Two recent events have brought into sharp focus a growing divide between India's geoeconomic and geopolitical strategies: India's failed bid for membership of the Nuclear Suppliers Group (NSG) in June – essentially scuttled by China – and the Modi Government's desire for closer defence ties with the US.

The NSG issue, and the signing of some kind of logistical support agreement with the US , were high on the American agenda when US Defence Secretary Ashton Carter visited India in April. But beyond these mechanics, the larger question of how to sync India's economic priorities (which would call for a greater partnership with China) with its national-security ones (which demands accepting the US as a de-facto ally) remains to be answered.

The trading dragon

The traditional approach in diplomacy compartmentalises economics and security issues. This will not work when it comes to China, where mandarins do not see these two as being independent realms of statecraft. China's One Belt, One Road initiative is a case in point. China's geoeconomic weltanschauung – where geoeconomics is defined as a state's economic management of geopolitical interests, and not merely as a synonym for its international economics and trade policy – should be matched in New Delhi.

According to the latest statistics from India's Ministry of Commerce, India-China bilateral merchandise trade grew by 9.9% in 2014-15 while India's total trade fell by 0.8%. China is India's largest trading partner, and India is the second-largest shareholder in the China-led Asian Infrastructure Investment Bank. Pragmatists in New Delhi are seriously investigating the possibility of India jumping on board the One Belt, One Road wagon, albeit in a way wherein India's core security interests are not compromised. India is a member of the Shanghai Cooperation Organization, and along with China would be one of the founding members of the Regional Comprehensive Economic Partnership, often viewed as an Asia Pacific trade architecture rival to the US-led Trans-Pacific Partnership (TPP).

Reconciling this record with growing calls for India's involvement with the US in managing Chinese intransigence in the South China Sea, as well as Beijing's continuing support for Pakistan's military establishment, will emerge as key challenges for Modi's foreign policy.

Indian policy-makers are operating under the assumption that economics will follow its own logic, and can be de-coupled from strategic competition and even potential conflict. But China is witnessing an unprecedented consolidation of both economic and strategic decision-making in one individual, President Xi Jinping. Premier Li Keqiang's role as the custodian of Chinese economic policy-making has been abrogated by Xi. Yet it seems India's economic policy planners have convinced the security establishment that the logic of the invisible hand will act as a 'firebreak' between India's pursuit of closer economic ties with China and its pursuit of a military embrace with the US.

When New Delhi policy-makers do wake up to the fact that economics and national security interact, they end up drawing all the wrong lessons. After China blocked the UN listing of Masood Azhar (head of the Pakistan-based group Jaish-e-Mohammed) as a global terrorist, an unnamed member of the security establishment suggested India could pause some of the incoming investment from China on national security grounds. Setting aside the myopia involved in such a line of thinking, it betrays a lack of understanding of economics. India's pursuit of Chinese FDI is one way by which the US$48 billion trade deficit in favour of China can be addressed. The manifest lack of parity in the India-China trade relationship implies very little leverage on India's part when it comes to coercive economic statecraft against China.

The one-eyed eagle

Carter's agenda during his April visit was discussed vocally in the Indian media and on social media. The gist of this debate was the possibility and desirability of India and the US signing one or more defence agreements that would bring the two countries an inch closer to becoming military allies in all but name.

At the Raisina Dialogue in March, the chief of the US Pacific Command Admiral Harry Harris stunned the audience by reviving the idea of a quadrilateral defence cooperation mechanism between the US, Japan, Australia, and India. The 'Quad', in the jargon of strategic analysts, has been a four-letter word for many. Beijing views it as a China-specific military alliance, and Australia, one of the closest US allies in the Pacific, had formally declined to be involved in what would surely be interpreted as a provocation by China. It quickly became clear after Harris's remarks that India too is less than enthusiastic about the Quad. Furthermore, Defence Minister Manohar Parrikar has made it clear that joint patrolling of the South China Sea is off the table, at least for the time being.

On the economic front, the US-India relationship continues to be fraught with disagreements and hostility, which has now extended to a spat about India's solar energy initiatives at the World Trade Organisation. The fact that the AIIB's first loan this year will likely go towards funding solar energy projects in India is an irony lost on few. Washington's much-toasted natural democratic all-but-ally in the Asia Pacific is not so when it comes to trade, as demonstrated by India's non-participation in the TPP.

The need for a realistic grand strategy

Ashutosh Varshney has suggested a distinction between mass politics and elite politics in India. Trade is a determinant of living standards in any open economy and therefore is a determinant of mass politics; national security and foreign policy issues are still in the realm of elite politics. As India's trade/GDP ratio – and urbanisation – grows, there will be a need to rethink how the latter influences the former, even from a purely domestic electoral point of view. A cohesive national grand strategy needs to be developed, bringing various ministries together in a vision that is internally consistent, cross-cutting India's economic and strategic interests.

Photo by Flickr user Harini Calamur.