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GS Paper: India & Its Neighborhood – Relations

  • India-Pakistan ties and the mirror of 2019

    Context

    An official delegation from Pakistan was in New Delhi recently to hold talks with its Indian counterparts under the aegis of the Indus Water Treaty.

    Positive developments in the relations

    • Starting from February, India has been sending through Pakistan consignments of wheat, via the World Food Programme, to the Taliban-run Afghanistan.
    • Evidently, channels of communication between the two governments are working and open hostility has subsided, if not vanished completely.
    • China factor: The change has been driven by realist considerations that surfaced during the Ladakh border crisis on the Line of Actual Control with China in the summer of 2020.
    • The recent change of government in Pakistan, including Imran Khan’s removal, is seen as a positive in New Delhi.
    • The official Indian establishment has had close ties with both the Pakistan Muslim League-Nawaz and the Pakistan Peoples Party that are now part of the government.

    Countering the collusive military threat from China and Pakistan

    • The border crisis in Ladakh raised the spectre of a collusive military threat between China and Pakistan.
    • Such a challenge cannot be effectively dealt with by the military alone and would need all the instruments of the state — diplomatic, economic, informational, and military — to act in concert.
    •  To prevent such a situation, India’s National Security Adviser Ajit Doval opened backchannel talks with Pakistan.

    Way ahead

    • There are some low-hanging fruits which can be plucked the moment a political go-ahead is given.
    • These include a deal on the Sir Creek dispute, an agreement for revival of bilateral trade, return of High Commissioners to the missions in Delhi and Islamabad, and build-up of diplomatic missions to their full strength.
    • Demilitarisation of the Siachen glacier is still seen to be off the table as the Indian proposal is believed to be unacceptable to the Pakistan Army.
    • A window of opportunity would possibly open in Pakistan after the next elections, which are scheduled next year but could be held earlier.

    Conclusion

    India must shift course from the belligerence it has displayed and profited from earlier in favour of proper diplomatic and political engagement with Pakistan.

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  • Supreme Court frees Perarivalan

    The Supreme Court has invoked its extraordinary powers to do complete justice under Article 142 of the Constitution and ordered the release of A.G. Perarivalan in former PM assassination case.

    Among the factors that sustained Perarivalan’s long battle was the determination and commitment of his mother, Arputham Ammal, who emerged as the face of an anti-death penalty movement, and the sympathy and empathy that he received from people from all walks of life.

    What is the news?

    • A Bench led by Justice L. Nageswara Rao, in its judgment, took into consideration Perarivalan’s long jail term for over 30 years to order his release.
    • The court held that the TN Council of Ministers’ advice to pardon Perarivalan was binding on the Governor under Article 161 (Governor’s power of clemency) of the Constitution.
    • The advice of the State Cabinet is binding on the Governor in matters relating to commutation/remission of sentences under Article 161.

    Note: As per Article 161, the Governor of a State shall have the power to grant pardons, reprieves, respites or remissions of punishment or to suspend, remit or commute the sentence of any person convicted of any offence against any law relating to a matter to which the executive power of the State extends

    What branded Perarivalan as a murderer?

    • He had bought two 9 volt battery cells on behalf of the bomber.
    • These were used to make the bomb explode.
    • This confession statement taken under Section 15(1) of TADA to establish his link with the assassins and his knowledge and role in the assassination.

    Why was this a case for Governor?

    • Perarivalan was not a death sentenced convict.
    • Earlier, the apex court had commuted his death penalty to life sentence for murder in 2014.
    • The Governor had no business forwarding the pardon plea to the President after sitting on it for years together.
    • Had this been a death penalty, the case would have been different.

    Why did the Supreme Court intervene?

    • Governor’s delay to decide Perarivalan’s pardon for more than two years has compelled the apex court to employ its constitutional powers under Article 142 to do justice to Perarivalan.
    • After all, the court said, a Governor’s non-exercise of power under Article 161 of the Constitution was not immune from judicial review.

    What is Article 142?

    • Article 142 provides discretionary power to the Supreme Court.
    • It states that the court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it.
    • Such decree shall be enforceable throughout the territory of India in such manner as may be prescribed by or under any law made by Parliament.
    • It is usually used in cases involving human rights and environmental protection.

    Other legal aspects of this pardon

    • The Court dismissed the Centre’s argument that the President exclusively, and not the Governor, had the power to grant pardon in a case under Section 302 (murder) of the Indian Penal Code.
    • The court had said that such a contention would render Article 161 a “dead-letter”.
    • This would rather create an extraordinary situation whereby pardons granted by Governors in murder cases for the past 70 years would be rendered invalid.

    Back2Basics:

    Pardoning powers of the President

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  • Bangladesh offers Chittagong Port to India

    In a major development in India-Bangladesh ties, India has now gained access to the crucial Chittagong Port after it was offered by Bangladeshi PM Sheikh Hasina.

    About Chittagong Port

    • The Chittagong/Chattogram Port is the main seaport of Bangladesh.
    • It is located in the port city of Chittagong and on the banks of the Karnaphuli River,
    • The port handles eighty percent of Bangladesh’s export-import trade, and has been used by India, Nepal and Bhutan for transshipment.
    • According to Lloyd’s, it ranked as the 58th busiest container port in the world in 2019. The port is one of the oldest in the world.
    • Chittagong Port is now being developed and modernized with Chinese investment and help.
    • It was widely believed that China will retain the right to use this port according to its plans and needs.

    Significance of the port

    • The use of Chattogram port was made possible under an agreement that allows the use of Chattogram and Mongla ports as transhipment hubs.
    • The port is significance for north-eastern states for enhancing connectivity between the neighboring countries.
    • This will reduce the distance, time and cost of logistics for transporting goods.
    • Currently, the road route between West Bengal to the northeast covers a distance of over 1,200 km.

    Some of the benefits India hopes from this new and shorter route are:

    • An additional connectivity route that’s economical and environment-friendly
    • States like Tripura, Assam and Meghalaya to get access to a port for transportation of goods
    • Lend a fillip to multi-modal connectivity between India and Bangladesh
    • Ease stress on supply chains that have been disrupted by the pandemic
    • Important bridge for India to reach Southeast Asia, East Asia and beyond

    Benefits for Bangladesh

    • Fresh investment flow in the logistics sector
    • New trade routes are expected to generate employment and give a fillip to transport, finance and insurance.
    • Generate revenue by way of administrative and port-related fees
    • Lead to economic transformation of cities such as Cumilla, Tamabil and Akhaura as well.

    Conclusion

    • India has settled the four-decade-old land boundary issue and also showing positive attitude towards Teesta water sharing issue.
    • At this moment, it is normal that Bangladesh would show some liberality towards use of ports.

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  • In news: Balochistan Freedom Movement

    The Baloch Liberation Army (BLA), one of the most prominent militant groups operating against Pakistani, has claimed a suicidal attack on Chinese citizens in Karachi.

    Who are the BLA fighters?

    • The BLA announced itself in 2005 with a rocket attack on a paramilitary camp in Balochistan Kohlu during a visit by then President Pervez Musharraf.
    • It is a nationalist militant group that has been waging an insurgency for Baloch self-determination and a separate homeland for the Baloch people.

    Rise of Baloch nationalism

    • While the BLA’s armed insurgency is about two decades old, demands of Baloch nationalists for political autonomy and threats of secession date back to 1947.
    • The Khan of Kalat (who claimed sovereignty over the four princely states of Kalat, Lasbela, Kharan and Makran) held out for independence, and the Pakistan Army forced his accession in March 1948.
    • Between 1973 and 1977, the Zulfikar Ali Bhutto-led government sent in the Pakistan Army to crush a leftist guerilla war inspired by the liberation of Bangladesh.
    • The tribal sardars of Balochistan, who had been at the forefront of Baloch nationalism, and were co-opted by the state in the late 1970s, grew rebellious again.
    • The insurgency gathered momentum from 2006, after the Pakistan Army killed the Bugti sardar, Nawab Akbar Khan Bugti, who had been also been a chief minister and governor of the province.

    Why it is gaining momentum now?

    • The Pakistan Army’s operations against Baloch nationalists over the last two decades have seen hundreds of disappearances, and other alleged human rights violations.
    • Baloch nationalists also see the sudden influx of jihadist groups in the province as a move by the Pakistan security establishment to counter their nationalist demands.
    • In 2012, the US Congress convened a hearing on Balochistan and supported the demand for a free Baloch land.
    • In a significant shift in policy, back then in 2016, PM Modi had made a reference to the Baloch freedom struggle in his Independence Day speech.

    Why Balochistan matters?

    • Balochistan borders Afghanistan and Iran.
    • The people are mostly tribal with secular principles and are admirers of ties with India.
    • With gas, oil, copper and gold deposits, it is the most resource-rich of Pakistan’s four provinces.
    • It makes up half of Pakistan’s area, but has only 3.6% of its population.
    • Pakistan alleges that the insurgency is backed by India.
    • This is the region where a former Indian Navy officer Kulbhushan Jadhav was abducted from Iran and charged for espionage supporting Baloch activism in Pakistan.
    • Many Baloch activists had been seeking asylum and has applied for Indian citizenship. New Delhi neither confirmed nor deny the reports.

    Why did BLA target the Chinese now?

    • The BLA claimed it attacks Chinese nationals because Beijing ignored warnings not to enter deals and agreements regarding Balochistan before the province had been “liberated”.
    • Baloch people see China-Pakistan Economic Corridor (CPEC) as neo-colonist move against their sovereignty.
    • Among China’s major projects in Balochistan is the port of Gwadar, strategically located near the Strait of Hormuz – a crucial oil shipping route in the Arabian Sea.
    • The security of its nationals in Pakistan has become a major issue for Beijing, especially since it launched the CPEC.
    • Such attacks has literally stalled the work in progress of CPEC projects making it a sheer failure.

    Significance of recent events

    • It is rare that the BLA deployed female suicide bombers. Recent attack was done by a highly educated lady and mother of two.
    • This is also the first time that a non-jihadist ethno-nationalist group has deployed a woman suicide bomber in the manner of Sri Lanka’s LTTE.
    • According to security experts familiar with the Baloch insurgency, it marks a worsening security situation in Pakistan.
    • As the training camps are alleged by Pakistan to be in Afghanistan, the incident may also be a pointer to Pakistan’s loss of control over the Talibans.

     

     

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  • The goal of an energy-secure South Asia

    Context

    Given that a 0.46% increase in energy consumption leads to a 1% increase in GDP per capita, electrification not only helps in improving lifestyle but also adds to the aggregate economy by improving the nation’s GDP.

    Widening electricity coverage in South Asian nations

    • The electricity policies of South Asian countries aim at providing electricity to every household.
    • The issues these policies address include generation, transmission, distribution, rural electrification, research and development, environmental issues, energy conservation and human resource training.
    • Bangladesh has achieved 100% electrification recently while Bhutan, the Maldives, and Sri Lanka accomplished this in 2019.
    • For India and Afghanistan, the figures are 94.4% and 97.7%, respectively, while for Pakistan it is 73.91%.
    • Bhutan has the cheapest electricity price in South Asia (U.S.$0.036 per kilowatt hour, or kWh) while India has the highest (U.S.$0.08 per kWh.) 
    • South Asia is reinforcing its transmission and distribution frameworks to cater to growing energy demand not only through the expansion of power grids but also by boosting green energy such as solar power or hydroelectricity.

    Adapting to renewable

    • Geographical differences between these countries call for a different approach depending on resources.
    •  India leads South Asia in adapting to renewable power, with its annual demand for power increasing by 6%.
    • India’s pledge to move 40% of total energy produced to renewable energy is also a big step.
    • Prime Minister Narendra Modi in his ‘net-zero by 2070’ pledge at COP26 in Glasgow asserted India’s target to increase the capacity of renewable energy from 450GW to 500GW by 2030.
    • The region is moving towards green growth and energy as India hosts the International Solar Alliance.
    • South Asia has vast renewable energy resources — hydropower, solar, wind, geothermal and biomass — which can be harnessed for domestic use as well as regional power trade.

    Steps toward SDGs

    • Solar power-driven electrification in rural Bangladesh is a huge step towards Sustainable Development Goal 7.
    • Access to electricity improves infrastructure i.e., SDG 9 (which is “build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation”).
    • Energy access helps online education through affordable Internet (SDG 4, or “ensure inclusive and equitable quality education and promote lifelong learning opportunities for all”), more people are employed (SDG 1: “no poverty”), and are able to access tech-based health solutions (SDG 3, or “ensure healthy lives and promote well-being for all at all ages”).

    Regional energy trade

    • The South Asian Association for Regional Cooperation (SAARC) prepared the regional energy cooperation framework in 2014, but its implementation is questionable.
    • Energy trade agreements: There are a number of bilateral and multilateral energy trade agreements such as the India-Nepal petroleum pipeline deal, the India-Bhutan hydroelectric joint venture, the Myanmar-Bangladesh-India gas pipeline, the Bangladesh-Bhutan-India-Nepal (BBIN) sub-regional framework for energy cooperation, and the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, rumoured to be extended to Bangladesh.
    • Challenges: ‘South Asia’s regional geopolitics is determined by the conflation of identity, politics, and international borders.
    • The current participation in cross-border projects has been restricted to respective tasks, among Bhutan and India or Nepal and India.
    • It is only now that power-sharing projects among the three nations, Nepal, India, and Bangladesh, have been deemed conceivable.

    Way forward

    • Energy framework: Going forward, resilient energy frameworks are what are needed such as better building-design practices, climate-proof infrastructure, a flexible monitory framework, and an integrated resource plan that supports renewable energy innovation.
    • Public-Private Partnership: Government alone cannot be the provider of reliable and secure energy frameworks, and private sector investment is crucial.

    Conclusion

    While universal coverage can catalyse the region’s economic growth, energy trade must be linked to peace building.

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  • India extends duration of $400 mn Currency Swap to SL

    India has extended the duration of a $400 million currency swap facility with Sri Lanka which it had concluded with the island nation in January this year.

    What are Currency Swaps?

    • A currency swap, also known as a cross-currency swap, is an off-balance sheet transaction in which two parties exchange principal and interest in different currencies.
    • Currency swaps are used to obtain foreign currency loans at a better interest rate than could be got by borrowing directly in a foreign market.

    Practice question for mains:

    Q. What are Currency Swaps? Discuss the efficacy of Currency Swap Agreements for enhancing bilateral cooperation in Indian context.

    How does it work?

    • In a swap arrangement, RBI would provide dollars to a Lankan central bank, which, at the same time, provides the equivalent funds in its currency to the RBI, based on the market exchange rate at the time of the transaction.
    • The parties agree to swap back these quantities of their two currencies at a specified date in the future, which could be the next day or even three months later, using the same exchange rate as in the first transaction.
    • These swap operations carry no exchange rate or other market risks, as transaction terms are set in advance.

    Why does one need dollars?

    • FPIs investors look for safer investments but the current global uncertainty over COVID outbreak has led to a shortfall everywhere in the global markets.
    • This has pulled down foreign exchange reserves of many small and developing countries.
    • This means that the government and the RBI cannot lower their guard on the management of the economy and the external account.

    Benefits of currency swap

    • The absence of an exchange rate risk is the major benefit of such a facility.
    • This facility provides the flexibility to use these reserves at any time in order to maintain an appropriate level of balance of payments or short-term liquidity.
    • Swaps agreements between governments also have supplementary objectives like the promotion of bilateral trade, maintaining the value of foreign exchange reserves with the central bank and ensuring financial stability (protecting the health of the banking system).

     

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  • Maldives bans ‘India Out’ Campaign

    Maldivian President Ibrahim Mohamed Solih issued a decree banning the ‘India Out’ campaign, now led by former President Abdulla Yameen, terming it a “threat to national security”.

    The India-Out Campaign

    • Maldivian protesters recently demanded the Solih administration to ‘stop selling national assets to foreigners’, implying India.
    • ‘India Out’ campaign in Maldives had started sometime last year as on-ground protests in the Maldives and later widely spread across social media platforms under the same hashtag.
    • It is not related to people-to-people conflict (Indian diaspora) but is discontent on close relationship between Maldivian government & India.

    Causes for the anti-India sentiments

    • Political instability: The anti-India sentiment is nearly a decade old and can be traced back to when Abdulla Yameen Abdul Gayoom became president in 2013. He used anti-India sentiments for his political mobilization and started tilting China.
    • Controversy over helicopter gift: Two Dhruv Advanced Light Helicopters (ALF) that were given by India to the Maldives for ocean search-and-rescue operations. Opposition tried to portray this as military presence in the country.
    • Confidential agreements: Most agreements being signed between the Ibrahim Solih government and India are backdoor and has not been publicly discussed in the Maldives Parliament.
    • Alleged interference in domestic politics: India being a big neighbour, there are unsubstantiated perceptions & allegations on Indian Diplomats stationed in Maldives interfering in Domestic affairs.

    Restoration of ties

    • Ibrahim Mohamed Solih who became President in 2018 has restored Maldives close ties with India.

    India-Maldives Relations: A backgrounder

    • India and Maldives are neighbors sharing a maritime border.
    • Both nations established diplomatic relations after the independence of Maldives from British rule in 1966.
    • India was one of the first nations to recognize Maldives’ independence.
    • Since then, India and Maldives have developed close strategic, military, economic and cultural relations.
    • Maldivians generally regard Indians and India as a friend and trusted neighbor in the field economic, social and political.

    Major irritants in ties

    • Political Instability: India’s major concern has been the impact of political instability in the neighborhood on its security and development.
    • Increasing radicalization: In the past decade or so, the number of Maldivians drawn towards terrorist groups like the Islamic State (IS) and Pakistan-based jihadist groups has been increasing.
    • Inclination towards terror: Radicalism in the island nation has increased the possibility of Pakistan-based terror groups using remote Maldivian islands as a launch pad for terror attacks against India and Indian interests.
    • Chinese affinity: China’s strategic footprint in India’s neighborhood has increased. The Maldives has emerged as an important ‘pearl’ in China’s “String of Pearls” construct in South Asia.

    Recent gestures by India

    [1] 2014 Malé drinking-water crisis

    • In the wake of a drinking water crisis in Malé in December 2014, following collapse of the island’s only water treatment plant, Maldives urged India for immediate help.
    • India came to rescue by sending its heavy lift transporters like C-17 Globemaster III, Il-76 carrying bottled water.

    [2] 2020 Covid-19 crisis

    • During the COVID-19 crisis of 2020, India extended help to Maldives in the form of financial, material and logistical support.
    • Also, the IAF airlifted 6.2 tonnes of essential medicines and hospital consumables to Maldives, as part of ‘Operation Sanjeevani’.

    [3] Greater Male Connectivity Project

    • India has recently announced the signing of a $500-million infrastructure project for the construction of the Greater Malé Connectivity Project (GMCP).
    • This infrastructure project, the largest-ever by India in the Maldives, involves the construction of a 6.74-km-long bridge and causeway link.

    Why is Maldives significant for India?

    • Increasing maritime cooperation: As maritime economic activity in the Indian Ocean has risen dramatically in recent decades, the geopolitical competition too in the Indian Ocean has intensified.
    • Toll Gate in Indian Ocean: It is situated at the hub of commercial sea-lanes running through the Indian Ocean. More than 97% of India’s international trade by volume and 75% by value passes through the region.
    • Naval cooperation: Maldives is an important partner in India’s role as the net security provider in the Indian Ocean Region.
    • Important SAARC member: Besides, Maldives is a member of the South Asian Association for Regional Cooperation (SAARC) and the South Asia Subregional Economic Cooperation (SASEC).
    • People To People Contact: There is a significant population of Maldivian students in India. They are aided by a liberal visa-free regime extended by India. There is also medical tourism.
    • Major destination for Tourists: Tourism is the mainstay of the Maldivian economy. The country is now a major tourist destination for some Indians and a job destination for others.

    Conclusion

    • There is a significant Indian diaspora in the Maldives. Innumerable Indians work across the hospitality, education, and health-care sectors of the Maldives economy.
    • India must use its Diaspora more extensively for strengthening its relations.

     

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  • A fatal friendship with Beijing

    Context

    China’s intervention has proved disastrous for the economies of Myanmar, Sri Lanka and Pakistan.

    China-Myanmar relations and its implications

    • Myanmar, China’s closest neighbour with a long history of cross border trade, was the first country to voluntarily turn towards Beijing, from 1988, when the State Law and Order Restoration Council (SLORC) took over the reins of government.
    • World sanctions followed, but Beijing reassured the generals of its continued support and in 1989, signed a treaty of trade and cooperation that made China the sole supporter of the illegitimate military government.
    • The strong western sanctions after 2007, made China virtually its sole trading partner.
    • The link with China became essential for the regime’s survival but did little to increase economic prosperity.
    • Wood alone accounts for about 70 per cent of Myanmar’s exports to China.
    • It’s clear that China is stripping bare Myanmar’s centuries-old teak forests.

    Implications for Pakistan

    • In 2012,  Pakistan signed on to the China Pakistan Economic Corridor.
    • New Delhi and Washington imagined wrongly that the CPEC would lead to a major People’s Liberation Army-Navy (PLAN) expansion into the Indian Ocean through Gwadar, which even now is a largely disused port.
    •  As a conservative IMF estimate put it, Islamabad’s poor management of the economy and reckless borrowing has put its immediate financial needs (2022) at $51 billion.
    • Projects chosen are unviable like the Gwadar port and the Lahore Metro and attracted huge public criticism. The CPEC was put on hold and rebooted.
    • The IMF warned Islamabad of the CPEC repayment boosting the current account deficit, forcing Pakistan to cut Chinese interest payments for 10 years.
    • The CPEC has been a humbling experience for China and an economic disaster for Pakistan.

    Implications for Sri Lanka

    • Against all economic surveys and advice, the Hambantota port was built, it floundered and Sri Lanka transferred the land as equity to China for 99 years.
    • From 2012 to 2016, China accounted for 30 per cent of all FDI to Sri Lanka, becoming the top source of foreign investment
    • Today China is funding 50 projects in the country, involving more than $1 billion, including the Colombo Port and the Lakvijaya thermal power plant.
    • Today, the Sri Lankan economy is in complete meltdown, with China holding the largest amount of Sri Lankan debt.
    • Private banks have run out of funds to finance imports. Its main sources of revenue, tourism and remittances, have dried up, and the government is in a crisis.

    Conclusion

    The recourse to availing Chinese money by Myanmar, Pakistan and Sri Lanka has led to a feeling of hubris among the leaders, inducing them to take bad economic decisions in the perception that Beijing is footing the bills.

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  • Explained: Red Star over Solomon Islands

    A recent leaked document has revealed that the Solomon Islands in the South Pacific has reached a deal with China. This has raised alarms in Washington and Canberra.

    Where is the Solomon Islands located?

    • The Solomon Islands is a sovereign country consisting of six major islands and over 900 smaller islands in Oceania, to the east of Papua New Guinea and northwest of Vanuatu.
    • Its capital, Honiara, is located on the largest island, Guadalcanal.
    • It is part of the ethnically Melanesian group of islands in the Pacific and lies between Papua New Guinea and Vanuatu.
    • The country takes its name from the Solomon Islands archipelago, which is a collection of Melanesian islands that also includes the North Solomon Islands (a part of Papua New Guinea).
    • It excludes outlying islands, such as the Santa Cruz Islands and Rennell and Bellona.

    Quick recap of its past

    • The islands, which were initially controlled by the British Empire during the colonial era, went through the hands of Germany and Japan.
    • It then went back to the UK after the Americans took over the islands from the Japanese during World War II.
    • The islands became independent in 1978 to become a constitutional monarchy under the British Crown, with a parliamentary system of government.
    • Nevertheless, its inability to manage domestic ethnic conflicts led to close security relations with Australia, which is the traditional first responder to any crisis in the South Pacific.

    What are the contents of the proposed deal?

    • The Framework Agreement has the potential to disturb the established security mechanisms in the South Pacific region.
    • The document explicitly enables Beijing to send its “police, armed police, military personnel and other law enforcement and armed forces” to the islands on the latter government’s request, or if the former sees that the safety of its projects and personnel in the islands are at risk.
    • The document also provides for China’s naval vessels to utilise the islands for logistics support.
    • There have been speculations in the wake of this revelation that China might be building its next overseas naval base in Solomon Islands after Djibouti.

    What is the rationale for the Solomon Islands’ increasing proximity to China?

    • The Solomon Islands had cultivated strong ties with Taiwan, which ended with the emergence of the current government in Honiara.
    • In 2019, the regime change switched Taiwan for China.
    • This was supposedly after Beijing offered half a billion US dollars in financial aid, roughly five times what Taiwan spent on the islands in the past two decades.
    • It has been alleged by the pro-Taiwan Opposition that the incumbent government has been bribed by China.

    Why is China interested in the Solomon Islands?

    • Isolating Taiwan: The Solomon Islands was one among the six Pacific island states which had official bilateral relations with Taiwan.
    • Supporter in UN: The small Pacific island states act as potential vote banks for mobilising support for the great powers in international fora like the United Nations.
    • Larger EEZ: These states have disproportionately large maritime Exclusive Economic Zones when compared to their small sizes.
    • Natural resources: Solomon Islands, in particular, have significant reserves of timber and mineral resources, along with fisheries.
    • Countering US: But more importantly, they are strategically located for China to insert itself between America’s military bases in the Pacific islands and Australia.

    What does this mean for the established geopolitical configuration in the region?

    • Diminishing western influence: The Pacific islands, in the post-World War II scenario, were exclusively under the spheres of influence of the Western powers, in particular the US, UK, France and Australia and New Zealand.
    • Inserting into western hegemony: All of them have territorial possessions in the region, with the three nuclear powers among them having used the region as a nuclear weapons testing ground.
    • Shifting of dependencies: The smaller island nations of the region are heavily dependent on them, especially Australia as it is a resident power.

    Damage control by West

    • Australia has reacted with boosted finances, and by extending its current security mission till 2023 when the islands will host the Pacific Games.
    • The US has responded by considering reopening its embassy in Honiara after a long 29-year gap.
    • New Zealand has shed its typical restraint about China and has criticised it for attempting to militarise the Pacific islands.

    Chinese response to Indo-Pacific

    • It is to be noted that China’s rise in the South Pacific is not without opposition.
    • AUKUS is a recent example of how the established powers are reacting; although, to what extent they can mobilize individual governments against China is questionable.
    • Significant discontent has been brewing within and among the Pacific island states against China’s economic inroads and its adverse impact on their vulnerable economic and political systems.

     

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  • Nepal’s dwindling Forex Reserves

    In an unusual development, the Nepali PM sacked the head of its central bank accusing him of leaking sensitive information and for failing to perform his duties.

    What is the news?

    • Nepal’s forex reserves have plummeted by 18.5% to $9.58 billion in March from $11.75 billion in July 2021.
    • The current forex reserves are not enough to pay the government’s import bills beyond the next seven months or so.
    • Nepal’s central bank recently announced a ban on the import of vehicles and other luxury items, citing liquidity crunch and declining foreign exchange reserves.
    • It is rumoured that the Nepali economy will go into a crisis like Sri Lanka.

    Why have Nepal’s forex reserves fallen?

    • Nepal’s forex reserves situation appears healthy as of now as the country, unlike Sri Lanka, is not burdened by external debt.
    • There are, however, concerns that the lower middle-income economy is being battered repeatedly by external factors and that may precipitate a crisis sometime soon.
    • Nepal which is blessed with one of the finest tourism sectors in South Asia, because of the Himalayan mountain range, suffered during the COVID-19 pandemic as global tourist flow fell.
    • This is followed by the global energy crisis caused by Russia’s invasion of Ukraine.
    • This has put extraordinary inflationary pressure on the economy.

    How bad is the situation?

    • Nepal’s economy is highly dependent on imports as the country buys a range of merchandise goods apart from fuel.
    • The prevailing weak economic indicators mean that Nepal is spending from its forex reserves faster than it can save.
    • Economists contend that Nepal will soon have double-digit inflation. All economic indicators are declining.
    • The real shortfall in forex reserves is because of the decline in foreign remittances which suffered during the pandemic when the Nepalese workforce abroad suffered job losses.

    Can the energy scene in Nepal escalate economic woes?

    • Nepal’s history shows that any uncertainty regarding fuel can trigger serious internal problems as was visible during the 2015-16 blockade when disruption of fuel supply from India.
    • Nepal’s primary supplier of energy is Indian Oil Corporation (IOC).
    • Nepal Oil Corporation (NOC) pays IOC in two installments every month, on the 8th and the 23rd.
    • The NOC has been in crisis for months as high global prices depleted the company’s savings, prompting it to approach the government for a lifeline.
    • The Government of Nepal has agreed to provide NOC the necessary amount to continue supplies from IOC.
    • NOC’s financial status makes it unattractive for banks and as a result the public sector company does not enjoy confidence in the market.

    Paradoxical situation

    • The government is in a paradoxical situation: It has to control imports of products from which it earns the highest amount of tax revenue.
    • Luxury items are the country’s major source of revenue.
    • If revenue shrinks, an economic crisis could be imminent.

    Impact on elections

    • Nepal will hold local level polls next month which will be followed by general elections towards the end of the year.
    • The election process requires considerable financial allocation and Nepal has received support in the past for elections from international donors like the USAID.
    • These donors help in carrying out pre-election staff training and logistics that are part of any democratic process.
    • But there are uncertainties considering the bleak financial situation.
    • It will require at least 10 billion Nepali rupees for the election process and that will mean diversion of a large amount of resources for the democratic process.

    Quick recap: Sri Lankan Crisis

    • Like Nepal, Sri Lanka is a country with a small economy. The Sri Lankan economy is around 1.5 times bigger than Nepal’s.
    • Sri Lanka’s economic crisis was in the making since it suffered a terrorist attack in 2019 which hit its tourism industry, a major contributor to the GDP.
    • Then came the pandemic, which further wiped out tourism incomes. Then there were debt burdens in dollars.
    • The political leadership failed to act to address the looming crisis.
    • The Rajapaksha dynasty made some wrong moves—it cut taxes and started printing money, hugely devaluing the currency.
    • In what looked like a well-intentioned move towards organic farming, the county banned imports of chemical fertilisers. Paddy production failed. The country ran out of money to pay its bills.

    Is Nepal really going the way of Sri Lanka?

    • In Nepal, the situation is not as bleak.
    • Nepal’s current forex reserves are enough to pay for imports of goods and services for about seven and a half months.
    • Tourism, one of the major foreign currency earners, was hit hard by the pandemic, but its gradual revival has given a glimmer of hope.
    • Since Nepal’s currency is pegged to the Indian rupee, a massive devaluation shock is unlikely. Tourism is also rebounding, giving a fillip to foreign currency reserves.

    Back2Basics: Foreign Exchange Reserves

    • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
    • They are commonly used to support the exchange rate and set monetary policy.
    • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
    • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
    • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

     

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