Key Trends for the Quarter
India Grapples With Its Economy and Foreign Policy
Armed with a renewed electoral mandate, Indian Prime Minister Narendra Modi faces daunting domestic and foreign policy challenges this quarter, including a cooling economy and rising trade frictions with the United States. With quarterly GDP growth falling to a four-year low, India's government will focus on reviving consumption by stimulating demand in the country's vast rural hinterland and jump-starting private investment. To reassure concerned investors, Modi will take baby steps toward reforming India's restrictive land and labor laws, though implementing these politically sensitive measures — which are aimed at creating tens of millions of jobs — is a task that will stretch far beyond the quarter.
India's relationship with the United States presents a major foreign policy challenge for New Delhi. When it comes to dealing with Washington's trade demands — specifically, lower tariffs to grant better access to U.S. firms exporting to India — New Delhi has limited retaliatory options. It will, therefore, avoid escalating the ongoing trade dispute beyond tit-for-tat measures — such as imposing $235 million in retaliatory tariffs — against the United States, which is India's largest export market. The fate of the dispute will ultimately depend on the White House and whether it chooses to launch a Section 301 investigation into Indian tariffs that it complains are too high. For India, trade tensions with the United States heighten the importance of entering regional trade blocs such as the Regional Comprehensive Economic Partnership (RCEP), a grouping of 16 countries, including China (though disagreements over market access between New Delhi and Beijing persist).
The United States wants to ensure its allies align with its objectives, especially when it comes to managing China, Russia and Iran. India imports Iranian oil — albeit in small quantities — and Russian arms, which puts New Delhi in the crosshairs of Washington's Countering America's Adversaries Through Sanctions Act (CAATSA). While India will reduce its oil purchases from Iran (potentially to nothing) and pay in rupees as opposed to dollars, New Delhi is highly dependent on Russian military equipment. Though it will not curtail its arms purchases from Russia, India is actively seeking to procure U.S.-made equipment, which will likely be enough to avoid CAATSA sanctions in the third quarter. And though India still counts China as its main strategic rival, the two will maintain calm on their disputed frontier as each country wrestles with other issues abroad. Even so, New Delhi's strategic and economic competition with Beijing will advance across South Asia as India cultivates deeper ties with Sri Lanka, the Maldives, Bangladesh and Nepal through a mix of foreign aid, diplomacy and security cooperation — in keeping with Modi's "Neighborhood First" policy. Pakistan, of course, will remain the outlier: talks, at least publicly, are unlikely this quarter since Modi rode to power on an anti-Pakistan platform.
Washington Wants an Afghan Deal by September
Though the war in Afghanistan rages on, the Taliban will remain in negotiations with the United States because dialogue offers the surest path to clinching the insurgency's paramount objective: the withdrawal of foreign forces. For its part, Washington will remain committed to talks in the hopes it can seal a peace deal ahead of Afghanistan's presidential elections in September.
The sticking point for negotiations has always been the sequencing of demands: The Taliban insist that U.S. forces leave Afghanistan first, whereas Washington wants a Taliban cease-fire, counterterrorism pledge and dialogue with the Afghan government first.
If, however, a deal eludes both parties this quarter, it will be because of the fundamental disagreement over the sequencing of their respective demands: The Taliban will insist that the United States first announce a withdrawal of forces, whereas Washington will demand a Taliban cease-fire, counterterrorism pledge and commitment to hold talks with the Afghan government. Iran could choose to spoil any peace deal, too, if it anticipates a U.S. military strike against it. The country could ramp up its support for the Taliban, emboldening the insurgency on the western fringes of Afghanistan. Iran would, however, seek to balance such a move with its need to maintain good relations with Kabul. Beyond Iran, regional actors including Russia, China and Pakistan — the Taliban's key external sponsor — will support efforts to enable a durable resolution to the long-running conflict.
Pakistan Endures Rising Opposition to Austerity Measures
Though Pakistan's government will face a social and political backlash arising from the government's austerity measures — which are tied to the International Monetary Fund's $6 billion loan — its survival won't be at stake. Prime Minister Imran Khan recognizes the importance of maintaining military support for his political survival, so he will accommodate the army's demands, principally delegating control over foreign and defense policy with respect to India and Afghanistan. A key constraint against protests over high inflation will be the sidelining of leaders from Pakistan's two main opposition parties — the Pakistan People's Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N).
Unpopular austerity measures will create social and political fallout, but thanks to the support of the armed forces, the government will hold strong through the quarter.
But even if protests grow, the army not only has the ability to control public disorder but can silence dissent in the media as well. Khan and the army want to avoid anything that could hurt business confidence in Pakistan, especially as the country's $300 billion economy prepares for an abrupt slowdown. For Pakistan, projecting an image of stability abroad is paramount.
- Defusing India's shadow banking crisis will be a major objective of the Reserve Bank of India as New Delhi seeks to stave off a liquidity crunch.
- As a key middle power, India will seek to strike a careful balance between the United States and Iran, sustaining its involvement in the latter's Chabahar port project.
Key Dates to Watch
- June 16-21: The Financial Action Task Force (FATF) will meet in the United States.
- July 1: The fiscal year will begin in India, Pakistan and Bangladesh.
- July 5: India's government will present its federal budget.
- Sept. 28: Afghanistan will hold presidential elections.
- Unknown: Kashmir will stage state elections (unscheduled but due this year).
- Unknown: The next round(s) of U.S.-Taliban talks will be announced.