Key Trends for the Quarter
India and the U.S. Draw Closer to Counter China
Recent U.S. actions that have rankled India — including not exempting it from steel and aluminum tariffs, threatening it with secondary sanctions for being a Russian arms customer, and pressuring it to reduce purchases of Iranian oil — will not derail the continued development of bilateral defense ties during the fourth quarter. The United States and India share the goal of thwarting Chinese hegemony in Asia and the Indo-Pacific, and progress on defense will take precedence in New Delhi's eyes. To safeguard the relationship, India will delay imposing retaliatory tariffs, and the two countries will probably begin implementing a security pact, the Communications Compatibility and Security Agreement (COMCASA), this quarter. Read more on the strategic concerns that bind India and the United States.
India and China Compete in South Asia and the Indian Ocean
While continuing to recalibrate its regional tactics, India will also try to keep easing tensions with China this quarter. Focused on the May 2019 elections, Indian Prime Minister Narendra Modi will avoid a politically costly confrontation such as the 2017 Doklam standoff. As Beijing works to deflect U.S. pressure, it will want to cautiously manage tensions with India and other powers on its periphery. Although India and China will explore areas of cooperation — including an infrastructure project in Afghanistan — Chinese expansion into South Asia and the Indian Ocean through the Belt and Road Initiative will push New Delhi to extend its own regional soft power efforts.
India's foreign policy will emphasize good relations with the new governments in Bhutan and Bangladesh after elections in those countries during the coming quarter. However, relations with the Maldives are headed for a long-term chill if President Yameen Abdul Gayoom secures another term. His victory would indicate that India is losing the ability to shape politics in its neighborhood, highlighting a serious strategic challenge for its foreign policy.
The Pre-Election Costs of Modi's Populism
As Indian politics enters the campaign season, the Modi government will indulge in populist spending and protectionism this quarter while the Reserve Bank of India is entering a tightening cycle. This spending will increase the government's borrowing costs, widen the fiscal deficit and slow the country's fiscal consolidation drive. And the focus on elections also means politically sensitive land and labor reforms will be off the agenda during the winter session of Parliament. The economy will continue to recover as the effects of demonetization and the Goods and Services Tax fade, but the lack of reform and a high proportion of nonperforming assets on corporate and banking balance sheets will hold back further labor-intensive growth and private investment. See our assessment of what the decrease in the rupee's value will mean for the Indian economy.
Pakistan and the U.S. Will Clash Over Afghanistan
Newly elected Prime Minister Imran Khan's hands-off approach to the military means Pakistan's foreign and defense policies on Afghanistan, India and the United States will remain under the army's control. Relations with the United States will remain troubled this quarter as Washington tries to coax Islamabad's new government into abandoning its support for militant proxies in Afghanistan. As the United States moves closer to India, Pakistan will continue exploring a deeper security partnership with Russia. Meanwhile, Pakistan's balance of payments will stabilize this quarter as Khan procures a $10 billion loan from the International Monetary Fund or China. However, borrowing from either carries risks. See what other challenges Khan will face as he continues to settle into his leadership role.
The Taliban and Three Great Powers in Afghanistan
The Taliban's desire to position themselves as serious political actors means the movement will seek to further elevate its diplomatic profile this quarter. Taliban representatives had already agreed to join Russian-sponsored talks on the Afghan war, tentatively set in Moscow. Those talks, when they occur, will also draw delegates from the Kabul government, marking the first time that both parties would be present at a multinational summit on the almost 17-year-old war. That breakthrough would allow Russia to claim a diplomatic victory and strengthen its leverage in the NATO-backed conflict while its relations with Washington remain tense. Meanwhile, Beijing's concerns about Uighur militants using Afghanistan as a base will compel it to play a greater role there, and progress on a Chinese-funded base in Badakhshan province will be a key development to watch this quarter. As for the United States, it will probably consider adjusting its strategy if President Donald Trump's frustration prompts a policy review of the conflict.
- The Cold War once drove Russia and Pakistan apart, but security concerns about Afghanistan are now pulling them closer.
- China is on the rise, and both India and the United States see it as a threat, which is driving the two countries into a closer defense partnership. See our assessment of their foundational defense pact, the Communications Compatibility and Security Agreement.
- The conflict in Afghanistan is fracturing Pakistan's relationship with the United States, a Cold War ally.
Key Dates to Watch
- Sept. 18: India's deadline to impose retaliatory tariffs on the United States.
- Sept. 23: Presidential elections in the Maldives.
- Oct. 7: 17th anniversary of war in Afghanistan.
- Oct. 16: Bhutanese parliamentary elections.
- Oct. 20: Afghanistan parliamentary elections.
- Nov. 4: U.S. deadline for India to reduce Iranian oil imports.
- December: State elections in the Indian states of Rajasthan, Madhya Pradesh, Mizoram and Chhattisgarh.
- Dec. 27: Likely date for parliamentary elections in Bangladesh.