2017 fourth-quarter forecast

Sep 28, 2017 | 13:57 GMT

7 mins read

South Asia

Everything that informs geopolitics can be found in South Asia: challenging demographics, geographic diversity, and contentious, ill-defined borders. The Himalayan Mountains form the northern border of South Asia, whose two main rivers, the Indus and the Ganges, support the region’s great population centers. India is the region’s dominant country, home to the world’s fastest growing economy. But its rivalry with neighboring Pakistan, a fellow nuclear power and growing consumer market, has made South Asia one of the world’s most dangerous nuclear flashpoints. The region is also a testament to how militancy and militarism can undermine the regional integration needed to unleash higher economic growth.

Everything that informs geopolitics can be found in South Asia: challenging demographics, geographic diversity, and contentious, ill-defined borders.
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section Highlights
  • India's ruling Bharatiya Janata Party will focus on working out the kinks of tax reform implementation during the quarter, bumping land and labor reforms off this year's legislative agenda.
  • Weak credit growth and tepid private investment will contribute to the continuing economic slowdown in India and put pressure on the government to respond with stimulus measures.
  • India will keep building up infrastructure and military assets along its contested border with China to improve its response capabilities, while cautiously expanding its security cooperation with Japan and the United States to counter Beijing's assertiveness.
  • Despite pressure from the United States to change its behavior, Pakistan will stick to its current strategy in Afghanistan as 3,000 U.S. troops arrive, dimming the prospects for negotiations with the Taliban to end the war.
  • India and Pakistan alike will work to contain Zakir Musa's new al Qaeda branch in Kashmir, which threatens both countries with transnational jihadism.
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India's Internal Evolution

Over the first three quarters of this year, India's ruling Bharatiya Janata Party (BJP) focused on bringing the Goods and Services Tax into effect. The ambitious measure is part of a decadeslong effort to formalize the Indian economy and, in turn, to fight poverty, create jobs and push the country toward middle-income status. As the year enters its final stretch, New Delhi will keep pushing the initiative by working to smooth out the bumps in the tax program's implementation. The government, striving for several consecutive months of efficient tax collection, will fine-tune the IT infrastructure underpinning the new system to reduce errors. At the same time, businesses in India's vast informal economy will keep taking steps to comply with the new system, however reluctantly. Companies will have little choice but to accept the Goods and Services Tax, though they will protest the administrative burden that the complex new structure has put on them.

The GST: Moving Toward a United India

With its focus locked on the tax system, the Indian government probably will defer investing political capital in land and labor reforms during Parliament's winter session this quarter. New Delhi doubtless will try to relieve the strain on state-owned banks and corporations that has constrained credit growth, along with private and household investment, but it won't manage the task before the end of the year. As a result, India's economy will continue to slow this quarter, and job growth will remain lackluster. Prime Minister Narendra Modi will be more willing to take dramatic executive actions, like the controversial demonetization scheme and cattle slaughter ban he introduced earlier this year, to show his base that his administration is still making progress.

Apart from its economic struggles, India's government will face challenges to its policies this quarter as well. As the ruling party asserts its political dominance, and as the opposition fails to muster a unified front to counter the prime minister, the country's judiciary will assume a more prominent role as a check on the Modi administration. The Supreme Court's recent landmark decision that privacy is a fundamental right, for example, will continue to reverberate in India as cases related to the government's biometric data collection program wend their way through the court system. And in Gujarat, the results of a state election could reveal daylight between the Modi administration and the voters of his home state, whose influential textiles industry decried the Goods and Services Tax.

India Takes on China

On the foreign policy front, China will command India's attention this quarter. New Delhi will prioritize speeding construction on 73 strategic roads leading to its contested border with China in the wake of their recent standoff on the Doklam Plateau. The onset of winter, however, will impede progress on the projects, which will continue to languish after years of fitful development. The Indian government also will continue working with the United States and Japan toward the informal trilateral defense partnership Washington has proposed to counter China's activities in the Asia-Pacific region. India will support Japan by ramping up its criticism of North Korea — an action New Delhi can afford to take since it doesn't have much at stake in its relationship with Pyongyang. In addition, Modi will work to bolster India's trade ties with Southeast Asia under his administration's "Act East" policy by advancing the India-Myanmar-Thailand Trilateral Highway and the Kaladan multimodal port project with Myanmar. And as China pushes on with its Belt and Road Initiative projects in South Asia — namely the China-Pakistan Economic Corridor — New Delhi will work to undermine Beijing by affirming its support for freedom of navigation in the South China Sea.

Buildup on the Border

China's infrastructure projects could cause their share of political strife elsewhere in South Asia, too. In Sri Lanka, the government could face more public backlash as it moves forward with plans to grant Beijing access to 6,070 hectares (15,000 acres) of land for the Hambantota port project. Nepal, on the other hand, will have fewer qualms as it looks to capitalize on the $8 billion in investments China promised it this year for projects including infrastructure development ventures. Voters in the country will head to the polls in November to elect their next prime minister, marking an important benchmark on Nepal's path to democracy. Though India and China have intensified their struggle for influence in Kathmandu over the past year, the competition probably won't sway Nepal's next leader. Instead, whoever wins the upcoming election likely will continue the country's outreach to Beijing as part of a strategy to diversify Nepal's strategic partnerships beyond India.

While nearby countries grapple with China's growing clout in the region, Bangladesh will be preoccupied with a different issue. Relations between the country and neighboring Myanmar will become more difficult as the Bangladeshi government in Dhaka accommodates more than 300,000 Rohingya refugees. Myanmar's government is reluctant to take back the displaced population because of the potential political costs for the country's de facto leader, State Counselor Aung San Suu Kyi.

Afghan Security Deteriorates as Pakistan Digs Its Heels in

Afghanistan, meanwhile, is bracing for an influx of foreign troops. Following through with the strategy it proffered in the third quarter to stabilize the South Asian country, the United States will send more than 3,000 military personnel to Afghanistan this quarter. The troops will be on hand mainly to train, advise and assist Afghan security forces in their long-standing war against the Taliban, and the additional deployment could help slowly turn the tides of the conflict in Kabul's favor.

U.S. Troop Levels in Afghanistan

But a breakthrough on the battlefield would require a heavier air and ground presence as well a concerted effort from Pakistan to goad the Taliban's leadership to the negotiating table. To that end, Washington will pursue a political campaign aimed in large part at pressuring Pakistan into cracking down on the militant groups it hosts. The U.S. administration will consider more stringent punitive actions against Islamabad, including withholding more of the $1 billion annual aid package it has pledged to Pakistan, sanctioning officials in the Pakistani government and even revoking the country's non-NATO major ally status. The threat of these measures, however, will only compel Pakistan to strengthen its alliances with regional powers such as China, Russia, Turkey and Iran. What's more, U.S. efforts to encourage India to get more involved in Afghanistan could deepen Islamabad's resolve against Washington (though the Indian defense minister announced Sept. 26 that New Delhi would not send troops there).

And so, Pakistan won't make any significant changes to its foreign policy on Afghanistan, regardless of U.S. ultimatums. Nevertheless, to try to pre-empt more pressure from Washington, Pakistan will attempt a fragile rapprochement with Afghanistan.

On the domestic front, Pakistan's political parties will spend the quarter preparing for national elections in 2018. Former Prime Minister Nawaz Sharif's anti-corruption trial will continue to play a defining role in the country's politics throughout the quarter. The opposition will try to seize on Sharif's ouster and the proceedings against him to break his Pakistan Muslim League-Nawaz (PML-N) party's stranglehold on Punjab, the country's most politically consequential province. So long as Sharif maintains cohesion in the party, though, the opposition will fail in this endeavor. The current prime minister, moreover, will help ensure the PML-N's dominance by prioritizing energy projects, including a coal-fired power plant in Port Qasim and the Suki Kinari hydropower station, as part of the government's pledge to end electricity blackouts before the next elections.

Finally, after a relative lull in previous months, tensions could rise again between India and Pakistan in the fourth quarter. India's ruling party could try to whip up enmity toward Pakistan among its public to try to win the Hindu nationalist vote in Gujarat. Coupled with the risk of a cross-border attack into Indian-administered Kashmir, and the chances — however modest — that New Delhi will enhance its presence in Afghanistan, the increased animosity toward Pakistan could heighten hostility between the longtime rivals. Yet on at least one issue, New Delhi and Islamabad will remain in a rare and inadvertent alignment as they try to contain Zakir Musa's new al Qaeda branch, which threatens Pakistan and India alike with transnational jihadism

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