May 24, 2018

Indialogue Weekly Newsletter: Aman Thakker


Welcome back to Indialogue! Apologies again for skipping last week’s brief due to travel plans. Let’s dig in.

This week’s brief looks at the aftermath of the Karnataka Elections, as well as Walmart’s acquisition of a controlling share of Flipkart. In foreign policy, I consider India’s reaction and path forward as the United States withdraws from the JCPOA, and Prime Minister Modi’s visit to Nepal.  

- Aman Thakker

A Dramatic End to a High-Stake and Ugly Election in Karnataka

The dust seems to have settled in Karnataka following the resignation of Bharatiya Janata Party (BJP) Karnataka leader B.S. Yeddyurappa as Chief Minister one day after he was sworn in, and an invitation by the Governor to Janata Dal (Secular)’s (JDS) CM-designate H.D. Kumaraswamy to form the government with support from the Indian National Congress (INC).

H.D. Kumaraswamy (left) and B.S. Yeddyurappa (right)

Key Developments This Week:

The results of the election wereannounced on May 15, with the following tally:

BJP - 104 seatsINC - 78 seatsJDS - 38 seatsOthers - 2 seats

INC offers open and unconditional support to the JDS to form the government, and claim a majority

The BJP and the INC-JDS coalition both approach the Governor of Karnataka, Vajubhai Vala, staking a claim to form the government

The Governor offers the first chance to form the government to BJP since it is the single largest party

INC-JDS challenge the Governor’s decision and approach the Supreme Court

Supreme Court decides it will not block the swearing in of B.S. Yeddyurappa as Chief Minister

Yeddyurappa is sworn in on May 17th

Minutes before a floor test on May 19th, to prove that Yeddyurappa’s government had a majority, Yeddyurappa resigns

Looking Towards 2019: The Diplomatrecently published my take on the events on the Karnataka elections and what it means for India’s political class as the BJP, the INC, and regional parties look toward the 2019 elections. You can read that article here.

India Tries to Balance As the United States Withdraws from JCPOA

President Trump announced on May 8 that the United States would be withdrawing from the Joint Comprehensive Plan of Action, or the “Iran Nuclear Deal,” and would reinstate sanctions on Iran, sending shockwaves around the world. Unfortunately, some of those shockwaves reached India, and will impact its foreign relations moving forward.

Bigger Picture: There are two obvious cases where India will have to consider the effects of U.S. withdrawal from the nuclear deal. The first is oil prices and oil supply. Brent Crude prices rose to above $80 this past Thursday (May 17), and India’s Petroleum Minister Dharmendra Pradhan reiterated “the need for “stable and moderate” prices in a phone conversation with Saudi Arabia’s Energy Minister Khalid al-Falih.” Given that Iran is India’s third largest supplier of oil, and India’s dependence on foreign oil (India imports nearly 80% of the oil it consumes), the rising oil prices will have detrimental impacts on its currency and inflation levels.

Moreover, India has also committed to developing the Shahid Beheshti port in Chahabar with Iran, and U.S. sanctions could significantly impact those plans. Indeed, “India has already committedabout $85 million to Chabahar development with plans for a total of $500 million on the port.” The development of the port was part of India’s goal to circumvent Pakistan and improve connectivity with Afghanistan and Central Asia through the sea. Another concern for India is that if it cannot keep up its ties with Iran under the threat of sanctions, Iran may feel greater impetus to join onto the New Delhi-opposed China-Pakistan Economic Corridor in an attempt to balance its interests.

President Trump holds up an Executive Order withdrawing the United States from the JCPOA

Expert Round-Up

Suhasini Haider outlines “5 ways India could be affected by U.S. decision to pull out of Iran nuclear deal”

Kabir Taneja writes “Despite Trump, however, Delhi should continue to back the European effort to keep the JCPOA alive. Working with Paris, London and Berlin to keep Iran an integral part of global economics gives India great leverage not just in its dealings with Tehran, but Washington as well — wisdom that has its learning from hard, past experiences.”

Tanvi Madan notes “Nonetheless, for Delhi, Iran is important because of a) India’s energy interests, and b) connectivity to Afghanistan and Central Asia. Both could be affected by the Trump administration’s withdrawal from the JCPOA, which Modi in an India-Iran joint statement two years ago said represented a “triumph of diplomacy and sagacity.” In its response today, New Delhi was careful not to condemn the U.S. action—but it will not welcome the step, particularly as it comes at a time of global and regional flux and uncertainty.”

Uzair Younus argues “India’s ability to counter growing Chinese influence in the region and have strategic access to Afghanistan and Central Asia rests on its ability to maintain close ties with Iran...The near-term repercussions of the U.S. decision to withdraw from the Iran nuclear deal will most certainly test India’s foreign policy as well as the U.S.-India relationship. In the long term, it may allow India’s regional rivals to bring Iran into their camp and further their geopolitical ambitions in South and Central Asia.”

Walmart Buys a 77% Stake in Flipkart for $16 Billion

Walmart announced on May 9 that it wasacquiring a controlling stake in Flipkart, an Indian e-commerce company backed by SoftBank. Flipkart, which was dubbedthe “third most funded private company” last year, was started by Sachin Bansal and Binny Bansal in Bengaluru in 2007. The investment comes as Walmart takes on Amazon, particularly in India where “Amazon holds about 27 percent of India’s burgeoning e-commerce market, according to Euromonitor, where Walmart only operates 21 cash-and-carry wholesale stores in the country that sell to businesses.” Livemint hasreported that, according to the investment, Flipkart is being valued at $21 billion. While Walmart will own close to 77% of the company, Flipkart’s existing owners will own the remaining 23%.

Sachin Bansal (left) and Binny Bansal (right) (both are not related)

Bigger Picture: Given that India still does not allow foreign direct investment in offline retail, this acquisition by Walmart represents a smart move to penetrate the Indian market after struggling in other parts of Asia, including China. The move also will set up greater competition with Amazon, which was reportedly also interested in acquiring for a stake in Flipkart. However, at the end of the day, e-commerce remains a budding sector India, and this acquisition has the potential to drive the needle forward in, not only growing the e-commerce market, but transforming India’s retail trends in the long term.

Modi Heads to Nepal, and Engages in “Religious Diplomacy”

Prime Minister Modi was in Nepal for atwo-day visit starting May 11. The visit came barely one month after Nepalese Prime Minister K.P. Oli visited New Delhi in his first inaugural trip after taking office. The trip involved Modi visiting two temples in Nepal, including the Janaki Temple in Janakpur, an important religious site where Lord Ram was supposed to have wed Sita. However, akey feature of the visit will be building trust.

Background: Trust levels between India and Nepal are at a historic low following India’s blockade on Nepal in 2015 and support of the Madhesi agitation, and the subsequent election of K.P. Oli earlier this year. Indeed, India has been suspicious of Oli and his overtures to China during his campaign and in office. On the other hand, Oli is distrustful of India given its alleged role in the blockade.

Prime Minister Modi with Prime Minister K.P. Oli in Nepal

Expert Voices:

Prashant Jha writes “As he embarks on his third visit to Nepal on Friday, a key element of Prime Minister Narendra Modi’s focus will be engaging with all political streams in Nepal, including, but not confined to, the elected government of the day, and sending signals of support and reassurance to all, said a person familiar with the planning of the visit. “This is a working visit. The PM will focus on bilateral projects and steps needed on both sides to expedite it. But another element will be political engagement with all sides,” the person said on condition of anonymity.”

Devirupa Mitra reports “Sources say that the main purpose of the visit is to build on Oli’s visit – “principally to carry forward the new initiatives and implement pending proposals”. With a stable government in Kathmandu, India is hoping that the implementation of many development projects which were stuck due to issues from the Nepali side like land acquisition and forest clearances will be accelerated. “Our hope is that we will receive greater coordination and cooperation from their end,” said sources.”

Kamal Dev Bhattarai argues “As general elections are due to be held in India in 2019, Modi is under pressure to improve ties with neighboring countries to prevent this issue from becoming a prominent campaign point for opposition parties. Modi also personally wanted to restore the image and goodwill in Nepal that he enjoyed in 2014. When Modi was in Kathmandu this month, people remembered the 2015 blockade at the India-Nepal border. During his visit, social media was filled with demands that Modi apologize for the blockade.”

Insight: The India-Nepal relationship is crucial as India looks around its neighborhood. Despite the attempts to “reset” relations with China at the informal summit in Wuhan, Chinese actions in India’s periphery are concerning, and given Nepal’s support for the Belt and Road Initiative, it is important that India regain its goodwill with, both, Nepal’s political class and its people. Although this trip may have started to do that, there is still a long way to go, as marked by the reaction of Nepalese citizens to the Prime Minister’s visit on social media.  

Stories you might enjoy:

Vishwanath Nair reports “Plan A was to get government power and power finance firms, like NTPC Ltd., Power Finance Corporation Ltd. and Rural Electrification Corp., to rescue stressed power projects. Two serious attempts and one year later, that plan has been abandoned. Now comes Plan B. Where banks come together to form an asset management company of sorts, which takes over stressed power assets and brings in an entity like NTPC to operate them till they are healthier.”

Amy Kazmin writes “The battle over the Yamuna, and its lack of water, highlights the profound — but scarcely acknowledged — crisis now confronting India: it is slowly running dry. As Cape Town has come perilously close this year to Day Zero — when municipal officials were to turn off the city’s taps and force residents to queue for water rations — experts are warning that Indian cities could be next.”

Livemint argues “The Reserve Bank of India (RBI) needs to be applauded for its conservatism. It pushed back severe pressures to slash interest rates last year. It also attracted many critics by assiduously building foreign exchange reserves as a buffer against the next global shock. That realism should serve India well in the months ahead, especially if the fiscal numbers deteriorate while higher oil prices put the external account under pressure.”

Devirupa Mitra reports “In the highest level ministerial visit from New Delhi in two decades, Indian minister of state for external affairs V.K. Singh is currently in Pyongyang to hold talks with the North Korean leadership and agreed to encourage more people-to-people exchanges to mark 45 years of diplomatic relations.”

C. Raja Mohan, Rory Medcalf, and Bruno Tertrais write “Amid concerns about Chinese assertiveness and the volatility of American policies, the quadrilateral dialogue of the United States, Japan, India and Australia can’t be the only effort at a new strategic arrangement for stability and balance. It’s time for India, France and Australia to join forces. This innovative security triangle is no flight of think tank fancy, but an ambition now being considered at the highest levels of policy. It was the key message of a far-reaching speech delivered last week by French President Emmanuel Macron at a naval base in Sydney

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