2017 third-quarter forecast

Jun 26, 2017 | 13:48 GMT

8 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 likely will manage to implement only part of the critical Goods and Services Tax in the third quarter because of disagreements between the federal and state governments as well as onboarding challenges for businesses across the country.
  • Social and economic disruptions caused by Prime Minister Narendra Modi's nationwide ban on cattle sales will give the opposition a pretext to keep the government from passing labor reform legislation during the Parliament's monsoon session.
  • Modi will continue pursuing a diverse foreign policy this quarter, visiting Israel, hosting Japanese Prime Minister Shinzo Abe and dispatching forces to participate in the Malabar naval exercises.
  • Fighting in Afghanistan will intensify as the United States sends more troops to bolster the Afghan National Security Forces in their war against the Taliban.
  • Pakistan will try to subvert Zakir Musa's Hizbul Mujahideen breakaway faction to prevent an anti-Pakistani transnational jihadist movement from taking root in the disputed territory of Kashmir.
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Realizing India's Tax Reforms

After three years in office, Indian Prime Minister Narendra Modi has centralized power enough to give his Bharatiya Janata Party (BJP) the leeway to pursue long-awaited reforms. Modi's administration achieved a victory on that front in the first quarter, when Parliament passed the Goods and Services Tax bill. But the task of introducing the changes prescribed in the law still lies ahead of the prime minister and ruling party. While India will likely manage to implement, at least in part, the sweeping tax reform by the government's July 1 deadline, lingering disagreements between state leaders and their national counterparts in New Delhi over tax classification will frustrate progress. In fact, the states of West Bengal and Tamil Nadu, two of the strongest objectors to the tax scheme, resisted adopting local versions of the legislation until recently. Their success putting the laws into practice will serve as a test case for the overall efficacy of the measures in India. In addition, complications bringing the businesses in India's vast informal economy into compliance with the laws, as well as obstacles to getting the plan's information technology infrastructure system up and running, will hold up the implementation process.

In part because of the fitful progress of the tax reform, India's business climate is unlikely to improve in the third quarter as the central government hoped it would. India's $2 trillion economy will keep struggling to attract foreign investment into its manufacturing sector, the focus of Modi's "Make in India" initiative. Of course, in a democracy of nearly 1.3 billion people, change is a gradual process, and the tax reform package, even if only partially implemented, marks a landmark achievement for India. The measures' implementation marks the first of many steps toward unifying the country's fragmented economy, boosting interstate trade, streamlining supply chains and increasing gross domestic product growth.

Hindu Nationalism: The Path to Power

But the fight over tax reform isn't the only political battle the Modi administration will face this quarter. Backlash will continue over the next few months over the government's latest Hindu nationalist measure, a nationwide ban on the sale of cattle for slaughter. Along the way, protests and strikes will erupt among meat industry workers across the country, including in Uttar Pradesh, India's most populous — and, by extension, most politically significant — state. The measure serves two immediate purposes, at once showing Modi's core support base that the ruling party is advancing the tenets of Hindu nationalism through its policies and distracting from persistently low rates of job growth. And in the longer term, the administration hopes that playing to the Hindu nationalist vote will help the BJP win future state elections and realize its goal of winning a majority in the legislature's upper house. Achieving a majority in both chambers of Parliament would ease the way for further reforms.

For now, however, the cattle ban could impede the Modi administration's progress. The controversial law will likely prompt the opposition to undermine the BJP's agenda during Parliament's monsoon session in July. As a result, Modi could run into problems over proposed legislation aimed at creating jobs, including a labor reform bill the BJP is considering. Still, the government, focused as it is on tax reform, is saving its political capital for addressing the disruptions that will inevitably arise from the tax reform laws.

India Looks Beyond the Neighborhood

Modi's foreign policy priorities in the third quarter are no less ambitious than his domestic political goals. The prime minister has a busy few months ahead of him, but three diplomatic engagements in particular reflect New Delhi's quest to assume a more prominent role on the international stage. In July, Modi will become the first Indian prime minister to visit Israel, thereby broadening his country's ties in the Middle East beyond the Gulf Cooperation Council's member states. Defense will be a key focus of this inaugural visit, and Modi will likely sign deals to manufacture arms for Israel, currently India's third-largest defense supplier, in support of the "Make in India" campaign.

The same month, India will showcase its burgeoning military ties with Japan when the two countries join the United States for the annual Malabar naval exercises in the Bay of Bengal. India's government is increasingly wary of China's plans under the Belt and Road Initiative to build up ports throughout South Asia, including in Sri Lanka, Pakistan and Bangladesh, and expand its navy's reach. The Malabar exercises will help New Delhi extend its military influence in the Indian Ocean to counter Beijing. India has also been deepening its economic cooperation with Japan for similar reasons. When Japanese Prime Minister Shinzo Abe visits New Delhi in September, he and Modi will likely sign agreements over the "Freedom Corridor," a joint initiative widely considered India's answer to the Belt and Road. The project aims to take advantage of India's large diaspora in Africa to help the country increase its sway there.

India, Pakistan and Kashmir: 70 Years of Independence

Closer to home, India will ring in 70 years of independence from Great Britain in the third quarter on Aug. 15, a day after Pakistan commemorates the 70th anniversary of its own independence. Despite the common milestone, the South Asian countries' bitter rivalry endures, and its most visible manifestation — the dispute in Kashmir — will figure prominently in the third quarter. Pakistan will try to subvert the breakaway faction of Hizbul Mujahideen that formed under Zakir Musa's guidance to stop transnational jihadism from suffusing the Kashmir conflict. Were Musa's faction to gain enough ground, it could change the decadeslong insurgency in the country's northeast by empowering anti-Pakistani jihadists in the area. Islamabad is trying to avoid an escalation in the contested region this summer to focus on operations against militant groups in the Federally Administered Tribal Areas (FATA) and Balochistan along the western border with Afghanistan. 

Even so, the Pakistani government probably won't make much progress in the third quarter toward merging the FATA with nearby Khyber-Pakhtunkhwa province. Prime Minister Nawaz Sharif is reluctant to push the initiative — intended to pacify the tribal areas, the epicenter of militant activity in the region — for fear of alienating the Jamiat Ulema-i-Islam Fazl party, which opposes it. Sharif needs support from the group, an important ally of his Pakistan Muslim League-Nawaz party, as he begins laying the groundwork for his re-election campaign next year. As part of this process, the prime minister will also prioritize energy projects in Punjab and Sindh, Pakistan's most electorally consequential provinces, under the China-Pakistan Economic Corridor (CPEC). Seeing the projects through will enable Sharif to make good on a key campaign promise to put Pakistan on the path toward resolving its acute electricity shortages and boosting growth. (At the same time, because of the emphasis on Sindh and Punjab, the western section of the CPEC project won't make much progress this quarter, ensuring that tensions will persist between the country's core and outlying provinces such as Balochistan and Khyber-Pakhtunkhwa.

More Fighting Means More Troops in Afghanistan

In Afghanistan, the warmer summer months will bring with them a surge in violence. Helmand province will experience some of the fiercest fighting as the Taliban's annual spring offensive swings into full gear in the third quarter. The intensification is one reason why U.S. President Donald Trump, who has delegated greater authority to the Pentagon in prosecuting the war, approved a proposal to send up to 4,000 troops to support the Afghan National Security Forces. (Whether Trump manages to persuade Washington's allies in the North Atlantic Treaty Organization to redouble their own troop commitments to the war in Afghanistan remains to be seen.) The deployment will arrest, if only temporarily, Washington's gradual drawdown from one of the region's two jihadist wars. Nevertheless, the modest increase betrays the United States' intentions. The NATO reinforcements are meant only to compensate for the Afghan National Security Forces' inadequacies and to help them stop Afghanistan's security from deteriorating further. Conflict management is the name of the game, not conflict resolution.

A solution to the 15-year conflict will remain out of reach this quarter, not least of all because of abiding disagreements between Afghanistan and archrival Pakistan. Pakistan has long hosted elements of the Taliban's leadership within its borders in hopes of gaining leverage in Afghanistan once the war finally ends, though the country prioritizes border security during the spring offensive to keep militants out. Kabul, meanwhile, will protest Islamabad's efforts to institutionalize the Durand Line, which the Afghan government disputes, by erecting fencing along the border between the two countries. That means occasional skirmishes between Afghan and Pakistani troops will likely continue this quarter, prompting Islamabad to periodically shut down points along its border with Afghanistan in an effort to coerce Kabul into securing its side.

But just because a resolution is nowhere in sight doesn't mean interested parties will stop trying to settle the conflicts. Russia, for example, is eager to mitigate the threat Afghan militancy poses to Central Asia. Having hosted three rounds of negotiations in December 2016, Moscow will likely return to its role as a participant in future peace talks. Similarly, India and Iran, which are discussing a prospective corridor through Afghanistan to the Chabahar port on the Iranian coast, will again join the negotiations should another round materialize. And China will keep expressing interest in mediating between Afghanistan and Pakistan as it tries to increase its presence in South Asia. Even if these talks take place, however, they won't get very far given the many obstacles that stand in the way of peace in the region

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