Foreign Policy Watch: India-China

Fighting COVID-19 together for a shared future

op-ed snap | International Relations | Mains Paper 2: Effect Of Policies & Politics Of World On India’S Interests

Note4Students
From UPSC perspective, the following things are important:
Prelims level: Not much.
Mains level: Paper 2- International cooperation on dealing with the epidemic.
Context

The Chinese government has mobilised the whole nation with confidence, unity, a science-based approach and targeted response.

Aspects that were focused by China to deal with COVID-19
- Formulated timely strategies for epidemic prevention and control.
- Strengthened a unified command and response in Wuhan and Hubei.
- Coordinated the prevention and control work in other regions.
- Strengthened scientific research, emergency medical and daily necessity supplies.
- Effectively maintained social stability.
- Strengthened public education.
- Actively engaged in international cooperation.
Mutual support between India and China
- China and India have maintained close communication and cooperation on epidemic prevention and control. In a letter to President Xi, India’s Prime Minister has expressed support for China.
- China appreciates the medical supplies provided by India and have helped facilitate the safe return of Indian nationals in Hubei.
- The global footprint of COVID-19: China has been closely following the global footprint of COVID-19.
Cooperation on a global level for disease control:
- Chines govt. will stay in close communication with WHO.
- Share its epidemic control experience with other countries.
- Seek closer international cooperation on medicine and vaccine development.
- Provide assistance to the best of its capabilities to countries and regions that are affected by the spread of the virus in keeping with its role as a responsible major
- The Chinese reach-out: China has provided various kinds of assistance including testing reagents, remote assistance and medical supplies to countries with a severe outbreak.
- Sharing of experience and protocol for treatment: China have shared diagnosis and treatment experience and protocols with many countries including India.
  - China is ready to maintain communication with India, share experience in a timely manner, render assistance and make joint efforts to overcome the epidemic.
Impact and recovery of China
- Robust economy: The impact on the Chinese economy will be short-lived and generally manageable. China has a resilient economy with robust domestic demand and a strong industrial base. We will definitely sustain the good momentum of economic and social development and meet the goal of achieving moderate prosperity in our society and eradicating extreme poverty in China.
- Strengthen coordination and communication: China will also strengthen coordination and communication with economic and trading partners and give priority to the resumption of production and supply of leading enterprises and key sectors that have a major impact on the stability of global supply chains.
  - The fundamentals of China’s economy will remain strong in the long run, and China will remain an important engine for global economic growth.
Conclusion

The history of civilisation is also one of a history of fighting diseases and a great journey of ceaseless global integration. To prevail over a disease that threatens all, unity and cooperation is the most powerful weapon.
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Foreign Policy Watch: India-Afghanistan

Fail-safe exit for America, but a worry for India

op-ed snap | International Relations | Mains Paper 2: Effect Of Policies & Politics Of World On India’S Interests

Note4Students
From UPSC perspective, the following things are important:
Prelims level: Not much.
Mains level: Paper 2- India-Afghanistan relations and return of Taliban after deal with the US.
Context

The recently negotiated peace deal between the United States and the Taliban is unlikely to bring peace to Afghanistan, is geopolitically disadvantageous for India, and has serious implications for our national security.

Power dynamics of the US-Taliban deal
- An honourable exit for India: The terms of the deal, the manner in which it was negotiated as well as the geopolitical context in which it was stitched up indicate that it was more about providing an honourable exit route for the U.S.
- Violence after concluding the deal: Within 24 hours of the much-publicised deal, violence and major disagreements about the deal began erupting in Afghanistan.
- Why there are the prospects of instability in Afghanistan: Given that the Taliban negotiated from a position of strength, the Trump administration from weakness and little political will, and that the Ashraf Ghani administration in Afghanistan was by and large a clueless bystander in all of this, means that the country is perhaps on the verge of yet another long-drawn-out and internecine battle.
The changed Taliban
- Taliban of the 1990s: When the Taliban came to power in the mid-1990s in Kabul, it had few backers in the world.
  - Nor was it seen as a useful commodity by the great powers or the states in the region, except for Pakistan, Saudi Arabia, and the United Arab Emirates.
- United pushback from the rest of the world: The international community was almost united in offering a normative pushback against the violent outfit.
  - As a result, the Taliban was at best reluctantly tolerated until it messed up towards the end of its regime in Kabul.
- The pressure of Northern Alliance: The Northern Alliance, supported by countries such as Russia and India, kept up its military pressure against the Taliban while it was in power.
- How today’s Taliban is different from the past: The situation today, at least for the moment, is perhaps the exact opposite of what was the case then.
  - Lessons learned to deal with the international system: The Taliban today is also more worldly-wise and might have learned, during its exile, to deal with the international system and play the game of balance of power.
  - Not necessarily the puppet: More so, it may not necessarily be a puppet of the Pakistani deep state once it returns to power.
International acceptance of the Taliban
- Lending the legitimacy to Taliban: Given the war fatigue and the geopolitical stakes in Afghanistan, most of the key players in the region and otherwise have been in negotiations with the Taliban one way or another, and for one reason or another, lending the terror group certain legitimacy in the process.
- Why countries want good relations with the Taliban: Anyone desirous of a stake in Afghanistan or does not want its domestic turmoil to spill over into their country would want to keep the Taliban in good humour.
  - Suitable withdrawal of the US: There is another reason why the Taliban has many suitors — because of the U.S. withdrawal by and large suits everyone, be it China, Pakistan, Iran, or Russia.
  - The US bigger challenge: Suddenly, the Taliban appears to have been forgiven for its sordid past and unforgivable sins because for most of these countries, the U.S. is the bigger challenge than the Taliban.
Why India’s strategy is diplomatically flawed?
- Only state at losing end: The only state that seems to be on the losing end, unfortunately, of this unfolding game of chess and patience in Afghanistan is India.
  - Why the earlier Taliban was anti-India? The earlier Taliban regime was anti-India, it was also because India had militarily supported the Northern Alliance that kept up the military pressure against the Taliban.
  - Today’s Taliban does not share the same animus for India.
- Need for Change in India’s approach: India, could have rejigged its approach to the Taliban this time around. However, it put all its eggs in the Ashraf Ghani basket, even on the eve of the signing of the peace deal in Doha.
- Not a diplomatic strategy by India: India also, for most intents and objectives, adopted a puritanical approach to the Taliban.
  - There are 2 reason India is neither reaching out to the Taliban nor exploiting the fissures within it-
  - Because it did not want to irk the elected government in Kabul and-
  - It adopts a moralistic approach to dealing with extremist groups in general — not a smart diplomatic strategy.
- Self-defeating position: This moralistic attitude, also a diplomatically lazy one, I would say, that be it Pakistan or Afghanistan, India would only talk to the legitimate government in that country, is a self-defeating position.
  - The world is not that perfect, nor state all that uniform, created in the shape and image of the Westphalian forefather.
  - Smart statecraft, therefore, is dealing with what you have and making the best of it.
What would be the result of India’s strategy?
- Impact on relations with Afghanistan: India’s relations with Afghanistan will take a hit in the immediate aftermath of the deal.
  - Limited ability to influence the outcomes: With China, India’s strategic adversary, deeply involved in the geopolitics and geo-economics of the region, including in Afghanistan, India’s traditional ability to influence the region’s political and security outcomes will be severely limited.
  - This will be further exacerbated by the withdrawal of the U.S., India’s closest friend, from the region.
  - India’s relation with the other players in the region: Other regional actors in Afghanistan are also less friendly towards India than ever before: Iran feels let down by India given how the latter has behaved towards it at the behest of the Americans.
  - Relation with Russia: For Russia, India is only one of the many friends in the region — the exclusivity of Russia-India relations is a thing of the past — and Pakistan would consider targeting India a fair game.
- Counter Strategy: Unless New Delhi carefully envisages a counter-strategy, these factors will increasingly push India into a geopolitical tough spot in the region.
  - Need to focus on the region: India should worry us that our political class is focused on domestic politics while the region is becoming ever more uncertain and evidently unfavourable to us.
Taliban and Kashmir Angle of the deal
- Negligible physical impact but the possibility of psychological impact: While the direct physical impact of the Taliban’s return to power in Afghanistan on Kashmir will be negligible, this will not be without serious implications for the unfolding situation in Kashmir’s restive regions.
  - Psychological impact: The most important impact is going to be psychological.
  - Interpretation of the event: Disenchanted Kashmiri youngsters, and there are a lot of them, will interpret the events in Afghanistan as follows: “If the mighty superpower USA could be defeated by the Taliban in Afghanistan with help from the Pakistan army, defeating Indian forces in Kashmir won’t be impossible after all.”
  - This enthusiasm is completely misplaced, but that is not the point.
  - That the Kashmiri youth might pick up guns drawing inspiration from the situation in Afghanistan is indeed the point.
- Increase in Pakistan’s utility: The U.S.-Taliban deal cannot survive without Pakistan’s assistance towards ensuring its success, and the U.S. and its allies recognise that. Such recognition of Pakistan’s utility provides the country with ability, as and when it wishes to, to up the ante in Kashmir.
- The geopolitical significance of Pok and Aksai Chin claim: India’s official statement which describes Afghanistan as a “contiguous neighbour” — meaning that India considers Pakistan-occupied Kashmir (PoK) a part of its sovereign territory — will make Pakistan and China sit up and take notice.
  - Claim making reconciliation more difficult: India also made a similar claim about Aksai Chin in the wake of its August decision on Kashmir. Erstwhile rhetorical claims on PoK and Aksai Chin have suddenly assumed a lot more geopolitical significance today making conciliatory approaches to conflict resolution ever more difficult.
Conclusion

Given that a new Taliban-led dispensation in Afghanistan will be far more accepted by the international community than the last time around also means increased acceptability for such regimes in general, either out of necessity or as a function of geopolitical calculations. That the Taliban mass-murdered its opponents into statehood in the 21st century and that this might provide potential inspiration to other outfits in the region and outside should indeed worry us.
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Coronavirus – Economic Issues

Corona, crude and credit

op-ed snap | Economics | Mains Paper 3: Indian Economy

Note4Students
From UPSC perspective, the following things are important:
Prelims level: Not much.
Mains level: Paper 3- How should India use the windfall from the fall in oil.
Context

Amid the gathering global crisis, its time India minds its own house.

Panic and dislocation in Global markets
- Panic at the level of the 2008 crisis: Global markets haven’t witnessed such panic and dislocation since the global financial crisis of 2008.
  - Global equity markets have collapsed, the US’s 10-year bond is at its lowest level ever, and crude prices underwent their largest single-day fall in 30 years.
- Interaction of three global shocks: The market mayhem is the upshot of three global shocks interacting with each other.
What are the three global shocks?
- Negative demand shock due to Coronavirus: A negative demand shock around the world. As the coronavirus proliferates globally, households and businesses are understandably becoming risk-averse, and the consequent “social distancing” is expected to exert significant demand destruction around the world.
- Negative supply shock emanating from China: The widespread industrial closures in China on the back of the COVID-19 outbreak will impact imports and supply chains in other countries, and thereby constitute an adverse supply shock for the rest of the world.
  - The magnitude of the shock: The 20-point drop in manufacturing output in the February PMI and the 17 per cent contraction in Chinese exports across January and February, suggests that the shock was large and immediate.
  - Supply shock likely to fade: That said, with the virus, gradually being contained in China, this supply shock is likely to fade even as the demand shock in the rest of the world widens and deepens.
- Positive oil supply shock: The failure of oil producers to agree on production cuts has led to a price war with production increases on the anvil.
  - Cumulatively, crude pieces are down almost 50 per cent — about $30/barrel — since January.
  - A positive supply shock, which even adjusting for the concentrated stress in the oil sector, is growth-additive for the world and particularly for India.
- India specific shock: There is a fourth India-specific force at play. The resolution and reconstruction of YES Bank was inevitable, but, at least temporarily, it is likely to result in a “flight to quality” in India’s financial sector, with resources moving from the financial periphery to the core.
  - Banks and NBFC may face difficulty in mobilising resources: To the extent that the periphery — smaller private banks and non-bank financial companies — will find it harder to mobilise resources, financial sector risk aversion could rise again.
Implications for India’s macroeconomic stability
- Significant negative impact due to export: India is a much more open economy than is widely believed with exports constituting almost 20 per cent of GDP. Therefore, the impact of the demand destruction around the world will not be trivial.
  - 40 bps decrease in the growth: If global growth is marked down by 100 basis points in 2020, which increasingly appears to be the case, we estimate that this would shave off about 40 bps from India’s growth through the export channel alone.
  - The cumulative drag to growth from exports and tourism would be a meaningful 60-70 bps.
- Positive impact due to oil price shock: The near $30/barrel decline since January constitutes a large positive terms of trade shock for India — equivalent to about 1.3 per cent of GDP even accounting for reduced remittances from the Middle East.
  - Meaningful mitigant: If oil prices remain at this level for long, it would constitute a meaningful mitigant to India’s macro headwinds, boosting activity, dampening prices, creating fiscal space and reducing external imbalances.
- Offsetting the negative impact of trade and tourism: Every $10 reduction in crude prices, boosts growths by about 20-25 bps.
  - Therefore, the $30 decline in crude, if it holds, should boost growth by about 60-70 bps, thereby largely offsetting the negative hit to growth from external trade and tourism.
- Space for monetary easing: Furthermore, crude at $35-40, along with the global demand destruction is expected to generate large disinflationary forces, opening up space for monetary easing.
- CAD would disappear: Finally, India’s current account deficit would virtually disappear, for the first time since 2003-04.
The growth offset conditioned on coronavirus spread
- The assumption in the offset: The above-mentioned growth offset, however, assumes that the coronavirus does not spread within India.
  - If India witnessed a rapid domestic proliferation, heightened risk aversion by economic agents could meaningfully hurt domestic demand.
- A thought experiment on the impact on the economy: Discretionary services constitute about 35 per cent of GDP and have been growing at 8 per cent a year.
  - If that growth rate were to halve, that alone would deduct 140 bps from growth, and swamp any growth tailwinds from lower oil prices.
  - Furthermore, a “sudden stop” of demand to certain sectors may necessitate fiscal/liquidity support to ensure these don’t magnify into more disruptive credit events for the financial sector.
- The best antidote to prolonged growth hit: The best antidote would be to aggressively contain the virus domestically, as authorities appear to be doing.
  - The experience from other countries suggests aggressive containment early in the process (isolation, quarantines, contract tracings, cancelled gatherings) reduces the growth rate of the virus from exponential to linear.
- Macroeconomic outlook: The key to India’s macro outlook is whether the crude price decline can sustain and whether India can avoid a sharp domestic proliferation of COVID-19.
Way forward
- Pass the oil windfall to the public: Given current fiscal pressures, it’s tempting to advocate that the public sector appropriate much of the windfall. But with consumption under such pressure, there’s a strong case to pass this on to households.
  - A sharp cut in domestic fuel prices will boost household purchasing power and aggregate demand thereby creating contemporaneous counter-cyclical pressures.
- Stick to the asset sale plan: While the turbulence in equity markets could understandably delay the government’s asset sale programme, it should not be allowed to derail it, given the criticality of asset sales to this year’s fiscal math.
  - Absorbing all the oil windfall through higher taxes as a substitute for asset sales would be a suboptimal mix.
- Continue with the reforms: The salutary effects of falling crude prices — which would boost India’s macros relative to other emerging markets — should not mask the imperative to continue with reforms, particularly recognising and resolving any further financial sector stress proactively.
Conclusion

Global markets are witnessing their most acute volatility since 2008. All we can do is mind our own house amidst the gathering global storm.
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Government Budgets

A prescription for revival

op-ed snap | Economics | Mains Paper 3: Government Budgeting

Note4Students
From UPSC perspective, the following things are important:
Mains level: Paper 3-Measures to revive the Indian economoy.
Context

The root cause of the present malaise in our economy is the “death of demand”.

How demand matters for growth?
- The relation between demand and growth: Growth in any economy depends on the growth in demand, both for investment as well as consumer goods.
- How slackened demand leads to a vicious cycle: If demand slackens, then the installed capacity will not be fully utilised, the fresh investment will not take place, employment will slacken and the economy will get caught in a vicious cycle, as we are experiencing today.
What needs to be done to break the vicious cycle?
- What sequence to follow in reviving demand? The basic challenge, therefore, is to revive demand in the economy in a sequence where the revival takes place first in the investment goods sector, automatically followed by a boost in demand for consumer goods through enhanced employment opportunities.
- Past precedents: This is the prescription we had followed in the Atal Bihari Vajpayee government when we were faced with the East Asian crisis and the post-Pokhran global economic sanctions soon after the government assumed office in March 1998.
Demand in India
- No dearth of demand in India: In a developing country like India, there is no dearth of “good” demand.
  - We still have to provide so many goods and services to our people in order to improve their “quality of life”.
- Need to create new infrastructure: Simultaneously, we have to create new infrastructure and improve the existing ones to reduce the transaction cost in our economy and make it more competitive.
- How infrastructure creation lead to the creation of demand: The emphasis on the construction of roads of all kinds — rural, state and national highways, the new telecom policy, the investment in railways, the emphasis on housing construction and development of the real estate, the improvement in rural infrastructure and reform in the agricultural sector were all meant to lead to the creation of demand in the economy.
- Creation of the virtuous cycle: The creation of demand should be in such a way that the demand for investment goods picks up first and faster, which creates the virtuous cycle of full capacity utilisation.
  - Demand for consumer goods: Demand for investment goods is followed by fresh investment for new capacity creation, larger employment opportunities of various kinds — unskilled, skilled and highly skilled — which reached money into the pockets of people leading to a surge in demand for consumer goods.
How the government should deal with the situation
- Deal with the demand side instead of supply-side: All commentators are agreed now that instead of tackling the demand side government is dealing with the supply side.
  - Tax relief to corporates: For instance, if, instead of wasting a precious amount of Rs 1,45,000 crore on tax relief to a limited number of corporates the government had spent that money on rural infrastructure and agriculture and a part of it on railways and highways, it would have led to the creation of demand both for investment goods as well as consumer goods.
- Issue of sticking to the fiscal deficit target: There is also the issue of resources. The government claims that it has stuck to the fiscal deficit targets.
  - But the provisions of Fiscal Responsibility and Budget Management (FRBM) Act have been treated in a cavalier manner by all subsequent governments.
  - What was the basic purpose of the act? The basic purpose of the act was to eliminate the revenue deficit completely within a short period of time and live with a limited fiscal deficit.
  - The original FRBM Act, therefore, mandated that revenue deficit should be eliminated completely and the rest of the fiscal deficit should be limited to one per cent of GDP.
  - In special circumstances like today, the fiscal deficit should be allowed to go up to even two per cent of the GDP, which will mean an amount of Rs four lakh crore.
Figures of the latest budget and need for the reforms
- Fiscal deficit figures: The government has taken credit in the Budget for the fact that it has successfully restricted total fiscal deficit for this fiscal to 3.8 per cent and for next fiscal at 3.5 per cent of the GDP.
- The issue involved in fiscal deficit figures: The revenue deficit for the current fiscal is 2.4 per cent of the GDP and for the next fiscal it is 2.7 per cent. In other words, minus the revenue deficit the fiscal deficit is only 1.4 per cent of GDP for this year and for the next year, it is 1.7 per se.
- Need for managing the expenditure: So, the real villain of the piece is revenue deficit and not fiscal deficit per se.
  - Need for the reforms: It is clearly the government’s responsibility to manage its expenditure and carry out reforms in it, including austerity in expenditure.
  - How will the reforms help? Controlled fiscal deficit will make more money available in the market for private sector investment and help RBI in reducing interest rates — things which will have an overall benign influence on the economy.
Conclusion

A lot of other things apart from austerity majors will have to be done, no doubt, like preventing companies, especially banks from failing, to further strengthen the growth impulses but in the present situation, the key is government spending and in the desired sequence.
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Coronavirus – Economic Issues

Medicine and frontiers

op-ed snap | Economics | Mains Paper 3: Indian Economy

Note4Students
From UPSC perspective, the following things are important:
Prelims level: Not much.
Mains level: Paper 3- Dominance of China in international trade and its implications for national security.
Context

Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.

Implications of the coronavirus disruption in China
- Global dependence on China in focus: As the coronavirus spreads far and wide, the global dependence on China for drugs and medical supplies has come into sharp focus.
- The argument for domestic production of medicine: In both the US and Europe, the shortage of essential drugs to treat the victims of the virus is strengthening the arguments for restoring some domestic production of pharmaceuticals.
- National security implications: Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.
China’s dominance in pharmaceutical production
- Two factors that contributed to China rise:
  - Active state support from Beijing and-
  - Western drug companies eager to shift production to cheaper destinations has facilitated China’s emergence as the most important global source for pharmaceutical products and medical devices.
- Global dependence on China for drugs: America and Europe are said to import nearly 80 per cent of their antibiotics from China.
  - India’s dependence for API: India is also an important supplier of generic drugs to the Western world, but it is itself dependent on massive imports of active pharmaceutical ingredients (APIs) from China.
  - Impact on India: The reduction in supplies from China after the virus breakout has been accentuated by the recent decision of Government of India to limit the export of common drugs like paracetamol.
- How the US is responding to dominance? Well before the current crisis, there had been warnings in the US about the national security risks from the massive reliance on external sources for basic medicines.
  - Weaponising the dominance: Late last year, the US-China Security Review Commission, established by the US Congress, pointed to the prospects of China weaponising its dominance over pharmaceutical production and its massive consequences for healthcare in the US.
  - Government support in China: The report also pointed out that the Chinese government promotes and protects the nation’s pharmaceutical companies to the disadvantage of foreign competitors and that leaves other nations little leverage with China.
- Need to limit the exposure to China in other sectors: While the current international focus is on the supply chains in the pharmaceutical sector, there has been growing recognition of the need to limit the expansive exposure to China in many different sectors.
National security argument of the dominance
- National security dimension of trade war: Trump’s case for bringing manufacturing back to America — by challenging the traditional framework of international trade — was not just economic.
  - It also had a strong national security argument — that the US cannot rely on China for servicing its national security needs in a range of sectors from digital components and drugs.
- What supporters of the globalisation said? Supporters of economic globalisation had countered these arguments by saying that tight interdependence will reduce the incentives for taking unilateral advantage by nations.
- China using trade dominance into leverage: The critics have pointed to the fact that China was turning its role as the “world’s factory” into powerful leverage.
  - Why did the West start regarding China as a challenge? The Chinese decision to stop rare earth exports to Japan during 2010 in relation to a minor political dispute had led many to put up red flags.
  - Since then, China’s greater political assertiveness and challenge to Western dominance in critical areas have strengthened the case in the West to regard China as a challenge if not an outright threat.
- De-coupling gaining traction: As the bipartisan political consensus in the US and Europe in favour of a strong economic partnership with China began to break down in recent years, the case for de-coupling has gained much traction.
How using economic leverage for strategic gains undergone changes?
- Use of economic leverage and stockpiling: The history of statecraft suggests that it was quite common for states to use economic leverage for strategic gains.
  - Use of strategy during the cold war: Through the Cold War, both America and Russia sought to corner strategic resources around the world. They also adopted policies for stockpiling special materials for use during conflicts. Sustaining a strategic petroleum reserve, for example, was a major priority for the US during the Cold War.
- Changes due to globalisation: The importance of hoarding resources at home and denying it to one’s adversaries seemed to diminish amidst great power harmony and economic globalisation that flourished after the Soviet Union collapsed.
  - Recent challenges due to weakening of globalisation: The erosion of that moment in the last few years has set up new tensions between the competing imperatives on Western governments.
- Capital vs. Security issue: While the logic of security compels the state to limit strategic economic exposure, the logic of capital demands policies that reduce costs of production and increase the margins of profit.
  - This tension has been at the heart of the recent Western debates on the China question.
Conclusion

While the world finds ways to deal with the Chinese dominance in the other sector, meanwhile, in the health sector, large continental entities like the US, Europe and India are likely to insure against over-reliance on a single source for life-saving drugs. They are likely to find ways to shorten the supply chains, expand domestic production and explore coordination among like-minded nations.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

No green shoots of a revival in sight as yet

op-ed snap | Economics | Mains Paper 3: Indian Economy

Note4Students
From UPSC perspective, the following things are important:
Prelims level: Not much.
Mains level: Paper 3- Significance of quarterly GDP estimates and revision.
Context

As the third-quarter GDP was marginally higher than the second-quarter figure of 4.5% many concluded that the economic slowdown witnessed during the last six quarters has “bottomed out”. Has it?

What closer examination of data reveal?
- Estimates revised upwards: A closer reading reveals that the latest data release has revised the estimates of the first two quarters of the current year (2019-2020) upwards to 5.6% and 5.1%, from the earlier figures of 5% and 4.5%, respectively.
- What the revision mean? The upward revisions have, perhaps unwittingly, changed the interpretation of the current year’s Q3 estimate: the slowdown has continued, not bottomed out; hence, there is no economic revival in sight as of now.
Competing views of the performance
- The question therefore is why did the current year’s Q1 and Q2 GDP estimates get revised upwards?
  - The answer is this was simply because the corresponding figures for the previous year (2018-2019) got revised downwards.
- The question over the revision process: Many viewed the revision of last year’s estimates as evidence of lack of credibility of the NSO’s revision process.
- Questions over the veracity of data: Such doubts are well taken, given the long-standing debate and unresolved disputes on the veracity of GDP figures put out since 2015, when the statistical office released the new series of National Accounts with 2011-2012 as base year.
Why the GDP estimates undergo revisions?
- Lags in data: As there are lags and unanticipated delays in obtaining the primary data, the GDP estimates undergo several revisions everywhere (except in China).
  - GDP is a statistical construct, prepared using many bits of quantitative information on an economy’s production, consumption and incomes.
- How frequently is data revised? GDP estimates are revised five times in India over nearly three years.
  - The initial two rounds, the advanced estimates, are prepared mainly using high-frequency proxy indicators followed by three rounds based on data obtained from various sectors.
Quarterly GDP estimates and issues with it
- Since 1999, quarterly GDP estimates are being prepared, as per the International Monetary Fund (IMF)’s data dissemination standards.
- Subpar quality: Their quality is subpar as the primary data needed quarterly are mostly lacking.
  - Why quality is subpar? Nearly one-half of India’s GDP originates in the unorganised sector (including agriculture), whose output is not easily amenable to direct estimation every quarter, given the informal nature of production and employment.
  - Hence, the estimates are obtained as ratios, proportions and projections of the annual GDP estimates.
- Quarterly estimates are extrapolations: In general terms, quarterly estimates of GDP are extrapolations of annual series of GDP. The estimates of GVA by industry are compiled by extrapolating value of output or value-added with relevant indicators.
Way forward
- Little ground to question the present revisions: There were considerable variations at the sectoral estimates after the revision, which probably contained more noise than information. For now, there is little ground to question the revised estimates based on the publicly available information.
- Slowdown not bottomed out: If we accept the latest data, it is clear, though in an alarming way, that there has been an undeniable decline in the GDP growth rate over seven consecutive quarters, from 7.1% in Q1 of 2018-2019 to 4.7% in Q3 of 2019-2020.
  - Considering that physical indicators of production, such as the official index of infrastructure output, or monthly automotive sales, continue to show an unambiguous deceleration, the economic slowdown has apparently not bottomed-out.
  - More seriously, the quarterly GDP deceleration comes over and above the annual GDP growth slowdown for four years now: from 8.3% in 2016-17 to 5% in 2019-20 (as per the second advance estimate).
- Limited primary information: India’s quarterly GDP estimates have limited primary information in them. Their revisions are largely extrapolations and projections of the annual figures. Hence, one should be cautious in reading too much into the specific numbers.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Don’t blame it on NSO

op-ed snap | Economics | Mains Paper 3: Indian Economy

Note4Students
From UPSC perspective, the following things are important:
Prelims level: Not much.
Mains level: Paper 3- Revision and estimates of GDP data.
Context

The latest GDP data witnessed significant revisions that have gone largely unnoticed.

The GDP data revision and its criticism
- Revisions an act of due diligence: In the last few years there has been a lot of noise regarding the data revisions.
  - The need for closer examination: While part of revision requires closer examination, we must be fair to our statistical system as such revisions are, in large part, due diligence and happen globally.
- Schedule of NSO estimates
  - First estimate: The NSO releases the first estimates of any fiscal year in January.
  - Revises the January’s first estimates in February.
  - And then again in May.
  - Simultaneous revision in February: Simultaneously, it revises the previous year estimates in February, alongside the February data release.
- Suspicion of statistically protecting the 5% growth: The primary criticism, with the current year’s fiscal data, is that the revisions in February for 2019-20 and the 4th revision in 2018-19 are almost identical, implying that the sanctity of 5 per cent growth was statistically protected.
Examining the criticism purely on the data
- Precedence of 1^st and 2^nd quarter revision: There is precedence to the first and second quarter revisions for the current financial year that happen in February.
  - For example, while in the current fiscal, the cumulative downward revision was close to Rs 30,000 crore.
  - In FY19, there was even a greater upward revision of roughly Rs 86,000 crore in February.
- Is there precedence of such large first-time revisions? Yes, there has been since 2014-15. In 2018-19, the first-time data was revised by a sharp Rs 1.43 lakh crore, while in 2017-18, it was revised by an even larger Rs 1.69 lakh crore.
- Revision in the same direction: The simultaneous revisions are mostly in the same direction, though different in magnitude, and hence it is unfair to say that the 2018-19 data was revised downwards to protect the 2019-20 numbers.
What was the problem?
- Uncertainty: The problem has been that the global and domestic uncertainties in 2017-18 and 2018-19 have been so swift that it has been virtually impossible to predict the outcome initially.
  - While in 2017-18, the final estimates were progressively higher.
  - In 2018-19, while the interim estimates were higher, they were drastically scaled-down later as the impact of the NBFC crisis began to unfold.
- The US example: The US Fed had also missed the possibility of the US economy bouncing back in 2018 on the back of tax cuts when in 2015 it had projected the economy to expand by only 2 per cent, only to change it to 3 per cent in 2018 (almost at par with scale of revisions in India).
Why such unconditional biases arise?
- Asymmetric loss function: It is common for such unconditional bias to arise due to the fact that the statistical reporting agency produces releases according to an asymmetric loss function.
  - For example, there may be a preference for an optimistic/pessimistic release in the first stage, followed by a more pessimistic/optimistic one in the later stage.
- Cost factor: Intuitively, one might argue that the cost of a downward readjustment of the preliminary data is higher than the cost of an upward adjustment.
- This asymmetric loss function is not so relevant at the reporting stage but at the forecasting stage.
- Interpreting the data revision: A statistical reporting agency like the NSO simply does not have all the data at hand and has to forecast the values of the yet to be collecting data.
  - It is at that moment that the asymmetric loss function comes into play.
  - So, we must be careful about interpreting data revisions by the NSO by attributing ulterior motives as we more often tend to do.
India lagging in the use of data analysis
- Unlike countries across the world, India is still significantly lagging in its use of data analysis.
  - Methodologies based on thin surveys: Some of the current methodologies of data collection is based mostly on thin surveys.
  - Not supported by the data in public domain: It is also not supported by data available in the public domain that are more comprehensive, less biased and real-time in nature, based on digital footprints.
  - The end result is that we end up publishing survey results that are misleading.
Way forward
- Development of big data and AI bases ecosystem: We must develop an ecosystem that is high quality, timely and accessible.
  - Big data and artificial intelligence are key elements in such a process.
  - Big data helps acquire real-time information at a granular level and makes data more accessible, scalable and fine-tuned.
- Use of payment data: The use of payments data can also help track economic activity, as is being done in Italy.
  - Different aggregates of the payment system in Italy, jointly with other indicators, are usually adopted in GDP forecasting and can provide additional information content.
Conclusion

To be fair to both the RBI and the NSO, the volatility of oil prices and structural changes in the economy make the forecasting of inflation and GDP a difficult job indeed. However, we should supplement our existing measurement practices with “big data” to make our statistical system more comprehensive and robust.
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Foreign Policy Watch: India-Iran

The diplomatic cost

op-ed snap | International Relations | Mains Paper 2: Effect Of Policies & Politics Of World On India’S Interests

Note4Students
From UPSC perspective, the following things are important:
Prelims level: Not much.
Mains level: Paper 2- Changing India-Iran relations.
Context

The CAA and violence in Delhi have started to take its toll on India’s secular foreign policy.

The US and other’s reaction to the situation in India
- Trump visit to India: President Trump referred to India as a democracy which was peaceful and tolerant. He lauded freedom, rule of law, liberty and protection of human dignity, adding graphically that where India had the holy Ganges, it also had the Golden Temple and Jama Masjid.
  - Assurance to the critics at home: He thereby cleverly reassured critics at home, especially in the US Congress, that he was not ignoring the values the two great democracies shared.
  - However, as the situation in Delhi spun into violence the next day, in an untutored media interaction at the US ambassador’s residence, he ducked questions about the CAA or Delhi riots, nonchalantly remarking it was “up to India” to deal with it.
  - This may have brought comfort to the Indian government but the world at large differed.
- Response from the other countries: Delhi had already exchanged angry words with Malaysia, Turkey and even Indonesia over their varied critique of India’s handling of its Muslim minority when Iran joined the issue.
Iran’s response to violence in India
- Condemnation by foreign ministers: Iranian Foreign Minister Javad Zarif condemned the “wave of organised violence against Indian Muslims”, adding that “Iran has been a friend of India”.
  - India’s foreign ministry summoned the Iranian ambassador to protest the inappropriateness of the minister’s remark.
- The reaction by the Iranian Supreme Leader: Soon after, Supreme Leader Ali Khamenei found the time, in the middle of the COVID-19 outbreak, to excoriate the Indian government.
  - Adding insult to injury, he appended #IndianMuslimsInDanger.
- No reaction on China problems: A facile response, can be that Iran is being hypocritical as it has not expressed remorse over the Chinese repression of Uyghurs.
- The difference in India’s importance to China: China is a veto-wielding member of the UN Security Council, which also sustains the Iranian economy despite US sanctions. On the other hand, India has a Shia population second only to that of Iran.
Relations with Iran
- Two consulates in India: There are two Iranian consulates in India in Hyderabad and Mumbai. Iran seeks the third one in Lucknow.
  - Qom also hosts many Shia students, particularly from the Kargil region.
- Historic links between the two countries: After Humanyun’s exile in Iran (1530-40) before recovering the Indian throne, the Persian language and culture fired the cultural renaissance at the Mughal court.
  - Religio-cultural heritage importance: India is important for Iran for its religio-cultural heritage, unlike China, which is needed for transactional and strategic reasons.
- Two interrelated questions flow from this reasoning:
  - 1. What is Iran’s importance for India and the trajectory of India-Iran relations over the last two decades?
  - 2. And why is Iran adopting this sharp tone over what the Indian government argues is an internal matter?
- Convergence in the relations: The closest India-Iran strategic convergence began in the 1990s, particularly after Kabul fell to the Taliban in 1996. These ties blossomed under reformist Iranian President Mohammad Khatami and Indian Prime Minister Atal Bihari Vajpayee.
- Tehran Declaration: In 2001, the two signed the Teheran Declaration. Khatami in his opening remarks said that Iran always admired India’s secular credentials and Vajpayee had maintained that tradition.
  - In 2003, Khatami was the chief guest at India’s Republic Day and a New Delhi Declaration was issued.
- Deterioration in relations and impact of India-US relation: The relationship began to slip as Iran’s clandestine nuclear programme and assistance from Pakistan’s rogue scientist A Q Khan was uncovered in mid-2003.
  - Impact of India-US closeness: Concomitantly, India was drawing closer to the US and negotiating a nuclear cooperation agreement.
  - The US used the nuclear issue to cause a cleavage as Indian and Iranian interests began seriously diverging.
  - Taliban factor: In any case, the Taliban had been ejected from Afghanistan and US troops literally surrounded Iran, having in 2003 overthrown Saddam Hussein. Geo-strategy trumped diplomacy.
The US-Iran relation cycle
- The nuclear deal with Iran: Iran-US relations also went through a cycle, with President Barack Obama recalibrating US policy towards the Gulf and West Asia.
  - Countering ISIS: Calculating that without Iran, ISIS could not be countered, the US in 2015 endorsed the nuclear deal that P-5 and Germany negotiated to end the nuclear stand-off.
- Missing warmth of the 1990s: Although India-Iran relations after that returned to near normal as most US sanctions were lifted, the warmth of the 1990s was missing.
  - Iran was now beginning to extend its influence and role across Iraq and West Asia.
- Maximum Pressure strategy of the US: President Donald Trump in 2016 reversed US policy and since then “maximum pressure” has been applied on Iran via tightened sanctions.
- India’s engagement with Saudi Arabia and UAE: PM Modi also moved more forthrightly to engage Saudi Arabia and the UAE.
- The fallout of the US strategy reversal: A fallout of the US policy reversal has been an exacerbation of not only the Shia-Sunni split but a Sunni-Sunni split as Qatar and Turkey are with Iran.
Changing polity and increasing influence in the neighbourhood
- Conservatives elected to power: In Iran’s parliamentary election on February 28, extremely conservative members have been elected, the moderates having been vetoed by the Guardians Council earlier.
  - Turnout was a low 43 per cent, due partly to fear of the coronavirus.
- Increasing influence in the neighbourhood: Iran is even more isolated, though determined to resist US demands, due to communications being curtailed due to the virus.
  - Relations with the Taliban: It has good working relations with the Taliban and converging interests to see that US troops exit the region.
  - The friendly government in Baghdad: Iran is battling to ensure a friendly government in Baghdad, despite the killing of Major General Qasem Soleimani, by keeping militias aligned to it in play.
Conclusion
- Perception of India: Khamenei’s tweet reflects the perception that India is in the US-Saudi-Emirati corner and of little use as long as Trump is president.
  - Growing closeness Abu Dhabi, Riyadh and Ahmedabad would have led Iran to this conclusion.
- Leveraging India’s dependence: In the Islamic world, Iran by publicly defending Indian Muslims embarrasses the silent Saudis.
  - It also calculates that India needs access to Afghanistan through Chabahar to assist the Ghani government or influence developments there.
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Coronavirus – Economic Issues

Monetary policy can’t combat the COVID-19 impact

op-ed snap | Economics | Mains Paper 3: Indian Economy

Note4Students
From UPSC perspective, the following things are important:
Prelims level: Not much.
Mains level: Paper 3- Is expansionary monetary policy enough to deal with the impact of COVID-19?
Context

Central banks the world over are devising the strategies to deal with the impact of COVID-19 on their economies.

How the Central banks are responding?
- US Fed’s response: The huge 50 basis points cut in rates by the U.S. Federal Reserve to lift economic sentiment hit by COVID-19 has disrupted central banking worldwide.
- Pressure on other Central banks to follow suits: Even as analysts debate whether a monetary policy response is a right strategy, central banks across the world are feeling the pressure to follow suit to the largest rate cut by the Fed since 2008.
- How banks are responding? Central banks of Australia and Malaysia have cut rates already while others such as the Bank of Japan, Bank of England and the European Central Bank are contemplating joining the caravan.
How the RBI is responding?
- First line of economic defence: With monetary policy turning out to be thede facto first line of economic defence against the ill-effects of the virus, the focus in India has turned to the Reserve Bank of India’s response.
- Hope of rate cut: Yields on 10-year government securities fell by as much as 0.12% in the hope of a rate cut by the RBI and they stayed soft.
- But what are the central bank’s options?
  - No unilateral rate adjustment: Unlike other countries, the legal framework in India after the setting up of the Monetary Policy Committee (MPC) is such that the RBI cannot unilaterally adjust rates.
  - The MPC will have to meet and deliberate on the situation before the call to cut rates is taken and such a call will have to be based on an assessment of inflation in the economy.
Is a rate cut the right response?
- Impact of the virus on the supply side: The first-order impact on the global economy of the spreading virus is a disruption to trade and to global supply chains.
  - With China being the factory of the world, the clampdown in that country has already disrupted supplies of products ranging from cell phone components to bulk drugs and auto components.
  - Factory lines across the world could freeze as supply chains get disrupted.
- Limits of Monetary policy to deal with the supply-side problem: Monetary policy is excellent to address demand shocks but is a blunt tool when it comes to addressing supply-side issues.
  - Where to spend? People may be encouraged to spend more due to a rate cut but what will they spend on if products go scarce, travel convulses and public spaces such as movie theatres and malls become no-go areas?
- The rate cut will boost the sentiments only: A rate cut can, at best, help to boost sentiment but that again will be transient as the market’s reaction after the Fed rate cut proves.
  - Expansionary monetary policy cannot improve the situation: The Swedish central bank’s deputy governor Anna Breman has rightly questioned the logic of a rate cut as a response to the coronavirus impact pointing out that an expansionary monetary policy cannot improve the situation.
- How the RBI might respond? The sentiment being what it is, the RBI may find itself under increasing pressure to act. Given the MPC constraint, it may well choose to do what it did in the February monetary policy– unleash other weapons in its armoury to give the same effect as a rate cut.
  - Thus, we may well see the central bank announcing another tranche of long-term repo operation, akin to the ₹1 lakh crore that it announced in February.
  - That will mean that banks will gain access to three-year funds at the repo rate of 5.15%, much lower than the market rate.
  - And then, there’s Operation Twist which the RBI employed to good effect in December, softening rates at the long end of the yield curve.
Would any of these measures yield any response?
- Doubtful results: It’s doubtful if any of these measures can address the hit to economic growth. The virus has undoubtedly surfaced at a very wrong time for the Indian economy which is showing hesitant signs of a return to growth.
- Which sectors will be impacted the most? The impact will be felt on more than one front. Industries such as pharmaceuticals, electronics and automobiles could be headed for trouble given their high dependence on Chinese inputs.
- Government’s response: While the government is said to be formulating a response, including the possibility of airlifting supplies, the practicality of this solution needs to be watched as also its impact on costs for the industries concerned.
Impact on exports and offsetting factor of oil import
- The biggest problem: The bigger problem could be from a fall in exports, which accounts for 20% of the GDP.
- Which exporters would feel the heat? If the developed world tips into recession due to the virus, exporters of products ranging from petroleum and textiles to leather and gems and jewellery will feel the heat.
- Oil offset due to fall in oil prices: The offsetting factor, of course, will be a lower oil import bill due to the sharp fall in oil prices. This may also have a benevolent effect on inflation.
- But there will be other headaches for the central bank if the developed world embarks on monetary expansion. The RBI will be faced with the challenge of staunching inflows of hot money coming in search of the higher returns available in India.
Conclusion
- Hot money concern for RBI: There will be other headaches for the central bank if the developed world embarks on monetary expansion. The RBI will be faced with the challenge of staunching inflows of hot money coming in search of the higher returns available in India.
- Opportunity in the crisis: As with every crisis, there’s also an opportunity here. Economic growth is bound to suffer in the short-term but there could be long-term spin-offs if domestic industry and government get their acts right.
  - Supply chains can be localised through fresh investments and India can bid to be an alternative to China in the global value chain.
- India can be an option to China for global supply chain: The COVID-19 crisis has only underlined in red the lesson that global corporations learnt when trade war broke out between the U.S. and China- the global supply chain needs alternative options to China. India is eminently qualified to assume that role. If only our policymakers and industrialists rise up to the challenge.
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Issues related to Economic growth

An unrest, a slowdown and a health epidemic

op-ed snap | Economics | Mains Paper 3: Indian Economy

Note4Students
From UPSC perspective, the following things are important:
Prelims level: Not much.
Mains level: Paper 3- Dealing with the trinity of social disharmony, economic slowdown and and global health epidemic.
Context

India faces imminent danger from the trinity of social disharmony, economic slowdown and a global health epidemic.

Social disharmony
- Violence in Capital: Delhi has been subjected to extreme violence over the past few weeks. We have lost nearly 50 of our fellow Indians for no reason. Several hundred people have suffered injuries.
  - Communal tensions have been stoked and flames of religious intolerance fanned by unruly sections of our society, including the political class.
- University campuses, public places and private homes are bearing the brunt of communal outbursts of violence.
- Institutions of law and order have abandoned their dharma to protect citizens. Institutions of justice and the fourth pillar of democracy, the media, have also failed us.
Impact of social disharmony on the economy
- Exacerbating the economy: At a time when our economy is floundering, the impact of such social unrest will only exacerbate the economic slowdown.
- Lack of investment by the private sector: It is now well accepted that the scourge of India’s economy currently is the lack of new investment by the private sector.
  - Investors, industrialists and entrepreneurs are unwilling to undertake new projects and have lost their risk appetite.
  - Increase in fears and risk aversion: Social disruptions and communal tensions only compound investors’ fears and risk aversion.
  - Social harmony, the bedrock of economic development, is now under peril.
- When policy tweaks stop to matter: No amount of tweaking of tax rates, showering of corporate incentives or goading will propel Indian or foreign businesses to invest, when the risk of eruption of sudden violence in one’s neighbourhood looms large.
- How the vicious cycle works: Lack of investment means a lack of jobs and incomes, which, in turn, means a lack of consumption and demand in the economy.
  - A lack of demand will only further suppress private investments. This is the vicious cycle that our economy is stuck in.
Impact of COVID-19 on the economy
- Global reactions: Nations across the world have sprung into action to contain the impact of this epidemic. China is walling off major cities and public places. Italy is shutting down schools. America has embarked aggressively both to quarantine people as well as hasten research efforts to find a cure.
  - Many other nations have announced various measures to address this issue.
- What India can learn? India too must act swiftly and announce a mission-critical team that will be tasked with addressing the issue. There could be some best practices we can adopt from other nations.
Bringing in reforms to address the problems
- The government must quickly embark on a three-point plan.
  - First, it should focus all energies and efforts on containing the COVID-19 threat and prepare adequately.
  - Two, it should withdraw or amend the Citizenship Act, end the toxic social climate and foster national unity.
  - Three, it should put together a detailed and meticulous fiscal stimulus plan to boost consumption demand and revive the economy.
Turning a moment of deep crisis into a moment of great opportunity
- The past instance of turning crisis into an opportunity: In 1991, India and the world faced a similar grave economic crisis, with a balance of payments crisis in India and a global recession caused by rising oil prices due to the Gulf War.
  - But India was able to successfully turn this into an opportunity to reinvigorate the economy through drastic reforms.
- Turning the present crisis into an opportunity: Similarly, the virus contagion and the slowing down of China can potentially open up an opportunity for India to unleash second-generation reforms to become a larger player in the global economy and vastly improve prosperity levels for hundreds of millions of Indians.
  - To achieve that, we must first rise above divisive ideology, petty politics and respect institutional salience.
Conclusion

The India that we know and cherish is slipping away fast. Wilfully stoked communal tensions, gross economic mismanagement and an external health shock are threatening to derail India’s progress and standing. It is time to confront the harsh reality of the grave risks we face as a nation and address them squarely and sufficiently.
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Type: op-ed snap