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.

Bank rate

It’s the rate charged by the central bank for lending funds to commercial banks.

Balance of Trade

 It’s the difference between the monetary value of a nation’s exports and imports over a certain time period. It is usually expressed in the unit of currency of a particular country.

Black Market

The buying and selling of goods or foreign money in an illegal way.

Black economy

It’s a section of a country’s economic activity that is derived from sources that don’t follow the country’s rules and regulations regarding commerce and trade. The activities are mostly illegal in nature.

Brown economy

It’s an economy that depends on the economic growth of the petrochemicals such as coal, petroleum and natural gas, which in production, great amounts of carbon dioxide and soot are released into the atmosphere. The economic development depends on restricted resources, the environmental pollution is severe.

Blue Economy

Blue economy is a term in economics related to the exploitation, preservation and regeneration of the marine environment. Its scope of interpretation varies among organizations. According to the World Bank, the blue economy is the “sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem.

Capital

It’s typically refers to cash or liquid assets being held or obtained for expenditures.

Cost

In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost.

Consumer Sovereignty

Consumer sovereignty is the economic concept that the consumer has some controlling power over goods that are produced, and the idea that the consumer is the best judge of their own welfare.

Demand  

Demand is an economic principle referring to a consumer’s desire to purchase goods and services and willingness to pay a price for a specific good or service. 

Economics

It’s the study of how people allocate scarce resources for production, distribution, and consumption, both individually and collectively.

Elasticity of Demand

It’s the responsiveness of the quantity demanded of a commodity to changes in one of the variables on which demand depends. In other words, it is the percentage change in quantity demanded divided by the percentage in one of the variables on which demand depends.

Equilibrium

In economics equilibrium is a condition or state in which economic forces are balanced. In effect, economic variables remain unchanged from their equilibrium values in the absence of external influences.

Economic Benefit

Economic benefits are defined as tangible benefits that can be measured in terms of revenue generated or money saved through the implementation of policies. An economic benefit is a benefit that we can quantify in monetary terms. Profits, net cash flow, net income, or revenue, for example, are economic benefits.

Fiscal policy

Itrefers to a government’s spending and how it affects the economy, particularly if spending levels change. Fiscal policy also refers to the tax policies of a government to influence economic conditions. It drives the policy actions of the Government. Budget, tax, subsidies, expenditure etc. form part of the fiscal policy.

GDP

Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services.  

Golden Economy

The term describes an ideal state for an economic system. In this perfect state, there is full employment, economic stability, and stable growth. It is also called sunshine economy. Emphasis is laid on energy sector. Sunshine Economy depend on non-fossil energy such as wind energy, solar energy, water, biomass energy, geothermal energy, marine energy etc. as basic energy supply to encourage distribution of facilities, to improve the energy structure.

Government spending

It refers to money spent by the public sector on the acquisition of goods and provision of services such as education, healthcare, social protection; the important areas being social welfare and defence.

Grey Market

It’s an unofficial market in goods that have not been obtained from an official supplier.

Grey Economy

The informal economy is also known to be the grey economy. This is an economy that is a diversified set of economic activities, enterprises, jobs, and workers that are not regulated or protected by the state. The grey economy helps to establish self-employment in small, unregistered enterprises. It has been expanded to include wage employment in unprotected jobs.

Green Economy

It’s a three-dimensional focus in sustaining and advancing economic, environmental and social wellbeing, to increase GDP and reduce poverty. A green economy is an economy that aims at reducing environmental risks and ecological scarcities, and that aims for sustainable development without degrading the environment. It is closely related with ecological economics, but has a more politically applied focus.

Incentives

In economics, incentives are what encourage an individual to act in a certain way. In other words, how consumers and businesses respond to market signals such as prices and financial benefits.

Inflation

Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.

Law of demand

It states that quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded.

Market

It’s a place where the exchange of goods and services takes place as a result of buyers and sellers being in contact with one another, either directly or through mediating agents or institutions.

Money

It’s a medium of exchange; it allows people to obtain what they need to live. Bartering was one way that people exchanged goods for other goods before money was created. Money has worth because for most people it represents something valuable. The units of measurement are dollars or another currency, with no time dimension.

Market capitalization

It’s the aggregate valuation of the company based on its current share price and the total number of outstanding stocks. It is calculated by multiplying the current market price of the company’s share with the total outstanding shares of the company.

Marginal utility

It refers to the amount of satisfaction a consumer gets by consuming a good or service. Marginal utility can be used by economists to measure how much of a good or service a consumer would buy in a given period of time.

Macroeconomics

Macroeconomics is a branch of economics dealing with performance, structure, behaviour, and decision-making of an economy as a whole; for example using interest rates, taxes, and government spending to regulate an economy’s growth and stability. This includes regional, national, and global economies.

Microeconomics

It’s a branch of mainstream economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.

Monopoly

It’s a market situation where there is a single seller in the market. In conventional economic analysis, the monopoly case is taken as the polar opposite of perfect competition. By definition, the demand curve facing the monopolist is the industry demand curve which is downward sloping.

Micro Economics

Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources, and prices.

Macro Economics

Macroeconomics focuses on the performance of economies; changes in economic output, inflation, interest and foreign exchange rates, and the balance of payments. 

Opportunity cost

What a business firm misses out on when selecting one option over another. It’s a way to quantify the benefits and risks of each option, leading to more profitable decision-making overall.

Oligopoly

An oligopoly is a market characterized by a small number of firms who realize they are interdependent in their pricing and output policies. The number of firms is small enough to give each firm some market power.

Optimization

It’s the process of making a trading system more effective by adjusting the variables used for technical analysis. A trading system can be optimized by reducing certain transaction costs or risks, or by targeting assets with greater expected returns.

Purple Economy

Purple Economy takes into account the ethnic, cultural, and sociological aspects of the place they operate in. Concepts such as racial equality, cultural transmission, and economic anthropology are the core tenets of this principle which draws from the ideas of both politics and capitalism. It is about looking beyond the economic value of cultural outputs to include the cultural dimension of any asset or service. Purple economy is part of a wider ethical approach.

Repo Rate

It’s the rate at which the Reserve Bank of India (RBI) lends money to commercial banks or financial institutions in India against government securities. Repo Rate in 2022 is 4.40%

Recession

In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending.

Red Economy

It’s related to the economy that is ruled by a government with style of communism.

Supply

 In economics, supply is the amount of a resource that firms, producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace or to an individual. Supply can be in produced goods, labour time, raw materials, or any other scarce or valuable object.

Scarcity

The gap between limited resources and theoretically limitless wants.

Sovereign bond

It’s a debt security issued by a national government to raise money for financing government programs, paying down old debt, paying interest on current debt, and any other government spending needs. Sovereign bonds can be denominated in a foreign currency or the government’s domestic currency.

Silver Economy

Silver economy is the system and structure of production, distribution and consumption of goods and services aimed at using the purchasing potential of older and ageing people and satisfying their needs, wants and consumption for a well living and health needs. All strategies are driven to face new challenges related to an ageing population (geriatrics), especially regarding technology services for wellbeing and health monitoring such as robotic assistance, electrical mobility, or health sports, including health tourism and green care.

Time value of money

It’s the concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the short-term.

Unemployment

It’s a term referring to individuals who are employable and actively seeking a job but are unable to find a job. Included in this group are those people in the workforce who are working but do not have an appropriate job.

White economy

Focuses on Digital Economy and how it changed business and trading for start-ups and entrepreneurs via digital.

I had written this article for my blog in December 2019 stating that according to the newspaper Mint dated 19^th Nov 2019, former Prime Minister and economist Dr. Manmohan Singh has cautioned that while India is not yet in stagflation territory, it would be prudent to watch out for increased risks of such an event occurring.

Last year, Moody’s Analytics, research arm of ratings agency Moody’s, said that India had entered into a stagflation phase with notably weaker growth but inflation still stubbornly high. Fitch ratings had also said that that the combination of high inflation and slow GDP growth implies that India may have entered into stagflation. Technically, it was not right to say India is faced with stagflation then in Dec 2019. But, today it looks that Moody Analytics might prove to be true….

A sharp decline in consumer spending in the European Union and the United States will reduce imports of consumer goods from developing countries. Developing countries, particularly those dependent on tourism and commodity exports, face heightened economic risks. Global manufacturing production could contract significantly, and the plunging number of travellers is likely to hurt the tourism sector in small island developing States, which employs millions of low-skilled workers.

Before the outbreak of the COVID-19, world output was expected to expand at a modest pace of 2.5 per cent in 2020, as reported in the World Economic Situation and Prospects 2020.

On 12th March 2020 Beijing News.Net has carried a news article that a range of financial institutions around the world have admitted that the corona virus pandemic would have a hard impact on the world economy. Countries around the world are facing the upcoming slowdown. US Federal Reserve has already slashed interest rates by a half-point, CNN reported. Though the likelihood of inflation is low, the threat of stagflation is for real. The global uptick in the Gross Domestic Product (GDP) could be as low as 1 percent this year, reports the Institute for International Finance (IIF) in last week of March 2020.

Stagflation is an economic cycle in which there is a high rate of inflation and also stagnation. Inflation occurs when the general level of prices in an economy increases, which means value of money falls. Stagnation occurs when the production of goods and services in an economy slows down or even starts to decline.

Stagflation, in this view, is caused by cost-push inflation. Cost-push inflation occurs when some force or condition increases the costs of production. This could be caused by government policies (such as taxes) or from purely external factors such as a shortage of natural resources or in a situation like war. Stagflation slows economic growth and creates rather high unemployment. It can also be defined as inflation and a decline in gross domestic product (GDP). But, a fact of stagflation is that real estate and commodities like gold, silver and platinum do well. Investment in these assets is a good decision.

Stagflation is costly and difficult to eliminate, both in social and fiscal terms. There are only a few examples in history and the most notable one occurred in the 1970s in the United States. The onset of stagflation In the 1970s was blamed on the US Federal Reserve’s unsustainable economic policy during the boom years of the late 1950s and 1960s. The Fed moved to keep unemployment low and boosted overall demand for products and services in the 1960s. However, the unnaturally low unemployment during the decade triggered something called a wage-price spiral. The wage-price spiral is a macroeconomic theory used to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. The wage-price spiral suggests that rising wages increase disposable income raising the demand for goods and causing prices to rise.

The OPEC oil prohibition in 1973 also contributed to the unwanted economic event in the US. Industries across the country suffered from excessively high oil prices and shortages. Demand fell to new lows and industrial output suffered.

Theories on the Causes of Stagflation

One theory states that this economic phenomenon is caused when there is a sudden rise in the cost of oil. It reduces an economy’s productive capacity. In October 1973, the OPEC (Organization of Petroleum Exporting Countries) issued a restriction against Western countries. This caused the global price of oil to rise dramatically, thereby increasing the costs of goods and contributing to a rise in unemployment. Because transportation costs rose, producing products and getting them to shelves became more expensive and prices rose even as people got laid off. Critics of this theory point out that sudden oil price shocks like those of the 1970’s did not occur in connection with any of the simultaneous periods of inflation and recession that have occurred since then.

Another theory is that the convergence of stagnation and inflation are results of poorly made economic policy. Harsh regulation of markets, goods and labour in an otherwise inflationary environment are cited as the possible cause of stagflation. Confluence of stagnation and inflation are results of poorly made economic policy. Harsh regulation of markets, goods and labour in an otherwise inflationary environment are cited as the possible cause of stagflation. Some point fingers to the policies set by former US President Richard Nixon, which may have led to the recession of 1970; he is blamed for the period of stagflation. Nixon put tariffs on imports and froze wages and prices for 90 days, in an effort to prevent prices from rising. Once the controls were relaxed, the sudden economic shock of oil shortages and rapid acceleration of prices led to economic chaos in US. While appealing to the former theory of OPEC’s ban of few nations, Nixon’s policies are basically an ad-hoc explanation of the stagflation of the 1970’s, which does not explain the simultaneous rise in prices and unemployment that has accompanied subsequent recessions up to the present.