The Political Economy of India and Its Strategic Choice under USA–China Power Rivalry and Hegemonic Competition: A Defensive Hedging Policy

Abstract

This paper explores hedging in a theoretical thinking and applies it to the foreign policy of India in an era of growing USA–China power rivalry. In this regard, hedging is defined as insurance seeking strategy under situations with high uncertainty, where rational actors (both middle and small states) will try to avoid taking sides and to pursue room for autonomy in decision-making. While Washington and Beijing dislike middle and small countries’ hedging, they both overlook that it is the uncertainties stemming from their own behaviors that push middle and small states to hedge. As uncertainties deepen, most countries in Indo-Pacific region will prefer to use hedging policies to reduce their possible losses. For India, unless USA–China rivalry escalates into a direct military conflict, or unless Washington retreats its commitment to regional security in Indo-Pacific, then India will stop hedging and moving to bandwagoning with China; or if Beijing’s actions directly undermine India’s vital interests in security, then India’s hedging will be replaced by balancing against China. In short, hedging is a passive response, not an active choice; India’s hedging strategy is very likely to persist on making ambiguities in the USA–China–India strategic triangle and entanglement.

KEYWORDS:

• Hedging
• India
• risk reversion
• U.S.–China power rivalry
• balancing

Notes

1 The real “non-alignment” is not to make an alliance with any country, not to choose not to align with specific countries. Take India as an example, it just does not ally with great powers, but still aligns itself with weaker countries.

2 For instance, China has become one of the most favorite destinations for Indian exporters. China’s share in India’s global exports has increased obviously from 1990s to 2000s.

3 The QUAD is an informal grouping brings together the U.S., Japan, India, and Australia in an alliance of democracies with shared values and interests.

4 It is worth noting that the importance of Japan’s FDI in India is gradually surpassing China’s. According to Prime Minister Fumio Kishida’s words, Japan will invest $42 billion in India over the next five years in a deal for boosting bilateral trade.

5 As concerns India’s trade potential, the trade gravity model shows that India has a huge potential to cooperate with China, and if more tariff and non-tariff barriers are removed, the trade volume between the two countries can more than double. Further, an undeniable fact is that India-China trade reached a record US$125 billion in 2021, which was a 43% increase from 2020.

6 India does not want to be a regional hegemon in the foreseeable future, so it does not like to see any country in the region becoming a hegemon. In such a case, a passive China or a China effectively suppressed by the U.S. will become the object that India is willing to associate with; conversely, a China that is too ambitious, or a China that has a good relation with the U.S., will keep India on pins and needles.

7 Table 1 shows India in relation to the U.S. and China from three dimensions. It will be given for 5 points in one specific dimension showing the level of interaction between India and the U.S. or China respectively. The higher the score shows, the better the interaction between the two countries in the situation would be, and the worse vice versa.

8 The trade deficit between India and China is US$72.9 billion in 2021-2022, an increase of US$28.9 billion from the US$44 billion deficit that two countries had the year before.

9 Geographical proximity has a key influence on whether a country aligns itself with its neighbors, but the key variable highlighted by most realist literature is that how much power that one country’s neighbors have.