million purchase of an Indian software startup.  The executive explained that “the red tape and ambiguity in Indian rules and taxes were overbearing.”

The Indian government is moving to ease these encumbrances, but according to the Wall Street Journal “Indian startups might still prefer listing in the U.S. as investors there seem to appreciate the growth prospects of online businesses and are less concerned about present profitability.”  And even with the regulatory changes, Singapore-based firms like Flipkart, which is one of India’s hottest e-commerce companies, might not find it worth their trouble to engage domestic capital markets.

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Still, the Modi government must be getting some things rightFDI inflows into India jumped 22 percent in 2014, for a total of $34 billion, even as global FDI flows fell 16 percent.  The increase meant that India placed ninth among FDI-attracting countries last year, as opposed to 15th in 2013.  The United Nations Conference on Trade and Development, which compiled the data, believes that “FDI inflows are likely to maintain an upward trend in 2015” in the country.

Bloomberg also reports that 350 private equity transactions, worth $12.69 billion, have taken place in India so far this year, as opposed to 315 deals amounting to $10.39 billion in all of 2014.

And India comes out on top of this year’s Baseline Profitability Index, which measures the relative attractiveness of 110 countries and territories when it comes to foreign investment.  The index’s compiler attributes the result to a combination of favorable growth forecasts, perceptions of decreased government corruption and better investment protections following Mr. Modi’s election as prime minister.

Finally, according to a JP Morgan survey, India is the most attractive of the BRIC markets for North American investment professionals.  A bank executive adds that “The prospects of long-term economic growth, favorable demographics, BJP’s reform agenda, numerous investment opportunities and a democratic legal system have been cited as the most attractive factors for investing in India.”
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India, Pakistan, and the Problem of the Sorcerer’s Apprentice

The National Interest website has posted my essay questioning whether the deterrent signals India is sending toward Pakistan these days are all that relevant to the gravest terrorist threats India faces from that direction.

India’s commando raid into Myanmar the other week has generated a great deal of debate about the propriety of New Delhi’s chest-beating and its utility to the specific challenge of jihadi attacks emanating from Pakistani soil.  Some criticize the Modi government for seeking domestic political gain while embarrassing the regime in Myanmar which clearly wants to keep its anti-militancy cooperation under wraps.  Others question the wisdom of highlighting operational details about an instrument of state power that should properly remain in the shadows.  And still others doubt whether a similar special-forces mission can even be undertaken against Pakistan-based targets.

Unexamined in the discussion, however, is the critical question of whether the deterrence signals India is transmitting are even applicable to the threats emanating from Pakistan.  The bombastic attitude in New Delhi these days fails to differentiate between jihadi groups over which Pakistan has some control and uses to its own strategic purposes as opposed to the large number of outfits that operate in defiance of the Pakistani state and see triggering unintended conflict between New Delhi and Islamabad as a way to advance their own interests.

Last fall Reuters quoted an Indian security official as acknowledging that “It has been clear for some time that there is no [jihadi] group that is fully within [Pakistan’s] control. They are all itching for independent action, some want to have a go at us immediately.”  Yet so far, Mr. Modi’s government shows no evidence of even recognizing the resulting deterrence conundrum.   But the failure to do so could well lead to military conflict neither country intends.

Indeed, the challenge of preventing mass-casualty attacks by Pakistan-based jihadi groups may not even be one well addressed by threats of punitive retaliation – either in the military realm or by suborning terrorism inside Pakistan as the Modi government has suggested (see here and here).  Rather, the priority might better be placed on bolstering India’s domestic counterterrorism apparatus, whose woeful state was laid bare by the November 2008 Mumbai attacks (see here, here, here and here) and whose repair remains unfinished (see here, here and here) more than six years later.

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India and the Limits of Effective Deterrence vis-à-vis Pakistan

By emphasized the resort to covert action in response to another major attack on Indian soil from Pakistan-based militants, did India’s defense minister implicitly acknowledge the sharp limits of conventional deterrence vis-à-vis Pakistan?

Read the rest of the essay via The Diplomat.

See here for an earlier post on the problems of Modi’s hard line toward Pakistan.

[UPDATE, June 9: The Indian army today carried out an airborne commando assault on two militant camps in neighboring Myanmar.  The operation, which reportedly inflicted “significant causalities,” was in response to a militant attack a few days ago that killed nearly 20 Indian troops in Manipur, a state in northeastern India that is afflicted by insurgents sheltering in Myanmar.  The Indian action was also motivated by “specific intelligence” pointing to more imminent militant attacks.

Some analysts argue that the Indian strike “is not likely to go unnoticed in the neighborhood” and will have a salutary effect on Pakistan’s behavior.  This is most probably not the case, however, since today’s operation was launched with the permission of the Myanmar military and focused on targets located a few kilometers inside that country.  In contrast, a cross-border raid aimed at Pakistan-based jihadis would be a much more difficult and risky undertaking, so much so as to give pause to Indian political leaders.]

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