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Type: Op-ed

  • The diplomatic cost

    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.

     

  • Monetary policy can’t combat the COVID-19 impact

    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.

     

     

  • An unrest, a slowdown and a 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.

     

     

     

     

     

  • Online versus offline

    Context

    Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise.

    Duopolies and scrutiny by the CCI

    • Duopolies in the most segment: The online marketplace or the platform/intermediation service market is now largely characterised by duopolies in most segments:
      • Amazon and Flipkart in e-commerce, Uber and Ola in transport, Zomato and Swiggy in food service, MakeMyTrip and Yatra in travel bookings.
      • Some niche players do exist in these segments, but by and large, the market has been carved up by large players.
    • Why CCI is scrutinising these companies? Several of these companies have come under the scrutiny of the Competition Commission of India (CCI).
      • What are the issues involved? The issues involved here have far-reaching ramifications for both online and offline market places. Some of the more contentious issues are:
      • Do such market structures restrict online competition?
      • Are the players engaging in predatory pricing?
      • If so, is it driving out both online and offline competition and does this adversely impact consumer welfare?
      • Is there a need for policy intervention, and, if so, what should be the underlying framework?

    Lower barrier to entry not translating into greater competition

    • Market not working as per theory: In theory, the online market structure should facilitate greater competition given the lower barriers to entry. But this may not be the case.
      • Take-over: Most other firms in the segments mentioned above have either been taken over or have folded up.
    • What is the reason for the emergence of such marker structures
    • Positive feedback loop: One explanation for the emergence of these market structures is that as companies grow, with more users coming on board these platforms, they benefit from what CCI calls positive feedback loop.
      • This leads to market concentration.
      • Difficulties for new players: Given the network effects, which are common in digital spaces, it becomes difficult for new players to enter these spaces, and gain market share as there isn’t much space for many such networks.
    • Capital intensive market: Another possible explanation is that, contrary to perception, the online space is highly capital intensive.
      • Deep pockets are required to fund the discounts to get customers on board initially.
      • Such market structures are more likely in capital deficit countries like India.
    • Incumbents restricting new entrant: Incumbents, as in other sectors, may also engage in various strategies to restrict entry and thus competition.
      • Even small actions by these platforms coupled with the network effects can adversely impact competition.

    Predatory pricing-issues involved in it

    • Allegations of predatory pricing driving out the competition: Many allege that these two-sided online platforms engage in predatory pricing or below-cost pricing either by funding it themselves (deep pockets) or by squeezing producers.
      • This drives out the competition — both online as well as offline.
      • Predatory pricing is anti-competition, to begin with.
      • How it is harmful to the customers? While consumers do benefit in the short run, once the competition is driven out, the platform starts raising prices to recoup previous losses.
      • But is it that straightforward?
    • What are the issues involved in predatory pricing?
    • First- Assessing whether a platform is engaged in predatory pricing.
      • In India, it is defined as price falling below average variable cost — may not be a straightforward exercise.
      • Why it is not a straight forward exercise? The dynamics of online pricing (prices change over time), their unique cost structures — in such two-sided platforms, prices/costs on both sides should be seen in conjunction — as well as the impact of economies of scale and organisational efficiency in lowering costs, all need to be factored in.
      • Discount for clearing inventories: Besides, one would also have to take into account that even offline firms engage in deep discounting to clear inventories.
      • As do both online and offline firms to acquire customers in the early stages of their business.
    • Second-The impact of such pricing strategies on competition and on consumer welfare must be carefully assessed.
      • Driving out competitors is not equal to driving out the competition: It is quite likely that once the competition is eliminated and the platform starts to raise prices, new players will enter the market, attracted by higher prices.
      • Driving out competitors may not be the same as driving out the competition — though the extent to which new firms are able to enter the market will depend on the degree to which barriers to entry exist.
      • Concerns of recovering the losses: Platforms will be mindful that losses will be hard to recover, and may not engage in below-cost pricing to drive out competitors for extended periods.
      • Consumers are unlikely to lose out as prices are likely to remain low.
    • Third- Possibility of collusion
      • There is also an argument for closer examination of such market structures because of the possibility of collusion.
      • Customers moving towards cheaper options: In most such markets, as the consumer has little to differentiate between the two platforms, it is the price that sets them apart.
      • Consumers tend to gravitate towards the cheaper option. This ensures continuous competition between the major players to offer low prices.
      • Possibility of customer left with no option: It is possible that at some point, the players will find it in their interest to venture into some sort of agreement that allows both of them to survive, rather than be engaged in a race to the bottom — as has seemingly happened in the telecom sector.
    • Fourth- Linking predatory pricing with abuse of dominant market position must be reexamined.
      • The dominant position is not always linked with predatory pricing: As the experience of the telecom sector shows, a dominant position may not be a prerequisite for predatory pricing.
      • Accepting this argument would imply that if regulatory intervention is required to check predatory pricing, it could kick in before market power or dominance is established.
      • Taking into account deep pockets: Alternatively, the definition of market dominance could be expanded to take into account deep pockets.

    Conclusion

    • Set of guidelines instead of the fixed framework: Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise. Having a fixed predetermined framework is unlikely to be helpful. Instead, it would be more useful to have a set of guiding principles based on which regulatory intervention, if required, can be undertaken.
    • Safeguarding competition not competitors: Competition policy should be driven by safeguarding competition, not competitors. It should seek to bring about greater transparency in pricing and reduce information asymmetry.

     

  • A disconnected pedagogy

    Context

    The gap between jobs, needs and knowledge, and the absence of role models, could be turning India’s demographic dividend into a nightmare.

    National curriculum and problems with it

    • What is in our national curriculum? It is a fixed set of topics prescribed in all subjects — from physics to geography, and engineering to planning.
      • And it is taught in English at our elite MHRD institutions.
    • Designed by professionals: It has not been designed by politicians but by our elite professors and bureaucrats: It is what they believe the nation really needs to know.
    • Issue of imposition: It is imposed on ordinary students and parents through competitive exams and on colleges and universities through various central regulatory agencies, most egregiously, through the UGC-NET, an objective-type multiple-choice (!) exam that decides who is fit to be a college teacher.

    Issues with the engineering curriculum

    • Doesn’t address the regional needs: We already know that the national engineering curriculum fails miserably in meeting regional needs.
      • No regional variation accounted for: Engineering for Himachal Pradesh needs to be different from that in Maharashtra or Kerala.
    • Not in sync with the demands of the industry: It must address the needs of core industries, local enterprises, the provisioning of basic amenities such as water and energy.
      • None of this is in our national curricula or practised at the IITs.
      • Moreover, there is no mechanism for engineering colleges to work with their communities.

    Issue with the social science curriculum

    • No interdisciplinary courses: Let us look at the UGC-NET curricula, which is largely what is taught in our elite institutions.
      • At the BA level, it is divided into several disciplines — for instance, political science, sociology and economics.
      • This is unfortunate since much of life in India is interdisciplinary.
      • As a result, many activities such as preparing the balance sheet for a farmer, or analysing public transport needs, and development concerns such as drinking water or even city governance, are given a miss.
    • Example of economics curriculum: The UGC-NET curricula in economics has 10 units, the very last unit is Indian Economics. Unit 8 is on Growth and Development Economics, where the student must know Keynes, Marx, Kaldor, and others.
      • There are various mathematical models, for example, the IS-LM macroeconomic model, whose validity in the Indian scenario is questionable.
      • Absence of important sectors: The study of sectors such as small enterprises or basic economic services such as transportation is absent. The District Economic Survey, an important document prepared regularly by every state for each district, is not even mentioned.

    Sociology curriculum and issues involved

    • Absence of certain important items: There is no preamble nor a list of textbooks or case studies.
      • Under “Social Institutions”, we have a list of timeless words such as culture, marriage, family and kinship.
      • Peasant occurs two times, but there is no farmer. Here is a sample question: “Who uses the phrase ‘fetishism of commodities’ while analysing social conditions?” followed by four names.
    • No mention of important data: There is also no mention of important data sets such as the census or developmental programmes including MGNREGA in either curriculum.

    Conclusion

    • National curricula divorced from the community: The training at our elite institutions, and consequently, in the national curricula, is not to empower ordinary students to probe their lived reality. Or to contribute professionally and constructively to the development problems around us. Rather, it is to perpetuate a peculiar intellectualism which is divorced from the community in which these institutions are embedded.
    • Need to rethink the one-nation-one curriculum: One-nation-one-curriculum certainly has some advantages in enabling mobility of some jobs, especially in the national bureaucracy and a multinational economy.
      • Cost to the developmental needs: But one-nation-one-curriculum comes at the cost of the developmental needs of the states and the emergence of good jobs there.
    • Turning demographic dividend into a nightmare: The above-stated asymmetry is behind the aspirational dysfunction in higher education. It is this disconnect between jobs, needs and knowledge and the absence of role models, which is slowly turning our demographic dividend into a nightmare on the streets.

     

     

     

  • Way out lies within

    Context

    Domestic demand must play a greater role in India’s growth story.

    Recovery in the Indian economy

    • Sub-5 per cent growth rate: India’s fourth-quarter GDP growth (the calendar year 2019) printed another sub-5 per cent growth rate.
    • Favourable base effect: It would have been lower had it not been for the large downward revisions to previous years’ GDP that statistically boosted the last quarter’s growth rate because of favourable base effects.
    • The decline in GDP stabilised: Policymakers and the market heaved a sigh of relief that the relentless decline over the last three years at least seems to have stabilised around 4-5 per cent.
    • Why some countries prefer sequential growth rate: Because year-over growth rates are so strongly affected by what happened a year ago, most economies (including China) instead publish and conduct policy discussions based on sequential quarterly growth.
      • Better sense of momentum: Sequential growth rates provide a much better sense of the momentum and turning points in activity, which are critical to deciding whether, how much, and when the economy needs policy support.
    • The magnitude of recovery: The growth momentum rose, albeit modestly, from 3.8 per cent in the third quarter of 2019 to 4.1 per cent.
      • Non-farm and non-governmental GDP recovery: More importantly, non-farm and non-government GDP (the closest approximation to non-farm private-sector GDP) bounced much more sharply from 1.6 per cent (and no this is not a misprint) to 4.4 per cent in the fourth quarter.

    What is the dominant narrative of the slide in growth?

    • The deceleration in sequential terms: With the revised data, we now know that annual growth over the last four years has slowed from 8.3 per cent to 7 per cent to 6.1 per cent to 4-5 per cent.
      • The decline in non-farm private GDP: In sequential terms, the deceleration was far more dramatic, especially in non-farm private GDP, which after hitting a run rate of 13 per cent in the first quarter of 2016 fell to 1.6 per cent by the third quarter of 2019.
      • The dominant narrative of the cause of slide: The dominant narrative is that India’s woes are just an unfortunate and unintended consequence of demonetisation, the shift to a national GST, and the credit squeeze caused by the bad debt in banks and non-banks.
      • The dominant narrative on recovery: With a bit more fiscal support, some monetary easing, and extended regulatory forbearance to help banks work out their bad debts, these headwinds will fade and India will likely be back to its winning ways.

    Why real cause of the slowdown lays somewhere else?

    Following factors suggest that answer lies somewhere else.

    • Disruptive but not the drivers of the slowdown: While it is undeniable that facts stated in the dominant narrative had been disruptive, they couldn’t be the drivers of the decline.
      • Slide in growth started even before demonetisation: India’s growth had been sliding since the second quarter of 2016; nearly 6 months before demonetisation and a year before the GST was introduced.
      • By the third quarter of 2016, non-farm private sector growth had already slid to 3.5 per cent.
      • Bad debt problem predates slowdown: Although bad debt hit the headlines in 2016, the overleverage had already begun to tighten bank lending since 2014.
    • Fall in corporate investment- inexplicable cause: More inexplicable is the argument that falling corporate investment is the main culprit for the slowdown.
      • It is true that corporate investment is no longer running at the heady 17 per cent of GDP of the pre-global financial crisis (GFC) days but at a much more sombre 11-12 per cent.
      • However, this outsized adjustment had already taken place by 2010 and since then, corporate investment has flatlined at current levels.

    The answer lies in globalisation

    It is obvious once one eschews India’s exceptionalism and accepts that it is just another emerging market economy that grew on the coattails of globalisation with the minimal reforms. Globalisation has largely determined India’s fate.

    • Growth in corporate investment and exports: Contrary to a widely held misperception, India is and has been for a long time far more open to the global economy than believed.
      • Rise in corporate investment from 5 to 17%: The limited liberalisation of 1991-92, coupled with the corporate restructuring in the late 1990s, spurred corporate investment to rise from 5-6 per cent of GDP in the early 2000s to 17 per cent of GDP by 2008.
      • Increase in exports: Almost all of this expansion in investment was geared to produce for exports, which grew at an astonishing pace of 18 per cent per year-over-year in this period as global trade expanded at breakneck speed with the entry of China into the WTO in 2001.
      • 12% of GDP to 26% of GDP: Exports as a share of GDP more than doubled from 12 per cent in the early 2000s to over 26 per cent by 2008.
      • Slow growth in private consumption: In contrast, private domestic consumption, which is considered to be India’s great strength, grew only at 6 per cent annually, less than the growth rate of the economy, such that its share in GDP fell from 63 per cent to 56 per cent.
      • The engine of the Indian economy- Export: Since 2012, global trade has floundered and with that so has India’s economy.
      • Indeed, the entire rise and fall of investment, including the quarter-to-quarter twists and turns in it, can be almost fully explained by changes in exports.
      • The Indian economy has long been flying on one engine – exports — and that is now spluttering.

    What are the prospects of taking the economy back to its high growth path

    • Unlikely: So will the nascent recovery strengthen and take the economy back to its high growth path? Unlikely on current policies.
    • COVID-19 factor: In the near term, as in now widely feared, the COVID-19 outbreak could turn into a pandemic, sharply reducing global demand and trade.
      • With that, even expectations of a modest 2019-20 recovery to 5.25 per cent growth are under threat.
    • Backlash against globalisation: Over the longer term, it is unlikely that global trade will return to its pre-Global financial crisis growth rates not only because supply chains have stopped expanding in the absence of any material technology breakthrough, but there is also a growing political backlash against globalisation in the developed market that has led to increased trade barriers.

    Way forward

    • Search for new sources of growth: India too, like other emerging market economies, needs to face up to the reality that it can no longer depend on global trade to be the only growth driver. Instead, it needs to search and find new sources of growth and that starts with recognising and accepting reality.
    • Let domestic demand play a greater role in the economy: Policymakers need to stop thinking about India as a perennially supply-constrained economy focusing almost all policies and reforms to easing these constraints. Instead, it is time to let domestic demand play a greater role in India’s growth story.
    • Policy changes: The above factors mean that India Inc. needs to shift from producing what foreigners want to produce what residents can afford, it also means that policymakers have to reverse policies that have so far forced households to keep increasing savings (for retirement income, children’s education, healthcare, and housing) through a web of financial repression, regulatory distortions, and public spending choices.
      • It means redesigning India’s infrastructure to look more inward and less outward.
      • Reduce out of pocket expenses: Increasing public provisioning of healthcare and education, reforming insurance regulations to reduce out-of-pocket expenses and eliminating financial repression to raise returns on retirement savings.
      • Merely tinkering with macroeconomic policies will not be enough.

     

     

  • A blow against social justice

    Context

    The recent verdict of a two-judge Supreme Court Bench on reservations and Scheduled Caste and Scheduled Tribes promotions — has mainly raised four constitutional questions.

    The first question-Whether reservation in promotions is a fundamental right or not. 

    • Scope for the reservation: Addressing the first question, the scope for reservation for the Backward Classes is promised in Part III of the Constitution under Fundamental Rights.
      • Articles 16(4) and 16(4A) which empowers the state to provide reservation for SCs and STs are a part of the section, “Equality of opportunity in matters of public employment”.
      • The right to equality is also enshrined in the Preamble of the Constitution. Many construe that the reservation is against Article 16 (Right to equality).
    • The basis for the reservation: One should understand that the absence of equal opportunities for the Backward Classes due to historic injustice by virtue of birth entails them reservation.
      • In other words, the right to equality is the basis of reservation as there is no level-playing field among castes.
      • Articles 16 (2) and 16(4) are neither contradictory nor mutually exclusive in nature. In fact, they are complementary to each other; even Article 16(4) is not a special provision.
    • Whether reservation should be applied in promotions?
      • The answer is yes because, in India, where there is a peculiar hierarchical arrangement of caste, it is conspicuous that SCs and STs are poorly represented in higher posts.
      • Confined to lower cadre jobs: Denying application of reservation in promotions has kept SCs and STs largely confined to lower cadre jobs. This is even seen in the higher judiciary.
      • Hence, providing reservation for promotions is even more justified and appropriate to attain equality.
      • Need of the reservation at every level: The question of law is not about enabling reservations in promotions or not, but this judgment destabilises the very basis of reservation; when there is no direct recruitment in higher posts, the implementation of the reservation is justified at every level to get a reasonable representation.
      • Subdivision of reservation not correct: It is not correct to subdivide the scope of reservation at the entry-level and in promotions; this delineation will only lead to confusion in the implementation of reservation.
      • Now, by declaring that reservation cannot be claimed as a fundamental right is a dangerous precedent in the history of social justice.

    The second question- Can a court issue a mandamus to the state for providing reservation?

    • Will it be appropriate for the courts to issue a mandamus in this regard?
      • This is inappropriate because when the court is empowered to pass orders to create extra seats every year for forward-caste students who claim to be affected by reservation, why cannot it direct the state to provide reservation in promotions?
    • Use of powers under Article 142: The Supreme Court has extraordinary powers under Article 142, which empowers the Court to pass any order necessary for doing “complete justice in any cause or matter pending before it”.

    Third question-Necessity of quantifiable data

    • Data to prove inadequate representation: The next question is about the necessity of quantifiable data to show an inadequate representation of reserved category people.
    • Article 16 addresses the question: This question has been addressed in the Constitution. Article 16(4) reads: “Nothing in this article shall prevent the State from making any provision for the reservation of appointments or posts in favour of any backward class of citizens which, in the opinion of the State, is not adequately represented in the services under the State.”
    • How “opinion of the State” should be construes: Here, “in the opinion of State” should not be construed as the discretion of the state to give the reservation or not; on the contrary, if the state feels that SCs and STs are under-represented, then it is in the domain of the state to provide reservation.
    • Quantifiable data for exceeding the 50% limit: In the Indra Sawhney vs Union of India case (Mandal Commission) the idea of quantifiable data on inadequate representation was applied for exceeding the 50% cap for reservation; within 50% where the existing quotas for SCs and STs are accommodated were not affected.
      • Responsibility to collect data on the State: The responsibility of collecting data on representation by the Backward Classes lies with the state.
      • Pathetically, the last caste-based census was in 1935, and in the pre-Independence era, by the British government.
      • No caste-based census in India: After Independence, no government has had the inclination to conduct a caste-based census due to political reasons.
      • Even if a caste-based census is collected, the population and proportionate representation of SCs and STs will be low. For this reason alone, a proper caste-based census has not been conducted in independent India.
      • No mention of quantifiable data: Moreover, Article 16(4) clearly mentions that if the state, in its opinion, feels that SCs and STs are not adequately represented, then it can provide reservation for them. There is no mention of “quantifiable data” in the Constitution. Even after 70 years of SC/ST reservation, their representation is as low as 3%.

    Fourth question-Whether it is the obligation of the state to give reservation?

    • Obligatory on the government: Finally, if the argument is that it is not binding on the state to give reservation, it must be noted that when reservation rights are in Part III as Fundamental Rights, it is the obligation of the state to ensure reservation to the underprivileged.
    • Interpretation as obligatory provisions: This judgment has interpreted Articles 16 (4) and 16(4A) only as enabling provisions.
    • Enabling provisions mean that these provisions empower the state to intervene; it does not mean the state is not bound to provide it.
    • Interpreting the Constitution by paraphrasing and selective reading is dangerous.

     Administrative efficiency

    • Reservation should not affect the efficiency of administration: More importantly, this judgment has raised a new point — that the decision of the State government to provide reservation for SC/STs should not affect the efficiency of administration.
      • This implies that the entry of SC/STs in the job market can reduce the quality of administration; this by itself is discriminatory.
    • No evidence to support the claim: There is no evidence that performance in administration is affected on account of caste.
    • There have been many attempts to dilute reservation in the past. But, this judgment appears to be debatable in the larger context and should be challenged in a constitutional bench.

    Conclusion

    In a country of parliamentary democracy, even the Constitution of India can be amended. If the government at the Centre has a genuine concern for SC/STs, it can amend the Constitution using its political majority.

  • The growth challenge

    Context

    The focus in the near future should to increase investments and facilitate credit for funding these productive assets so that India’s potential output growth can steadily rise.

    Growth prospects of India

    • The NSO forecast at 5%: The latest data from the National Statistical Office (NSO) retained India’s economic growth forecast at 5 per cent for the current financial year.
      • Growth has dropped from 6.1 per cent in the previous year.
    • Fall in nominal GDP: More strikingly, nominal GDP growth has decelerated from an average of 11 per cent during 2016-17 to 2018-19 to 7.5 per cent this year.
      • Lower inflation added to the volume slowdown.
      • The value of India’s GDP for FY20 is estimated at around $2.9 trillion.

    Input and output side growth prospects

    • GDP is estimated from both output and demand lenses, using specific economic indicators as proxies for activity in specific sectors.
    • Output side: From the output side, sector-wise estimates were as following-
      • Agriculture sector growth was revised up to 3.7 per cent (up from the 2.8 per cent previously).
      • Agricultural production is expected to improve based on the third advance estimates of the rabi season crops, as well as higher horticulture and allied sector output (livestock, forestry and fishing), which now is significantly larger than conventional food crops.
      • Industrial activity was lowered to 1.5 per cent (from 2.3 per cent earlier).
      • The key concern regarding the continuing slowdown is the increasing weakness in the industrial sector (particularly of manufacturing, whose growth has progressively fallen from 13.1 per cent in FY16 to 5.7 per cent in FY19, and plummeting to 0.9 per cent in FY20).
      • Services output remained largely unchanged at 6.5 per cent.
    • Demand-side: From a demand perspective, the obverse side to the manufacturing slowdown is the even sharper drop in fixed asset investment growth — down sharply from an average 8.5 per cent during FY17 and FY19 to -0.6 per cent in FY20.
      • The causes for this contraction needs to be understood in detail, and we will return to this.

    Private consumption- a significant driver of growth

    • Private consumption at 60% of GDP: The other significant driver of growth in India has been private consumption. For perspective, the share of private consumption had averaged 59-60 per cent during FY16-FY20.
    • Government consumption 10% of GDP: Reflecting the higher spending over the last couple of years, the share of government consumption in GDP has risen from an average of 10.5 per cent of GDP over FY12-17 to almost 12 per cent in FY20, resulting in the share of total consumption above 70 per cent.

    Drop in the share of nominal investment

    • Drop from 39 % to 30 % of GDP: The really remarkable trend, though, as noted above, is the share of nominal investment in GDP progressively dropping from 39 per cent in FY12 to 30 per cent in FY20.
    • Is it a good sign? Part of this is actually good, reflecting higher Capex efficiency.
      • Slowing household consumption: One narrative underlying the contraction in fresh Capex in FY20 was slowing household consumption growth, which, in nominal terms, fell from an average 11.6 per cent during FY16-19 to an estimated 9.1 per cent in FY20.
      • Disproportionate contribution to lower growth: Though the deceleration prima facie does not seem significant enough to result in a broader economic slowdown of the current magnitude, the high share of household consumption has contributed disproportionately to lower growth.
      • Fall in capacity utilisation: A direct fallout of this is that seasonally adjusted capacity utilisation (based on RBI surveys) had shrunk from 73.4 per cent in the first quarter of FY20 to 70.3 per cent in the second quarter, and this is unlikely to have improved materially in the second half of the year.
      • This is one of the reasons for the low levels of fresh investment.

    Reduced flow of credit to the commercial sector

    • Impediment to growth revival: The other cause of the low Capex, more from the supply side, is a much-reduced flow of credit to the commercial sector, and this remains the proximate impediment for growth revival, with signs of risk aversion in lending still strong despite the recent measures by RBI to incentivise credit to productive sectors.
      • Funds from selected sources, over April-January FY20, was only about Rs 9 lakh crore as against Rs 15 lakh crore in the corresponding 10 months of FY19.
    • Bank credit lowest in three months: Growth in bank credit (which is still the largest source of financing) till mid-February 2020 was down to 6.3 per cent — the lowest in three years.
      • Even this is almost wholly driven by retail credit; incremental credit to industry and services over this period was negative.

    Investor confidence and coronavirus factor

    • A bright feature of the economic environment: One bright feature in this economic environment is strong foreign investor confidence in India, reflected in both FPI equity and FDI flows.
      • Many borrowers have used offshore sources to refinance or pay down domestic bank loans and debt.
      • A global risk-off environment might restrict even this channel in the near future.
    • Robust corporate bond issuances: Domestic corporate bond issuances have also remained robust, although the dominant set of borrowers still remain public sector agencies and financial institutions.
    • Coronavirus factor likely to moderate the gains: Monthly economic indicators suggest that the growth deceleration has likely bottomed out in the third quarter.
      • The bet has been on reducing inventories and the consequent production ramp-up to replenish stocks. However, the evidence on this is mixed.
      • The coronavirus effects, both concurrent and lagged, will also moderate some of the emerging positive effects of counter-cyclical policy measures of the past six months.
      • If the outbreak does not abate over the next month or so, the complex supply chains of intermediates sourced from China will run dry and add to the already weak system demand.
    • Growth prospects in the next few weeks: Surveys indicate that both business and consumer confidence, which while improving, remain muted. A growth revival, hence, is likely to be only very modest over the next few quarters.

    Conclusion

    A $5 trillion economy by 2025 is still a worthwhile target and aspirational; coordinated strategies, policies, execution and institutional mechanisms will be needed to move up to a sustained 8 per cent plus growth consistent with achieving the target. The focus in the near future should to increase investments and facilitate credit for funding these productive assets so that India’s potential output growth can steadily rise.

     

  • Pushing the wrong energy buttons

    Context

    For more than a decade, no major meeting between an Indian Prime Minister and a U.S. President has passed without a ritual reference to India’s promise made in 2008 to purchase American nuclear reactors.

    Issues in the nuclear deal

    • Construction of reactors: During president Trumps visit techno-commercial offer for the construction of six nuclear reactors in India at the earliest date was considered.
    • More expensive: Indeed, it has been clear for years that electricity from American reactors would be more expensive than competing sources of energy.
    • Prone to disasters: Moreover, nuclear reactors can undergo serious accidents, as shown by the 2011 Fukushima disaster.
    • No liability for accidents: Westinghouse has insisted on a prior assurance that India would not hold it responsible for the consequences of a nuclear disaster.
      • Which is effectively an admission that it is unable to guarantee the safety of its reactors.

    Who will be benefited from the deal?

    • The two beneficiaries: The main beneficiaries from India’s import of reactors would be Westinghouse and India’s atomic energy establishment that is struggling to retain its relevance given the rapid growth of renewables.
    • Political implications: Mr Trump has reasons to press for the sale too. His re-election campaign for the U.S. presidential election in November.
      • The election centrally involves the revival of U.S. manufacturing and he has been lobbied by several nuclear reactor vendors, including Westinghouse.
      • Finally, he also has a conflict-of-interest.

    Comparisons with the renewables

    • The total cost of the reactors: The six reactors being offered to India by Westinghouse would cost almost ₹6 lakh crore.
      • If India purchases these reactors, the economic burden will fall upon consumers and taxpayers.
    • Per unit price: In 2013, it was estimated that even after reducing these prices by 30%, to account for lower construction costs in India, the first year tariff for electricity would be about ₹25 per unit.
    • Comparison with solar energy: Recent solar energy bids in India are around ₹3 per unit.
      • Lazard, the Wall Street firm, estimates that wind and solar energy costs have declined by around 70% to 90% in just the last 10 years and may decline further in the future.

    Safety concern with nuclear energy

    • Long term cost in case of disasters: Nuclear power can also impose long-term costs.
      • Chernobyl accident: Large areas continue to be contaminated with radioactive materials from the 1986 Chernobyl accident and thousands of square kilometres remain closed off for human inhabitation.
      • Fukushima accident: Nearly a decade after the 2011 disaster, the Fukushima prefecture retains radioactive hotspots.
      • The cost of clean-up: the cost of clean-up has been variously estimated to range from $200-billion to over $600-billion.
    • No liability towards company: The Fukushima accident was partly caused by weaknesses in the General Electric company’s Mark I nuclear reactor design.
    • But that company paid nothing towards clean-up costs, or as compensation to the victims, due to an indemnity clause in Japanese law.
    • What are the provisions in Indian laws: Westinghouse wants a similar arrangement with India. Although the Indian liability law is heavily skewed towards manufacturers, it still does not completely indemnify them.
      • So nuclear vendors have tried to chip away at the law. Instead of resisting foreign suppliers, the Indian government has tacitly supported this process.

    India’s experience with nuclear energy

    • Starting with the Tarapur 1 and 2 reactors, in Maharashtra, India’s experiences with imported reactors have been poor.
    • The Kudankulam 1 and 2 reactors, in Tamil Nadu, the only ones to have been imported and commissioned in the last decade, have been repeatedly shut down.
    • Producing less than capacity: In 2018-19, these reactors produced just 32% and 38%, respectively, of the electricity they were designed to produce.
    • These difficulties are illustrative of the dismal history of India’s nuclear establishment.
    • Electricity generation stagnant at 3%: In spite of its tall claims, the fraction of electricity generated by nuclear power in India has remained stagnant at about 3% for decades.

    Conclusion

    The above factors indicate that the government should take the rational decision on the adoption of nuclear energy given its cost and the risk involved and the better alternative available in the form of solar and other renewable energies.

     

  • New forces in orbit

    Context

    As it looks at the growing role of the private sector and the effort by nations like the UAE and Luxembourg, Delhi needs to move quickly towards a new model for India’s space activity.

    Growing presence in the outer space

    • Outer space no longer a preserve of a few: When you think of outer space, you think of big powers like the United States, Russia and China.
      • You might also note the collective European effort under the European Space Agency as well as the impressive national space programmes of India and Japan.
      • Strategic or symbol of national pursuit: Space programmes have for long been viewed as either strategic or symbols of national prestige for big countries that are prepared to invest significant resources in the pursuit of a credible presence in outer space.
    • Two small countries challenging the narrative: Two small countries, the United Arab Emirates in the Gulf and the Grand Duchy of Luxembourg in Europe have begun to demonstrate that the outer space need not be the playing ground for big powers alone.
      • Sceptics might think it is pretentious for the UAE with its native population of barely one million and Luxembourg with 600,000 people to think of a place for themselves in space.

    UAE’s presence in the space

    • Reminder for India: The interesting path these two countries have set for themselves in outer space is a reminder that Delhi needs to adapt to the rapidly changing dynamic in outer space.
    • Hope Mars Mission: That size is not a constraint is reflected in the UAE’s plan to launch its Mars mission, “Hope”, later this year in partnership with a range of organisations across the world — including three universities in the US.
      • Japan is scheduled to launch the UAE Mars probe this year.
      • India’s own ISRO is also working with the UAE on its Mars mission.
    • Last year, the first Emirati Astronaut, Hazza al-Mansouri spent more than a week in the US-Russian space station.
    • What are the reasons for the UAE’s space strategy? It is about cornering a slice of the rapidly growing commercial space industry — part of a major effort to diversify the UAE economy away from its reliance on hydrocarbons.

    How Luxembourg is increasing its presence in the outer space

    • Commercial space as a major opportunity: Over the years, Luxembourg moved away from its past reliance on the steel industry to become a centre of European banking and finance.
      • It is now looking at commercial space as a major opportunity.
    • Regulatory steps: Luxembourg has taken a number of regulatory steps to create a vibrant ecosystem for space companies ranging from satellite operations to future extraction of resources from asteroids and other space objects.
    • Expansion of the space sector: At the moment, the space sector accounts for nearly 2 per cent of Luxembourg’s GDP.
      • There are more than 50 companies and two public research organisations that are driving the expansion of space sector in Luxembourg.
      • It entered the space sector only in the middle of the last decade. It is also driven by the need for economic diversification.
    • Leveraging new ideas: UAE and Luxembourg do have a reputation for leveraging new ideas to transcend the limitations of their size in the world.
      • But their space adventure was not possible without the structural changes that are reshaping the global space activity.

    How space industry underwent a change over the years

    • Preserve of national programs: Through the second half of the 20th century, outer space was the sole preserve of national space programmes driven by government-funding, direction and management.
    • The emergence of the private sector: As military uses of space and prestige projects like Moon-landing emerged, major private sector entities already in the aviation industry like Boeing and Lockheed won space contracts in the US.
      • Collaboration with government: The Pentagon and the National Aeronautics and Space Administration (NASA) told these companies what to do.
    • Expansion: The last decades of the 20th century saw significant expansion of satellite-based telecommunication, navigation, broadcasting and mapping, and lent a significant commercial dimension to the space sector.
      • As the digital revolution in the 21st century transformed the world economy, the commercial space sector has begun to grow in leaps and bounds.
      • The global space business is now estimated to be around $ 400 billion and is expected to easily rise to at least trillion dollars by 2040.
    • Rise of SpaceX: One example of the rise of private sector companies in the space sector is SpaceX run by the US entrepreneur Elon Musk.
      • Hired for a resupply mission for the space station, it now launches more rockets every year than NASA.
      • The entry of the private sector has begun to drive down the cost-per-launch through innovations such as reusable rockets.

    Scope of the expansion of the space industry

    • Decrease in launch cost and rise in ambition: As launch costs came down, the private sector has become more ambitious.
      • Internet through space: SpaceX plans to launch hundreds of satellites into the low-earth orbit to provide internet services. Amazon has plans to build a network of more than 3,000 satellites in the low-earth orbit.
      • Space tourism: Musk and Amazon’s Jeff Bezos have plans to develop space tourism and build human settlements on the Moon and on Mars.
      • Small private companies in the fray: It is not just big companies that are aiming for the Moon. Last year, a private company in Israel sent a lunar lander to the Moon. Although the lander crashed, much like India’s Vikram, the private sector has begun to do things that were once the monopoly of national agencies.

    India not in synch with the global changes

    • Not adapting to the change: India, however, is quite some distance away from adapting to the unfolding changes in the global space business.
      • In its early years, India’s space programme that was constrained by lack of resources found innovative ways of getting ahead in space.
    • Space sector dominated by the government: Although the ISRO encourages private sector participation in the national space programme, its model is still very 20th century — in terms of governmental domination.

    Conclusion

    As it looks at the growing role of the private sector and the effort by nations like the UAE and Luxembourg, India needs to move quickly towards a new model for India’s space activity. It needs a regulatory environment that encourages a more dynamic role for the private sector and promotes innovation.