The conversations and pronouncements from India, Pakistan and the United States since the Mumbai attack confirm the strategic dilemma facing the Indian government. India has evidence of Pakistani involvement. The United States recognizes this evidence and is leaning on Pakistan to do something about the terrorists being trained within is borders. The Pakistanis (to varying degrees in varying parts of the power structure) deny any kind of official hand in the attack or its preparation.
India can keep up a war of words, and try to build international pressure for controlling the terrorists in Pakistan. My guess is that any public efforts via diplomacy will accomplish nothing. It will just increase the need for the Pakistani power structure to appear that they are not bowing to outside forces, particularly from its neighbor or from the West.
India could also take direct action. Some in India are even calling for tit-for-tat retaliation, or even more extreme measures, to try to permanently solve the problem. This approach would not only fail, but make things much, much worse, both in the short and the long run.
The problem for India is that its government has its own political imperatives. It, too, needs to appear strong. Elections are just a few months away. In fact, strong action, with some military component, would likely guarantee that the main party in the ruling coalition returns to power. But the cost would be too terrible to bear for the nation.
Anything short of pursuing conflict and the government will lose the election. With that premise, it may as well take a principled approach and fix what it can. There are enormous deficiencies across the board in national security, both with respect to India’s borders, and inside the country. Clearly this is where a rapid and determined improvement must take place. There could be concerns about preserving India’s democratic freedoms, but so much can be fixed or improved without even coming close to having to make difficult tradeoffs – this is because the current situation is so poor.
Fixing the security situation with respect to protecting citizens, visitors and property more effectively does not preclude taking other measures to combat terrorism. But these will have to be silent and secret. The less the Indian government makes public its intentions, the more effectively it can pursue a proper strategy to prevent a repeat of the Mumbai attack, or other forms of terrorism. That approach does not win votes, but again, what it as stake here transcends partisan politics.
Meanwhile, the Indian government has to make sure that the economy keeps growing robustly. Ultimately, inclusive economic growth within a democratic polity is the key to dealing with the problem of terrorism. India has to show the Pakistani people what is possible, if they are to work toward a government that serves their interests better.
Some forms of economic activity, such as tourism, are going to be severely affected by the Mumbai attack, and this comes on top of the global economic crisis, which is starting to bite more and more deeply. I think the dangers in terms of a substantial economic slowdown in India are now much more severe after the attack, much more than before.
In this context, recent policy announcements after the attack have been encouraging. Last week the government readied a fiscal stimulus package, which is due to be announced any day now (probably before this post is up). The reported figure now is US $10 billion, or Rs. 500 billion – twice what was mentioned a few weeks ago. The proposed policy involves using foreign exchange reserves, which will effectively be spent domestically on infrastructure investment. This seems to keep the spending off the budget, and if the initial vehicle for the funds, the Indian Infrastructure Finance Corporation Ltd (IIFCL), can make some good decisions with the money, so that it is well spent, the payoff could be substantial.
However, the process of deciding and implementing new projects takes time – spending may take years. Monetary policy also acts with a lag, but these could be shorter. On December 6, the Reserve Bank of India cut its policy rates by 1 percentage point. This is most welcome. Further cuts may also be needed. In fact, the RBI could have been even more aggressive and doubled the cut – wholesale price inflation is negative, and inflation six months from now is likely to be under the RBI’s target. Indian industry also asked for more easing, with respect to quantitative controls. I am inclined to agree with them. Compared to several other central banks, the RBI seems to be proceeding somewhat timidly.
Finally, the best economic policy right now will be to take concrete, public measures to improve India’s security environment. These include reorganization, retraining, investment and collaboration with other governments. It would be great if the government were to announce and begin implementing a comprehensive plan for overhauling mechanisms to protect national security, by the beginning of 2009.