Geopolitics is the study of how a country’s geography inclusive of location, terrain, land size, climate, soil and raw materials affect its foreign, economic, military policy and positioning strategy. The word geopolitics comes from the words “geography” and “politics”. The term geopolitics means a broad analytical framework in international relations, encompassing different phenomena such as political instability, tensions and military conflicts between countries, terrorist threats or geographical events that can have regional or global impacts.
Globalisation has increased scope for trade and economic growth due to cross-border trade, and cooperation. However, over the last few years, global trade and the geopolitical landscape are rapidly changing because of chaotic results of geopolitical events. The chaotic landscape of geopolitics is hindering global trade.
Geopolitical risk adversely affects the global economy and triggers financial instability through a variety of channels. On the macro and micro economy side, geopolitical risk impacts the economy negatively affecting GDP growth, inflation, trade, investment, consumption and savings. The factors of geopolitical economy include, climate, topography, demography, natural resources, and applied science of the region being evaluated. Geopolitics focuses on political power linked to geographic space, in particular, territorial waters and land territory in correlation with diplomatic history.
Macroeconomic network of geopolitics can affect the outlook on the government’s fiscal position as well as inflation dynamics. History suggests that war has a detrimental effect on inflation and economic growth. As we have already seen, conflict in the Middle East has a direct impact on the cost of trade, the prices of imported goods and, ultimately, economic growth.
Israel-Palestine War, Terrorist Insurgency in Iraq, Ethnic Violence in South Sudan, border disputes in India, Russia’s invasion of Ukraine have resulted in havoc in terms of human lives and to the economies of the countries and regions. Geopolitical risk, which has increased of late, is threat to financial stability. Recent conflict in the Middle East, fears of rise in US-China tensions over Taiwan and the Russian invasion of Ukraine have all raised concerns about geopolitical stability. Adverse geopolitical events can trigger rapid shifts in market sentiment and sharp increases in uncertainty, exposing existing vulnerabilities in financial institutions and markets.
Moreover, they can reduce consumption and investment plans, with knock-on effects for economic growth, and activate adverse feedback loops between the real economy and the financial world. This special feature starts by providing a conceptual overview of the channels through which geopolitical risk can affect euro area financial markets, the economy and the financial sector. It then goes on to present empirical evidence on the effects of geopolitical risk on euro area non-banks and banks.
Let’s look at how the present geopolitical elements are affecting India:
Raised stakes in Kashmir
Increased global cooperation with India, and thus its rise in geopolitical value, comes at potential costs for its neighbour Pakistan. The most immediate threat is control in the Kashmir dispute. Washington’s hinge away from Pakistan and towards India is visible in its different levels of engagement with the two South Asian nations. United States recently defended its military maintenance package to Islamabad. However, this material expression of support appears to be the exception instead of the rule. Messages from the past and present Presidents of US have historically been subtle signs of Washington’s aspirations in the region. Shrinking support in Washington considering India’s rising status means that Pakistani leverage in the Kashmir border dispute is at risk now more than ever. Despite recognizing recognition both sides in the Kashmir conflict, the United States has increasingly shown biased support to India. Pakistan has not curbed terrorism, it is on ever increase in many parts of world. This not only raises the stakes in the Kashmir conflict but also adds a new layer to the region’s already tense security architecture.
Increased risk of Chinese revenge
India’s geopolitical rise has also increased the chance of an escalation with China by directly putting its interests at risk. For instance, Japan’s expanded partnership and alignment with India has focused on building resilience against Chinese presence in the East and South China Sea. China’s sweeping claims of sovereignty over the sea and the sea’s estimated 11 billion barrels of untapped oil and 190 trillion cubic feet of natural gas have antagonized competing claimants Brunei, Indonesia, Malaysia, the Philippines, Taiwan, and Vietnam. On July 12, 2016, the arbitral tribunal adjudicating the Philippines’ case against China in the South China Sea ruled overwhelmingly in favor of the Philippines.
India’s increased influence is also repositioning its leverage on border disputes with China. For instance, recent independent investigations exposed that the United States shared crucial satellite imagery of Chinese military positions during a December 2022 border clash, helping to give India an edge. Such intelligence sharing was a direct result of US-India joint initiatives those were confirmed. A dispute over the boundary is critical since it is a major determining factor for the two nations. China cannot give away its claims to their lands without having a weakened claim on the sovereignty threat over Tibet forcefully taken away in the 1950s.
The regional response
Considering these developments, China and Pakistan will adjust their strategic calculations, accordingly, bringing along risks of big tensions and acceleration in warlike situation. China’s assertiveness in Taiwan is an expected consequence. While traditionally this has come as a reaction to the United States, recent Indian strategic gains bring an added element of risk for Beijing. Whether rightly perceived or not, these heightened fears in China will impact its confidence in what it regards as its territories, and the region and West will have to compete with those developments.
Beijing’s current hostility in the region in response is an active sign of these adjustments. China is asserting its strength in the region. It has also directly responded to the border dispute risks, given India-US collaboration, by seeking support elsewhere. In renewed talks with Bhutan earlier this year, Beijing pushed an exclusive border deal that could build leverage against India, if it loses strategic ground in the disputed Doklam plateau. Beijing’s attempted renaming of several areas which India disputes have also accompanied a similar policy of counter response. As such, increasing pressure on China by the West via India has pushed China in unexpected ways, leading to strong responses from Beijing that Washington may not be expecting.
Likewise, Pakistan is expected to insist itself in Kashmir in fear of its diminishing international value. irrespective of the subject matter being discussed or the theme of the forum and fails to get any support or traction. India has previously rejected Pakistan’s attempts to raise the Kashmir issue at international forums, asserting that the “Union Territory of Jammu and Kashmir and the Union Territory of Ladakh have been, are and will always remain integral and inalienable parts of India.”
India has dismissed Pakistan’s attempt to inject Kashmir into a discussion of the workings of the Security Council as an undignified misuse of the General Assembly forum. Pratik Mathur, a minister at India’s UN mission, reacting to Pakistan bringing up Kashmir, said that it “misused this forum to spread baseless and deceitful narratives, which is not a surprise.”
“I will not dignify these remarks with any response just to save valuable time of this august body,” he added witheringly. Mathur, who did not name Pakistan and referred to it as “one delegation” was reacting to Pakistan’s Permanent Representative Munir Akram’s suggestion to set up a Security Council body to monitor the implementation of its resolutions on Kashmir. But the target of his condescending dismissal was clear. Regardless of the topic under discussion or its relevance, Pakistan consistently brings up Kashmir.
Given the nuclear capabilities of both nations, the international community should remain on high alert, especially considering Pakistan’s expanding military and economic cooperation with China. Pakistan and China may “lock” both India and the United States out of counterterrorism efforts in the region, which poses not only risks to their national security but also to regional stability; terrorist attacks have brought India and Pakistan to the brink of war on numerous occasions.
Moving forward
Overall, India’s rise cannot simply be viewed from the lens of Delhi gaining global ground. The crucial question is one of threat perceptions on the Pakistani and Chinese sides which whether legitimate or not risk destabilizing the region. Members of the international community who are giving increased value to India as a geopolitical anchor must beware of unrest and consequences. External shocks have aggravated Nepal’s economic vulnerabilities too. Decreasing external remittances, inflation, and the increasing trade deficit have contributed to low forex reserves. This has impacted its already scarce foreign investments and has also persuaded the import-dependent country to regulate or ban the import of certain commodities, including fuel. Although not as catastrophic as Sri Lanka and Pakistan, Nepal’s crisis is a recipe for a perfect disaster, considering the history of its political instability and governance.
In all above cases, China’s complicity has also been critical. China’s less conditioned and easily available loans motivated these countries to continue borrowing without promoting any structural reforms, making them more economically and politically vulnerable. In addition, China’s high-rate interest loans and employing its capital goods and labor has accumulated debts rather than reaping economic benefits for the host country.
Neighbourhood Risk includes spillover effects caused by problems in a region, in a country’s trading partner, or in countries with similar perceived characteristics.
