Select Committee on Foreign Affairs Minutes of Evidence

Written evidence submitted by the Foreign and Commonwealth Office

I.  INTRODUCTION

  1.  The Terms of Reference given by the Select Committee on Foreign Affairs (FAC) for this Inquiry on South Asia are as follows:

—  Political and economic developments in India and its growing importance.

—  Relations between India and Pakistan, and the question of Kashmir.

—  India's role in the region and its links with its neighbours.

—  India's contribution to the international system, including to the United Nations and other multilateral fora, such as the non-proliferation regimes.

—  The roles of the United Kingdom and the European Union in South Asia.

  2.  For the purposes of this Memorandum South Asia encompasses India, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan and Maldives. This Memorandum reflects the context set by the above terms of reference of the inquiry, focusing particularly on India as required by the FAC. This is not a full reflection of British Government policies in the region, where the relationship with other countries, in particular with Pakistan, is of major importance to key British interests.

  3.  This inquiry comes at a pivotal time for South Asia. The region as a whole is increasingly vital to our domestic and foreign policy agendas. It is fast growing in political and economic weight, and offers enormous opportunity. There are also significant challenges posed by instability and conflict, corruption, poverty, extremism and terrorism.

  4.  We have strong political, economic, cultural and historical links across the region. There is a large South Asian diaspora in the UK. The UK is a key investor, strategic partner and development funder in these countries. The relationship with India is closer than it has ever been across a broad range of policy areas. The UK also has vital interests at stake in good cooperation with Pakistan, particularly on counter-terrorism and over Afghanistan, but also because of our deep people to people ties, growing investment, and strong development partnership. Throughout the region our key priorities cover the development of democracy, counter-terrorism, immigration, climate change, sustainable development, globalisation, counter-proliferation of WMDs, the rule of law and economic benefit. We work to achieve these objectives in conjunction with the UN, EU, G8, Commonwealth, and with other international partners. We also increasingly work with the countries of South Asia—notably India—to achieve these objectives in the region and internationally.

  5.  The development challenge in the region is immense. The UK will disburse over £500 million of bilateral aid this financial year to the region as a whole. The UK's largest single bilateral aid programme is to India amounting to £248 million in 2005-06 and set to increase to £300 million. The Millennium Development Goals will be won or lost on Indian soil: even after reaching Middle Income Country status, India will have close to 300 million people living on under a dollar a day. Across large swathes of the country, development indicators are currently worse than in most of Sub-Sahara Africa.

  6.  The FAC will visit India first. India dominates the region, geographically, economically, culturally and politically. The UK's relationship with India is strong, wide and deep. The Joint Declaration signed by the Prime Minister and Dr Manmohan Singh in September 2004 reflected this by establishing a strategic partnership. It pledged closer co-operation in foreign and defence policy (including counter-terrorism and immigration); economic and trade issues; science and technology; climate change; sustainable development; expanding educational and cultural links; and other areas.

  7.  The trade and investment relationship between India and the UK has huge potential for our future competitiveness, productivity and global economic reach. The Select Committee on Trade and Investment (TISC) recently held an inquiry on this issue. The Indian economy continues to grow at about 8% year on year. Bilateral trade in goods and services has doubled since 1993. In 2005 the total value of bilateral trade between the UK and India was £7.9 billion, a rise of almost 20% (from £6.6 billion) in 2004. In 2005-06, Indian investments into the UK grew by 110%. India is now amongst the largest foreign investors in the UK. British people of Indian origin constitute some 2% of the UK population, contributing at least an estimated 4% of GDP.

  8.  India is currently the fourth largest emitter of greenhouse gases in the world and global climate security is strongly linked to how India develops. It faces a near-doubling of energy demand over the next 30 years and relies heavily on coal. Its overriding desire to secure development and alleviate poverty through economic growth has consequences for taking action to produce clean energy and India strongly resists submission to reduction targets. The UK has made some progress (either bilaterally or through the EU) in engaging with the Indian Government on this over the past two years. An EU-India Initiative on Clean Development and Climate Change was launched at the EU-India Summit in September 2005 and the G8 Action Plan contains several initiatives that involve India. The UK and India have every interest in addressing the problem together, not least because of India's importance as a possible model for the developing world.

  9.  The bilateral visits agenda is rich. Highlights in coming months are likely to include several Cabinet and other Ministers, royalty and an array of prominent public figures travelling to India.

  10.  The FAC will also visit Pakistan. Pakistan is a vital partner for the UK: we have a large number of common interests. 800,000 people of Pakistani origin are British citizens living in the UK while 80,000 British passport holders live in Pakistan. Our shared trade is worth almost £1 billion a year. There is a strong development partnership: the UK was proud to help Pakistan deal with its devastating earthquake in October 2005, and in the reconstruction phase that continues now. We are both fighting extremism in our communities and work together on counter-terrorism. Pakistani help is essential in combating the Taleban threat to Afghanistan, including to UK troops deployed there. The bilateral relationship is encapsulated in the Joint Statement agreed by the Prime Minister and President Musharraf in December 2004: "UK-Pakistan, A Partnership for Peace and Prosperity". It covers a broad set of issues, ranging from tackling extremism and countering terrorism, supporting stability in Afghanistan and non-proliferation, to achieving the Millennium Development Goals and improving trade. This will be complemented later this year by a 10-year development agreement currently being negotiated.

  11.  High-level bilateral visits are again a regular feature, with a series of further ministerial and other high level visits planned for coming months.

  12.  The Pakistan economy is growing at 7% a year. Britain and Pakistan have always enjoyed good trade relations and many Pakistani businesses see Britain as the country of first choice to do business with. There are over 80 British companies operating in Pakistan, with plenty of interest from others. Bilateral trade has doubled in the last four years. UK Exports continue to show strong growth (of 37.3% for the period January to April, 2006 compared to the corresponding period last year). The trade balance is still in favour of Pakistan, but since 2003 the UK trade deficit is showing a downward trend. In 2005 this decreased by 85% from £219 million in 2004 to £32.6 million. At the same time UK foreign and direct investment (FDI) into Pakistan stood at £190 million, a year on year increase of 34.4%.

  13.  Bangladesh, Sri Lanka, Nepal, Bhutan and the Maldives each face significant challenges as they seek to fulfil their potential.

  14.  In Bangladesh, a parliamentary democracy, and the recipient of £125 million of DFID assistance this financial year, progress has been made on gender equality issues and it has social indicators in some cases better than India's. But there are concerns including an often dysfunctional and confrontational—not to say violent—political culture, corruption, poor governance and growing extremism. The hope is that an acceptable, free and fair parliamentary election in January 2007 will provide a platform for the next government to address these concerns. Prospects for the elections are however far from certain.

  15.  The ceasefire in Sri Lanka exists on paper only following the recent escalation in violence, though the government and the Liberation Tamil Tigers of Eelam (LTTE) continue to express support for the ceasefire agreement and Norway's role as facilitator of the peace process. Restraint and a reduction in the violence is the key short term requirement. The absence of a roadmap for a negotiated settlement is increasingly of concern—achieving broad political support in the South for a credible political offer to the Tamils will require a bold lead from President Rajapakse.

  16.  Following a popular uprising in April 2006 which forced the King to relinquish absolute power Nepal's reinstated democratic government remains fragile. The Seven Party Alliance (SPA) government is negotiating with the Maoists about the transition to elections for a Constituent Assembly, including when and how the Maoists will disarm and enter government. Mutual confidence is low. The Maoists have made thinly veiled threats to provoke civil unrest if their demands for immediate access to power are not met. The SPA and the Maoists each invited the UN to assist with arms management and to monitor the election process. The Government still needs to give the UN a specific and clear mandate for it to take this forward promptly. The UK has set aside funding (£1.9 million) in support of the UN for this. India is especially concerned about events in Nepal because of the long and open common border.

  17.  Bhutan is at a key point of transition. The King has introduced a new constitution under which he plans to abdicate in 2008, to be replaced by a constitutional monarchy. There will be elections, although no sign yet of political parties being formed. In a small, landlocked country of some 600,000 people, the economy is healthy: hydro-electric power is generating revenue (selling to India); tourism is growing. Bhutan enjoys good relations with India, more difficult ones with Nepal: the refugee problem remains unresolved (there are 100,000 mainly Bhutanese refugees in camps inside Nepal).

  18.  Maldives has embarked on a process of political reform allowing for multi-party representation. Difficult relations between the government and opposition have hindered progress to date, though there are encouraging signs now of a more constructive atmosphere.

  19.  A number of issues have wider regional significance. These include: water; movement of peoples; energy; and economic co-operation. They all have far-reaching political and economic implications. The major external players in the region are China, the US and to a lesser extent the EU. All strongly influence South Asian issues. Afghanistan, Iran and Russia also have a bearing on the region. Furthermore, India itself is increasingly developing as a leading global player.

II.  INDIA

Political Role

  20.  The domestic political scenery in India has changed since the 1970s. The relative decline of the Congress Party and the rise of regional, lower-caste and Hindu political groups have transformed Indian politics, the party system and the balance of power. There is no longer a "natural party of government". The Congress Party and the Bharatiya Janata Party (BJP) are still the two main political forces, but neither can command a Parliamentary majority in its own name. The balance of power is with a loose collection of regional and other parties. The governing Congress-led United Progressive Alliance is reliant upon the support of left-wing parties.

  21.  The balance of power between federal and state governments is changing. There is a growing sense of loyalty at the state rather than the national level. As a result, 50-60 state parties are represented in the national legislature making it essential that the national parties forge partnerships with them in order to form a government. Coalition politics, and associated constraints on policy making, are now a fixture. Three types of broad coalitions are likely: BJP or right wing-anchored; Congress-anchored; or a "third front" of mainly left wing parties aligned with regional or caste-based groups. India has been governed by each of these types of coalition in the past 15 years.

  22.  Congress no longer commands the exclusive support of Hindu Brahmins, tribals, lower castes and Muslims. Most of these groups find regional and caste-based parties more attractive. Caste-based politics also complicates the BJP's hunt for votes and allies. Regional and caste-based cleavages make it more difficult to campaign on a single national platform.

  23.  India's political establishment remains "senior" ; the average age of MPs in Parliament when the 14th Lok Sabha began in May 2004 was 52.

  24.  At the state level party affiliation is fluid; tactical alliances and seat-sharing arrangements are common practice and anti-incumbent sentiment is almost a given. The importance of caste (and religion) in state elections varies greatly from state to state, as does the importance of state elections for political coherence and longevity at the centre. Uttar Pradesh has a population of 170 million, including many Muslims, and returns 80 members of parliament; eight out of thirteen Prime Ministers have been from this state. Meghalaya is largely Christian and elects two members.

  25.  India's rate of population growth remains considerable: a child is born every 1.25 seconds; the population grows by 15.3 million every year (adding almost as much as the total population of Chile annually). Widening disparities in terms of growth and development between and within states pose a threat to India's long-term economic unity, with implications for political and social stability. The contrasts are stark. For instance, the world's largest slum, Dharavi in Mumbai, covers 1.7 sq km; on the other hand, an average of five million new mobile phone connections are added every month. The growing states of the west and south have poverty levels below 25%, literacy rates of 46-88%, and receive 89% of investment. The stagnant states of the east and north have poverty levels above 33%, low literacy rates, and receive only 11% of investments. As the gap between the economically successful states and the rest widens, existing inter-state tensions are likely to be exacerbated, with the poorer states demanding "social justice" (subsidies, labour demarcation, etc) and the wealthier demanding greater economic reform.

  26.  Notwithstanding the demise of single-party government in New Delhi, there remains broad consensus that India needs strong and stable central government to protect and advance its national interests and to mediate between states. In addition, recent fiscal problems faced by a number of states have forced them to seek additional federal resources in return for agreement on policy reforms. This has acted as a counter to decentralisation.

  27.  Many Indians look to the political system to deliver social equity or justice (there are over 27 million cases pending in India's courts and obstacles to the effective functioning of the police and criminal justice system—including under-resourcing—mean justice is simply not accessible to many citizens).

Economic Role and the impact of Globalisation

  28.  India is emerging as a global player, economically and politically. The geopolitical and economic consequences of its projected rise will be profound. It is predicted to become the most populous country in the world by 2035. It is currently the world's fourth largest economy in PPP terms (IMF figures), and is forecast to become the world's third biggest dollar economy before 2050, and fastest growing one by 2020. The economy is growing steadily at 7-8%. Despite its huge poverty tail (300 million people on less than $1 a day) India is beginning to impact on the global economy, and at an accelerating pace.

  29.  Economic success has been underpinned by dynamic private sector activity in services (around 60% GDP) and manufacturing—particularly in the IT, BPO services, pharmaceuticals, biotech, textiles and automotive industries. Much of this growth is in the southern and western states, which have embraced the new technology and enterprise opportunities available in a globalising economy. Regional disparities are widening. Agriculture now accounts for less than a fifth of GDP, but around two thirds of the workforce are dependent on the sector, so it remains an important determinant of welfare.

  30.  India's growth could accelerate, if fuelled by a number of factors:

—  the process of economic reform and improved governance may move faster than anticipated, in particular unleashing the country's huge manufacturing and agricultural potential. The 11th five-year plan (starting in 2007) is likely to target 10% annual growth.

—  India's huge educational drive—fuelled by the competition from such a young population (54% under 25)—may accelerate the success story, as India becomes the workforce of the world in the decades of 2020 and 2030, in sharp contrast to ageing Europe, US, China, Russia and Japan.

  31.  But there are also risks that economic growth could be undermined by:

—  Inconsistent levels of governance, both administrative and political. Inertia. Corruption. A statist mindset which constrains the private sector. Coalition politics could compound all this, and inhibit political leaders from taking the longer economic view.

—  Employment generation, one of India's most daunting challenges. India will need to find the jobs to replace the subsistence farming that keeps 650 million people currently dependent on agriculture.

—  Rising energy demand in Asia and competition between Japan, China and India for resources directly affect their own political, economic, climate and energy security interests (and, of course, those of the UK). The consequent decisions taken in India now on energy infrastructure, particularly on carbon intensive coal-fired generation, will have huge implications for global climate security for decades to come.

—  If India's large public deficit is not tackled, government debt could crowd out private investment, limit government investment in infrastructure and undermine financial stability. FDI inflows could then decline.

—  India's inadequate infrastructure risks putting India at a disadvantage against Asian competition. Problems in the energy/power sector are a particular worry. Water management needs significant investment too.

—  A widespread belief in the political establishment that economic reform is somehow inversely related to retaining political power. The upset that the BJP faced in 2004 and the perceived failure of their "India Shining" campaign merely reinforced this belief. India watchers agree: either the reform process and its benefits have not been "marketed" well enough and consistently enough or large sections of the population still feel relatively untouched by the benefits of reform.

Society

  32.  There is a world-wide Indian diaspora of some 20 million. Another three million Indian migrants live in Gulf countries as guest workers. There are nearly 1.5 million Britons of Indian origin in the UK together with 175,000 Indian nationals residing in the UK. India watchers increasingly refer to India's "soft" power. Indian language films and filmstars have a huge following in the UK and across South Asia. Indian celebrities from the creative arts are especially influential in India and among the diaspora worldwide.

  33.  A major trend in migration is the very high level of cross-border economic migration between India and neighbouring countries—but mainly into India. There are an estimated 2-3 million Nepalese migrant workers in India. Estimates for the number of Bangladeshis in India vary widely (and are vigorously disputed) but 12 million is not an unrealistic figure. Whilst the overwhelming majority of migrants come and go voluntarily, there are cases of coerced migration and trafficking, eg children from Bihar illegally taken by private contractors to work on road construction in Nepal.

  34.  The majority of migrants move within India, eg over 800,000 Oriyas are estimated to have migrated to Gujarat. Some migration is seasonal; some itinerant labourers are continually on the move; most migrate permanently in search of a better life. India is experiencing an explosion of rural-to-urban migration. The drivers remain constant: unemployment and agricultural interruptions are "push" factors; the lure of employment, education opportunities and services and resources are "pull" factors. Awaiting these migrants are a host of difficulties. Most Indian cities are already very densely populated, each facing the same problems of grossly inadequate housing, transportation, sewerage, electric power, water supplies, schools and hospitals. Congestion, noise, traffic jams, air pollution, and major shortages of key necessities characterise urban life.

  35.  India is constitutionally a secular state in which tolerance is extended to all religious groups—but religion and caste always have potential to cause trouble. Hindus constitute 82% of the population, Muslims 12%, Christians and Sikhs over 2% each leaving the balance of Buddhists, Jains, Parsees and Jews. For historical, social and political reasons Muslims in India are economically and educationally disadvantaged compared to Hindus.

  36.  Communal relations have tended to be good, though sporadic and usually low-level communal violence is a periodic feature of Indian life and tensions run higher in some areas, most notably Gujarat. Communal clashes are often sparked, or exacerbated, by property or commercial disputes rather than by religious differences and intolerance. The most notable recent exception was the severe rioting in 2002 in Gujarat. There are concerns that Hindu-Muslim animosity may sharpen in wake of terrorism designed to exploit these tensions and to divide the two communities yet despite this revivalist Islam has made only limited inroads so far.

  37.  There are several thousand castes in India. Caste membership is determined by birth, fixing an individual's status in the overall hierarchy and still to a considerable extent determining his/her occupation. About 15% of the population classified by the Constitution as members of the most disadvantaged castes are entitled to their own representation in Parliament and a reserved quota of government jobs and places in higher education. Many states have extended this system of reservations to other disadvantaged groups. The government provoked a violent reaction from members of higher castes earlier this year when it announced it would reserve 27% of seats in higher educational institutions for other disadvantaged classes. Higher-caste protestors demanded that merit should be the sole criterion for admission.

  38.  Caste tension and discrimination, not necessarily overt violence, pervades Indian society and caste identities run deep, including in cities. Caste violence does take place but not on a scale that attracts sustained national media or political attention.

III.  PAKISTAN

Political Role

  39.  Pakistan's government has alternated between weak civilian and military rule since 1947. President Musharraf's coup in 1999 led to a hybrid Government in 2002, when there were elections for the National Assembly and Senate. The ruling party, the PML(Q) holds most seats but not a majority, and governs in a coalition with the MQM and the PPP (Patriots). The PPP is the largest opposition party. The six party religious alliance, the MMA, has a majority in the NWFP and governs in coalition with the ruling party in Baluchistan. The PML(Q) holds the Government of Punjab and Sindh. The next elections are due by the end of 2007.

  40.  Pakistan is a strategic player in the region. It recognises its key role in ensuring stability in Afghanistan, and has been supportive of the E-3's efforts to ensure Iran does not develop nuclear weapons. Relations with India continue to play a significant role in Pakistan's foreign policy, but they are no longer the lens through which all Pakistani foreign policy has to be seen. Pakistan is a predominantly moderate Muslim country that has a lot to offer the world. It is one of the largest troop contributors to UN Peacekeeping missions. Pakistan's strategic importance during the Cold War and Soviet occupation of Afghanistan ensured close Western links. Pakistan's recognition of the Taleban stemmed from a desire to defuse old cross-border Pushtun frictions, for stability on its western border and, perhaps most importantly, for a Pakistan-friendly government in Kabul to prevent perceived Indian interference and influence.

  41.  The dilemma for President Musharraf is how to tackle terrorism and extremism whilst at the same time preventing alienation of his wider domestic constituency. This has been a delicate balancing act. Al Qaeda and the Taleban pose as much of a threat to President Musharraf as they do to UK interests. Pakistan has made a serious dent in the former's leadership operating on its soil. But a wider threat remains. The Federally Administered Tribal Areas (FATA) have traditionally been free to run their own affairs, including when under British rule. The attempt to establish more direct central control has been costly. The Government has just signed a peace deal with local tribes in north Waziristan, and is now promoting a comprehensive development strategy for FATA. It is seeking to use the substantial funds available (both internal resources and support from external donors) to pay for this. Pakistan's vital efforts against terrorism and extremism involves close co-operation with, and support from, the UK amongst others in the international community.

Economic Role

  42.  Pakistan is a developing country, which has seen rapid growth in recent years. In 2005 it had one of the highest GDP growth rates in Asia, and at 8.6% was second only to China. However, it also remains an impoverished and underdeveloped country. It has suffered from decades of economic mismanagement and low levels of foreign investment. Almost 50% of the population is illiterate.

  43.  Things are now starting to change. Reforms begun in 2000-01 have resulted in a stronger economic outlook and accelerated growth in the manufacturing and services sectors, reducing the relative dependence on agriculture. Following the lifting of G7 sanctions, imposed after Pakistan tested nuclear bombs in 1998, there has been an increase in exports and an improvement in Pakistan's balance of payments.

  44.  There are a number of success stories in the Pakistani economy—one of which is textiles. The sector's value added amounts to about 10% of GDP and 40% of the country's manufacturing output. Despite the conclusion of the Multi-Fibre Agreement in January 2005, which opened up textiles to full competition, Pakistan's textile and clothing exports continue to fare well. The service sector has also seen strong growth rates.

  45.  Privatisation and strong performance in manufacturing and services has led to an inflow of FDI. Levels have risen to $970 million so far this year (excluding privatisation), up from $515 million for the same period last year. The sectors attracting the most FDI are power, telecommunications and oil and gas exploration, which make up over 40% of all FDI. The UK is an important source, contributing around 20% to total FDI levels.

  46.  Although the economy is heading in the right direction, risks still remain. High growth rates in recent years (over 5% GDP growth per annum since FY 2002-03) have put the economy at risk of overheating.

  47.  The government budget has been generous in the lead up to an election year, with spending increases of 27%. It has been labelled the "budget for the poor" and offers substantial pay rises to government officials and food subsidy increases. These initiatives are encouraging. But with little sign of an attempt to widen the tax base, they beg the question: how will the increased spending be financed?

  48.  Overall the outlook for the Pakistani economy is positive and its stands to benefit further from enhanced integration of the South Asia region. At the moment South Asia is one of the least economically integrated regions of the world. In total it covers 3.5% of the world's land surface, contains almost a quarter of the world's population, but shares only 1.3% of the world's trade. Although trade and FDI are growing as a percentage of GDP in Pakistan, very little is from within the region, reflecting ingrained suspicions and decades of political conflict with India. Trading within the South Asian Association for Regional Cooperation (SAARC) accounts for less than 5% of the members' total global trade. However, this may change with the formation of the South Asian Free Trade Area, which the Pakistani government ratified earlier this year. It creates a framework for a reduction in tariffs by 2007 and the creation of a free trade zone in South Asia to be in place by 2012.

Society

  49.  The challenges facing Pakistan are considerable. Feudal structures have historically been strong and civilian institutions correspondingly weak. In recent times, political parties have relied more on the personalities of their leaders to attract voters than on comprehensive policy platforms. A weak judiciary, a lack of accountability, corruption and patronage at all levels persist whatever the complexion of the government. The involvement of the military across a wide spectrum of society, together with the domination of the feudal elite, continue to take a toll. Many of Pakistan's sectional interests feel excluded from national institutions: this is a major factor undermining social cohesion and producing ethnic and sectarian violence. State education is poor, which has led to a growth in both private and madrassa education. Although there have been considerable advances in recent years, a quarter of the population lives below the national poverty level. These factors all constitute further major challenges to a cohesive society.

  50.  Even before the foundation of Pakistan, modernists and Islamic radicals contested the idea of what kind of state it should be; simply a country where Muslims could live together or a state where Islamic law would prevail. Those who led the call for a separate Muslim homeland, including Mohammed Ali Jinnah, were largely modernists. However, the martial law regime of Gen. Zia ul-Haq in the 1970s and 1980s introduced a policy of "Islamisation" of the country's institutions, including Islamic penal codes and economic principles, and left an enduring legacy which sits uneasily with Pakistan's moderate sufi traditions. The majority of the population today remains largely moderate, although devout, but religious radicalism has grown and sectarian tensions are never far from the surface. President Musharraf is committed to a progressive agenda he terms "enlightened moderation". But attempts by the Government to reform Islamic laws have met with stiff opposition. Most recently the Government had to stall passage of its "Women's Protection Bill" to amend the Hudood ordinances—laws which are highly discriminatory against women—following parliamentary opposition.

IV.  SECURITY

India/Pakistan and the Kashmir issue

  51.  The UK has welcomed progress made in recent years between India and Pakistan within their Composite Dialogue process. These discussions cover: Peace and Security; the Wular Barrage/Tulbul Navigation project; Siachen Glacier; Sir Creek; Economic and Commercial Cooperation; Terrorism and Drugs and the Promotion of friendly exchanges. Separately, the Indians have formed five Working Groups to provide a structured framework for looking at ways to improve the situation in Kashmir. The five groups will discuss:

—  measures for improving the condition of people affected by militancy, plus schemes for rehabilitating orphans and widows affected by insurgency;

—  simplifying cross-Line of Control travel, increasing goods traffic and expanding people-to-people contacts, including the promotion of pilgrimages and group tourism;

—  economic development, employment generation and the balanced regional development of Kashmir;

—  the special status of India-administered-Kashmir within the Indian Union, and to consider how to strengthen democracy, secularisation and the rule of law (this Working Group has yet to meet); and

—  good governance, the strengthening of local self-governance and the implementation of the Right to Information Act.

  52.  The India-Pakistan relationship has been transformed since 2002 when the two countries appeared to be on the brink of war. Despite some difficulties following recent terrorist atrocities in Mumbai, the Joint Statement agreed at Havana (in the margins of the NAM Summit) in September 2006 means that both countries have re-committed themselves to continuing the process. As a close friend of both countries, we remain in regular contact with India and Pakistan, and we will continue to encourage both countries to seek a durable resolution to all the issues outstanding between them, including over Kashmir.

  53.  The situation in Kashmir continues to be of concern. Cross-Line of Control terrorist groups continue to operate in Indian-administered Kashmir, and there are almost daily attacks. Despite relatively successful elections in Indian-administered Kashmir in October 2002, and some signs of increased "normalcy" eg large numbers of Indian tourists, there is still widespread alienation among people in the Kashmir Valley (in contrast to the two other regions of Jammu and Ladakh). The Indian Government has made some efforts to begin dialogue with separatist groups and to address popular concerns, but there has been limited progress so far. Over half a million men are stationed with the security forces (army, central paramilitaries, police) in Indian-administered Kashmir. Human rights violations by the security forces have reduced in recent years but are still a cause of concern.

Terrorism

  54.  Terrorism is a growing concern in South Asia. Most of the countries in the region are affected to a greater or lesser degree by terrorism on their territory. Suspicions and allegations about external involvement in or support for particular attacks colour a number of bilateral relations within the region, in particular India-Pakistan, and also India-Bangladesh and Afghanistan-Pakistan. The links between domestic extremist groups in the region are becoming more evident, as are links to UK-based extremists. It is widely thought that some core Al Qaeda leadership are in hiding in the remote Afghanistan-Pakistan border region.

  55.  Pakistan-based terrorists and their links to the British-Pakistani diaspora currently pose the greatest terrorist threat to the UK. Working with the Government of Pakistan is therefore a top UK counter-terrorism priority. Some British-Pakistani terrorist networks are closely linked to Al Qaeda; some are more loosely associated. The attacks in London on 7 July 2005 and the more recent arrests in connection with Operation Overt (the series of arrests made in the UK on 10 August in relation to a plot to explode a number of US-bound aircraft) demonstrated that these terrorist networks seek to co-operate, facilitate, and train with extremists in Pakistan. Pakistani and UK Government co-operation was a crucial feature of Operation Overt.

  56.  The Baluchistan Liberation Army (BLA) was proscribed by the UK in July 2006. Proscription of other groups, including Hizb ut Tahrir (HuT), is kept under constant review.

  57.  Terrorist groups, including ever-mutating splinters and off-shoots, still conduct attacks in Indian-administered Kashmir on Indian security forces and civilians. It is not clear where all of these groups are based. Most have a jehadi style Islamist agenda for Kashmir. Such groups—particularly in recent times Lashkar-e-Toiba (LeT) and Jaish-e-Mohammed (JeM)—have conducted attacks in both India and Pakistan. The UK has proscribed LeT and JeM.

  58.  Recent attacks in India include the Delhi bombs (29 October 2005) with around 60 fatalities; an attack on a police Special Task Force station in Hyderabad; shootings at an Indian Institute of Science conference in Bangalore (28 December 2005, one dead); the Varanasi bombings (7 March 2006); the Mumbai bombings (11 July 2006 nearly 300 killed); and the bomb attacks in Malegaon (8 September 2006, at least 30 killed). Pakistan is also a victim of terrorism, including assassination attempts (there were two attempts on the life of President Musharraf in 2003 and one on the life of Prime Minister Shaukat Aziz in 2004), and sectarian violence such as the recent assassination of Pakistan's most senior Shia cleric.

  59.  There are several insurgencies in the North East of India including the one in Assam, led by ULFA (United Liberation Front of Assam). There are Maoist (Naxalite) insurgents in the East and parts of central India (particularly Bihar, Jharkand, Chattisgarh and Andhra Pradesh). The authorities are very concerned about the spread of Naxalite activity. More civilians are thought to have died in Naxalite violence this year than in violence in Indian-administered Kashmir. There is also a significant criminal element to most of these insurgencies. Pakistan has also confronted an armed insurgency in Baluchistan (where there is a strong sentiment against perceived misappropriation of natural resources by the centre).

  60.  The Bangladesh Government is also tackling a serious terrorist problem. On 17 August 2005 in what was seen as a demonstration of co-ordination, over 450 bomb attacks took place simultaneously across Bangladesh, killing two people. In the following months, further attacks led to the deaths of around twenty more people. A banned extremist group Jamaat Mujahidin Bangladesh (JMB) claimed responsibility—the Government has since captured the leaders. There have also been a number of assassinations in Bangladesh, primarily linked to other domestic extremist groups. There are concerns that there may be some Bangladesh-based connections with terrorist groups active elsewhere.

  61.  Nepal has faced a 10 year Maoist insurgency which has resulted in the deaths of some 13,000 people, many at the hands of the security forces. The Maoists have used terrorism, extortion, abductions and other human rights abuses to pursue their cause. Since the restoration of multi-party democracy and the mutual ceasefire in April 2006 fighting between the Maoists and the (formerly Royal) Nepalese Army has largely ceased. But Maoist abuses continue.

  62.  In Sri Lanka the Liberation Tigers of Tamil Eelam (LTTE) have been waging a violent campaign, including terrorism tactics, against the Government for over twenty years to try and secure a separate state, or at least federal devolution, in the north and north-east of the country. Recent weeks have seen a resurgence in open hostilities resulting in considerable loss of life, including to civilians. Norway, as facilitator to the peace process, continues to work hard, with the full support of the international community, including the UK, to bring the parties to resume negotiations for a peaceful settlement.

WMD Proliferation

  63.  India and Pakistan have both ratified the Chemical Weapons Convention (CWC) and the Biological and Toxin Weapons Convention (BTWC). India is destroying its stockpile of chemical weapons under the CWC verification regime. The Pakistani Ambassador is President-designate of the five-yearly BTWC Review Conference scheduled for later this year.

  64.  Neither country has signed the Nuclear Non-Proliferation Treaty (NPT), nor the Comprehensive Nuclear Test Ban Treaty (CTBT). Both India and Pakistan are on the list of countries which must ratify the CTBT before entry into force. For many years their nuclear status was ambiguous: even when India conducted a partially successful nuclear test in 1974, it characterised it as a "peaceful nuclear explosion". But in 1998 India conducted a series of nuclear tests, closely followed by Pakistan, and both countries openly declared themselves to have nuclear weapons programmes. However, since nuclear-weapon States (NWS) are defined by the NPT as "states which manufactured and exploded a nuclear weapon or other nuclear explosive device prior to 1 January 1967", India and Pakistan have to be regarded as non-nuclear-weapon States (NNWS) for NPT purposes.

  65.  In the aftermath of the 1998 tests the UN Security Council, on the basis of a P5 Joint Communiqué, unanimously adopted UNSCR 1172. This condemned the tests and, among other things, called on India and Pakistan to stop their nuclear weapon development programmes and to become parties to the NPT.

  66.  The UK is a member of the Nuclear Suppliers Group (NSG). The NSG's present Guidelines on nuclear-use-only items prohibit their supply to any NNWS which does not have a safeguards agreement with the IAEA covering all its nuclear material (a so-called "comprehensive safeguards agreement", CSA). For the purposes of the NSG Guidelines India and Pakistan are not nuclear weapons states. There is no prospect of either accepting a CSA, which would require them to put under safeguards materials they intend for their nuclear weapons programmes. Consequently the Guidelines require that NSG members should not supply nuclear use only items to either country.

  67.  On 15 March 2002, the then Minister of State Ben Bradshaw set out HMG's policy towards nuclear exports to both countries. This policy was to deny all exports for items on the NSG Dual-Use List to India and Pakistan and to discourage contacts between UK nuclear scientists and their South Asian counterparts.

  68.  This policy was revised in August 2005 with respect to India. It now stipulates that we will continue to refuse:

—  applications in respect of all NSG Trigger List items; and

—  applications in respect of all items on the NSG Dual-Use List, when they are destined for unsafeguarded nuclear fuel cycle or nuclear explosive activities, or when there is an acceptable risk of diversion to such activities.

  69.  We will now, however, consider on a case-by-case basis licence applications for items on the NSG Dual-Use List destined for other activities. We will also consider all applications to export other items assessed as licensable, including those assessed as licensable under WMD end-use control, on a case-by-case basis, taking into account:

—  the risk of use in, or diversion to, unsafeguarded nuclear fuel cycle or nuclear explosive activities, or acts of nuclear terrorism;

—  the risk of possible onward transfer of these items to other States for proliferation purposes, including the recipient State's export control performance; and

—  the potential utility of the items concerned for, and contribution that they would make to, such activities.

  70.  We will continue to consider applications for exports which will contribute to the physical protection or security of civil or military nuclear facilities or assets in India. Licences may be issued in exceptional cases, consistent with our obligations and commitments.

  71.  We will encourage contacts between UK nuclear scientists, academics and those working in or with the UK nuclear industry with their Indian counterparts, except where we consider that such contacts might be of assistance to the weapons-related aspects of its nuclear programme. In light of this new policy towards India, the UK-India Civil Nuclear Contact Scheme has been introduced to oversee and facilitate contacts between the UK and India, maximising scientific collaboration within the parameters of the UK's existing international and domestic legal obligations. Where such contacts involve the transfer of technology, which require export licences, we will continue to consider applications for such licences in accordance with the provisions of UK export control legislation, on a case-by-case basis.

  72.  This announcement followed careful consideration of moves by India to improve its non-proliferation laws and their implementation. Following the revelation of the proliferation network run by AQ Khan, it was concluded that it was inappropriate at that point to make similar changes to our policy towards Pakistan.

  73.  Separately from this process, US President Bush and Indian Prime Minister Manmohan Singh agreed on 18 July 2005 to launch the US-India Civil Nuclear Co-operation Initiative (CNCI). The US Administration would seek agreement from Congress to adjust US laws and policies, and work with others to change the NSG guidelines, to enable full civil nuclear energy co-operation and trade with India.

  74.  In return, India would:

—  identify and separate its civilian and military nuclear facilities and programmes in a phased manner, placing the former under IAEA safeguards in perpetuity;

—  sign and adhere to an Additional Protocol on its civilian facilities;

—  continue its unilateral moratorium on nuclear testing;

—  work with the US for a multilateral Fissile Material Cut Off Treaty; and

—  adhere to the Missile Technology Control Regime and NSG guidelines.

  75.  The Prime Minister welcomed the announcement of the CNCI. In addition to its non-proliferation benefits, the Initiative can make a significant contribution to energy security, development, economic and environmental objectives for India and the international community. HMG remains committed to the objective of universal NPT adherence, but we recognise this is a long-term objective. The CNCI makes no difference to India's status under the NPT as it can only sign up to the Treaty as a Non Nuclear Weapons State (NNWS). India has taken action in recent years to conform to international non-proliferation norms, for example the adoption of new export control legislation in April last year. The commitments made in the US-India Joint Statement of 18 July 2005 represented further progress.

  76.  Implementation of these commitments will bring India further into, and thereby strengthen, the broader nuclear non-proliferation framework, of which the NPT is the cornerstone. In particular, the CNCI will reinforce the centrality to this framework of both IAEA safeguards and the Additional Protocol, and can only aid the latter becoming a universal standard.

  77.  The NSG has discussed the CNCI at its meetings since the 18 July announcement, though no decision has yet been taken on whether to amend its Guidelines. In parallel, India has held two meetings with the IAEA to discuss Safeguards. These have been regarded as initial talks that have gone well, but further work is needed. In the US, legislation has slowly been going through Congress to allow US bilateral cooperation.

V.  REGIONAL SECURITY AND GOVERNANCE

India's Central Role

  78.  Since the end of the Cold War India's foreign policy orientation has been in transition. This has also been driven by India's impressive economic growth. It has developed closer ties with Western nations, in particular the US (as exemplified by the negotiations on civil nuclear cooperation) but also the UK, EU and Japan. India has been trying to move away from its "hyphenated relationship" with Pakistan, to be looked at as a serious regional and global player in its own right and on a wide range of issues. However, the relationship with Pakistan remains very important, both for bilateral reasons, and because of its implications for the stability and potential development of the region.

  79.  The adversarial relationship with Pakistan dominated India's outlook for much of the post-1947 period. India and Pakistan have fought three major wars (and one minor one) and threatened a fourth in 2001-02. The issue of Kashmir has been the key bone of contention. Since 2004 three rounds of negotiations ("Composite Dialogue") over a range of bilateral issues have made some progress towards normalising relations. Several confidence-building measures have been agreed. A cease-fire along the Line of Control is nearly three years old. The volume of trade has grown, albeit from a very low base, though around half still flows via Dubai. There are direct people-to-people links, including a bus service across the Line of Control. But there has been no substantive progress on topics where control of territory is at issue, ie Kashmir, the Siachen Glacier and Sir Creek. Full normalisation of relations is unlikely until there is final agreement on the status of Kashmir. Without this, South Asia remains arguably the most likely arena where the failure of deterrence could lead to the use of nuclear weapons.

  80.  Though instrumental in securing Bangladesh's secession from Pakistan in 1971 India's relations with Bangladesh have always been strained. The relationship is stymied by a number of contentious issues: unresolved borders (including enclaves in both countries), trade, shared rivers, illegal immigration, transit rights and the alleged presence of anti-Indian insurgents in Bangladesh. Each country has opposing priorities: Bangladesh focuses on trade and water; India on insurgents/security, illegal immigration and transit rights to its North Eastern states. India's economic and military power and sheer size dominate the national psyche in Bangladesh perhaps even more than in India's other neighbours.

  81.  In early 1997 the two countries signed a landmark agreement (renewed annually) on water sharing for the Ganges rivers and for improved liaison over refugee and border security issues. The fall from power in 2001 of the Awami League and the return of the Bangladesh National Party in coalition with Islamist partners, have led to cooler relations. India remains concerned over the influence of the Islamist parties and by the rise of Islamism and terrorism in Bangladesh.

  82.  Bangladesh's growing problem of extremism, a political-criminal nexus and a general lack of good governance present a potential threat to the region's stability. Elections are due in January 2007 but Bangladesh's parliamentary democracy is undermined by deeply confrontational relations between the two main parties. The government needs to do more to establish a free and fair election playing field. Failed elections are not out of the question. India will want to let the dust settle on the elections before moving forward on any initiatives to improve relations.

  83.  Against a backdrop of pre-election uncertainty, the major Indian corporation, Tata, has recently suspended plans for a $3 billion infrastructure project in Bangladesh, amidst reports that Bangladeshi Ministers were concerned about popular reaction to official endorsement of such a large Indian investment.

  84.  The two major influences on India's relations with Sri Lanka have been security and the shared ethnicity between Tamils in southern India and in northern and eastern Sri Lanka. The failed 1987 Indo-Sri Lankan Accord, the fighting between Indian peace keeping troops in Sri Lanka and the LTTE in the 1980s, and the assassination of Rajiv Gandhi in 1991 by an LTTE suicide bomber have made deep wounds. India has called on Sri Lankan President Rajapakse to bring an end to the killing of Tamil civilians and spell out his vision of devolution. India is a strong supporter of Norway's role as facilitator of the peace process.

  85.  Despite President Rajapakse's suggestion that the Indians should play a more central role in the peace process, Delhi has so far resisted this and continues to make clear its strong support for the Norwegian efforts. It meanwhile stresses to the government of Sri Lanka the need to tackle the serious humanitarian and human rights situation.

  86.  Relations with Nepal are close, yet fraught. Under the 1950 Treaty of Peace and Friendship each government agreed, inter alia, to give citizens of the other "national treatment with regard to participation in industrial and economic development" and "the same privileges in the matter of residence, ownership of property, participation in trade and commerce". Political instability within Nepal and the Maoists' "people's war" launched in 1996 have been of great concern to India, not least because of suspected links between Nepalese Maoists and Maoist groups in India, but also because of the rise in criminal activity, eg smuggling, in border areas and unrestricted migration. The Treaty has been and still is the subject of a certain amount of resentment in Nepal; the Maoists have demanded that this "discriminatory" Treaty should be abrogated.

  87.  In recent years India has helped broker agreements between the political parties, King and Maoists. In late 2005 they helped broker the 12 Point Agreement between the Seven Party Alliance (SPA)—now the Government—and Maoists. Since the people's uprising in April 2006 and the return of multi-party government, India has supported the attempts by the SPA to bring the Maoists into government, once the management of arms has been satisfactorily resolved. After initial hesitation, India has recognised the value of a UN role in providing technical assistance to the peace process. Prime Minister Koirala has good relations with Indian leaders, and made a high profile visit to New Delhi in June 2006 during which a substantial Indian aid package for Nepal was announced. India naturally has influence over all key players in Nepal, including the Maoists. Indian influence can sometimes stir controversy in Nepal, but all parties in Nepal recognise that they have more to gain from good relations with India than not.

  88.  Like Nepal, Bhutan is a buffer state with China. India has always seen Bhutan's internal stability as integral to her national security. The 1949 Treaty of Friendship with Bhutan stipulates that Bhutan will be guided by India's advice in regard to her external relations and makes India responsible for Bhutan's external security. This relationship has worked well and served India's interests when in December 2003 the Royal Bhutan Army, in co-ordination with Indian forces, began successful military operations against guerrilla bases in southern Bhutan. The bases had been established by groups seeking to establish an independent Assamese state in north-east India. India provides Bhutan with developmental assistance and co-operation in infrastructure, telecommunications, energy and industry and hydro-electricity projects which have boosted Bhutan's GDP exponentially. Bhutan is sensitive to India's concerns about its relationship with China.

  89.  India and Maldives have enjoyed friendly relations since the latter's independence in 1965. The maritime boundary was settled in 1976 and in 1988—at the request of Maldives and in keeping with India's preparedness at the time to take a lead in the region—India dispatched 1,600 troops by air to restore order in the capital after an attempted coup. The Indian Navy provided early post-tsunami assistance to the islands.

  90.  India's other important relationships in the wider region include:

—  Burma: while India says it shares the concern to see democracy established in Burma, it argues for a policy of engagement. It is very conscious of the need to work with the Burmese regime for security reasons (north-east insurgent groups have used Burma in the past), and for reasons of strategic competition with China.

—  Afghanistan: India has very good relations with President Karzai's Government. It has given a lot of reconstruction assistance—$650 million—and has an active presence on the ground. It is very concerned about Taleban influence and possible linkages to terrorists operating against India. Difficulties in the India-Pakistan relationship can sometimes spill over into relations with Afghanistan.

—  Iran: India, which is home to over 27 million Shia Muslims, is proud of its "civilisational relationship" with Iran. There is also strategic interest in good relations with Iran because of Pakistan. Recently there has been a focus on potential energy deals (sale of LNG and an oil/gas pipeline via Pakistan). The Indian Prime Minister has said that India does not wish to see Iran develop a nuclear weapon, but it is also keen to find a peaceful resolution through negotiation.

India's involvement in Regional bodies

  91.  South Asia is characterised by very low levels of economic integration and intra-regional trade. Economic co-operation has traditionally been held hostage to narrow political and security perceptions and the fear amongst her neighbours that India will become even stronger. Formal trade and non-trade barriers are indicators of political unwillingness to open markets to real competition. India is key to any successful regional trade agreement. It is at the heart of the region, and any regional economic endeavour will need Indian support if it is to work. As a regional player with global ambitions, India does not want to be left out of any emerging groupings. But concrete benefits have been fairly limited so far.

SAARC

  92.  The South Asian Association for Regional Co-operation (SAARC) comprises Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka and Afghanistan (recently joined). It was established in 1985 with the objectives of, inter alia, promoting the economic growth, social progress and cultural development in the region. After a slow first ten years SAARC has now begun to make some progress on economic and trade matters. But regional co-operation is affected by the state of India-Pakistan relations in particular.

SAFTA

  93.  The South Asian Free Trade Agreement (SAFTA) was signed in January 2004 and began implementation from January 2006 with full operational efficacy anticipated for 2016. SAFTA's key objective is the liberalisation of trade in goods. Its scope is not particularly ambitious, but resistance to trade liberalisation is still strong as the economies of the area do not feel ready to expose themselves to the competition of neighbours. Disagreements have continued over the list of "sensitive" (ie exempt) items, rules-of-origin issues and compensation levels for SAARC's Least Developed Countries.

ASEM/ASEAN

  94.  Since the early 1990s India has had a so-called "Look East" policy for several reasons: a reorientation following the end of the Cold War, to provide an alternative to the problematic relationship with Pakistan to the West, and to boost Indian influence in Asia as a whole, particularly with those countries traditionally within China's sphere of influence.

  95.  Since 2002, India has been an ASEAN Dialogue Partner. It is a member of the ASEAN Regional Forum (ARF), participated in the first East Asia Summit (in December 2005), and joined the Asia Europe Meeting (ASEM) in September 2006. It is in the process of negotiating a Free Trade Agreement with ASEAN, as well as bilateral agreements with several ASEAN members.

  96.  India attaches some importance to these relationships, but they are not at the top of its foreign policy priorities. It is much closer to some countries, eg Singapore, than others.

Shanghai Co-operation Organisation

  97.  India (and Pakistan) received observer status in 2005, and has been keen to maintain a presence in the Shanghai Co-operation Organisation (SCO). The SCO is primarily centred around economic co-operation and Central Asian security-related concerns (terrorism, separatism and extremism) but the overall geo-political direction of the organisation is being driven by Russia and China towards curbing Washington's influence in Central Asia. India has not applied for full SCO membership and is unlikely to do so for fear that it will undermine developing relations with the US.

BIMSTEC

  98.  The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation (BIMSTEC) was established in 1997 to foster socio-economic co-operation among Bangladesh, India, Myanmar, Sri Lanka and Thailand. Bhutan and Nepal were admitted as full members in 2004. BIMSTEC is envisaged as facilitating trade and development between its member states—five of which are SAARC countries and two of which are members of ASEAN. The seven countries have endorsed a plan for a free trade pact by 2017 whilst India, Sri Lanka, and Thailand are committed to trade liberalisation by 2012. In theory, BIMSTEC could displace SAARC as it is not hostage to Indo-Pakistan relations. Whether it does or not will be largely up to India, the potential lynchpin of BIMSTEC. If India wants to get the best out of BIMSTEC's potential it will have to re-energise its economic reforms and improve its infrastructure, especially in the underdeveloped East and North East. But in the day to day Indian international trade agenda BIMSTEC does not feature much.

VI.  INDIA'S INTERNATIONAL ROLE

India's Growing Influence

  99.  India tries to find a balanced way through its traditional NAM loyalties and emphasis on south-south cooperation, and its increasing interest in the US. The relationship with the US has been transformed in the last ten years, though suspicions remain, in particular of the US foreign policy agenda. India has put much effort into defending and promoting the civil nuclear agreement with the US, which symbolises the transformation since 1998 when the US imposed sanctions following India's first openly military nuclear test.

  100.  India's relations with China have changed quite dramatically from being one of competition to co-existence and co-operation. Trade between the two countries is booming and continues to grow as they, like the rest of the world, explore the potential in each other's expanding markets. The historic suspicions that have dogged the relationship since the end of the 1962 war still remain, but are no longer a significant issue. Relations between India and China matter to the UK at economic, military and strategic levels. How these two countries get along together will have an impact on the wider world for many years to come.

International Organisations:

India's profile at the UN

  101.  Reflecting India's contribution to the work of the UN, the size of its population, and the importance of its emerging economy, the UK has supported India's bid for a permanent seat on the UN Security Council since 2003. India is active across the board at the UN. It is also an influential member of the G77 (group of 132 developing countries).

  102.  India is the third largest contributor to UN peacekeeping, with over 9,000 troops and civilian police deployed on 12 UN peacekeeping operations. Over half are deployed to the UN Mission in the Democratic Republic of Congo (MONUC). The Indians have also supplied MONUC with attack helicopters, which have played an important role in disarming and demobilising the belligerents.

  103.  The Indians are active in the contentious debate in New York on UN management reform. The 2005 UN World Summit agreed a series of management reforms to modernise the UN, including through a more efficient, effective and accountable UN Secretariat. Reform should be increasingly in India's interest, as its own contribution to the UN regular budget will increase as its economy grows. But India, like her G77 partners, is concerned that the reform agenda might reduce the power of the wider membership in the General Assembly and place the Secretariat more under the influence of the major (predominantly western) financial contributors.

  104.  India initiated negotiations for a UN Comprehensive Convention on International Terrorism. India has played a positive role in that process and in discussion of a draft UN Counter-Terrorism Strategy. Like us, the Indians want a strong condemnation of terrorism by the UN; they support the SG's work on the issue; and want all parts of the UN system to be better co-ordinated.

  105.  The UN Human Rights Council (HRC) was established in 2006 to replace the discredited Commission for Human Rights. India made a series of election pledges for its seat on the Council, including committing to work for the success of the Council and to continue to support UN bodies. It was elected comfortably. India was generally flexible and constructive in the procedural HRC negotiations in June, and helped promote some good solutions on moving the Council's establishment forward.

  106.  India is a Non-Annex I country within the UN Framework Convention on Climate Change and is a signatory to the Kyoto Protocol which India ratified in August 2002. As a non-Annex 1 country India has no set Kyoto target to meet between 2008-12. India shares with the rest of the G77 the view, acknowledged in the UNFCCC, that the burden of reducing global CO2 emissions rests in the first instance with the developed world. India is suspicious of any action that it perceives to be an attempt to lock it into emission reductions targets that might prove harmful to its economic growth.

India and the WTO

  107.  India is an important and active country within the WTO. It is a leading member of the G20 grouping of advanced developing countries, which also includes Brazil and China. India's position in the current round of negotiations (the Doha Development Agenda—DDA) is driven by a mix of interests. India wants to protect its subsistence farmers and about 600 million people who depend directly or indirectly on agriculture, particularly from subsidised imports and on non-agricultural market access—NAMA (protection of its infant industry and a fear of an influx of Chinese textiles and manufactured goods). At the same time, India recognises that an increasing number of its industrial sectors (pharmaceuticals, auto parts etc) are beginning to be globally competitive, hence there has been significant autonomous reductions in industrial tariffs in recent years, and it may be willing to go further as part of a WTO agreement.

  108.  India, like the UK, wants to see a reduction in developed countries' trade-distorting agricultural subsidies. Given the potential benefits that the Round could deliver, particularly for the poorest developing countries, but also for India's fast-growing emerging economy, we are urging them to take the most constructive approach possible.

  109.  The WTO Round remains the UK's main priority and India also remains ready to engage. But with the current impasse in the WTO negotiations, India is increasing its focus on potential bilateral and regional trade agreements, and appears to be giving the launch of formal negotiations with the EU a high priority.

India in the Commonwealth

  110.  India has always placed a key role within the Commonwealth. Some say it was India's decision soon after Independence to continue in the Commonwealth which influenced other Asian and African countries to join the organisation and which therefore opened the era of the modern Commonwealth.

  111.  India is the largest member state of the Commonwealth with nearly 60% of its total population. It is the fifth largest contributor to the Commonwealth Secretariat's budget after the UK, Canada, Australia, and South Africa. India is an active member of key Commonwealth bodies, including the Committee on Terrorism and played a key role when a member of the Commonwealth Ministerial Action Group on the Harare Declaration (CMAG). India continues to show its commitment to the Commonwealth by being one of the principal donors for the Commonwealth Small States Office in New York.

  112.  India will be hosting the 2010 Commonwealth Games in Delhi.

IBSA

  113.  The initial purpose of the India-Brazil-South Africa (IBSA) Dialogue Forum was to foster south-south co-operation between three key regional developing nations and present a cohesive voice at the bargaining sessions anticipated for the Doha Rounds of WTO talks. The common challenges of poverty alleviation, economic development and social equity provided the early focus, but specific trade and sectoral issues also featured highly at the September 2006 IBSA Summit in Brasilia. IBSA is also seen by India as a potential gateway to wider regional markets already governed by customs unions (MERCOSUR and SACU) and some work on preferential trade arrangements between India and these two groupings is now underway. IBSA has also pressed for a more representative (multilateral) UN; specifically, India and Brazil support each other's candidature for inclusion as permanent members of the Security Council.

Energy:

Energy Security

  114.  India has recently launched an Integrated Energy Policy to address energy security. But even if the policies are implemented, the demand for imported oil and gas will continue to rise well beyond India's indigenous capacity to meet demand. The new policies propose to:

—  Increase the production of domestic coal and gas through new exploration licences.

—  Increase civil nuclear power production based on domestic thorium.

—  Promote the use of renewable and next generation energy sources. The Indian government is promoting the use of ethanol made from sugar cane and bio-diesel extracted from local plants. Additionally, India is emerging as a growing market for solar, wind and hydroelectric power.

—  Liberalise the fuel market.

—  Invest significantly in energy efficient technologies and R&D.

India in the Global Energy Market

  115.  While India has significant reserves of (low grade) coal, it is relatively poor in oil and gas resources. India's rapidly increasing demand for energy will lead to a substantial increase in demand particularly for oil. The World Energy Outlook projects India's dependence on oil imports will grow from 70% to 92% by 2020. Its oil reserves amount to 5.9 billion barrels, 0.5% of global reserves, with a total proven, probable, and possible reserves of close to 11 billion barrels. The majority of India's oil reserves are located in fields offshore from Bombay and onshore in Assam. Recently there have been significant finds of oil in the deserts of Rajasthan by UK-based Cairn Energy.

  116.  India imports around 65% of its oil requirements from the Gulf region. Conscious of this growing reliance on the Gulf, India is seeking to diversify its suppliers. Indian investment in overseas oilfields has reached $10 billion in the last few years, not including a $25 billion deal with Iran. In support of this, India is developing new relationships, for example in Sudan, where India has invested $750 million in oil; Nigeria where India negotiated a purchase of about 44 million barrels of crude oil per year on a long-term basis; and in Syria, where India recently finalised a contract for the exploration, development and production of petroleum with a Syrian company.

  117.  India is trying to gain a foothold in the Caspian basin. India has provided Tajikistan with a $40 million aid package and undertook to refurbish an air base near the Tajik capital Dushanbe.

  118.  The Russian territory of Sakhalin, Vietnam and Myanmar are also potential suppliers to the Indian market and areas in which Indian firms have made major investments.

  119.  The government is trying to promote a shift towards natural gas and Liquefied Natural Gas (LNG). There have been recent finds in the Krishna-Godavari basin. But new finds do not match growing demand. India will be a major importer of natural gas and LNG over the next few decades. The cheapest way to supply India with gas is through pipelines from Central Asia and the Middle East, through Pakistan.

  120.  India remains confident that there will be agreement on an Iran-Pakistan-India (IPI) Pipeline at some stage, although problems over the price of the gas and the security of the pipeline are yet to be resolved. The other gas pipeline India is actively considering is the Tajikistan-Afganistan-Pakistan (TAP) pipeline. This pipeline is also fraught with problems. However with Gazprom showing an interest in this pipeline, the TAP pipeline seems to be nearer to implementation than the IPI one.

  121.  On the eastern coast, imports of small amount of natural gas from Bangladesh may be feasible. However, Bangladesh's internal party politics do not allow it to take a decision in favour of exports to India. Consequently, India is focusing on costlier LNG imports especially from Oman, Qatar and Australia. Construction of the required infrastructure is already underway.

Reliability of supply

  122.  India is becoming increasingly aware that its economy is highly vulnerable to supply disruptions and, until recently, India did not have an energy security policy or contingency plan in case of crisis. The Indians are aware that they are the late entrants in the acquisition of equity oil and are therefore prepared to take more risk in acquiring equity oil concessions. As well as these purchase strategies India is building a strategic crude oil reserve facility on its southern and eastern coasts.

  123.  India's rising energy demand directly affects the UK's energy security interests. Indian energy demand is driving up oil prices; India is investing in maritime capabilities to protect transit routes; state owned companies are buying oil and gas assets in countries that will influence their foreign policies in ways the UK may find difficult (eg Burma).

Environment:

Climate Change and India

  124.  The impacts of climate change in South Asia could undermine domestic priorities in sustainable economic development and lead to regional conflict, migration and an increase in competition over natural resources. Temperature increase of 3-4 degrees centigrade over the next thirty years could cause Himalayan glaciers to shrink; areas that rely on glacial runoff would suffer severe shortages with 500 million people depending on the glacier-fed Indus and Ganges rivers for water. Desertification, deforestation, soil erosion and a reduced water table are already major problems—more climate change will worsen this. A one-metre sea rise would affect 5,763 square kms, and threaten another 7.1 million people. Goa would lose 4.3% of its land, including tourist areas. Rice and wheat production would drop significantly because of climate change. Gujarat, Maharashtra, Karnataka, Punjab, Haryana, and Uttar Pradesh would be worst affected. Temperature rise would lead to increased pest populations and crop losses and vector-borne diseases such as malaria would invade new areas.

  125.  Again, the decisions taken in India on energy infrastructure, particularly on carbon intensive coal-fired generation will have huge implications for global climate security for decades to come.

  126.  India has no targets, specific policies or programmes to reduce greenhouse gas emissions. However, it has numerous policies, driven by concerns about energy security and environmental health, which also deliver climate change benefits. These include policies on energy efficiency, energy conservation, promotion of renewables and protection of the environment. Action is in the form of voluntary targets, policies and regulation—tasking states to prepare energy efficiency or renewable energy plans and then providing incentives for states to implement the policies. There has been some initial work on climate change impacts, but there is limited research and understanding of adaptation to climate change and what this may mean for India. Adaptation to climate change may be included in the national policy agenda in the near future, however.

  127.  The Indian government resists discussion on emissions reductions, particularly with regard to targets, and looks critically at some international collaboration which it fears might lead to targets. The Indian political view is that India's need for economic growth must not be compromised by environmental concerns.

  128.  The UK is actively engaged with India on climate change through the ongoing Structured Dialogue on Climate Change (SDCC) that encompasses work on the impacts of climate change in India, vulnerability of certain sectors and adaptation strategies, as well as study of barriers to transfer of low carbon technology. Ensuring intergovernmental engagement has been at the core of the bilateral work on climate change and environment.

  129.  The Department for International Development (DFID) is focussing on climate adaptation and collaborating with the Ministry of Rural Development and with state governments in Andhra Pradesh, Madhya Pradesh and Orissa. These projects are to help communities adapt to drought and floods, which are expected to become more frequent and severe as a result of climate change. DFID also contributes to the Disaster Risk Management Programme under the Ministry of Home Affairs, to support disaster preparedness in Bihar, Uttar Pradesh, Tamil Nadu and Delhi.

  130.  The UK climate change agenda is also being pursued through Indian involvement in the G8 Gleneagles Dialogue on Climate Change, Clean Energy and Sustainable Development. At the first ministerial meeting of the Dialogue in London last year, both countries announced a joint study on barriers to technology transfer for a low carbon economy. The study was lead by the Ministry of Environment & Forests, with cross-Government representation on the Steering Group. The results will be presented at the second ministerial on 4-6 October 2006 in Mexico. The UK engagement with the Indian Government in the Gleneagles process should continue over the coming year with a planned project working with the Ministry of Urban Development on integrated transport systems to be taken further at the second Gleneagles ministerial meeting.

Sustainable Development

  131.  India has a wide range of climatic conditions incorporating almost all the world's types of habitat. India has about 45,000 plant species and an equally rich and varied fauna with about 75,000 species of animals. There are over 63 National Parks and Sanctuaries located in different parts of the country. Deforestation, habitat degradation, inadequate water supply, poor energy sources and water quality are region-wide problems, which need to be addressed on a priority basis. In the cities, especially Mumbai, Delhi, Kolkata and Chennai, air pollution and solid waste management is an increasingly serious problem. A list of major environmental issues and concerns in the region includes: integrated land use planning, deforestation, desertification, solid waste management, declining availability of fresh water and deteriorating water quality, growing urbanisation, population explosion, environmental diseases, degradation of marine and coastal resources, loss of biological diversity and climate change.

  132.  The Joint Declaration of the UK-India Summit in September 2004 paved the way for the UK-India Sustainable Development Dialogue, established in October 2005. Under the Dialogue the UK and India have formed working groups on each of four themes: sustainable forestry; reducing illegal trade in wildlife; desertification; and Corporate Social Responsibility (CSR).

VII.  INDIA-UK AND INDIA-EU RELATIONS

India-UK Bilateral Relations

  133.  Bilateral relations are now closer than they have ever been across a broad range of policy areas. During Prime Minister Manmohan Singh's first visit to the UK on 20 September 2004 he and the Prime Minister launched a Joint Declaration (the Prime Ministers' Initiative). This is the umbrella statement of policy under which the two countries will take forward detailed work on co-operation under the strategic partnership. It covers five main areas for future co-operation: home affairs and counter-terrorism; foreign and defence policy; public diplomacy, including educational and cultural links; trade and economic links; and sustainable development.

  134.  The Joint Declaration also established the UK-India Joint Economic and Trade Committee (JETCO) to "enhance bilateral trade and investment in specific sectors". JETCO has formally met twice—in January 2005 in New Delhi, when Patricia Hewitt and Kamal Nath chaired the meeting and agreed a ten-point action plan, and in January 2006 in London. The next meeting will take place in India in January 2007. On the UK side, UKTI sector teams are taking forward much of the work, with other departments or professional groups leading on specialist issues (Law Society on legal services, Patent Office on intellectual property rights, DCMS on creative industries etc). A UK-India Investment Summit will be held in October 2006 alongside the now annual political summit.

  135.  The Economic and Financial Dialogue was also announced in September 2004. The Chancellor and his Indian counterpart agreed its terms of reference in February 2005. It provides for annual ministerial sessions and was formed to discuss bilateral economic issues and economic policy agendas, in the context of globalisation. It covers international economic issues, sustainable economic development, structural reform, reform of financial systems and markets, improving regulatory frameworks, and international development.

  136.  The Joint Declaration established annual summit meetings between the Prime Ministers. At the 2005 summit, the Prime Minister announced the UK/India Education Research Initiative. This pledged £10 million of UK government funding, plus corporate sponsorship with the aim of stepping up existing educational relations between India and the UK over the next five years. That sum has since been enhanced by £2 million further finding from the Treasury, £6 million from the Indian Government, and nearly £2 million in funds and in kind from industry.

  137.  At the summit in October 2006 we hope to see enhanced collaboration on counter-terrorism: the UK and India have each suffered recent terrorists attacks on our transport networks and can learn from each other's experiences. We expect also to agree the groundwork for closer collaboration on renewable energy sources, access to energy, clean energy technology, and wider issues on adaptation to climate change. The UK-India Investment Summit will be a key opportunity to identify further avenues for bilateral investment, including how the UK and India can work together to open up markets in India: Indian infrastructure projects alone are expected to require $150 billion of investment over the next 10 years.

Trade Issues

  138.  Bilateral trade of goods and services between India and the UK has doubled since 1993. In 2005 the total value of bilateral trade was £7.9 billion, a rise of almost 20% (from £6.6 billion). The UK is India's fourth largest trading partner and India is one of the UK's largest export markets in the developing world.

  139.  India is now the third largest investor in the UK. About 500 Indian firms have set up operations in the UK, the majority from the ICT sector. In 2005-06 there were 76 new Indian investment projects into the UK, an increase of 110% from the previous year. The UK is the top European investment location for Indian companies targeting the European market and beyond.

  140.  The UK is the third largest investor in India (it has the third largest share of new investments approved since 1991—10.04% well ahead of Germany, Japan and France).

  141.  Despite this apparent success, there are a number of market access issues that JETCO, in parallel with EU-India and WTO dialogues, is seeking to overcome:

—  Legal/regulatory barriers.

—  Bureaucracy.

—  Inadequate infrastructure.

—  Bars to or limits on FDI in some sectors (eg legal services).

—  Foreign banks may take a 75% equity share in Indian banks, but only in non-profitable ones.

—  FDI up to 51% in retailing of single brands.

  142.  Other bodies are active in promoting trade links. The Indo-British Partnership Network, working with UKTI, seeks to facilitate access Indian markets for UK SMEs. The Asia Task Force (ATF) is an informal stakeholder group responsible for advising the Secretary of State for Trade and Industry. The ATF works to reduce barriers to UK companies setting up operations in Asian countries, and ensuring that, in both trade and investment terms, they are able to take full advantage of the rise of India, China and emerging Asia.

Development Assistance

  143.  During the Prime Minster's visit to Delhi in 2002, he pledged to increase UK bilateral assistance to India to £300 million. Since then, DFID has been increasing its aid year-on-year. DFID disbursed £248 million in 2005-06. It is due to reach £300 million in 2008-09. DFID's current support includes a £252 million multi-year contribution to a national programme to reduce maternal mortality and infant deaths, as a fifth of the world's maternal deaths and a quarter of its infant deaths occur in India; and £210 million of multi-year support to a national programme of elementary education that is helping bring 10 million out-of-school children into education.

Whitehall Work on Globalisation

  144.  HMG continues to assess the emergence of India, the better to calibrate the UK's responses:

—  Businesses are increasingly global, not national entities, which use international supply chains. Increasingly UK and Indian companies are working in partnership to their mutual benefit.

—  India has a comparative advantage in well-educated, low cost and English speaking labour, and in mass production techniques. India's advantages are an increasingly integral part of UK firms' supply chains. We believe the branching out of Indian firms beyond national boundaries will further accelerate the efficiency gains from global supply chains.

—  India is at the forefront of some global economic trends—IT, outsourcing, and biotechnology. Off-shoring business activities are becoming integrated in the UK economy and many British household name companies now have a supporting function performed in India.

—  As the economy continues to open up India is likely to offer enormous potential for British businesses, particularly given the close cultural and historical ties with the UK. In terms of number of projects, India is now one of the highest investors in the UK.

—  We want to work with India to tackle obstacles to foreign investment and business activity in its markets. Amongst other things this will require reducing restrictions on foreign investment and reforms to labour markets. Helping the government in tackling corruption will also be key.

—  The UK is in an advantageous position to develop a special relationship with India. We have extensive people-to-people links and a cultural affinity. There are educational and healthcare links and human capital, including a shared intellectual base. The existing diaspora contributes greatly to the UK economy and influences the movement of people between our two countries. In 2005 over 600,000 British nationals visited India and our Posts in India issued over 300,000 visas, with an estimated 500,000 Indians travelling to the UK.

Human Rights issues

  145.  A substantial proportion of parliamentary and public correspondence with the Foreign and Commonwealth Office regarding India is on a range of human rights issues, notably issues relating to Dalits ("untouchables"—who remain among the poorest of Indians) and attacks on religious minorities. These together with other human rights or societal issues are regularly raised with the Indian Government, and with national and state level bodies. Our Posts continue to take opportunities to work with non-governmental organisations in India and elsewhere on caste and other human rights issues.

  146.  India has a robust parliamentary tradition, an independent judiciary, professional and apolitical armed forces, a vibrant civil society, and free media.

  147.  India has signed and ratified all of the six core UN human rights treaties except the Convention Against Torture (CAT), which it has signed but not ratified. We continue to encourage India to ratify the CAT. In May, India was elected to the UN Human Rights Council. While recognising the challenges faced by India in narrowing the gap between the spirit and implementation of the UN Rights Conventions (civil, political, economic, social and cultural), and recognising also the progress made in a number of areas, it remains the case that implementation varies from state to state in India and awareness of human rights issues is inconsistent. Gaps remain between legislation and enforcement in numerous areas—minority, gender and child rights, for example. As a result, the rights of women, children, minorities, Scheduled Castes and Scheduled Tribes often suffer. The socially and economically disadvantaged sections of society are particularly vulnerable.

India's relations with the EU

  148.  India and the EU have each woken up to the importance of a strong relationship. The 2004 EU-India summit in The Hague established a strategic partnership. The UK Presidency of the EU took this a step further with the agreement of the EU-India Joint Action Plan. This forms the framework for concrete engagement on a range of issues under four broad headings: political issues; people to people contacts; economic issues; and trade issues.

  149.  The main outcome of the October 2006 EU-India summit is likely to centre on progress to date in implementing the Joint Action Plan.

Foreign and Commonwealth Office

October 2006

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Prepared 4 May 2007