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Tuesday, August 27, 2013

India’s Policy Towards Pakistan



Introduction

      Forty eminent experts have asked for cancellation of talks between the Indian and Pakistan Prime Ministers. Egged on by TV anchors, several eminent Indian’s are talking about retaliation.  Others have pointed out that talks are not a favor to anyone; they are an essential part of diplomacy.  However, neither the use of force nor diplomacy can serve if we are confused about our Strategy and Objectives.  The basis of ‘strategy’ is an unsentimental understanding of the opponent and his strategy and objectives.

Past: Jihad & its Supporters

   After the formation of Bangladesh in 1971, the Pakistan Military, fully supported by the entire Pakistan establishment, developed a two pronged strategy of dealing with India: Acquire nuclear weapons and use these as a shield to carry out Jihad against India.[1]  Pakistan’s entire international policy and much of its internal policy was driven by this obsession of revenge against India. But make no mistake, it was not just a policy of the Military it was fully supported by and implemented by the elites of Pakistan (political, bureaucratic, diplomatic, business, professional), whichever country they resided in.[2] 
General Zia ul Haq (1977-98), imposed a policy of state-led Islamization, by bringing in his concept of Sharia, including the infamous blasphemy law. Under his regime, the fundamentalist Ahl-e-Hadith version of Islam, was introduced in (all) school curricula as a result of which, “An entire generation of Pakistanis studying in public (and secular) schools has grown up viewing not only non-Muslim minorities but also Muslim minorities as “the other,” as “unpatriotic,” and as ‘not Muslim enough’.”[3] Zia used to greet all Indians with expansive bear hugs.

Present: Pak Democracy

So the first question we have to answer is whether there is any change in this dual policy towards India?  The Al Qaida attack on the USA (9/11) has clearly set in motion a process of learning among the US, UK and other Western analysts and policy makers, that directly or tacitly supported this Pakistan policy by connecting all violation of global rules and practices by Pakistan to something that India did or did not do.  The erosion of the international carte blanche for Pakistan, forced a rethink by the globalized English speaking elites of Pakistan. But Inside Pakistan they are a shrinking minority, decimated by the murder of any one who exposes Pakistan military’s double dealing on Terrorism or draws the ire of the Sunni fundamentalist killers. With the coming of democracy, the leaders of the major Pakistani political parties (PPP, PML-N) have realized that their own and their parties interests are not identical to those of the Pakistan Military and appear to be willing to consider changing the anti-India policy. Mr. Nawaz Sharif has gone further than Mr. Zardari could, in making clear that more normal relations with India would also be in the interest of his party.
However, in a democracy one must ask, what is the extent of support for changing a policy of anti-India Jihad, to one of Peace. Unfortunately, as the old (English educated) elite has begun to realize that the Frankenstein terrorists they have created may destroy Pakistan itself by taking it back into a medieval age, the new Urdu speaking (Sunni) elites appear to be fully behind the terrorists.[4]

Future: India’s Policy

Keeping this background in mind what should be the Indian Governments strategy to deal with Pakistan.  As has been clear for some time it is in India’s interest to have a two pronged approach towards Pakistan:[5]
(1) Increase the costs to the Pakistan Military of its anti-India Jihad and thus affect its benefit-cost calculus. This has three elements: (a) The Military as an institution (flow of financial aid and sophisticated equipment & technology), Forceful response to cease fire violations. Targeted attack on valuable (but not iconic/symbolic) assets by a small super-specialized commando force, in response to cross-border terrorist incidents. (b) The Anti-India Jihadi organizations (Take the fight to them all over S. Asia by developing covert assets). (c) The personal interests of serving & retired Army/ISI officers: Identifying & blacklisting (UN, US, west) all those connected with terrorism.
(2)  Identify, discuss and implement economic, cultural and other policies that are good for the people of both India and Pakistan.  For instance, theory and empirical evidence points to the fact that normal trade, transit, investment backed by good trans-border and trans-Asian (from C. Asia/Iran to Myanmar) infrastructure would be in the interests of both countries and their people.  Similarly, genuinely open and symmetric social and cultural policies would be mutually beneficial and can and should be pursued without interruption.  What is completely unclear at this point is the case for India to make any asymmetric economic concessions and gestures that are only economically beneficial for Pakistan and financially costly for us. These require a much higher standard of trust in the Pakistan government and in its ability to overcome domestic objections to normalization.

Conclusion

   It is pointless putting pre-conditions for talks that we keep abandoning.  Any condition on talks must be simple, effective and enforceable.  One simple condition could be that we will not officially/formally discuss J&K's (including Siachin's) future unless effective and credible steps are taken to try known anti-India terrorists in Pakistan (i.e no formal composite dialogue with the Kashmir/Siachin sub-groups).  All issues should however be open for discussion on back channels.


[1] Trilateral Nuclear Proliferation: Pakistan’s Euro-Chinese Bomb, IDSA Monograph Series No. 1, Institute of Defence Studies and Analysis, New Delhi, December 2006. http://www.idsa.in/monograph/TrilateralNuclearProliferationPakistansEuro-ChineseBomb_avirmani_2006 .
[2] About 6 years ago, I overheard Pakistani friends in USA referring to anti-India Jehadis as “Paltu Kutta (pet dogs).”
[4] Punjab lawyers agitated to free the Punjab governor’s self-confessed killer, the courts free self-confessed killers all in the name of Islam. Businessmen fund the JUD and other front organizations of the terrorists. Recent poll showed 83% support for Osama Bin Laden (should have been protected in Abbottabad). 
[5]Globalisation, Growth and National Security” at https://sites.google.com/site/drarvindvirmani/international-relation-security, and “World Economy, Geopolitics and Global Strategy” EPW 2006.

Friday, August 16, 2013

What Can Govt ( & RBI) Do Now?



Background

   After we had successfully tackled the effects of the global financial crisis in 2009 (and before I retired from GOI[1]) the general euphoria led me to warn about four potential dangers:
 (1) Sustaining growth would be a challenge heightened by global slowdown & disruptions.[2] Dormant policy reforms needed to be activated.[3]
(2) A higher fiscal deficit saved us from growth collapse in 2008-9 and ensured faster recovery in 2009, but was politically addictive.  It must be brought back to the sustainable level reached in 2007-8 as soon as growth was restored(as it was in 2009-10).[4]
(3) Food inflation was becoming more entrenched because of faster growth in income (demand), rising supply chain constraints & costs and traditionally slow productivity growth. Agriculture the only unreformed sector needed de-control of external & internal trade & land market.[5]
(4) Capital flow volatility, with surges and sudden stops, had to be tackled by un-conventional policy means.[6]  One had to counter capital inflow surges and exchange rate appreciation, but allow exchange rate depreciation on outflow. 
   There is no public information to show that the ruling party, government ministers, bureaucrats or economists took any of this seriously till late 2012.  Since then appreciation and action have lagged the pace of economic deterioration, so that options that may have been available earlier have been closing one by one till the government and RBI appear to be boxed into a corner.[7]

Policy Action

     What can the government (and RBI) do at this late stage when one mini-crisis after another seems to be hitting the economy. What we need is an updated version of the Expenditure Reduction-Expenditure Switching cum Policy/Structural Reform Strategy successful employed in 1991.[8] This involves the following:
(1)    A sharp reduction in government consumption, subsidies and transfers, to bring down the Revenue and Fiscal deficits. Could be accompanied by a modest push to accelerate productive government investment in bottleneck areas.
(2)    A sharp loosening of monetary policy, particularly through a reduction in medium-long term rates.  An interest rate twist would be ideal, with very short term interest held steady or increased, even though it is not sustainable for long.
(3)    A market led depreciation of the rupee to a stable level.  Though a successful interest rate twist would dampen volatility, it is not clear whether it is still feasible or sustainable for much longer.
(4)    A major political and governmental decision, followed by an active push, to dismantle the Government coal monopoly, Central government monopolies in infrastructure sectors like Railways, Ports, Airports and States' monopoly in electricity distribution (Open Access as per 2003 electricity act).  A major political thrust on investment enhancing (as against vote enhancing) legislation.  The public is not convinced that the ruling party has made a credible effort to do so (and that the blame, therefore lies with the opposition party).
(5)    A full correction of legal and administrative missteps taken by the revenue department in the last 5 years. Instead of waiting endlessly for GST it may still be worth introducing a proper central VAT (CENVAT) including services.[9]
(6)    Introduction of simple, transparent procedures for auctioning of mineral exploration and production rights as also for land under the control of the central government and in States under its control. Setting up of a professional, independent environmental protection agency, and transfer of regulatory functions to it.
(7)    A comprehensive liberalization of the agriculture sector, with decontrol (permanent QR removal) of imports, exports, internal trade and land markets (leasing in and out of land;  regulated sale-purchase of land in non-tribal areas). A pre-announced system of variable import and export duties on major crops would be devised within 3 months to balance interests of farmers & consumers.  Rural Fertiliser, Electricity and Kerosene subsidies to be replaced by Adhar based cash transfers to all rural residents (excluding census towns and income tax payees). FDI to be not just allowed but encouraged in all Agricultural based activities such as retail of agricultural-food products, Agri-rural banking, insurance (including crop, weather).


Further to restore confidence in government and its weakened credibility:-
(8)    Acceptance of (and action on), Election reforms to remove criminals from politics (including fast track courts), State funding of elections and auditing of accounts under ages of Election commission, Police reforms including a new police act to break the criminal-police-politician nexus, legal and judicial reforms to improve respect for law (increase fear of the law in potential law breakers and remove fear in innocents).


If the Macro-Pivot (steps 1-3) and some policy reforms (steps 4-7) are not carried out, and conventional monetary policy continues, rising interest rates will trigger  a further reduction in the growth rate (from the latest govt. forecast of 6%) and decline in stock market while CPI inflation persists and rupee depreciation continues (despite higher interest rates).

A version of this article, titled "Cut Expenditure, Boost Investment" appeared on the editorial page of the Times of India on Friday, 30th August, 2013. http://timesofindia.indiatimes.com/home/opinion/edit-page/Cut-spending-boost-investment/articleshow/22144597.cms .


[1] As Chief Economic Advisor in Ministry of Finance.
[2] The Sudoku of India’s Growth, BS Books, New Delhi, 2009. www.business-standard.com/books.
[3] A menu of reforms was suggested in the 2008-09 Economic survey in 5 separate boxes covering different areas.
[4] The economic survey, 2008-09, Box on Macro reforms, suggested targeting 0 fiscal deficit by end 2010s.
[5] Economic Survey 2007-08 and mid-year review.
[6] Virmani, Arvind “Macro-economic management of the Indian Economy: Capital flows, interest rates and inflation,” Macroeconomics and Finance in Emerging Market Economies,Vol. 2, No. 2, September 2009, pp 189-214.
[7] Notes at http://dravirmani.blogspot.in/p/macro.html, starting from latest on top.
[8] India: Crises Reform and Growth, Economic and Political Weekly, Volume XXXII, No. 32, August 9-15, 1997, pp. 2064-2068.
[9] Central Value Added Tax: CENVAT, Economic and Political Weekly, Vol. XXXVI No. 8, February 24-March 2, 2001, pp. 630-632.