Free NonAlignment 2.0: A Foreign and Strategic Policy for India in the 21st Century by Sunil Khilnani

recent performance has attracted justified scepticism. As we seek to position ourselves as a financial hub, we shall need to balance prudence with bold innovation, so as to mitigate risks. The range of possible policy choices remains wide. But we do need a national consensus on at least this basic proposition: our choices in finance should not be made purely based on short-term crisis management considerations. They must be based on an understanding of the strategic value of a developed, globally oriented financial sector.
    The fact that pressures on imports are likely to remain may also make it tempting to manage current account deficits by encouraging flows of ‘hot money’. But as faras possible, India should encourage FDI, and not solve structural problems by short-term measures that may carry large costs later. Managing the current account will also require us to be inventive in encouraging new instruments like bilateral currency swaps.
    We will need to devise a clear view of what kind of role we wish to play in the international economic order. Very important decisions that we are taking—capital account convertibility, the structure of banking reform, the creation of bond markets, exchange rate policies—are driven by immediate domestic concerns. While this may to some extent be inevitable, it is imperative that we keep firmly in mind the strategic consequences of such choices: Are we a net debtor or a net creditor? Do we have pretensions of having our currency among a basket of reserve currencies? Many policy options will depend on how we answer these questions.
    Indian capital is itself rapidly going global. The reasons driving this are complex, but there are clear strategic consequences here too. What, for instance, will be the Indian state’s relationship to Indian private capital abroad? India’s diplomacy will have to be increasingly geared to serve its commercial as well as its other interests.
    Our internal fiscal system needs to evolve considerably if it is to support India’s international aspirations. Thegoods and services tax (GST), along with full integration of imports and exports (where imports are charged the domestic GST and exports are zero-rated, thus refunding the entire burden of domestic indirect taxation), will make a major difference to trade in goods and services. The shift to residence-based taxation will bring India on a par with the countries of the Organisation for Economic Cooperation and Development (OECD) and all sophisticated emerging markets on the treatment of capital flows, as opposed to the present Mauritius treaty. Special efforts need to be undertaken on appropriate tax treatment of Indians working abroad for part of the year, and on non-residents working in India for part of the year.
    Agriculture has been a vexed issue for India. The domestic political implications of agriculture sector liberalization are uncertain. The external dimension of agriculture will be shaped by two contexts. Food security is going to be on the agenda of several major economies, as fears of food price inflation spread. It is in India’s interest that the global regime on food trade be fair and open. Global cooperation on food security will be of fundamental importance. Second, the gradual elimination of agriculture subsidies in the United States and Europe may bring agriculture liberalization back on the agenda. Agriculture liberalization is a difficult area for us. It hascomplex social and economic consequences. But India needs to carefully weigh its options, and to have a clear long-term strategy in this area—one that is not merely susceptible to short-term political pressures. Here too, we need to evolve greater agreement on long-term management of the agriculture sector, leading to a national consensus on its strategic importance, particularly in an era of uncertainty in global food commodities markets.
    Our international economic integration will require partners in the immediate