India-Australia: Creating a Defining Partnership

For much of their history as independent nations, the bilateral relationship between India and Australia can at best be described as having been indifferent. For decades, the countries have operated in separate strategic spheres, with neither country perceived as central to the other’s geopolitical or economic agenda. However, this status quo has fundamentally changed over the past several years. The rapid rise and the more recent slowdown of China, the most important trading partner to both India and Australia, is shifting the economic equilibrium in the region and creating an incentive for the two countries to reassess and realign their partnerships. Further, and of strategic importance, both countries share a growing mutual security interest in the Greater Pacific region , the primary staging ground for the US Asia Pivot and China’s increasingly assertive security policy. The US policy requires India and Australia (and Japan) in particular to build closer ties for the Asia Pivot to be meaningful. India also stands to gain a lot from a partnership with Australia including securing foreign capital, skills and natural resources it needs to power its economy and an important ally in helping it act as a counterweight to China in the region. For Australia, the core opportunity is to diversify its risk away from China and partner with a country which could emerge as an equally large source of value over the next decade. Accordingly, recent years have seen engagement by representatives of both India and Australia seeking to strengthen their ties. For example, Australia has formed an important part of Prime Minister Narendra Modi’s foreign policy outreach, with Mr. Modi being the first Indian prime minister to visit Australia in nearly three decades. While this increased engagement is promising, the next phase will need to show tangible results to close the gap between intent and the very significant potential. What is needed is a much more comprehensive strategic engagement framework of the kind that both India and Australia have with the US and Japan with sustained cooperation across various levels of government and different spheres of activity, including government, business, finance and social. Such a partnership between India and Australia, with successful collaboration across economic and geopolitical issues, could redefine both countries’ strategic position in the Greater Pacific region and the world.

Context: How China’s Rise and Slowdown Created the India-Australia Partnership Opportunity

Despite the two countries’ shared history as former British colonies and members of the Commonwealth, India and Australia walked largely separate paths during the 20th Century. While Australia moved squarely into the Western orbit during the Cold War, forming close economic and military links with the United States and emerging as the largest customer of US arms exports globally, India, in contrast, led the Non-Aligned Movement during this period, but in practice was much more closely tied to the Soviet Union, both economically, strategically and philosophically. The fall of the Soviet Union and the economic and military rise of China fundamentally transformed these positions. The first led India to abandon its socialist economic policies and more forcefully embrace the West, most notably the US. The latter, created a significant economic opportunity for Australia.

China’s rapidly expanding need for natural resources to fuel its industrial economy led it to become Australia’s biggest trading partner, helping Australia achieve strong economic growth of 3-4% between 2001 and 2008 and enabling it to avoid recession in the aftermath of the Global Financial Crisis. However, despite growing mutual economic dependency and annual bilateral trade in excess of US$115bn (as of 2014), and significant efforts by Australian leaders, the relationship between Australia and China has remained a tactical one, with the two countries failing to form broader strategic and political links. China’s recent economic slowdown and the decrease in its demand for raw materials has significantly impacted Australia, particularly its mining industry, which accounts for more than 50% of exports. However, it is also a force for the rethink of Australia’s economic dependency on China and creates the necessity for Australia to form newer and potentially deeper partnerships with countries in the region.

India, with 1.3bn people and the world’s fastest-growing large economy and an active pluralist democracy, is an obvious candidate to be on the shortlist of potential strategic partners. Since embarking on a series of economic and market reforms in the early 1990s, India has delivered strong economic growth with GDP expansion averaging 6.8% between 1991 and 2014. More recently, the country weathered the Global Financial Crisis, but, following the disastrous policies of its Congress government, fell into a defining economic and political slump that paved the way for the outright victory of the Modi-led BJP government on a growth and development agenda. India has emerged as the world’s fastest growing major economy on the back of the policies of the government, led by Mr. Modi, which has initiated structural reforms and laid the groundwork for attracting back foreign capital. As a result, India today is where China was approximately a decade ago across a number of macro-economic metrics and is embarking on a plan of rapid infrastructure development and mass industrialisation like China at that stage, and could potentially create a similar resource demand that Australia is well placed to meet but in addition create a broader demand for skills and capital that China did not take up. Further, India has become increasingly outward-looking and focused on building strategic partnerships that serve its economic and geopolitical interests (as opposed to the previous disposition where it let what turned out to be a flawed ideology drive foreign policy). Since taking office in May 2014, India’s Prime Minister Modi has been executing a “Look East” policy to strengthen India’s ties with a number of countries in the Greater Pacific to aid its development plan.

However, Mr Modi’s policy is driven by more than just economics and contains a significant geo-strategic and security component as well. He has recognised that there is a significant overlap between India and Australia’s security interests in the Greater Pacific region and is seeking to foster closer collaboration. India and China have always treated each other with caution, and have a number of potentially conflicting security concerns that are coming to the fore with China’s increasingly assertive foreign policy. China’s “One Belt One Road Strategy” is seen in India as an attempt to encircle the country with Chinese infrastructure and outposts, particularly the “String of Pearls” of ports and naval bases that links China to the Middle East straight through the Indian Ocean is part of a larger set of security moves. “We need to ensure that the rise of China does not disturb the security and relative harmony of the region upon which China’s prosperity depends.”
Malcolm Turnbull, Prime Minister of Australia Further, while China has generally adopted a measured approach in dealing with outstanding Sino-Indian territorial disputes, its steady escalations in its South China Sea disputes are also cause for concern in New Delhi. The “Look East” policy is partly designed to counter China’s geopolitical influence in the region. China’s maritime territorial disputes are also relevant to Australia, which has a legitimate naval security interest in the Greater Pacific. In addition to causing uncertainty in the regional strategic environment, China’s moves in South China Seas have a direct impact in Australia, with its island building, accompanied by the building of airstrips, military infrastructure and ports, placing the North of Australia within the range of the China’s Xian H-6K strategic bombers. Given “intent” is fluid, capability is key in military assessments and so this ranks as a significant red flag in security terms.

Key Points of Alignment in Building an India–Australia Partnership

Given their current economic and geopolitical positions, India and Australia today have a number of complementary overlaps around which their interests can align. Any partnership between the two countries, whether strategic or tactical, will naturally need to focus on these areas of mutual interest in which the benefits of working together are most pronounced. These are:

1. Significant Bilateral Trade Potential. Australia and India can significantly broaden and deepen their bilateral trade, diversifying away from natural resources and bulk goods in favour of services and high value added goods.

   India and Australia’s bilateral trade to date has fallen far short of its potential, both on an absolute as well as relative basis. At c.US$12bn annually, bilateral trade is well below the levels each country achieves with its other major neighbours, in Australia’s case even when adjusting for the size of India’s economy (see chart: “Australia Trade Comparison”). Trade between India and Australia is also very limited in scope, heavily skewed to mineral exports from Australia to India, which account for 70% of total exports. While India clearly has need for these resources, its rapid economic build-out requires more than just minerals. India’s economic growth is rapidly building a middle class, expected to be 200m by 2020, driving potential demand for a much broader trade relationship including infrastructure, building and construction, hospitality, consumer goods, agri-business, media and entertainment, retail and financial services. Indian exports to Australia, on the other hand, have focused on relatively commoditised bulk goods with agricultural products, textiles chemicals and engineering products representing 80% of total exports. Total service exports are only c. US$1bn annually, indicating that India’s world-class information and communications technology (ICT) companies have made only minimal inroads to Australia. Stronger links to India’s ICT sector could provide a massive push for Australia’s own technology sector, particularly its start-ups, which the government is seeking to support with a variety of funding, legislative and tax break measures. Beyond providing access to technology, services and partnerships India’s ICT industry is a key potential source of funding to augment Australia’s underdeveloped venture capital sector, which funded only 69 companies with less than US$100m deployed in 2013.

2. Long-Term Investment Strategy. India and Australia have the potential to build a long-term investing partnership, providing India with a key source of financing and skills and providing Australia with attractive and diversified returns and a huge customer base for domestic investments. Unlocking the value of the partnership will require the joint development of scaled yet bespoke investment opportunities.

   As with trade volumes, current levels of cross border investment between India and Australia are paltry, with c.US$2.0bn total cross-border investment annually. Although both countries rank among the top ten FDI destinations globally, neither makes the other’s list of top ten sources today, indicating clear growth potential. While India faltered in the last decade, the current growth and policies are attracting Canadian pension funds, US endowments, Japanese banks and Middle Eastern sovereigns. This renewed interest is driven by several factors including favourable currency levels , a set of six high-growth states which have grown at c.10%, and eight high-growth sectors I see Australia as a major partner in every area of our national priority
   Narendra Modi, Prime Minister of India which have grown at c.15% (despite the overall slowdown), combined with a strong coordinated push by the Modi government to accelerate growth to over 8% by driving financial inclusion, implementing structural reforms to improve the ease of doing business and streamlining clearances and approvals to pave the way for large investments in infrastructure and manufacturing. Effectively, the combination of factors means that India is compressing three big waves – scaling agriculture, industry and its technology sectors – simultaneously , making it an opportune time for long-term strategic investments in India. Australia has one of the few large pools of capital, particularly through its large pension funds, and therefore has an opportunity to become a preferred investment partner across the spectrum of investment requirements.

3. Sustainable Energy Solutions. Given India’s rapidly growing demand, Australia has the potential to be a key partner for India’s future energy needs based on taking a comprehensive approach combining both trade, investment and know-how for fossil fuels as well as renewables.

   The two countries share highly complementary energy resources and requirements. Both countries are among the top five coal producers in the world, however India consumes more than it can produce thereby making it the largest importer while Australia’s resources are far above its requirements making it the largest exporter globally. While coal represents the highest value trade good between the countries today, with potential scope for further near term growth, the longer term trade prospects for coal are set to decline if the Modi government's coal production goals, which target a doubling of coal output by 2020, play out. . While this achieving any meaningful portion of this vision would reduce India’s coal imports significantly, it will first require considerable investment and assistance from abroad, and Australia is a world leader in mining technology as well as a major potential foreign direct investor in domestic mining projects. The partnership opportunity extends well beyond coal, however, given India’s nuclear energy build plans and Australia’s position as the world’s third largest producer and exporter of uranium. Historically, uranium exports to India have been challenging politically, with successive Australian governments supporting and opposing sales to India based on the country not being a signatory to the nuclear non-proliferation treaty. However, the two countries signed a deal supplying India with uranium in 2014, making Australia the fourth supplier behind France, Russia and Kazakhstan. With 30 new nuclear reactors planned in India, there is significant scope for closer collaboration.

4. Joint Human Resource, Social and Environmental Development Agenda. India’s mass urbanisation, modernisation and growth requires partnerships beyond the commercial. The two countries’ shared language and close proximity provides significant scope for shared human resource and for Australia to impact India’s social agendas, in addition to the broader environmental agenda.

   India has the challenge of clean growth and coupled with an urbanisation rate that will place 40% of its population in ever-expanding cities by 2030, it has urgent need for solutions ranging from education, urban development and environmental management. Australia today is the third most popular destination for Indians studying abroad, behind the US and UK, and today hosts 5% of the country’s overseas students, roughly commensurate with its pro-rata share of both population and GDP among the host countries. India currently accounts for c.10% of Australia’s US$13.5bn in annual education exports, implying significant growth potential, particularly in light of the education needs of the 250m additional Indians entering the workforce in the next 15 years. For Australia, the opportunity is an obvious one given education’s position as the country’s largest service, and fourth largest overall export. Beyond education, there are a number of further areas for collaboration on the countries’ broader development agendas. Both its companies and Australia as a whole rank highly on international sustainability indices, and over the past decade it has demonstrated significant progress in clean energy technology. As early as 2003, for example, the country’s government and coal industry collaborated to set up a US$875m clean coal research fund, which would be funded by voluntary levies on coal production. As India embarks on an ambitious growth agenda, which will require increased energy consumption it stands to benefit from Australia’s experience of balancing economic and resource requirements with environmental sustainability. Both countries have made initial attempts at collaboration, signing a US$6m partnership to improve the production of clean fuels, and there is potential for significantly larger scale collaboration on this front going forward

5. Mutual Security Interests. Australia and India have converging security interests, the joint pursuit of which will require closer collaboration in defence and coordination with other Greater Pacific powers, particularly the United States and Japan.

   Australia’s and India’s converging security and defence interests provide a further point of alignment around which to build a strategic partnership. As the two indigenous naval powers in the Indian Ocean, Australia and India are among the key guarantors of security in the region. With only 3,900km of open water between Perth and Chennai, collaboration on maritime security, including peacekeeping and disaster relief, is a natural area of partnership for the two countries. However, as outlined above, their shared interests extend to the broader Greater Pacific region as well. Given the importance of its historical relationships with both the United States and China, Australia has traditionally adopted a measured geo-political stance in the Pacific region. However, with China becoming increasingly assertive in expanding its economic and military influence over the last few years, Australia is seeking to broaden and deepen its strategic relationship with the US, while recognising the need for maintaining good relations with China. India finds itself in a similar position vis-a-vis the United States and China, being wooed by the US while having to contend with its more powerful neighbour. This alignment of interests provides significant scope for more comprehensive policy coordination between India and Australia, who held their first bilateral naval exercise in 2015.

An Enduring Strategic Partnership in the Greater Pacific Region: Seven Big Ideas

It is clear that the most productive and sustainable partnerships are multi-dimensional in nature and based on shared objectives as well as shared values. Accordingly, Australia and India will need to forge not just economic and security but also strong political and cultural links to form an enduring partnership. As the world’s fastest growing major economy, and by virtue of its sheer size, India is the only country with the potential to pick up the slack in Australian exports left by China’s slowdown. In recognition of this, India is currently being wooed by, and is in turn wooing, multiple allies, with Mr. Modi having visited 12 of the 19 other G-20 countries in his first year and a half in office.

Setting out from the outset to build a deep and multi- dimensional relationship, as opposed to falling into the trap of building a mercantilist one, will cement the partnership and allow it to endure beyond the point when India’s basic development needs have been satisfied. Japan’s relationship with China is a good example of the risks underlying a purely mercantilist partnership, Japan having been one of the biggest foreign investors in China, Our next priority is an economic partnership with India
Tony Abbott, Former Prime Minister of Australia contributing 16% of the total FDI into the PRC between 1990 and 2004. Technology transfers from Japan were critical in the development of China’s electronics, automotive and high speed rail industries, among others. However, the two countries never managed to engage more broadly and address their historical and political differences, allowing issues between to the two escalate, and in recent years, negatively impacting bilateral trade and investment, transforming China from the cornerstone of Japan’s economic development into its greatest potential security threat.

Given that Indo-Australian collaboration has fallen far short its potential for such a long period of time, the countries will need to launch their partnership with a number of scaled and radical initiatives across a number of key areas, and execute them in parallel in order to break through the current inertia and create momentum for a much deeper strategic relationship. The following seven big ideas build on the major shared objectives of the parties and have the potential to galvanise stakeholders in each country towards broader and deeper bilateral collaboration.

1. Trade: Execution of Free Trade Agreement in 2016. The Australia-India Comprehensive Economic Cooperation Agreement, a bilateral free trade agreement has been described as being “on the cusp” of completion for a number of years. Since the start of free trade talks between the two in 2011, bilateral trade has actually fallen and Australia has signed trade agreements with Korea, China and Japan, while discussions with India appear to have bogged down. The signing of the long awaited free trade agreement is an appropriate symbolic start to the strategic partnership between India and Australia. Not only has this agreement been estimated to be worth US$40bn to the parties, it will also open the door for more comprehensive regional economic integration. India to date is not party to the 12 member Trans-Pacific

Partnership, but a free trade agreement with Australia would provide it with major links into one of its most important members, and pave the way for deeper collaboration with and potential future membership in the TPP.

2. Investment: Launching a US$5bn National Banking Fund. Financial inclusion has been one of the key areas of focus for Mr. Modi. The Indian government has targeted enrolling several hundred millions of households into India’s formal banking system within its first two years, making significant headway in signing up people for first time bank accounts. However, there are significant challenges that need to be addressed: India’s public sector (PSU) banks’ ability to continue expanding into unbanked regions of the country is limited by an overhang of stressed assets. Further, capital requirements are also creating a large burden on the exchequer with no easy funding options available. Australia’s large pension funds can play the key role in solving these challenges A National Banking Fund, subscribed to by Australian investors, can help bridge this funding gap in exchange for fixed-returns guaranteed by the Government of India. For India, the Fund finances the expansion of rural banking, results in credit growth, and lowers the cost of capital for the new population being brought into the financial system. For Australia, the Fund provides a targeted opportunity to work alongside the Indian government on an important growth project, while delivering secure long-term returns to subscribing investors.

3. Education: Kick-Start a Multi-Billion Cross-Border Education Opportunity. Given India’s growing need for high quality education and its severely inadequate infrastructure of schools and universities, the countries should partner to unlock the cross border education opportunity, 95% of which is today based on enrolments by foreign students in Australia itself. The governments should work with Australia’s ten largest universities to set up a US$5bn overseas student loan fund, as well as subsidise the college tuition costs of high-calibre individuals at these universities. In return, India would provide incentives to participating universities to establish five or more physical campuses in India for the delivery of education services offshore, a largely untapped growth opportunity. The benefits of this association are significant: for Australia US$5bn of additional education exports would translate to a 40% increase with the revenues retained in the Australian economy and Australian universities would get the ability to participate in India’s US$20bn tertiary education sector which is growing at 25% and highly profitable . For India, this initiative could yield an additional 130,000 highly-skilled workers along with additional tertiary education capacity of c.50,000 with significantly higher productivity as a result of the quality of education imparted by Australian universities.

4. Infrastructure: Creation of a US$5bn Indian Infrastructure Transfer Initiative. With India’s infrastructure facing an estimated funding gap of US$1tn as the country looks to build out large roads, highways and ports projects, there is a significant opportunity for Australian investors to help bridge this gap. Despite being major financiers of global infrastructure projects, Australian investors have traditionally been very selective about Indian opportunities, primarily due to India’s track record of stalled projects and regulatory delays. Both governments should partner to address these challenges through a US$5bn infrastructure transfer initiative that would see Australian pension funds acquire ownership stakes in existing and cash-generating government-owned Indian infrastructure, with the government retaining a minority equity position and guaranteeing the provision of the necessary clearances and approvals. The Indian government could re-invest these investment proceeds towards the build out of new infrastructure in the country, while Australian investors would have an opportunity to deploy their capital into “de-risked” infrastructure assets that yield 10-15% in investment returns per annum.

5. Energy: Underwriting an Energy Independent and Sustainable India by 2030 If India’s ambition to match domestic energy production with its own increasing demand over the longer term is to be met, it will need to develop a comprehensive energy plan drawing on foreign capital, expertise and at least initially, energy supplies. Australia has a critical role to play in the plan as a major energy producer, a major potential foreign direct investor in the Indian energy sector as well as a provider of technology and expertise. In terms of driving initial sustainability, Australia can be the preferred partner for clean coal and sequestration technology as well as the top provider of ‘cleaner’ energy imports such as natural gas and uranium, with Australia’s export capabilities currently far exceeding India’s total import needs. In terms of energy independence, Australia would become one of the leading investors in the Indian energy sector, financing, building and operating renewable energy projects and recovering natural resources with the minimum environmental footprint possible. Working with India will help accelerate Australia’s own economic diversification away from coal, whose long term structural sustainability is increasingly being called into question, boosts the country’s competitiveness in the sustainable energies that will replace it.

6. Security: Indian Ocean Maritime Security Pact. India and Australia should enter into a comprehensive bilateral Indian Ocean security pact. In addition to securing freedom of navigation for the 55,000 ships transiting the Indian Ocean region annually, the partnership should focus on humanitarian assistance and disaster relief, building on the successful cooperation in the aftermath of the 2004 Indian Ocean tsunami. With three of the top 15 countries on the Fragile States Index on the Indian Ocean, the partnership will also play a major role in anti-piracy and counter-terrorism. The security pact should be anchored by annual joint military exercises in the Indian Ocean, starting in 2016 and building on the collaboration envisaged by the 2014 Framework for Security Co-operation between the two countries. Further, India’s increasing arms purchases from the US, e.g. of military transport aircraft, are creating overlap with Australia’s hardware and the potential for synergies and collaboration outside of the water, too.

7. Grand Strategy: Revival of the Geopolitical “Quad”. Finally, there is an opportunity for India and Australia to play a key role in geopolitical ‘grand strategy.’ The partners should seek to revive the short-lived Quadrilateral Security Dialogue with the US and Japan, which led to in a joint naval exercise in 2007, when Australia withdrew from the dialogue amid strong protests from China. Since this time, China has become increasingly assertive and more difficult to negotiate with in both economic and security issues, while the US has increased its commitment in the Asia-Pacific region. A “Quad” of economically powerful democracies based on a clearly defined strategic scope would provide the most effective guarantor for the members’ interests and provide significant leverage against China that is otherwise lacking (and which each of the parties is currently seeking on its own).Further, the increasing economic integration of the countries in the Quad provides an increasing degree of insurance against trade or investment related pressures China might bring to bear. The pieces of the “Quad” are well established, with deep Indo-US, Indo-Japanese, US-Japanese, Japanese-Australian and US-Australian links already in existence. What is missing is a similarly deep partnership between India and Australia.

Key Conclusions: Redefining the Greater Pacific

The Great Game is alive and well in Asia and its extension into the Greater Pacific Region is well underway. As a result, Asia and the Greater Pacific region will certainly be the centre of global economic and political gravity in the coming decades. The flurry of trade and security agreements being discussed and signed by countries in the region indicate that states today are placing the bets and drawing the lines that may well define the geopolitical and economic order during the remainder of the century, much like the Great Powers did during the turn of the previous century. “The New Great Game for influence is [in] the Indo-Pacific, which has arisen at the confluence of…China’s Maritime Silk Road, India’s Act East Policy, and the United States’ Rebalance to Asia”
Foreign Affairs Oct 2015 The intensity of the game is spurred by a resurgent India which many in the region and in the US hope will be a counterweight to China’s too rapid ascent. India’s ability to play its potential role in the regional game and the global one rests as much in its own hands as in the hands of its allies. New allies are being forged and it is already clear that the US is at the front of this game. Both Australia and Japan are important to this story. Japan has begun to map out its intent. Australia faces an important strategic choice as to whether it is a comprehensive ally or one with a limited scope.

Its high degree of development and relative geographic isolation will not insulate Australia, nor will India’s potential economic and development surge insulate it from the forces at play. The game for all the countries in the region therefore must be based on deciding on when and how, and under what conditions to partner or compete with other countries. If India, Australia and enough others get this wrong, the result will be a bipolar world with US and Chinese camps and with little overlap and hardened lines. If they get it right, the result will be a network of joint partnerships that create a stable equilibrium, locking all parties into a regional community of states that cooperates and competes at the same time. A comprehensive and strategic Indian-Australian partnership has the potential to be one of the key components of this equilibrium, linking into and influencing regional security, political and economic matters, and underwriting the long-term stability of the Greater Pacific region.

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