How India Uses Economic Statecraft in Foreign Policy

Economic statecraft — the use of economic instruments (trade policy, aid, investment, sanctions, energy) to achieve foreign policy objectives — has become an increasingly prominent element of India's foreign policy toolkit under Modi. India's large and growing domestic market ($3.7 trillion GDP, the world's fifth-largest), its strategic role in global supply chains (pharmaceuticals, IT services, increasingly manufacturing), and its control over strategic resources (rare earth potential, agricultural surplus, water in South Asia) provide the economic instruments for statecraft. 

The most visible exercise is trade agreement diplomacy: India's rapid conclusion of the India-UAE CEPA (88 days from launch to signing, February 2022) and India-Australia ECTA (signed April 2022) demonstrated that India could use its market access as a rapid diplomatic instrument when political will exists.

Representational Visualization: How India Uses Economic Statecraft in Foreign Policy

India's development assistance to neighbours — EXIM Bank lines of credit (approximately $30 billion committed to Africa and South Asia collectively), India-UN SDG Fund contributions, and the International Solar Alliance (ISA, India's climate diplomacy initiative) — constitutes its "soft power" economic statecraft. 

The ISA (co-founded by India and France at the 2015 Paris Climate COP) has 120+ member states and provides a framework for India to lead developing world solar energy adoption. India's $30 billion+ EXIM Bank commitments to Africa (railways, ports, hydropower) position India as an alternative to Chinese BRI finance in a continent where Chinese debt-trap concerns are growing.

What You Need to Know

• India's FTA portfolio: India-UAE CEPA (2022); India-Australia ECTA (2022); India-Mauritius CECPA (2021); India-Japan CEPA (2011); India-Korea CEPA (2010); India-ASEAN FTA (2010); India-UK FTA (under negotiation since 2022); India-EU FTA (relaunched 2022, stalled); India-Canada FTA (stalled since diplomatic crisis over Nijjar assassination); India-GCC FTA (under negotiation); India-EU comprehensive deal remains the most strategically significant unconcluded FTA.
• India-Canada diplomatic crisis: Canadian PM Justin Trudeau alleged in September 2023 that Indian government agents were involved in the assassination of Hardeep Singh Nijjar (a Sikh activist Canada designated as a terrorist) on Canadian soil; India rejected the allegations as "absurd"; diplomatic expulsions and visa suspensions occurred; the FTA negotiations were indefinitely suspended; India-Canada relations remain strained into 2025; this represents a significant cost of India's security operations reaching beyond its borders.
• EXIM Bank Africa: India's EXIM Bank has committed approximately $12–15 billion in credit lines to African countries for infrastructure, railway, and energy projects; the Africa credit line portfolio makes India Africa's second-largest development finance partner (after China) with growing influence through the Africa Conclave during India's G20 presidency.
• International Solar Alliance (ISA): launched COP21 Paris 2015 by India and France; 120+ member countries; focuses on deploying solar energy across developing world; India contributes ₹100 crore annual secretariat funding; ISA is India's most successful multilateral institution founding — it has actual operational programmes unlike many Indian-initiated institutions.
• Sanctions strategy — MFN revocation and trade suspensions: India's revocation of Pakistan's Most Favoured Nation (MFN) status (February 2019, post-Pulwama) is India's most direct use of trade as a foreign policy instrument; India also imposed import restrictions on Chinese goods after Galwan 2020; these are targeted, symbolic economic measures rather than comprehensive sanctions.

How It Works in Practice

1. Market access as leverage: The India-UAE CEPA concluded in 88 days partly because India offered the UAE preferential access to India's 1.4 billion consumer market in exchange for UAE investment, energy, and diplomatic alignment; the speed of conclusion reflected political will driven by Saudi Arabia's perceived closer ties to Pakistan; similar market-access leverage is being deployed in FTA negotiations with the UK, EU, and GCC.

2. Development assistance as soft power in South Asia: India's $4 billion Sri Lanka emergency support (2022) is the clearest recent example: it came faster and with fewer conditions than China's support; it came with cultural understanding and logistical convenience (India is 30km from Sri Lanka); it produced substantive diplomatic alignment; the difference between India's and China's Sri Lanka support illustrates how development assistance quality and speed matter as much as quantum.

3. The Russia-oil economic statecraft dimension: India's purchase of discounted Russian crude oil at 1.8 million bpd is simultaneously economic logic (cheaper energy) and implicit economic statecraft supporting Russia's war financing while maintaining India's strategic autonomy from Western pressure. This is not India's stated intent but is the functional effect; Western partners view it as economic statecraft that complicates their Russia pressure campaign.

4. Make in India as supply chain statecraft: India's Production-Linked Incentive (PLI) scheme — offering financial incentives to global manufacturers for production in India — is a form of economic statecraft that simultaneously addresses domestic industrial development and strategic supply chain diversification. Apple (manufacturing iPhone 15+ in India), Samsung, and pharmaceutical companies (bulk drug PLI scheme) have relocated production; India is positioning itself as the "China+1" alternative for Western supply chain diversification.

5. Water as unspoken South Asian statecraft: India's control of Himalayan river headwaters gives it structural leverage over Pakistan, Bangladesh, and to some extent Nepal; the Indus Waters Treaty suspension (consultations after Pahalgam 2025) is the most direct recent expression; India has avoided weaponising water previously but the IWT suspension signals a willingness to use water-related pressure that has been absent from India's statecraft toolkit.

What People Often Misunderstand

• India's FTA strategy is selective, not comprehensive: India has concluded fewer FTAs than most major economies; India's RCEP withdrawal (2019) and stalled EU/UK/Canada FTAs reflect a domestic political economy where agricultural and manufacturing lobbies resist liberalisation; India's FTA ambition is genuine but the negotiating mandate is constrained.
• Development assistance is not charity — it's strategic investment: India's EXIM Bank credit lines, technical cooperation, and grant programmes serve India's interests (market access, political alignment, energy security, connectivity) alongside the recipient country's development needs; development assistance as pure altruism misunderstands its strategic logic.
• The Nijjar assassination claim has created a lasting Canada relationship problem: India-Canada FTA prospects are indefinitely stalled; broader Five Eyes intelligence sharing concerns about India may have been raised; the diplomatic cost of India's alleged extraterritorial security operations is real and ongoing; India's refusal to engage with Canadian allegations while not providing alternative explanations has prevented diplomatic normalisation.
• India's PLI scheme is the most significant economic statecraft tool for domestic industrial development: The PLI scheme's $30+ billion incentive pool (spread across 14 sectors from smartphones to pharmaceuticals to textiles to drones) is transforming India's manufacturing landscape; this domestic industrial policy has direct foreign policy implications by reducing supply chain dependencies on China.
• ISA's diplomatic value exceeds its energy output: The ISA has 120+ members and provides a multilateral platform for India's climate and development diplomacy; its actual solar energy deployment figures are more modest; but as a diplomatic instrument — positioning India as a global solar energy leadership institution — it has real value disproportionate to its technical outputs.

What Changes Over Time

The India-EU FTA's conclusion — repeatedly predicted and repeatedly delayed — will be the most consequential pending economic statecraft development; an India-EU FTA would be India's most significant trade agreement with a major developed economy and would deepen strategic alignment with Europe on technology, regulation, and supply chains.

Sources and Further Reading

• CSIS — India's future strategic choices: https://www.csis.org/analysis/indias-future-strategic-choices-complications-mass
• Tribune India — Sindoor strategic autonomy: https://www.tribuneindia.com/news/bricsleadership/operation-sindoor-beyond-how-india-asserted-strategic-autonomy-amid-tariffs-security-challenges

(This series is part of a long-term editorial project to explain the structures, institutions, policies, and strategic frameworks that shape governance and statecraft in India for a global audience. Designed as a 25-article briefing cluster on Indian Foreign Policy Strategy & Doctrine, this vertical examines how India understands, formulates, and executes its engagement with the world — from the institutional architecture of foreign policy and the evolution from non-alignment to multi-alignment, to strategic autonomy, neighbourhood diplomacy, great-power relations, security doctrines, economic statecraft, multilateral engagement, and India's emerging role in a rapidly changing international order. Written in an accessible format for diplomats, investors, researchers, academics, journalists, policymakers, students, civil society organisations, and international observers, the series seeks to explain not only what India does abroad, but why it does so. Particular attention is given to the historical evolution of India's strategic thinking, the practical realities of decision-making, the tensions between ideals and interests, and the opportunities and constraints facing a rising power in the twenty-first century. This is Vertical 9 of a larger 20-vertical knowledge architecture being developed by IndianRepublic.in under the editorial direction of Saket Suman. All articles are protected under applicable copyright laws. All Rights Reserved.)