Weaponising ODI Nirupama Soundararajan is Senior Fellow & Head of Research, and Dnyanada Palkar is a Senior Research Associate, at Pahle India Foundation India’s economic ties with its immediate and extended neighbourhood are perhaps not as well planned as they could be. Economic ties in the sub-continent have suffered for a decade now. Not only is SAARC dead in the water owing to India-Pakistan hostilities, but alternative fora such as BIMSTEC and SASEC have also fallen short of fostering the desired regional economic integration goals. As the western world becomes more and more protectionist and the world continues to cope with the America-China trade wars, there is an immediate need for India to look at other markets for export. Even while India’s foreign investment inflows and overseas investment outflows have remained relatively stable, prevailing conditions throw up some as yet unexplored questions. In terms of trade and investments, who or where does India place its chips? What are the trends in India’s trade and investment over the past few years? Does India plan its outward investments at all? If yes, then does it do so based on existing bilateral and multilateral relations, or with a view to building assets for future returns? We address a few of these questions here and in the course of our analysis also examine if India could potentially use overseas direct investment (ODI) as an economic tool to further its strategic, geopolitical goals. A nation’s desirability as an investment destination is measured by its foreign direct investment (FDI) inflows. In most developing and emerging economies, this is also a measure of robust growth. However, while FDI receives the bulk of attention, its counterpart – overseas direct investment (ODI) receives little to no mention, let alone planning or attention. As far as trade and foreign policy are concerned, focusing on ODI outflows and measuring their impact on bilateral and multilateral trade is equally necessary. More so even because it can be a useful strategic tool in a nation’s foreign and trade policy arsenal. Trade has always been the driver of economic integration at the regional level and of economic co-dependence at the bilateral level. While the economic benefits of trade are apparent and capitalised on by most, the strategic benefits of trade need to be highlighted more often – specially to inform better foreign policy decisions. It is clear as day for anyone to deduce that wealth wields influence. Strong economic relations help build any nation’s influence, as is clearly seen in the case of countries like the United States and China. In India’s case, strong bilateral and multilateral economic relations will determine which countries stand by us in our times of need. There have in fact been instances of where India’s economic relations with another nation have helped either nation to get through some tight spots, both economically and strategically. Take for instance, India’s trade with Iraq and Iran. India chose to meet her oil needs through imports from Iraq during US sanctions, and these were done through innovative mechanisms such as Oil-for-Food Programme through which India was able to pay for oil through delivery of essential commodities to Iraq. In fact, India increased its crude oil imports from Iraq, leading to an increase in trade from USD 5.7 billion in 2006-07 to USD 20.52 billion in 2012-131. Medical aid was another important aspect of this trade. Iraq had always been one of India’s largest export markets before the onset of the Gulf War. It was only because of India’s historic diplomatic and economic relations with Iraq that allowed for the timely evacuation of all 80,000 Indians in Iraq prior to the 1991 Gulf War2. Strong economic relations also led to the support of Iraqi government for evacuation of Indians from the country in 2014, at the peak of the conflict with ISIS. Similarly, India’s steady trade with Iran also stood us in good stead when during US sanctions on Iran over their nuclear program, Iran agreed to accept payment for their oil in Indian rupees3. Even more importantly, India has been a strategic investor in the Chabahar Port, which ensures India’s connection to Eurasia. It is for this reason that despite the low convertibility of the Indian rupee, the Iranian administration continues to repose trust in India as both a customer and a trade partner. Now, at the time of sanctions again, Iran is using Indian rupees to buy sugar from India4. Israel’s approach to building ties with India is a noteworthy case study on building strategic ties using economic or trade tools. Even though India had voted against the creation of Israel in 1948 at the United Nations, when India needed arms during the 1971 war and requested the same, Israel responded. Israel was able to come to India’s aid again in 1999, when ammunition and missiles were required during the Kargil War. Despite pressure from the US on delaying arms deliveries to India, Israel took the decision to speed up deliveries and kept the supply going. It was post Kargil, in 2000 when high level ministerial exchanges began between India and Israel5. India has not looked back since, and the India-Israel relationship has gone from strength to strength. These economic ties that complemented diplomatic ties were what helped India at the time of US sanctions post the Pokhran Nuclear Test. At the time when the US decided to withdraw all economic aid, credit and credit guarantees, and opposed any kind of economic lending to India, it was India’s economic ties that helped her. All trade in technology and strategic materials was banned, credit and loans were also stopped under the sanctions. However, trade in essential commodities such as oil, natural gas and even ammunition continued with the support of nations like Iran, Iraq and Israel. India’s prescience in ensuring trade was spread across partners and no dependence on a single partner existed, helped it take a stand and bide its time. A time that arrived within the decade and India received a waiver from the Nuclear Suppliers’ Group to pursue civil nuclear agreements with other nations6. The US rolled back sanctions of its own accord. Not only because history came calling in the form of 9/11, but also exports from several American states took a hit and their industry suffered as a result7. While it is evident that trade and economic relations have particular foreign policy and strategic significance, given examples do not particularly highlight how ODI can be used as a foreign and strategic policy tool. For this, we examine the approaches adopted by the US and China. With the establishment of the Bretton Woods system for the management of a new financial order in the post war years, the US led the charge on the creation of a capitalist, free-market, international order8. It has championed the cause of removal of trade barriers and free flow of capital across borders. In the process, it became the world’s largest foreign direct investor, as well as recipient of the largest foreign direct investments. Coincidentally, China capitalised on the FDI from the US to build scale in its manufacturing sector. Ranging from textiles to defence technology, China used FDI inflows during its transitionary development years to build capacity and consequently used ODI outflows to create resource bases in foreign nations. A US Senator, John Cornyn said in a statement last year that China had “weaponised investment” to siphon off US advanced technologies over the years, and consequently undermine their defence industrial base9. While this is still debatable, China has been creating a formidable resource base through a decidedly Chinese style of ODI. Chinese ODI spans the breadth of 90 countries and sectors ranging from services, manufacturing, resource exploration and extraction to transport, communications, finance and hospitality10. China’s initial patterns of ODI therefore served a four-fold purpose. One, promoting the export of commodities it produced, therefore ensuring an efficient trade balance. Two, securing of natural resources either for present or future use. Three, controlling the distribution of these natural resources to other countries, and four, to ensure Chinese presence in the form of businesspeople across the globe. The latter has been the main reason for the shift in recent years of Chinese ODI to developing or poor economies, especially in nations that lie on the One Belt, One Road (OBOR) initiative axis. However, the pattern of investments has also shifted to what are generally recognised as poorly governed nations, mainly Africa and Latin America, which also meant that these nations’ governments can be influenced from within, therefore hinting at a strategic rather than economic choice. While the general opinion is that China’s investment and lending patterns in these nations has been to monopolise strategic resources like copper, cobalt and oil, there is speculation on whether these investments have truly paid off. Given the poor governance environment in the nations where these investments are made, production from mines has been delayed and a decline in international oil prices along with overinflated oil reserve estimates has led to poor returns on investment. There is therefore an alternative perspective that China has stretched itself thin with both the variety and the volume of its ODI, which is another way of asking at what point strategic investment decisions make less sense than economic ones. Irrespective of the volume of ODI and the returns on it, the US and China are leading investors across the globe today, which puts them in positions of influence. Influence over national policies, decisions taken in companies (by dint of mergers and acquisitions) and over natural resource extraction. The same cannot be said of India. Not merely because India does not have the financial wherewithal to approach, let alone match US and Chinese levels of ODI, but also because India’s overall ODI as it stands today is dismal and haphazard. The development assistance that India proffers to most partner nations cannot be counted as ODI as it does not lead to value addition. Table 1 provides the trends in US, Chinese and Indian ODI according to UNCTAD data. India’s ODI volumes are scarcely a fraction of US and Chinese volumes. For India to even conceptualise competing with either country at a global level requires putting its house in order, that is concentration on its own sub-region or immediate neighbourhood. Here too, India’s own data on ODI reflects a sad state of affairs. None of India’s immediate neighbours reflect among the top ten destination countries for ODI. India strategically invested in Iran, Iraq, and Israel for good reason, but that vision seems to be missing. If indeed trade builds economic co-dependence which in turn boosts political stability, India’s strategy for ODI must be based on a long-term vision of how and where India would like to wield influence. South Asia is definitely a priority today, as is the BIMSTEC region. Not only because it is the least economically integrated region in the world, but also because India and especially its newly elected administration have oft-repeated the goal of making India a regional power. India cannot afford to be a regional power at the behest of or while depending on other world powers (US and China included). If India is to consolidate its power in the sub-continent, it must step up its game in its own neighbourhood. India’s categorisation of ODI data is limited to the top ten destination countries, the major sectors and the overall ODI outflows. While Singapore comes in at a consistent second place, Mauritius stands out as a top ODI destination, which hopefully has more significance after the renegotiation of tax treaties between the two countries. India’s unwavering focus on soft diplomacy and development assistance has put it in a quandary. This was apparent in the Maldives debacle in 2017. The island nation had requested financial investment or loans, as well as high-level diplomatic or state visits for a few years. Both requests were constantly ignored. In fact, India had in a gesture of trademark soft diplomacy gifted two Dhruv Advanced Light Helicopters (ALHs) to the Maldives sometime earlier. However, when India’s concern over the Maldives election process came to the fore, the island nation made its displeasure known by returning India’s gift11. India’s track record at managing regime change in its immediate neighbourhood has been disappointing, if not a downright failure. The lack of economic ties with the Maldives, which had been requesting the same, stood out in this case. More recently, as the US levied sanctions on Iran again, India had to resort to paying with Indian rupees. However, the situation was complicated when sanctions were adjusted to blockade all transport of oil and crude from Iran, and an American aircraft carrier was deployed to the vicinity. India has since had to stop all oil imports from Iran12. Indian exports to Iran are also set to suffer. Once rupee payments dry up in the limited exposure UCO Bank account of Iran, exports to the country will stop unless oil imports begin13. The latter seems unlikely in the short term, given US sanctions and the unmoving stance of the Trump administration. Much as India had to succumb to US pressure on Iran, it had to tread carefully with Maldives as it turned to China for the finances it required in its period of crisis. India had no say in either matter, and will continue to have no say in any matter unless it gets its own economic strategy in order. With careful planning and prioritisation of strategic goals, the newly elected administration could use ODI as an economic and strategic tool to great effect. While India cannot follow either the US or the China models, given a lack of military wherewithal for the former and financial wherewithal for the latter, nothing prevents India from coming up with her own ODI approach and strategy. India needs to reduce her focus on development assistance and soft diplomacy, and balance it out by working on building economic relationships in the neighbourhood. Countries prefer value addition and the economic fillip provided by FDI inflows, and wherever possible either through the public or private route, India must provide what ODI it can to its partner nations. Even if the effort is limited in terms of volume of investment and geography covered, it still needs to be carefully targeted to ensure maximum economic and strategic returns. India’s limited assets can still be put to good use if done so with careful consideration. If nothing else, the administration would do well to remember that ‘crippling an economy’ is apparently more acceptable, for right or wrong reasons, and perhaps even more efficient than destroying a nation. Endnotes 1. ‘India-Iraq Bilateral Relations’, Ministry of External Affairs, Government of India, 2018: pgs. 2-4. https://mea.gov.in/Portal/ForeignRelation/Bilateral_Brief_iraq.pdf 2. Ibid. 3. ‘India pays for Iran oil in rupees, Turkey route halted: sources’, Nidhi Verma, Reuters, 18th February 2013. https://www.reuters.com/article/us-india-iran-imports/indian-pays-for-iran-oil-in-rupees-turkey-route-halted-sources-idUSBRE91H0AN20130218 4. ‘Iran buys Indian sugar for first time in five years to overcome U.S. sanctions’, Rajendra Jadhav, Reuters, 26th February 2019. https://in.reuters.com/article/india-iran-sugar/exclusive-iran-buys-indian-sugar-for-first-time-in-five-years-to-overcome-u-s-sanctions-idINKCN1QF0JG 5. ‘How Israel helped India during the Kargil war’, India Today, 5th July 2017. https://www.indiatoday.in/fyi/story/israel-helped-india-during-kargil-war-modi-in-israel-diplomatic-ties-1022521-2017-07-05 6. ‘Twenty years since Pokhran nuclear tests, India has come a long way’, PTI, The Financial Express, 12th May 2018. https://www.financialexpress.com/defence/twenty-years-since-pokhran-nuclear-tests-india-has-come-a-long-way/1164255/ 7. ‘Looking Back: The 1998 Nuclear Wake Up Call for US-India Ties’, Raymond E Vickory Jr, The Diplomat, 31st May 2018. https://thediplomat.com/2018/05/looking-back-the-1998-nuclear-wake-up-call-for-us-india-ties/ 8. ‘Foreign Investment and U.S. National Security’, Jonathan Masters and James McBride, Council on Foreign Relations, 28th August 2018. https://www.cfr.org/backgrounder/foreign-investment-and-us-national-security 9. ‘China using ‘tentacles’ to erode US security, senator warns, urging passage of bill boosting scrutiny of deals’, Robert Delaney, South China Morning Post, 14th February 2018. https://www.scmp.com/news/china/policies-politics/article/2133263/china-using-tentacles-erode-us-security-senator-warns 10. Cai, Kevin G “Outward Foreign Direct Invesment: A Novel Dimension of China’s Integration into the Regional and Global Economy”. The China Quarterly, No. 160 (Dec, 1999): pg. 865. 11. ‘India to take back helicopters gifted to Maldives’, Suhasini Haidar and Dinakar Peri, The Hindu, 5th July 2018. https://www.thehindu.com/news/national/india-to-take-back-helicopters-gifted-maldives/article24342543.ece 12. ‘India has ended Iranian oil imports to comply with US sanctions: Envoy’, PTI, Business Standard, 24th May 2019. https://www.business-standard.com/article/economy-policy/india-has-ended-iranian-oil-imports-to-comply-with-us-sanctions-envoy-119052400105_1.html 13. ‘Exports to Iran may go down to zero if oil imports are not resumed: Exporters’, Amiti Sen, The Hindu Businessline, 19th May 2019. https://www.thehindubusinessline.com/economy/exports-to-iran-may-go-down-to-zero-if-oil-imports-are-not-resumed-exporters/article27178763.ece
India needs to reduce her focus on development assistance and soft diplomacy, and balance it out by working on building economic relationships in the neighbourhood


Table 1. Annual Overseas Direct Investment Outflows 2010-2017 (USD millions)

Source: World Investment Report 2018, UNCTAD