2019 second-quarter forecast

Mar 10, 2019 | 21:49 GMT

6 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.

Key Trends for the Quarter

U.S.-Taliban Negotiations Focus on Conflict Resolution

The United States and the Taliban will spend the quarter negotiating an agreement to end the 17-year war in Afghanistan. Unlike previous failed attempts, however, the talks are unlikely to collapse this time, mainly on account of Washington's stated desire to exit the conflict. Still, in the quarter ahead, the insurgent group won't be able to force the U.S.-led coalition into a complete withdrawal — a major Taliban objective that has long eluded the movement and prevented any meaningful dialogue with the government in Kabul. Even so, countries in the region will prepare for the reality of a total U.S. departure. 

This map shows district-by-district control in Afghanistan

For once, Washington and the Taliban have a shared interest: the exit of Western forces from Afghanistan. This helps explain why both parties are interested in strengthening their dialogue this quarter.

Pakistan is bracing for an influx of refugees across its border with Afghanistan, while China — a country with a vested interest in regional security to safeguard its far-reaching Belt and Road Initiative — will offer to mediate between Kabul and Islamabad. Barring a short-term cease-fire agreement, fighting will continue in Afghanistan because of the practical leverage that taking and holding ground affords the negotiating parties. As Kabul prepares for presidential elections in July, the incumbent, Ashraf Ghani, will seek to create an inclusive negotiating team this quarter to hold potential talks with the Taliban. To learn more about the coming negotiations, read our latest assessment on Afghanistan.

Indian Elections Take Center Stage

Elections will define Indian politics this quarter. Facing a resurgent opposition, the government led by Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) will emphasize national security, populism and Hindu nationalism over fiscal consolidation and economic reforms to boost its chances of winning another five-year term in April. Another BJP-led government would ensure continuity of policy, but if the BJP earns only a plurality, it will empower the regional parties on whose support its coalition depends. 

If regional parties gain more seats in India's parliament in April, they will gain a bigger platform to agitate for their own interests — which may differ greatly from New Delhi's plans to exert greater central control.

In the unlikely event that a non-BJP coalition — unified solely by its disdain for Modi — takes office, India would return to an unstable era of coalition politics. In such a case, the already-challenging task of passing economic reforms to boost labor-intensive growth in the $2.6 trillion economy will become only more complicated. Until elections conclude, Modi is also unlikely to grant concessions to the United States on greater market access. Trade, therefore, will remain the most contentious aspect of the U.S.-India relationship in the second quarter. For more on the various issues surrounding the upcoming Indian election, read our latest assessment.

China's Belt and Road Hits a Bump in South Asia

China's Belt and Road Initiative will be subject to renegotiation in South Asia as heavy debt burdens prompt various governments to seek better terms. The $62 billion China-Pakistan Economic Corridor (CPEC) may be the most strategically significant branch of the Belt and Road, but as Pakistani Prime Minister Imran Khan contends with a slowing economy, his government will seek opportunities to update contracts and projects to ensure the CPEC doesn't hurt local employment prospects. In the Maldives, President Ibrahim Mohamed Solih will assess the true cost of the Belt and Road projects he inherited from the previous administration, including the construction price tag for the China-Maldives Friendship Bridge. And in Nepal, the government will draft a plan to make good on nine remaining Belt and Road projects after a lack of progress led Beijing to ask Kathmandu to trim its list of 35 projects. Renegotiations notwithstanding, no country in South Asia will withdraw from China's infrastructure initiative because the overall benefits still outweigh the costs. For a perspective on China's approach to the initiative in 2019, read our latest assessment.

Fixing Pakistan's Economy

Resolving Pakistan's macroeconomic crisis will be Khan's main domestic task this quarter. A slowing economy, compounded by Pakistan's limited foreign exchange reserves, will force Islamabad to hunt for external funding. This includes soliciting the assistance of the International Monetary Fund, though negotiations will hinge on politically unpopular austerity measures that Khan's government wishes to implement more gradually than the IMF would like. Because Pakistan's occasionally fractious civil-military balance has remained stable thanks to Khan's cordial relationship with the army, his government will not cut defense spending in spite of a widening budget deficit exacerbated by low revenue generation. High inflation will force the Pakistani central bank to maintain high interest rates, while fiscal constraints will restrict the prime minister's ability to redress the budget deficit. Instead, Khan will focus on anti-corruption issues this quarter to show potential investors that Pakistan is making progress, even if he doesn't tackle the country's economic problems head-on. To learn more about Pakistan's economic limitations, take a look at our recent assessment.

Kashmir Remains a Sticking Point

Though there is a pressing need for dialogue, India and Pakistan will not normalize their relations this quarter in the wake of the military flare-up in Kashmir in February. Reaching out to Pakistan would be politically noxious for India's Modi ahead of April's general elections — in which the BJP will focus on the threat from Pakistan and stake out a tough position on national security to reap electoral gains. Accordingly, relations between the fierce rivals will remain poor but manageable as New Delhi continues efforts to isolate Islamabad diplomatically and exchanges of fire persist across the Line of Control in disputed Kashmir. You can catch up on our latest take on Indo-Pakistani relations here.

Additional Forecasts

These Stratfor analyses provide additional insights for the Quarter

Key Dates to Watch

  • April (expected): Indian general elections.
  • April 1: Start of India's new fiscal year.
  • April: India's central bank will hold a policy meeting.
  • April: The Taliban will launch their annual spring offensive.
  • Unscheduled: Chinese President Xi Jinping will visit India.
  • Unscheduled: Pakistan will sit down with the International Monetary Fund.
  • Unscheduled: The United States and the Taliban continue talks in Doha.

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