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Subject: International Relations

  • Bhutan-China Border Agreement

    In a step towards resolving their boundary disputes, Bhutan and China signed an agreement on a three-Step roadmap to help speed up talks to “break the deadlock” in negotiations.

    Bhutan-China Border Issues

    Bhutan shares an over 400-km-long border with China.

    • Doklam: China wants to exchange the valleys to the north of Bhutan with the pasture land to the west (including Doklam), totalling 269 square kilometres.
    • Jakarlung and Pasamlung valleys: located near Tibet to Bhutan’s North, which measure 495 sq. kms.
    • Sakteng Wildlife Sanctuary Project: China claims this area (near to Arunachal Pradesh) in eastern Bhutan as its own.

    What is the recent agreement?

    • The roadmap “for Expediting the Bhutan-China Boundary Negotiations”, is expected to progress on the boundary talks process that has been delayed for five years.
    • It was stalled due to the Doklam standoff in 2017, and then by the Covid Pandemic.
    • Although China and Bhutan do not have official diplomatic relations they have engaged in 24 rounds of ministerial-level talks to resolve their border dispute.

    Implications for India

    The boundary issue between China and Bhutan is special because it not only relates to Bhutan but also has become a negative factor for China-India ties.

    • China control much of the Doklam: Since the 2017 stand-off with India, Beijing has already strengthened its de facto control over much of the Doklam plateau, located strategically along the India-China-Bhutan trijunction.
    • Bhutan supports it: This agreement has been equally endorsed and appreciated by Bhutan and China.
    • Deadlock at LAC talks: Its timing is particularly significant New, given India-China border talks on their 17-month-old standoff at the Line of Actual Control appear to have hit an deadlock.
    • India’s strategic risks: This has big implications for India, since the Doklam swap would have given China access to the strategically sensitive “chicken neck” of the Siliguri corridor.

    India’s interest

    (a) Doklam

    • The Doklam plateau remains hugely critical for India due to the Siliguri Corridor that lies to the south of Doklam.
    • The corridor, also known as the ‘Chicken’s Neck’, is a 22-km wide major arterial road connecting mainland India with its northeastern states and thus it is a highly sensitive area for China.

    (b) Sakteng: the hotspot

    • The Sakteng sanctuary adjoins West Kameng district and Tawang disticts in India’s Arunachal Pradesh state.
    • Its strategic value lies in its proximity to Arunachal Pradesh, where China claims around 90,000 sq km of Indian territory.
    • Tawang, the major bone of contention between India and China in the eastern sector of their border dispute, lies to the northeast of the Sakteng.

    Conclusion

    • Bhutan has to balance its ties with India as well as China.
    • We need to explore channels that India can activate with Bhutan when it comes to the highly sensitive matter of settling the boundary dispute between them and China.

     

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  • India-Central Asia relations

    In his speech at the Shanghai Cooperation Organization (SCO) meet last month, PM Modi stressed on commitment for increasing its connectivity with land-locked Central Asia.

    What is the Central Asia Region?

    • Central Asia is a region in Asia which stretches from the Caspian Sea in the west to China and Mongolia in the east, and from Afghanistan and Iran in the south to Russia in the north.
    • It includes the former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan.

    India-Central Asia Ties

    • India has decades-old wish to connect with the resource and fuel-rich Central Asian nations.
    • Since the emergence of the Central Asian Republics as independent countries in the early 1990s, New Delhi has been trying to establish ties with them.

    Trade and collaboration

    • India’s trade with the five Central Asian Republics—Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan and Tajikistan—was below $ 2 billion in 2018.
    • The potential areas for collaboration include construction, sericulture and pharmaceuticals to IT and tourism.
    • Much of this trade was routed through Iran, Russia or the United Arab Emirates (UAE).

    Efforts for connectivity

     

    1. Turkmenistan–Afghanistan–Pakistan–India (TAPI) Gas Pipeline
    2. Development of Iran’s Chabahar Port
    3. Zaranj-Delaram Highway
    4. International North-South (Transit) Corridor (INSTC)

    About INSTC

    • In 2000, India, Iran and Russia agreed on a new route for trade that later came to be known as INSTC.
    • It was aimed at cutting the costs and time in moving cargo between Russia and India.
    • The pact was ratified in 2002 and the original multi-modal route linked Mumbai in India to Bandar Abbas and Bandar-e-Anzali in Iran, then across the Caspian Sea to Astrakhan, Moscow and St. Petersburg in Russia.
    • Over the years, more countries joined the INSTC.
    • In 2003, India and Iran announced the development of the Chabahar port in the Sistan-Balochistan province.

    China’s opportunism: Based on proximity

    • China’s trade with Central Asia was $50 billion-$60 billion in the same period.
    • The obvious advantage in China’s favour is geographical proximity.

    Hurdles for India

    • Lack of mutual trust: Unfortunately, many connectivity options are not open to them today due to the lack of mutual trust.
    • Pakistan factor: Tensions with Pakistan mean there is no viable land route towards Central Asia.
    • Iran and the US sanctions: Efforts to look for a circuitous route via Iran (and Afghanistan) have stalled due to US sanctions on Iran.

    Issues in Iran-Afghanistan bypass route

    Recent events acquire broader geopolitical relevance for India in this route:

    • Taliban takeover of Afghanistan: The takeover of Afghanistan by the Pakistan-backed Taliban has severely set back India’s plans in Central Asia.
    • Iran’s bypassing of India: Iran’s overtures has been clearly visible after itself allocating Farzad-B Gas exploration contract to another company bypassing India.

    Central Asia’s importance for India

    • Fossil fuels: While Central Asia is seen as fuel-rich and, hence, important for an energy-starved India.
    • Mineral richness: Central Asian states are also mineral-rich, and Kazakhstan, for one, has been a source of uranium for India’s nuclear power plants.
    • Market for India: A country like India which is seen as a major economy has to have a presence in these markets. INSTC also offers a safe and cost-effective route to the EU (European Union) market.
    • Convergence against Terrorism: India can forge a common position on terrorism and radicalization, which is a matter of concern to the region as much as it is to India.

    India’s recent engagement

    • Defence collaboration: In recent years, New Delhi has engaged with Central Asian Republics in the defence sphere through military exercises (say Ex Kazind).
    • Engagement at UN: Political and economic engagement is also important, given the imperatives of working together at a body such as the United Nations (UN).
    • Technological ties: India has set up universities there—Sharda and Amity are examples.

    Scope for expansion

    • Dairy Sector: There is scope for collaboration in the dairy sector.
    • Pharma: Indian firms have been setting up pharmaceutical units in Russia that can serve these countries as well.
    • Info Technology: IT and IT-enabled services are two other areas.
    • Cultural connect: Bollywood movies are quite famous in these countries.

    Way forward

    • India needs to develop into stronger bonds of trade and commercial bonds which will be possible once the INSTC crystallizes.

    Conclusion

    • The road ahead in the short term is difficult as India doesn’t seem to have any real leverage to get the connectivity projects with Central Asia going.
    • India has been negotiating with individual bilateral partners though.

     

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    Also read:

    [Burning Issue] Ashgabat Agreement

  • Explained: China-Taiwan tussle

    Recently China flew over 100 fighter jets into Taiwan’s air defence identification zone setting off alarm around the world that it was preparing to take over the island by force.

    Taiwan: the Republic of China (RoC)

    • Taiwan, earlier known as Formosa, a tiny island off the east coast of China, is where Chinese republicans of the Kuomintang government retreated after the 1949 victory of the communists.
    • It has since continued as the Republic of China (RoC).
    • Although largely unrecognized by other countries as such, self-ruled Taiwan sees itself as no less than an independent nation.
    • Its leaders, have vowed to defend its sovereignty against the Chinese goal of “reunification”.

    Chinese claims over Taiwan

    • Since its establishment in 1949, the PRC has believed that Taiwan must be reunified with the mainland, while the RoC claim to be an independent country.
    • The RoC became the non-communist frontier against China during the Cold War, and was the only ‘China’ recognised at the UN until 1971.
    • That was when the US inaugurated ties with China through the secret diplomacy under President Richard Nixon.

    Independence politics by Taipei

    • In 1975, Taiwan got its first democratic reforms. Trade ties with PRC were established.
    • As the British prepared to exit Hong Kong in 1999, the “One China, Two Systems” solution was offered to Taiwan as well, but it was rejected by the Taiwanese.
    • In 2004, China started drafting an anti-secession law aimed at Taiwan; trade and connectivity, however, continued to improve.

    Hurdles for Taiwanese independence

    • Taiwan now has massive economic interests, including investments in China, and pro-independence sections worry that this might come in the way of their goals.
    • Inversely, the pro-reunification sections of the polity, as well as China, hope that economic dependence and increasing people-to-people contacts will wear out the pro-independence lobbies.

    Global significance of Taiwan

    • The island is located in the East China Sea, to the northeast of Hong Kong, north of the Philippines and south of South Korea, and southwest of Japan.
    • What happens in and around Taiwan is of deep concern to all of East Asia.

    Geopolitics: US ties with Taiwan

    • Officially, the US has subscribed to PRC’s “One China Policy” which means there is only one legitimate Chinese government.
    • The most serious encounter was in 1995-96, when China began testing missiles in the seas around Taiwan, triggering the biggest US mobilization in the region since the Vietnam War.
    • Now, the US backs Taiwan’s independence, maintains ties with Taipei, and sells weapons to it.
    • Taiwan is entirely dependent on the US for its defense against possible Chinese aggression.
    • This is why every spike in military tensions between China and Taiwan injects more hostility into the already strained relationship between Washington and Beijing.

    Challenge for the US

    • The Biden Administration has declared “rock-solid” commitment to Taiwan after an incursion by Chinese warplanes.
    • As tensions rise, the world is watching the US, which is face-saving after exiting from Afghanistan.
    • In East and Southeast Asia, several countries including Japan, South Korea, and the Philippines, which are sheltered under the Protective umbrella of the US, are reading the situation.
    • The US has also agreed to abide by the “Taiwan Agreement”, under which US support for the “One China Policy” is premised on Beijing not invading Taiwan.

    Recent initiatives against China

    • The AUKUS pact among the US, UK, and Australia, under which Australia will be supplied with nuclear submarines, has imparted a new dimension to the security dynamics of the Indo-Pacific.
    • Taiwan has welcomed the pact, while China has denounced it as seriously undermining regional peace.

    Implications for India

    • With India facing its own problems with China at the LAC, there have been suggestions that it should review its One China Policy.
    • It has in any case long stopped reiterating this officially — and use not just the Tibet card, but also develop more robust relations with Taiwan to send a message to Beijing.
    • India and Taiwan currently maintain “trade and cultural exchange” offices in each other’s capitals.

    India-Taiwan Ties: A backgrounder

    • India and Taiwan both do not maintain any official diplomatic relations.
    • India recognizes only the People’s Republic of China (in mainland China) and not Taiwan’s claims of being the legitimate government of Mainland China, Hong Kong, and Macau.
    • However, India’s economic and commercial links, as well as people-to-people contacts with Taiwan, have expanded in recent years.
    • Major Taiwanese exports to India include integrated circuits, machinery, and other electronic products.

    India’s interest

    Ans. Semiconductor economy

    • Taiwan’s position as a semiconductor superpower opens the door for more intensive strategic-economic cooperation between Delhi and Taipei.
    • The talks with Taipei are ongoing to bring a $7.5-billion semiconductor or chip manufacturing plant to India.
    • Chips are used in a range of devices from computers to 5G smartphones, to electric cars and medical equipment.

    Way forward

    • Delhi must begin to deal with Taiwan as a weighty entity in its own right that offers so much to advance India’s prosperity.
    • Delhi does not have to discard its “One-China policy” to recognise that Taiwan is once again becoming the lightning rod in US-China tensions.

    Conclusion

    • As Taiwan becomes the world’s most dangerous flashpoint, the geopolitical consequences for Asia are real.
    • Although Delhi has embraced the Indo-Pacific maritime construct, it is yet to come to terms with Taiwan’s critical role in shaping the strategic future of Asia’s waters.

     

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  • [pib] One Sun One World One Grid

    The Union Minister for Power and New and Renewable Energy (MNRE) has addressed the Ministerial session of the Green Grids Initiative-One Sun One World One Grid (OSOWOG) Northwest Europe Cooperative Event.

    One Sun, One World, One Grid

    • The mega plan of OSOWOG calls for trans-national electricity grid supplying solar power across the globe.
    • It will connect 140 countries through a common grid that will be used to transfer solar power.
    • The idea was first floated by PM Modi in 2018 during the first assembly of the International Solar Alliance (ISA).
    • The vision behind the OSOWOG mantra is “the Sun never sets” and is a constant at some geographical location, globally, at any given point of time.

    With India at the fulcrum, the solar spectrum can easily be divided into two broad zones viz:

    1. Far East: It would include countries like Myanmar, Vietnam, Thailand, Lao, Cambodia and
    2. Far West: It would cover the Middle East and the Africa Region

    Implementation phases of the plan

    The plan is divided into three phases:

    • Phase 1: It will connect the Indian grid with the Middle East, South Asia and South-East Asian grids to share solar and other renewable energy resources
    • Phase 2: It will connect the first phase nations with the African pool of renewable sources
    • Phase 3: It will be the concluding step of global interconnection

    How novel is the idea?

    (1) Scale of the program

    • Not limited by national boundaries, it can tackle global challenges linked to energy.
    • It will tackle access for underserved people and communities the world over.
    • It will enable 3 billion people to access clean drinking water (via solar pumps), give 2 billion women access to clean cooking and bring light to the homes of 750 million people.

    (2) Pivotal moment in India’s energy history

    • Going back even further, almost a decade ago, the price of solar energy (then INR 15 a unit) had raised question marks about its commercial feasibility.
    • Today OSOWOG envisions dispatching surplus electricity at near-zero cost as India produces the cheapest solar-powered electricity anywhere in the world.

    (3) Sustainability

    • OSOWOG directly tackles two key problems that are emerging as energy systems try to deliver both energy sustainability and access to underserved populations.
    • Countries like Singapore or Bangladesh simply may not have enough empty land to generate solar energy.
    • Many nations’ policies also prioritise food security (i.e., devoting land to farming) over solar energy. These countries can still benefit from the solar energy dispatched to them via OSOWOG.

    (4) India extending leadership

    • Having international associations is not a new trend for the energy sector which already has a strong geopolitical organisation such as OPEC.
    • Several countries including China have initiated infrastructure projects in other countries, which is seen as a sign of asserting supremacy by several policy experts.
    • While India is a partner nation with most trade associations, with ISA and OSOWOG, it is planning to take a leadership position.

    Significance of OSOWOG

    • Successful ambitious project: It is obviously a very grand and ambitious project with a looming success.
    • Pathbreaking idea: It is also clear that a new energy sector paradigm is needed as we are facing a huge inflection point in electricity generation and consumption.
    • Green benefits: Potential benefits include widespread scale up in energy access, abatement in carbon emissions, lower cost and improved livelihoods.
    • Energy alternative: With battery and storage technology becoming cheaper, electricity consumption at source end is a more feasible idea for solar power.

    Limitations of OSOWOG

    • Low financial benefits: This may sound a geopolitically a clever strategy. However, it is to be seen if this makes sense, technology-wise and in terms of financial benefits.
    • Cost-sharing challenge: The mechanism of cost-sharing will be challenging, given the varied priorities of participating countries depending on their socio-economic orders.
    • Pace of progress: The OSOWOG will turn out to be an expensive, complex and very slow progress project.
    • Geopolitical issue: Any disruption caused due to any bilateral/multilateral issues can potentially affect critical services in multiple continents and countries.
    • Grid parameters: There is a difference in voltage, frequency and specifications of the grid in most regions. Maintaining grid stability with just renewable generation would be technically difficult.

    Way forward

    • While India has taken baby steps with ISA, a major investment drive is still missing. This is planned to be achieved through OSOWOG.
    • India will need a strong coalition of international partners to realise this vision.

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    Back2Basics: International Solar Alliance

    • Officially announced during UN Climate Change Conference in Paris in 2015, the ISA is a partnership of solar-resource rich countries.
    • Currently, there are 121 countries that have agreed to be members for ISA.
    • Most of these are countries with large participation from Africa, South-east Asia and Europe.
    • Pakistan and China are not a part of ISA.

     

  • Europe as a valuable strategic partner

    Context

    Last week’s in-person summit in Delhi was with the Danish prime minister, Mette Frederiksen.

    Europe as a valuable partner

    • Few Asian countries view Europe with strategic suspicion. Many in Asia see Europe as a valuable partner.
    • As the deepening confrontation between the US and China begins to squeeze South East Asia, Europe is widely seen as widening the strategic options for the region.
    • The perspective is similar in Delhi, which now sees Brussels as a critical element in the construction of a multipolar world.
    • Cultivate Europe: As External Affairs Minister Subrahmanyam Jaishankar puts it, India’s strategy is to “engage America, manage China, cultivate Europe, reassure Russia, bring Japan into play”.
    • EU’s Strategy for India: The EU outlined a strategy for India in 2018 to focus on four themes — sustainable economic modernisation, promotion of a rules-based order, foreign policy coordination, and security cooperation.
    • At the summit in Portugal in May this year, the EU and India agreed to resume free trade talks and develop a new connectivity partnership that would widen options for the world beyond the Belt and Road Initiative.
    • Rebalancing the international system: Above all, there is a recognition in both Delhi and Brussels that the India-EU strategic partnership is crucial for the rebalancing of the international system amidst the current global flux.

    Possibilities with smaller European countries

    • Europe looms so large in the Indian diplomatic agenda today and smaller European states draw unprecedented political attention from Delhi.
    • That Denmark, a country of barely six million people, can establish a significant green partnership with India, is a reminder that smaller countries of Europe have much to offer in India’s economic, technological, and social transformation.
    • Luxembourg brings great financial clout, Norway offers impressive maritime technologies, Estonia is a cyber power, Czechia has deep strengths in optoelectronics, Portugal is a window to the Lusophone world, and Slovenia offers commercial access to the heart of Europe through its Adriatic sea port at Koper.
    • As India begins to realise this untapped potential, there are new openings with the 27-nation EU headquartered in Brussels.

    EU’s important role in Indo-Pacific

    • The EU’s Indo-Pacific strategy is likely to have a much greater impact on the region more immediately and on a wider range of areas than military security.
    • Area’s of impact range from trade and investment to green partnerships, the construction of quality infrastructure to digital partnerships, and from strengthening ocean governance to promoting research and innovation.
    • Defence and security are important elements of the EU’s Indo-Pacific strategy that “seeks to promote an open and rules-based regional security architecture, including secure sea lines of communication, capacity-building and enhanced naval presence in the Indo-Pacific.
    • Whatever the specific circumstances of the AUKUS deal and its impact on France, the US wants all its partners, especially Europe, to contribute actively to the reconstitution of the Asian balance of power.
    • Working with Quad: The EU strategy, in turn, sees room for working with the Quad in the Indo-Pacific, while stepping up security cooperation with a number of Asian partners, including India, Indonesia, Japan, the Republic of Korea, Singapore and Vietnam.
    • India is conscious that Europe can’t match America’s military heft in the Indo-Pacific.
    • But it could help strengthen the military balance and contribute to regional security in multiple other ways.

    Consider the question “Delhi knows that Europe could significantly boost India’s capacity to influence future outcomes in the Indo-Pacific. It would also be a valuable complement to India’s Quad coalition”. Comment.

    Conclusion

    It was Russia that defined India’s discourse on the multipolar world after the Cold War. Today, it is Europe — with its much greater economic weight, technological strength, and normative power — that promises to boost India’s own quest for a multipolar world and a rebalanced Indo-Pacific.

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  • India invited to become full-time IEA member

    International Energy Agency (IEA) has invited India, the world’s third-largest energy consumer, to become its full-time member.

    International Energy Agency (IEA)

    • The IEA is an autonomous intergovernmental organization established in the framework of the Organisation for Economic Co-operation and Development (OECD) in 1974 in the wake of the 1973 oil crisis.
    • Based in Paris, IEA was initially dedicated to responding to physical disruptions in the supply of oil, as well as serving as an information source on statistics about the international oil market.
    • In the decades since, its role has expanded to cover the entire global energy system, encompassing traditional energy sources such as oil, gas, and coal as well as cleaner and faster growing ones such as solar PV, wind power and biofuels.
    • It is best known for the publication of its annual World Energy Outlook.

    Role and responsibility

    • The Agency’s mandate has broadened to focus on providing analysis, data, policy recommendations and solutions to help countries ensure secure, affordable and sustainable energy for all.
    • In particular, it has focused on supporting global efforts to accelerate the clean energy transition and mitigate climate change.
    • The IEA has a broad role in promoting rational energy policies and multinational energy technology co-operation with a view to reaching net zero emissions.

    India and IEA

    • India, in March 2017, became an associate member of the Paris-based body which advises industrialised nations on energy policies.
    • Today the IEA acts as a policy adviser to its member states, as well as major emerging economies such as Brazil, China, India, Indonesia and South Africa to support energy security and advance the clean energy transition worldwide.

    Significance of the invitation

    • This proposal if accepted will require New Delhi to raise strategic oil reserves to 90 days requirement.
    • India is becoming increasingly influential in global energy trends.

    Try this MCQ:

    Q.The Global Energy Transition Index recently seen in news is released by:

    a) International Energy Agency (IEA)

    b) World Economic Forum (WEF)

    c) International Renewable Energy Agency (IRENA)

    d) International Solar Alliance

     

    [wpdiscuz-feedback id=”092iami3uv” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

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  • Explained: Patrolling Points along LAC

    The standoffs between Indian and Chinese troops in Ladakh on the Line of Actual Control (LAC), where initial steps towards disengagement have taken place, are around a number of patrolling points or PPs in Galwan, Hot Springs and Gogra areas.

    What exactly are Patrolling Points?

    • PPs are patrolling points identified and marked on the LAC, which are patrolled with a stipulated frequency by the security forces.
    • They serve as a guide to the location of the LAC for the soldiers, acting as indicators of the extent of ‘actual control’ exercised on the territory by India.
    • By regularly patrolling up to these PPs, the Indian side is able to establish and assert its physical claim about the LAC.

    Are all the Patrolling Points numbered?

    • Some of the PPs are prominent and identifiable geographical features, such as a pass, or a nala junction where no numerals are given.
    • Only those PPs, where there are no prominent features, are numbered as in the case of PP14 in Galwan Valley.

    Are all on the Patrolling Points bang on the LAC?

    • Mostly, yes. Except for the Depsang plains in northern Ladakh, where PP10, PP11, PP11A, PP12 and PP13 – from Raki Nala to Jivan Nala – do not fall on the LAC.
    • These are short of the LAC, on the Indian side.

    Are these Patrolling Points not manned?

    • The PPs are not posts and thus not manned.
    • Unlike on the Line of Control (LoC) with Pakistan, the border with China is not physically held by the Army all along.
    • They are just physical markers on the ground, chosen for their location and have no defensive potential or tactical importance for the Army.

    If the Patrolling Points are not manned, how is the claim actually asserted?

    • The claim is asserted by the Army or joint Army-ITBP patrols as they show more visible presence in these areas.
    • This is done by physically visiting PPs with a higher frequency, as the deployment has moved closer to the LAC and due to improved infrastructure.
    • As the Chinese may not see when the Indian patrols visit these PPs, they will leave come cigarette packets or food tins with Indian markings behind.
    • That lets the Chinese know that Indian soldiers had visited the place, which indicates that India was in control of these areas.

    Who has given these Patrolling Points?

    • These PPs have been identified by the high-powered China Study Group, starting from 1975 when patrolling limits for Indian forces were specified.
    • It is based on the LAC, after the government accepted the concept in 1993, which is also marked on the maps with the Army in the border areas.
    • But the frequency of patrolling to PPs is not specified by the CSG – it is finalised by the Army Headquarters in New Delhi, based on the recommendations made by the Army and ITBP.

    What is this frequency?

    • The frequency of reaching various PPs are given in the annual patrolling programme.
    • Based on the terrain, the ground situation and the location of the LAC, the duration for visiting each PP is specified – it can vary from once a month to twice a year.

    Major friction area: Hot Springs

    • Hot Springs lies in the Chang Chenmo River valley, close to Kongka La, a pass that marks the Line of Actual Control.
    • India’s Patrolling Point 15, it is not a launchpad for any offensive action though the area did see action before and during the 1962 war.
    • China’s unwillingness to pull back its platoon-sized unit from Hot Springs is a sign of the difficulties that lie in normalising the situation.
    • The PLA has traditionally had a major base east of Kongka La.
    • The pass also marks the border between two of China’s most sensitive provinces — Xinjiang to the north and Tibet to the south.

     

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  • Explained: Global Minimum Tax Deal

    A global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed by 136 countries.

    What is the news?

    • The OECD said four countries – Kenya, Nigeria, Pakistan and Sri Lanka – had not yet joined the agreement.
    • However, the countries behind the accord together accounted for over 90% of the global economy.

    Why a global minimum tax?

    • With budgets strained after the COVID-19 crisis, many governments want more than ever to discourage multinationals from shifting profits – and tax revenues – to low-tax countries.
    • Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions.
    • This has allowed companies to avoid paying higher taxes in their traditional home countries.
    • The minimum tax and other provisions aim to put an end to decades of tax competition between governments to attract foreign investment.

    How would a deal work?

    • The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) in sales globally.
    • Govts could still set whatever local corporate tax rate they want.
    • However, buif companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits.
    • A second track of the overhaul would allow countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue.

    What happens next?

    • The next step is for finance ministers from the Group of 20 economic powers to formally endorse the deal, paving the way for adoption by G20 leaders at an end October summit.
    • Nonetheless, questions remain about the US position which hangs in part on a domestic tax reform the Biden administration wants to push through the US Congress.
    • The agreement calls for countries to bring it into law in 2022 so that it can take effect by 2023, an extremely tight timeframe given that previous international tax deals took years to implement.
    • Countries that have in recent years created national digital services taxes will have to repeal them.

    What will be the economic impact?

    • The OECD, which has steered the negotiations, estimates the minimum tax will generate $150 billion in additional global tax revenues annually.
    • Taxing rights on more than $125 billion of profit will be additionally shifted to the countries were they are earned from the low tax countries where they are currently booked.
    • Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.
    • However, various deductions and exceptions baked into the deal are at the same time designed to limit the impact on low tax countries like Ireland, where many US groups base their European operations.

    Back2Basics: Base Erosion and Profit Shifting (BEPS)

    • BEPS refers to corporate tax planning strategies used by multinationals to “shift” profits from higher-tax jurisdictions to lower-tax jurisdictions.
    • It thus “erodes” the “tax base” of the higher-tax jurisdictions.
    • Corporate tax havens offer BEPS tools to “shift” profits to the haven, and additional BEPS tools to avoid paying taxes within the haven.
    • It is alleged that BEPS is associated mostly with American technology and life science multinationals.

    Try this:

     

    Q.3) What are the factors that led to the demand of global minimum corporate tax? What will be its implications for India? (10 Marks)

     

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  • Issues faced by World Bank and IMF

    This article discusses some inherent issues with the international organizations (IOs) i.e., the World Bank (Bank) and International Monetary Fund (IMF) (aka Bretton Woods Twins). This comes in the backyard of the WB decision to scrap its flagship publication, the ‘Doing Business’ report.

    Issue over chair: A monopoly of the West

    • Common individuals to head: The individuals which are common to them: Paul Wolfowitz, Jim-Kim, David Malpass, Rodrigo Rato, Dominique-Strauss Kahn, Christine Lagarde, and Kristalina Georgieva.
    • Monopoly of US/EU: They have all become heads via a dual monopoly selection procedure: Only an American can head the Bank and only a European can head the IMF.
    • Personal integrity: This has been called into question, the most recent being the revelations of malfeasance at the World Bank where data was apparently massaged to make at least two major countries — China and Saudi Arabia— look better than they would otherwise have been.

    Issues with these heads: Hypocrisy

    • Political accountability: Within countries, we expect reasonable standards of integrity from heads of important institutions, and democratic political accountability mechanisms exist to ensure that.
    • Probity: The effectiveness and legitimacy of these individuals and indeed of the international institutions they head require personal qualities of probity.
    • Non-virtuous preachers: These heads often go around the developing world, preaching the virtues of good governance, from arguing against the scourge of corruption to improving data integrity.
    • Undue parameters: There are even World Bank indices to rank countries on those metrics.

    How has this impacted these institutions?

    Ans. The credibility of the institutions is lost.

    • It is not just the charge of hypocrisy, but also the effect on the morale and motivation of the staff of these institutions.
    • Many of them chose to work here because of a commitment to public service.
    • The recent letter by more than 300 former World Bank staff, expressing their anguish at the recent revelations on the Doing Business index, captures this sentiment.

    Why such issues grapple these institutions?

    • Goal definition: International institutions operate in a grey zone of neither clearly being in or outside the realm of formal politics and hence have weaker mechanisms of accountability.
    • Selection of heads: The selection procedure for choosing heads of the Bank and the Fund has been a dismal failure. Compromised heads are potentially more biased.
    • Indoctrination: Contrast this with the growing alarm and anxiety that characterizes the rise of China and its attempts to place its own nationals in existing IOs as well as creating new ones.

    Chinese has intruded even into these

    • Countries place their nationals to head these institutions, both for prestige and to pursue their national interests.
    • China has its own nationals now head four of the 15 UN specialized agencies (it suffered a rare setback to head the World Intellectual Property Organisation last year).

    Conclusion

    • The contest between the West (and especially the US) and China to shape the global order is becoming manifest.
    • China’s efforts, its success, and more broadly its influence in IOs should certainly raise deep concerns, most notably the suppression of the inquiry into the origins of the coronavirus.
    • Looking ahead, if the US and Europe do not hold themselves to the standards they exhort to the rest of the world, their credibility and legitimacy will continue to degrade.
    • This will cede ground and soft power to geopolitical rivals.

    Way forward

    • So, global political leaders convening next week for the annual meetings of the Bank and Fund must act with urgency and conviction to stem the rot.
    • They must open the selection of the heads of these institutions to the best candidate, regardless of nationality.
    • And to pave the way, they should clear up the current mess over the Doing Business saga.

    Back2Basics:

    International Org. | Part 7 | Bretton Woods Institutions – World Bank Group

     

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  • India-ASEAN FTA

    The Commerce and Industry Minister has called for a renegotiation of the India-ASEAN free trade agreement (FTA).

    Why such move?

    • The MCI aims to prevent its misuse by ‘third parties’ and remove trade restrictions as well as non-tariff barriers that he said had hurt Indian exports disproportionately since the pact was operationalized in 2010.
    • The focus needed to be on new rules to eliminate misuse ‘by third parties outside ASEAN’, the minister said, hinting at China.
    • India had to deal with several restrictive barriers on exports in the ASEAN region, particularly in the agriculture and auto sectors.

    About ASEAN

    • Members:
    • Officially the Association of Southeast Asian Nations, ASEAN is an economic union comprising 10 member states in Southeast Asia.
    • It promotes intergovernmental cooperation and facilitates economic, political, security, military, educational, and sociocultural integration between its members and other countries in Asia.

    India-ASEAN Free Trade Agreement

    • The initial framework agreement for ASEAN–India Free Trade Area (AIFTA) was signed on 8 October 2003 in Bali, Indonesia.
    • The FTA came into effect on 1 January 2010.
    • The FTA had emerged from a mutual interest of both parties to expand their economic ties in the Asia-Pacific region.

    Background of the AIFTA

    • India’s Look East policy was reciprocated by similar interests of many ASEAN countries to expand their interactions westward.
    • After India became a sectoral dialogue partner of ASEAN in 1992, India saw its trade with ASEAN increase relative to its trade with the rest of the world.
    • Between 1993 and 2003, ASEAN-India bilateral trade grew at an annual rate of 11.2%, from US$2.9 billion in 1993 to US$12.1 billion in 2003.
    • Total Indian FDI into ASEAN from 2000 to 2008 was US$1.3 billion.

    Acknowledging this trend and recognising the economic potential of closer linkages, both sides recognised the opportunities to pave the way for the establishment of an ASEAN–India Free Trade Area (FTA).

    Structure of the AIFTA

    • The signing of the ASEAN-India Trade in Goods Agreement paves the way for the creation of one of the world’s largest FTAs – a market of almost 1.8 billion people with a combined GDP of US$2.8 trillion.
    • It sees tariff liberalisation of over 90 percent of products traded between the two dynamic regions, including the so-called “special products”.
    • The products include palm oil (crude and refined), coffee, black tea and pepper.

    Criticism

    While there are many benefits to the ASEAN-India FTA, there is concern in India that the agreement will have several negative impacts on the economy.

    • Opening-up its market: This FTA will allow them to increase the market access of their products.
    • No specific gains: It is criticised, however, that India will not experience as great an increase in market access to ASEAN countries as ASEAN will in India.
    • Export driven ASEAN: The economies of the ASEAN countries are largely export-driven. Considering India’s expansive domestic market, the ASEAN countries will look eagerly towards India as a home for its exports.
    • Huge trade deficit: Since the early 2000s, India has had an increasing trade deficit with ASEAN. It is feared that a gradual liberalisation of tariffs and a rise in imported goods into India will threaten several sectors of the economy.
    • Inaccessible Markets: As a dominant exporter of light manufacturing products, ASEAN has competitive tariff rates that make it difficult for India to gain access to the industry market in ASEAN countries.
    • Cheaper imports: The state of Kerala is an important exporter in the national export of plantation products. It fears that cheap imports of oil palm, rubber, coffee, and fish would lower domestic production, adversely affecting farmers and ultimately its economy.

     

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