Public Lecture by Mr Peter Varghese AO, Chancellor of The University of Queensland, to the Perth USAsia Centre, University of Western Australia, 28 April 2021

Today I wish to talk about Australia and India:  to take stock of the bilateral relationship but also to locate it within the broader currents of the Indo Pacific region.

I cannot but begin however by expressing my deep sympathies to the people of India as they deal with this deadly second covid wave.  We have been watching in horror as the number of fatalities rise and the public health system comes under intense pressure.  Our hearts go out to the victims of covid, and we should do all we can to assist.

In 2018 I submitted a report to the then Australian prime minister with a simple message.  The transformation of the Indian economy is underway. Its progress will be uneven but the direction is clear and irreversible. To realise the opportunities this opens up, we need as a country to make a strategic investment in India driven at the highest levels of the Australian Government.

How does this judgement stand, tested against the changes wrought by Covid and the geo-political shifts now unfolding in our region? 

Let me start with three headline points and then circle back

  • Firstly, what we are seeing in the Indian economy is the playing out of some deep structural drivers which give it momentum but this built in momentum alone will not deliver the growth rates that India needs to lift its standard of living and provide employment for its young demographic.  It will also need structural economic reforms.
  • Second, If India does not get the economy right it cannot play the broader geostrategic role which it and countries like Australia want it to play
  • Third, Australia’s ambitions for the bilateral relationship are rightly high and should remain so:  we see India to the first tier economic and security partner, with people to people links as close as any we have in Asia

The trajectory of the Indian economy

India needs to be understood in its own terms. It will always march to its own tune.  It is the only country with the scale to match China but it will not be the next China.  Indeed comparisons with China only get in the way of understanding the singularity of the Indian economy and the nature of the opportunities in the Indian market.

No Indian government will be able to direct the economy in the way China does.  Nor will it ever have the control over the allocation of resources which has been intrinsic to China’s economic success.  China has a discipline to its economic planning which flows from its one party political system and the competence of its state institutions.  Also, for all its diversity, China has a strong Han Chinese core which has no counterpart in the linguistic and cultural diversity of India.

Nor will India’s economic model mirror that of East Asia more broadly.  India’s economic model will be sui generis.  Its growth will be driven by consumption and services, not exports and manufacturing and it will be anchored in myriad small and medium size enterprises. 

The drivers of Indian growth are deeply structural which suggests they are also sustainable.  They include the urbanisation of the world’s largest rural population, the gradual movement of the informal economy, accounting for around 80-90 per cent of India’s workers, into the formal economy, a young demographic with a mean age of 28, considerable investment in infrastructure, the absence of which has in the past held back growth, and the beginnings of an ambitious program to upskill 400 million Indians.

These structural drivers will likely keep India on a relatively strong growth path.  In my 2018 report I took a moderate view of the rate of growth out to 2035, assuming that it will be in the order of 6-8 per cent each year over the next 20 years.  This assumes incremental rather than radical structural reforms.

Covid has probably slowed this trajectory by a few years but it has neither stopped nor reversed it.  Forecasts of a strong V shaped recovery in the first half of this year will now likely be revised downwards in the light of the second wave which will also have a significant impact on business confidence.  So while the short term outlook for the Indian economy will dip, the trend line over the next two decades will likely be reasonably close to my report’s estimate of an average 6-8 per cent growth per annum.

But while India has some strong structural drivers of growth it is also the case that structural reforms are essential if India is to move from potential to delivery.

India does not need any tuition on what form these reforms should take, and certainly not from outsiders.  The reform agenda has been part of the Indian economic debate for decades and includes reform of the banking system, access to land, labour market rigidities, deregulation, privatisation and state capacity.

How to do this in an argumentative and robust democracy such as India is a matter for India but it will require a significant investment of political capital. 

Economic reform is never easy and there will always be constituencies who will oppose it.  How much political capital to invest in economic reforms versus other issues will be a question challenging India’s political leadership for decades to come.

India has shown in the past that when it must it can deliver on economic reforms.  In the last four decades India’s per capita income has quadrupled and over 200 million people have been lifted out of absolute poverty.

The lesson of India’s economic history is that the more it opens up its economy, internally and externally, the stronger its economic performance.

This is the background against which India’s well wishers will view concepts such as self reliance.  Self reliance is a virtue but the risk is that it can slide into self sufficiency which is a failed economic policy.

Economic sovereignty has had made a comeback everywhere in the post covid era.  But covid has not changed the laws of economic gravity.  It has not obliterated comparative advantage in trade or the economic benefits from the efficient allocation of domestic resources.  We should keep this firmly in mind when we discuss concepts such as self reliance, dual circulation, decoupling and so on.

The post covid focus on security of supply chains opens up new opportunities for India.  India is high on everyone’s diversification strategy.  But if India is to act on these opportunities it will need to do all it can to increase the attractiveness of India as a place in which to invest and to do business.  Ease of doing business is one element in this and India has done much in this area in the last few years.  But even more important are inputs such as infrastructure, regulatory certainty, a sound financial system and access to skills.

More recently, The Modi government has shown a stronger interest in economic reform.  It has set out an ambitious privatisation program.  It is looking to both reduce the space occupied by government in the economy and to improve the efficiency of the civil service.  These are welcome signals which build on its introduction of the GST and bankruptcy reforms and its ramped up investment in infrastructure in its first term.

India as a geopolitical partner

We live in an age of geo-economics and some of these trends present India with large new opportunities.

China’s abandonment of hide and bide, its ambition to become the predominant power in the Indo Pacific if not beyond, its use of economic coercion and its desire to recreate the Middle Kingdom where harmony was hierarchy with China at the top:  all of this is leading other countries to balance and constrain China.  And India is seen as an important element in these strategies.

But India’s capacity to play such a role ultimately turns on its economic weight.  For India to be a balancer and a major strategic power it needs a strong economy.  Otherwise its role will be more rhetorical than real.  For India to be a geopolitical shaper it needs economic heft.

From an Australian perspective there are three geo-political factors which are drawing Australia and India closer together.

Firstly, as partners in the Indo Pacific we are each grappling with the implications of the declining margin of US strategic predominance and the sharpening ambition of China to become the predominant power in the region.

Second, both Australia and India support a rules based international order. That order is under increasing threat.  Its defenders are shrinking and its challengers growing.  Since Australia can neither buy nor bully its way in the world, a system based on rules, not power, is important.

Third, India is a partner in seeking to forge regional institutions in the Indo Pacific which are inclusive, promote further economic integration and can help at the margins to manage the tensions which inevitably flow as economic growth across the Indo Pacific region shifts strategic weight and relativities.  That is why India should be brought into APEC.

Regional institutions are currently in the background.  But notwithstanding the current tensions each of us face in our relationship with China, both Australia and India see China as an important part of inclusive regional institutions, especially the East Asia Summit (EAS).  And both countries attach a high priority to our relations with ASEAN and the individual countries of South East Asia.

So while India will always march to its own strategic tune and cherish its strategic autonomy, the scope for us to work together on the broader challenges of the Indo Pacific is growing as is India’s willingness to work in the Quad together with the US, Japan and Australia, in ways which capture the growing strategic convergence of these four democracies.

The Quad is not a grand anti-China military alliance in the making.  It is not an Asian NATO, even if it is likely to see more military cooperation among the four countries.  Indeed India is allergic to the very idea of alliances.  Rather, the Quad is a means of managing China’s ambitions in a way which puts some constraints on how far it is prepared and allowed to go.  It signals that leverage is a two way street.

Of course to exercise leverage, the Quad will have to do more than meet and issue communiques in support of the peaceful resolution of disputes, the upholding of international law and the eschewing of coercion.  It will have to be prepared to make it clear that it is willing to impose costs on China for unacceptable behaviour.  These costs might range from diplomatic through to economic all the way to collective measures to uphold principles such as freedom of navigation and the Law of the Sea.  It is this capacity to exercise leverage which will determine the success of the Quad, rather than what it does collectively in areas such as infrastructure, climate change or pandemic responses, important as those issues are.

Each member of the Quad brings a different perspective and motivation to its dealings with China.  For the US, it is a means of helping blunt China’s ambitions for predominance and reinforcing the absolute determination of the US to stay number one.  For Japan and India, both of which carry historical baggage when it comes to China, it is a shared concern that a predominant China will narrow their strategic options and room for manoeuvre.

The one member of the Quad for whom the core issue is the character of the Chinese system is Australia.  Indeed Australia is perhaps the only member of the Quad whose anxieties about China would likely disappear if China were a liberal democracy.  After all, what would be the basis of our concern in those circumstances?  Australia does not have any in principle objection to the concept of a predominant power in our region.  Quite the contrary.  We have historically seen US strategic predominance as the bedrock of our security and also as the great enabler of economic growth in Asia.

The US may speak the language of a new ideological cold war but the reality is it is driven more by its determination to hold on to strategic primacy than a battle against an authoritarian system.  The US would be just as determined to remain number one if China were a liberal democracy.  And neither India nor Japan, for reasons of history and geography, would be at ease with a democratic China as the predominant power in the Indo-Pacific.  We may be in the same Quad bed, but we each have very different dreams.

So the Quad is one means of moving from “hope for the best” engagement with China to “engage and constrain”.  It is saying to China that we want a relationship of mutual benefit but we also want China to pursue its interests in a way which respects the sovereignty of others and avoids coercion.  And if China behaves otherwise, there will be collective push back from countries which are capable of effectively doing so. 

China portrays the Quad as containment by another name but we should not give China a veto over our strategic policy.  Besides, constraining China differs from containment whose ultimate logic is a complete rejection of engagement.  Containment seeks to thwart China.  Constraining seeks to manage China.

Constraining China will take time to construct.  It is unlikely the Quad will ever reach the NATO like point where an attack on one is considered an attack on all.  Nor is the Quad likely collectively to rush to the assistance of a member which may be the target of Chinese economic coercion.  If anything some Quad members may benefit from such coercion in that the restriction of imports from one Quad member may create export opportunities for another Quad member.  In short, the Quad currently has neither the unity of approach nor the will for serious collective action.  But China’s behaviour is rapidly filling this gap.  It is also shifting perceptions beyond the Quad as more countries see with discomfort what an assertive China looks like.  This has both hastened the urgency of pursuing arrangements such as the Quad and reduced the caution about offending China.

China currently seems determined to behave in ways which are quickly losing it friends and respect.  Polling shows this is evident across the globe with negative sentiment about China rising substantially.  Yet China seems not to care.  This is either the arrogance of a nation which believes that its time has come and it can do as it pleases.  Or it reflects an essentially internal dynamic where the party sees domestic advantage in adopting a strongly nationalist position irrespective of the diplomatic costs.  I suppose all of us who have worked as professional diplomats have learnt that domestic considerations beat foreign policy most of the time.  Indeed what makes the management of relations with China so complicated is that these days on all sides it is driven by domestic compulsions.

Australia and India

Let me now turn to the bilateral Australia India relationship and the ways in which it is being reshaped by economics and geopolitics.

At the heart of our economic agenda is a structural complementarity between the Indian and Australian economies which is the key to translating ambition into opportunities.

Put simply, a growing Indian economy will need more of the things Australia is well placed to provide from education services to resources and energy; from food to health care; from tourist destinations to expertise in water and environmental management.  Indeed services are likely to be the fastest growing segment of our future economic relationship with India.

The core of the economic strategy in my report is “sectors and states”. 

Sectors

The report identified ten sectors in an evolving Indian market where Australia has competitive advantages. 

Identifying sectors is not choosing winners:  only pointing to the areas which hold promise for Australian trade and investment in a growing market where there will be large gaps between what India needs and what it can provide from domestic resources.

Education is identified as the flagship sector of the future because of a combination of Australian expertise, the scale of India’s education deficit and the way in which an education and training demand weaves its way through virtually every sector of the Indian economy.

Beyond education the report identified tourism, agribusiness and resources as the lead sectors of the future, followed by six other sectors most of them services such as health care, financial services and innovation.

States

The focus on states reflects a number of judgements.  First, India is best seen not as a single economy but as an aggregation of very different state economies, each growing at different rates, driven by different strengths, led in different ways and likely to continue to be uneven in their progress.  

Second, competitive federalism is becoming a larger part of the underlying dynamic of the Indian economy.  It is encouraged by the centre and is being enthusiastically embraced by many states, especially those six states which produce 75 per cent of India’s exports. 

Third, many of the hardest structural reforms holding back the Indian economy, such as land access and labour market regulation, are mainly within the jurisdiction of state governments. 

Fourth, as barriers to trade across state borders reduce, and the introduction in 2017 of a GST was the single biggest step in this direction, labour and capital will gravitate towards those states which offer the best conditions and prospects for business.

Investment

In virtually all of Australia’s relationships in Asia, investment lags trade by a wide margin.  India holds out the prospect of being different.

India has a relatively open foreign investment regime.  It has the rule of law even if long delays are common.  Its institutions are familiar to Australians, both derived from British models, and English is widely spoken – a very significant asset.

In short, we may have a better chance with India to secure more synergy between our trade and investment relationship than we have with any other major Asian economy. My report calls for a ten fold increase in Australian investment in India lifting India to become the third largest destination in Asia for outward Australian investment.

People to people ties

The third pillar of the contemporary bilateral relationship ­– our growing people to people links – may over time prove to be the most significant asset of all.

India is currently our largest source of skilled migrants, our second largest source of international students and, at least up until covid struck, a substantial proportion of those who come to Australia under temporary visas to fill skilled positions that Australians cannot.

In the last decade we have seen a very large increase in the size of the Indian diaspora in Australia, now over 700 000 strong and the fastest growing large diaspora in Australia.  To reach this size in a little over a decade is remarkable.

This diaspora will have a big role to play in the partnership of the future.  They can go into the nooks and crannies of a relationship where governments cannot.  They can shape perceptions in a way governments cannot.  And they create personal links, in business, the arts, education, and civil society which can help anchor the relationship.

This is a diaspora which is also likely to exert a growing influence on Australian politics, something which is already evident in state politics.  As they have in Canada, the UK and elsewhere, the Indian diaspora may prove over the next two decades to be the most politically active of any migrant group in Australian history since the Irish.  This will have implications for the priority our political leaders will place on the relationship with India.

The involvement of the Indian diaspora in Australian politics is reflective of a broader point:  the liberal democratic character of India is a key part of its attraction to Australia as a comprehensive strategic partner.  Indeed without it our partnership would be tepid.

There have been several periods in India’s history when its liberal democratic character has been tested, most notably the period of the Emergency under Indira Gandhi.  Today there are again signs that the liberal democratic character of India is under pressure.

I do not share the view that India has become an illiberal democracy.  But there are indeed signs that minorities fear for their freedoms and key institutions tasked with independence may be too accommodating of the wishes of government.  These signs should not be lightly dismissed.  But when it comes to democracy in India I tend to the view which is often ascribed to the US, namely,

there is nothing wrong with Indian democracy which cannot be fixed by what is right with Indian democracy.  True democracies are ultimately self correcting.  

Conclusion

Let me conclude by recalling the observation I made at the outset:  India must be understood in

and challenges now clearly favours opportunities.

I remain a long term optimist about India for as long as it holds to its democratic character and does not resile from the politically challenging task of further opening its economy.  That economic line was never linear and always subject to the many compromises intrinsic to a great democracy.  But it remains the key to India moving from potential to delivery.