Over three decades ago PM Indira Gandhi introduced the policy of “poverty alleviation.” The rationale bears repetition as it has remained unchanged for decades and underlies the EGS. It was argued that, “Economic growth does not lift all boats equally. As poverty is pervasive, all these people cannot be left to suffer while we wait for poverty to be eliminated by economic growth. We therefore need targeted programs for the poor to give them relief till such time as poverty is eliminated.” During that period of Indian socialism, the rate of growth of per capita income was 1.3% per annum and poverty was on an uptrend. Dozens of poverty alleviation programs have been introduced by successive governments. We may recall that “those who ignore history are condemned to repeat it.” My fear is that unless the EGS is seen in an overall context of policy and institutional reform it will become just another poverty alleviation program to be supplanted by new ones by the next government. Then, ten-fifteen years from now a new set of brilliant young academics will be agitating for another revolutionary new program to alleviate the suffering of the poor.
Most people would agree with the contents of a 1988 Planning Commission paper “Efficient Labour Intensive Growth: Key to Accelerated Poverty Reduction.” Among other things it suggested a change in labour policy that is discouraging organised manufacturing industry from hiring unskilled labour and making it impossible for India to compete with other countries in mass (unskilled) labour intensive manufacturing. If the poor are to participate in the modern manufacturing or service sectors they must also have Basic/Primary education and information about job opportunities suitable for them across the country. However, even if these and other reforms for accelerating labour intensive growth eliminate poverty in fifteen years, there will be geographical (remote areas), seasonal (between sowing and harvesting) and cyclical (drought years) pockets of unemployment. Therefore in a 1999 Finance Ministry paper, “From Poverty to Prosperity: Reforms for Accelerating Growth,” I recommended an Employment Guarantee Scheme and a Right to Information Act along with other reforms for accelerating (employment) growth.
There are four elements of a successful EGS. First it must replace the dozens of poverty alleviation schemes in existence today. This can be done by amalgamating and integrating these schemes into the EGS, with a minimum 75% of EGS funds coming from these dissolved schemes. To ensure that the employment builds infrastructure assets that have a long term benefit to the local population, all local infrastructure building programs (village/block roads, water harvesting, irrigation & drainage, sewage & sanitation systems, school/PHC building & maintenance) should be within its purview. The concerned schemes departments must be required to provide their expert advise and assistance (consultancy) to the EGS scheme so that it builds productive assets.
Second, the EGS wage rate should be less than or at most equal to the local off-season market wage. If the former is raised above the latter, Rents rise and so does the incentive for corruption, with less chance of the poor getting any employment. In addition with a higher wage, even employed people will be drawn away from productive private jobs to the “sarkari jobs” where shirking is a birthright and accountability is low. The uniform minimum wage of Rs. 60 (about 3/4th of daily per capita GDP) may prove to be too high for high poverty districts making EGS as ineffective as earlier schemes (15% to poor).
Third, full disclosure must be built into the EGS rules. Thus the names of every person employed in the EGS, the hours worked and wages paid and the assets built, must be posted in a public place and be available for cross-checking by NGO’s subsequently.
Fourth, incentive compatibility must be ensured between the funding and the implementing agencies. A 90:10 Center:State funding ratio provides little incentive for the State government machinery to ensure that funds are spent efficiently. These could be corrected by merging the local area development programs of the State government into the EGS.
If these four elements can be ensured the scheme could be a very successful one. If not, a few years of good performance are likely to be followed by a sharp fall in effectiveness, as happened in the Maharashtra EGS. A mere law, even the Supreme Court, cannot ensure that every person in every remote village gets employment.
Monday, August 22, 2005
Tuesday, August 9, 2005
Next Steps in Strategic Relations: Completing The Triangle
A recent research paper forecast that the World will become bipolar in 25 years and Tripolar by the middle of the 21st century and that this possibility would lead to greater technological cooperation between the USA and India. In this context, the two recent US-India framework agreements (defense & nuclear) are just the beginning of a far reaching transformation of the global order. Realization of potential into reality requires work not only on India-US relations, but more importantly on India-China relations over the next 12-18 months, to reap the benefits.
First we should turn our attention back to the second pole China by implementing the agreements reached earlier this year between Dr. Man Mohan Singh and PM Wen Jibao. One was an agreement to enhance economic cooperation and double the volume of bilateral trade. The India-China study group (of which I was a member) had identified several constraints and barriers to trade in goods and services. India and China must work together to ensure that the route map outlined for addressing these issues is followed and the full potential of trade in goods in services is realized expeditiously.
The second was a framework agreement on defining the India-China border. Its importance can be gauged from the fact that since PM Rajiv Gandhi’s pioneering visit to China, two decades of meetings on the border issue had failed even to define the line of control between the two countries. As India is quite used to the concept of ‘LOC’ (a la J&K), some Chinese objective or fear must have prevented this from happening. The framework agreement therefore reflects a change in China’s approach to India and this must be followed up to a successful conclusion. The key to an India-China border settlement and lasting peace is secure and defensible borders, not how much territory is exchanged. A fair, just and equitable settlement of the border that reduces the risks & enhances the security of both is in the long term interests of both countries.
The third is to carry forward the strategic dialogue. We could perhaps propose a bilateral agreement on non-proliferation of WMD’s and nuclear/space technology to each others neighbors (e.g. Pakistan, Bangladesh; Vietnam, Taiwan). To avoid any ambiguity such an agreement should have an explicit, detailed list attached. Such an agreement would reduce suspicion and enhance mutual trust.
Our communist parties, the CPI and the CPM, can play a vital role in this process by convincing their fraternal party the Communist Party of China of the fundamental need for better India-China relations.
The successful completion of these three steps would set the stage for a comprehensive co-operation agreement (/FTA) covering goods, services, FDI and skilled personnel, between the two countries. An India-China joint study group for the same could be set up by the end of 2006-7. This could lay the foundation for the formation of an (East) Asian Economic Community.
There is also a lot of work to be done on the Indo-US front. Indian business, including US MNCs in India, must work with the NRI/PIO community in the USA to persuade the US Congress to change US laws and rules to provide India full access to Civilian Nuclear and all ‘Dual Use’ technology. At home transparent rules and regulation for private investment (including FDI) in nuclear power must be put in place. A Commercial Nuclear Power Corporation could be set up with 49.9% govt. equity and 50.1% private equity (investors, Indian companies and FDI). Some government re-insurance (for major catastrophe) as well as risk cover for loans and/or central purchase of nuclear power may be necessary initially (for the first few private nuclear power plants). The great advantage of such plants is that they can be subject to international rules and safeguards without affecting our existing nuclear establishment in anyway. Logically we can be “no worse off” than before, if we keep our current facilities as non-commercial ones for the time being. Subsequently we can declare one or more (Tarapur, RAPP) as commercial ones, if and only if it makes us “better off.” The choice is ours (nuclear experts), not that of the US or another country.
We must also activate our diplomatic machinery to free up the flow of civilian nuclear technology from Japan, Russia, UK, France, Germany and other EU members. If this can be done by the time the US Congress approves the promised changes, India will reap the maximum benefit of competition among them to supply materials, equipment and power plants to India. We could similarly promote greater competition in defense technology transfer and co-production by signing appropriate agreements with Japan and others where they are needed to lubricate flows of defense technology or equipment.
Though media reports suggest that F16/F18 deals are imminent, considerable staff work has to be done to give substance to the Indo-US defense agreement, so that the benefits begin to flow to both countries. We should also expand the discussion from air to naval equipment and components, without which a ‘minimum nuclear deterrent’ and ‘No first use,’ nuclear policy is not credible to any recognized nuclear power.
If these and related issues are pursued with seriousness and determination, the Indo-US strategic partnership will help accelerate the transformation of the World from a uni-polar one into a stable tri-polar one, with the USA, China and India as the three poles. President Bush and Dr. Man Mohan Singh must be congratulated for taking bold decisions that may well determine their place in history.
First we should turn our attention back to the second pole China by implementing the agreements reached earlier this year between Dr. Man Mohan Singh and PM Wen Jibao. One was an agreement to enhance economic cooperation and double the volume of bilateral trade. The India-China study group (of which I was a member) had identified several constraints and barriers to trade in goods and services. India and China must work together to ensure that the route map outlined for addressing these issues is followed and the full potential of trade in goods in services is realized expeditiously.
The second was a framework agreement on defining the India-China border. Its importance can be gauged from the fact that since PM Rajiv Gandhi’s pioneering visit to China, two decades of meetings on the border issue had failed even to define the line of control between the two countries. As India is quite used to the concept of ‘LOC’ (a la J&K), some Chinese objective or fear must have prevented this from happening. The framework agreement therefore reflects a change in China’s approach to India and this must be followed up to a successful conclusion. The key to an India-China border settlement and lasting peace is secure and defensible borders, not how much territory is exchanged. A fair, just and equitable settlement of the border that reduces the risks & enhances the security of both is in the long term interests of both countries.
The third is to carry forward the strategic dialogue. We could perhaps propose a bilateral agreement on non-proliferation of WMD’s and nuclear/space technology to each others neighbors (e.g. Pakistan, Bangladesh; Vietnam, Taiwan). To avoid any ambiguity such an agreement should have an explicit, detailed list attached. Such an agreement would reduce suspicion and enhance mutual trust.
Our communist parties, the CPI and the CPM, can play a vital role in this process by convincing their fraternal party the Communist Party of China of the fundamental need for better India-China relations.
The successful completion of these three steps would set the stage for a comprehensive co-operation agreement (/FTA) covering goods, services, FDI and skilled personnel, between the two countries. An India-China joint study group for the same could be set up by the end of 2006-7. This could lay the foundation for the formation of an (East) Asian Economic Community.
There is also a lot of work to be done on the Indo-US front. Indian business, including US MNCs in India, must work with the NRI/PIO community in the USA to persuade the US Congress to change US laws and rules to provide India full access to Civilian Nuclear and all ‘Dual Use’ technology. At home transparent rules and regulation for private investment (including FDI) in nuclear power must be put in place. A Commercial Nuclear Power Corporation could be set up with 49.9% govt. equity and 50.1% private equity (investors, Indian companies and FDI). Some government re-insurance (for major catastrophe) as well as risk cover for loans and/or central purchase of nuclear power may be necessary initially (for the first few private nuclear power plants). The great advantage of such plants is that they can be subject to international rules and safeguards without affecting our existing nuclear establishment in anyway. Logically we can be “no worse off” than before, if we keep our current facilities as non-commercial ones for the time being. Subsequently we can declare one or more (Tarapur, RAPP) as commercial ones, if and only if it makes us “better off.” The choice is ours (nuclear experts), not that of the US or another country.
We must also activate our diplomatic machinery to free up the flow of civilian nuclear technology from Japan, Russia, UK, France, Germany and other EU members. If this can be done by the time the US Congress approves the promised changes, India will reap the maximum benefit of competition among them to supply materials, equipment and power plants to India. We could similarly promote greater competition in defense technology transfer and co-production by signing appropriate agreements with Japan and others where they are needed to lubricate flows of defense technology or equipment.
Though media reports suggest that F16/F18 deals are imminent, considerable staff work has to be done to give substance to the Indo-US defense agreement, so that the benefits begin to flow to both countries. We should also expand the discussion from air to naval equipment and components, without which a ‘minimum nuclear deterrent’ and ‘No first use,’ nuclear policy is not credible to any recognized nuclear power.
If these and related issues are pursued with seriousness and determination, the Indo-US strategic partnership will help accelerate the transformation of the World from a uni-polar one into a stable tri-polar one, with the USA, China and India as the three poles. President Bush and Dr. Man Mohan Singh must be congratulated for taking bold decisions that may well determine their place in history.
Thursday, July 14, 2005
Historic Transformation of US-India Relations and India’s Role in Asia?
US President Nixon transformed US relations with China, with his breakthrough trip to China. This led after a decade or so to a transformation of China’s role in Asia. President Regan transformed US relations with the USSR, contributing to the disintegration of the Soviet empire. Will President Bush similarly transform the US relationship with India leading to a transformation of India’s role in Asia? A change in objective conditions, presented in several of our papers (WP #160, March 2005 and WP# 150, December 2004), suggests that this is likely. There are however obstacles on the US side that will have to be overcome before this can happen.
President Clinton, after his statement about China and USA being strategic partners and jointly deploring India’s 1998 nuclear tests, repaired relations by condemning Pakistani aggression in Kargil and supporting the Strobe Talbot – Jaswant Singh talks. These talks along with candidate Bush’s advisory group ‘Vulcans’ (that included Profs Condolezza Rice of Stanford and Prof Robert Blackwill of Harvard) laid the foundations for a changed approach of USA towards India. President Bush envisaged a much bigger role for India in Global affairs than his predecessors. PM Vajpayee reciprocated by calling India and USA “Natural Allies.” This resulted in the initiative labeled “Next Steps in Strategic & Technological Partnership (NSSTP).” The process was however side tracked by 9/11 as the US focus shifted to Afghanistan & Iraq and Pakistan made itself indispensable to the US.
The transformation had therefore to await President Bush’s second term and the visit of Secretary Rice to India in March 2005 (followed by the background briefing recognizing India’s potential power). A major landmark will be the visit of PM Dr Manmohan Singh to Washington starting on July 16th 2005. A key test will be US support for a permanent (veto bearing) UNSC seat. A possible deliverable is the formation of an India-US study group for a CECA. The transformation will likely (with 75% probability) be in place by the time President Bush visits India at the end of 2005-6, with the key test being an effective agreement to free the flow of nuclear plants, equipment and materials from the USA to India.
As shown in the author’s ICRIER working papers #150 (December 2004) and #160 (March 2005), the global economy is undergoing a dramatic transformation. Over the next 35 years both Chinese and Indian economies will become larger than the US economy in size (measured in PPP). In the case of China this will happen in a decade while in the case of India it will take an additional 25 years. At the same time Japan’s economy will decline gradually and Russia’s rise slowly (relative to the US) as the population of both declines by 25% over the next 50 years. The large economies of Europe will see varying population declines that will reduce their GDP relative to the USA.
The impact on the Global balance of power will be equally dramatic. This is shown by our ‘Index of Power Potential’ based on the economic projections. Currently the USA is the strongest power in the World by a wide margin and the World is correctly described as being Uni polar (the constraint imposed by terrorists, Jehadis and rogue states notwithstanding). With the rise of China and India the World will first become Bi polar (by 2025) and then Tripolar by 2050. This poses a serious challenge to the global order in general and to the USA in particular. Historically, the rise of a new power has invariably led to conflict with the established power. This suggests that China will very likely challenge US power in Asia during the next 20 years and conflict between the two on Taiwan cannot be ruled out. If the USA withdraws from Asia then the imbalance of power will put great pressure on the freedom and independence of China’s neighbors’ in Asia.
There is one exception to the generalization of inevitable conflict between the incumbent and the challenger. The declining colonial power Britain gradually ceded power to the rising USA in the late 19th and early 20th century. There are several differences between that situation and the one today. Firstly, both the USA and UK were English speaking democracies with a large cultural and philosophical overlap. This is not true of Marxist-Leninist (Communist) Party ruled China and the USA. Second China considers Taiwan, parts of N. India, the South China Sea and other areas as wrongfully taken from it. It has historical grievances against Japan that persist to this day. Unless these issues are resolved peacefully they retain the potential for igniting conflict. Third, the degree of globalization and economic interdependence is now much higher (Exports, FDI, investments). Fourth is the existence of nuclear weapons and their deterrent effect. The first two factors suggest that US-China conflict is more likely and the next two that it is less likely than in the US-UK case.
In either case the balance of power in Asia will be critical to peace in Asia and India’s power potential will be greater than Japan’s and Russia’s by 2025. A natural balance of power, in which India and China (with equal population in 2030) have similar levels of per capita GDP will make peaceful evolution of global relations more likely. This requires an expeditious closing of the technological and economic gap between India and China. The recognition of this fact by President Bush and his advisors is the key factor underlying the transformation of US-India relations. The fact that the USA and India share fundamental human and democratic values provides a basis for mutual trust.
From India’s perspective the key to a US-India partnership is technology transfer and technological co-operation. This requires a complete exemption of India from the denial regime set up by the USA and its allies after India’s 1974 atomic test, which played a role in the opening of the China-India GDP gap. In particular India must get civilian nuclear technology on conditions no more stringent than China. President Bush’s past actions suggest that he has the guts to change a dis-functional regime that has allowed NPT members to transfer weapons designs and/or technology to Pakistan, Libya, N Korea and Iran while stopping the supply of nuclear fuel to India’s power stations.
The Indian public seems to sense this possibility. That is why global polls show Indians giving the USA and its president the highest positive ratings among all countries. Indian’s are well aware of the US blind eye towards Pakistan military/ISI’s sheltering of Taliban & Al Qaeda leaders and training & financing of anti-India terrorists. But they hope that, despite the large current asymmetry in GDP and power, President Bush can transform India-USA relations to one that bring equal benefits to both.
President Clinton, after his statement about China and USA being strategic partners and jointly deploring India’s 1998 nuclear tests, repaired relations by condemning Pakistani aggression in Kargil and supporting the Strobe Talbot – Jaswant Singh talks. These talks along with candidate Bush’s advisory group ‘Vulcans’ (that included Profs Condolezza Rice of Stanford and Prof Robert Blackwill of Harvard) laid the foundations for a changed approach of USA towards India. President Bush envisaged a much bigger role for India in Global affairs than his predecessors. PM Vajpayee reciprocated by calling India and USA “Natural Allies.” This resulted in the initiative labeled “Next Steps in Strategic & Technological Partnership (NSSTP).” The process was however side tracked by 9/11 as the US focus shifted to Afghanistan & Iraq and Pakistan made itself indispensable to the US.
The transformation had therefore to await President Bush’s second term and the visit of Secretary Rice to India in March 2005 (followed by the background briefing recognizing India’s potential power). A major landmark will be the visit of PM Dr Manmohan Singh to Washington starting on July 16th 2005. A key test will be US support for a permanent (veto bearing) UNSC seat. A possible deliverable is the formation of an India-US study group for a CECA. The transformation will likely (with 75% probability) be in place by the time President Bush visits India at the end of 2005-6, with the key test being an effective agreement to free the flow of nuclear plants, equipment and materials from the USA to India.
As shown in the author’s ICRIER working papers #150 (December 2004) and #160 (March 2005), the global economy is undergoing a dramatic transformation. Over the next 35 years both Chinese and Indian economies will become larger than the US economy in size (measured in PPP). In the case of China this will happen in a decade while in the case of India it will take an additional 25 years. At the same time Japan’s economy will decline gradually and Russia’s rise slowly (relative to the US) as the population of both declines by 25% over the next 50 years. The large economies of Europe will see varying population declines that will reduce their GDP relative to the USA.
The impact on the Global balance of power will be equally dramatic. This is shown by our ‘Index of Power Potential’ based on the economic projections. Currently the USA is the strongest power in the World by a wide margin and the World is correctly described as being Uni polar (the constraint imposed by terrorists, Jehadis and rogue states notwithstanding). With the rise of China and India the World will first become Bi polar (by 2025) and then Tripolar by 2050. This poses a serious challenge to the global order in general and to the USA in particular. Historically, the rise of a new power has invariably led to conflict with the established power. This suggests that China will very likely challenge US power in Asia during the next 20 years and conflict between the two on Taiwan cannot be ruled out. If the USA withdraws from Asia then the imbalance of power will put great pressure on the freedom and independence of China’s neighbors’ in Asia.
There is one exception to the generalization of inevitable conflict between the incumbent and the challenger. The declining colonial power Britain gradually ceded power to the rising USA in the late 19th and early 20th century. There are several differences between that situation and the one today. Firstly, both the USA and UK were English speaking democracies with a large cultural and philosophical overlap. This is not true of Marxist-Leninist (Communist) Party ruled China and the USA. Second China considers Taiwan, parts of N. India, the South China Sea and other areas as wrongfully taken from it. It has historical grievances against Japan that persist to this day. Unless these issues are resolved peacefully they retain the potential for igniting conflict. Third, the degree of globalization and economic interdependence is now much higher (Exports, FDI, investments). Fourth is the existence of nuclear weapons and their deterrent effect. The first two factors suggest that US-China conflict is more likely and the next two that it is less likely than in the US-UK case.
In either case the balance of power in Asia will be critical to peace in Asia and India’s power potential will be greater than Japan’s and Russia’s by 2025. A natural balance of power, in which India and China (with equal population in 2030) have similar levels of per capita GDP will make peaceful evolution of global relations more likely. This requires an expeditious closing of the technological and economic gap between India and China. The recognition of this fact by President Bush and his advisors is the key factor underlying the transformation of US-India relations. The fact that the USA and India share fundamental human and democratic values provides a basis for mutual trust.
From India’s perspective the key to a US-India partnership is technology transfer and technological co-operation. This requires a complete exemption of India from the denial regime set up by the USA and its allies after India’s 1974 atomic test, which played a role in the opening of the China-India GDP gap. In particular India must get civilian nuclear technology on conditions no more stringent than China. President Bush’s past actions suggest that he has the guts to change a dis-functional regime that has allowed NPT members to transfer weapons designs and/or technology to Pakistan, Libya, N Korea and Iran while stopping the supply of nuclear fuel to India’s power stations.
The Indian public seems to sense this possibility. That is why global polls show Indians giving the USA and its president the highest positive ratings among all countries. Indian’s are well aware of the US blind eye towards Pakistan military/ISI’s sheltering of Taliban & Al Qaeda leaders and training & financing of anti-India terrorists. But they hope that, despite the large current asymmetry in GDP and power, President Bush can transform India-USA relations to one that bring equal benefits to both.
Saturday, May 21, 2005
A Tripolar World: India, USA and China
With the collapse of the Soviet Union in 1990, the World has become unipolar, with USA as the predominant power. Russia and France, along with rising powers such as China, have resisted this reality by pushing the concept of a multi polar world. Henry Kissenger had earlier written about the four powers, USA, EU, China and Russia and maybe a fifth India. Till about 9 months ago the US establishment was confident that the USA would remain the predominant world power and that China did not pose a serious threat to it during most of the 21st century. There was also a feeling that India could become a swing state in terms of the power balance in Asia in the second half of the century and therefore an improvement of India-US relations was desirable.
In a recent paper (ICRIER WP #160, March 2005) I have projected that within 25 years, China will become strong enough to challenge US power in Asia and India will become the third most powerful country in the World. This process will continue in the next 25 years so that by the middle of the century the World will become Tripolar. The USA, China and India will be the three great powers during most of the 21st century. A recognition of this fact will have a profound effect on the foreign and security policies of USA, India, EU and Japan. There is an important caveat: The projections for India depend on continuing reform of economic policy as well as reform of government institutions and political systems. Similarly we assume that single party (Chinese Communist Party) rule will remain in China and it will continue to introduce market reforms to correct the weakness of socialist policies. Though the European Union (EU) could be the fourth power if Germany, UK, France and Italy surrender their individual power to a EU “virtual” State, this appears unlikely (at present).
Though the size of a Nation’s economy has always been an important basis of its global power this will be more so in the 21st century. The size of a nation’s economy (GDP at ppp) is the multiple of its population and Per capita GDP (average income). If we compare each country’s share in World population and in World GDP we find four countries with the greatest imbalance. The USA and Japan’s share of world GDP is more than their respective shares of population by 16.5% & 5%, while China and India’s share of World GDP is less than their share of population by 11% and 9% respectively. Germany, France, UK, Italy also have significant positive and Indonesia a negative imbalance (there is no imbalance for Russia and Brazil). These imbalances will get reduced or eliminated during this century of globalization (free flow of technology). The reason for this are policy reform and catch-up growth by the three laggards, India and Indonesia, which are low income countries and China which is a lower middle income country: Since 1980, China, India and Indonesia have ranked 1st , 9th and 11th in terms of the average rate of growth of per capita GDP.
Over the next two decades, China and India will remain among the 5 fastest growing economies in the world and will therefore continue to close the per capita income gap with the USA. According to our mean scenario, in 2050, China and India’s per capita GDP ppp is projected to become 57% and 36% respectively of that of the USA. As China’s and India’s population would be 3.4 and 3.75 times that of the USA (respectively), their GDP at purchasing power parity will become about 1.9 and 1.3 times that of the USA in 2050. In contrast the GDP of the fourth largest country, Japan would be 1/5th that of the USA.
Though the size of the economy forms the basis of Global Power it may not be an adequate measure of power given that even in a Globalized world, each country has to develop its own strategic technology. We therefore measure the potential power of a country through a Power Potential Index (PPI) that gives additional weight to technological capabilities and national resources. The index shows that by 2050 China’s power is likely to be about 40% higher than that of the USA. China will therefore be able to challenge US power in Asia within 20 years, when its PPI will be about 70% of the USA. We also find that India’s potential power will be about 35% of USA in 2025 and 90% in 2050. If our projections come true, India will become a global power during the second quarter of this century and the World will become tripolar.
History shows that the risk of war rises when a new great power (now China) emerges to challenge an existing one (USA). In Asia, these risks are heightened by the imbalance between China and India. India’s economy will reach a low of 40% of China’s in the middle of the next decade, before starting to close the gap. However, even in 2050 the Indian economy is projected to be only 70% of China’s economy. Part of the reason for this gap is that the rich countries have denied India for 30 years the technology that they have allowed China to access. It is in the interest of the USA, EU, Japan and Russia to ensure that the technological and economic gap between India and China is closed as quickly as possible. They must lift the controls and restrictions on transfer of Dual use, nuclear and space technology to India, imposed after our first atomic test in 1974. The Bush administration seems to have recognized this imperative, as reflected in the statements of Secretary of State Condalezza Rice on her visit to India in March and the subsequent backgrounders by US spokesmen in Washington. India must use this opportunity to develop an ‘Indo-US partnership for peace’ that is mutually/equally beneficial to both. At the same time efforts to develop closer technological collaboration with Russia, Japan, France, UK and other countries must continue. We need to jettison the victim mindset engendered under the East India Company/British Raj and learn to act like a big power.
Normalization of relations between India and China will be critical to peace in the Tripolar World. We must enhance our economic ties through removal of bilateral impediments and development of inclusive structures such as an Asian Oil community and an (East) Asian Economic Community.
In a recent paper (ICRIER WP #160, March 2005) I have projected that within 25 years, China will become strong enough to challenge US power in Asia and India will become the third most powerful country in the World. This process will continue in the next 25 years so that by the middle of the century the World will become Tripolar. The USA, China and India will be the three great powers during most of the 21st century. A recognition of this fact will have a profound effect on the foreign and security policies of USA, India, EU and Japan. There is an important caveat: The projections for India depend on continuing reform of economic policy as well as reform of government institutions and political systems. Similarly we assume that single party (Chinese Communist Party) rule will remain in China and it will continue to introduce market reforms to correct the weakness of socialist policies. Though the European Union (EU) could be the fourth power if Germany, UK, France and Italy surrender their individual power to a EU “virtual” State, this appears unlikely (at present).
Though the size of a Nation’s economy has always been an important basis of its global power this will be more so in the 21st century. The size of a nation’s economy (GDP at ppp) is the multiple of its population and Per capita GDP (average income). If we compare each country’s share in World population and in World GDP we find four countries with the greatest imbalance. The USA and Japan’s share of world GDP is more than their respective shares of population by 16.5% & 5%, while China and India’s share of World GDP is less than their share of population by 11% and 9% respectively. Germany, France, UK, Italy also have significant positive and Indonesia a negative imbalance (there is no imbalance for Russia and Brazil). These imbalances will get reduced or eliminated during this century of globalization (free flow of technology). The reason for this are policy reform and catch-up growth by the three laggards, India and Indonesia, which are low income countries and China which is a lower middle income country: Since 1980, China, India and Indonesia have ranked 1st , 9th and 11th in terms of the average rate of growth of per capita GDP.
Over the next two decades, China and India will remain among the 5 fastest growing economies in the world and will therefore continue to close the per capita income gap with the USA. According to our mean scenario, in 2050, China and India’s per capita GDP ppp is projected to become 57% and 36% respectively of that of the USA. As China’s and India’s population would be 3.4 and 3.75 times that of the USA (respectively), their GDP at purchasing power parity will become about 1.9 and 1.3 times that of the USA in 2050. In contrast the GDP of the fourth largest country, Japan would be 1/5th that of the USA.
Though the size of the economy forms the basis of Global Power it may not be an adequate measure of power given that even in a Globalized world, each country has to develop its own strategic technology. We therefore measure the potential power of a country through a Power Potential Index (PPI) that gives additional weight to technological capabilities and national resources. The index shows that by 2050 China’s power is likely to be about 40% higher than that of the USA. China will therefore be able to challenge US power in Asia within 20 years, when its PPI will be about 70% of the USA. We also find that India’s potential power will be about 35% of USA in 2025 and 90% in 2050. If our projections come true, India will become a global power during the second quarter of this century and the World will become tripolar.
History shows that the risk of war rises when a new great power (now China) emerges to challenge an existing one (USA). In Asia, these risks are heightened by the imbalance between China and India. India’s economy will reach a low of 40% of China’s in the middle of the next decade, before starting to close the gap. However, even in 2050 the Indian economy is projected to be only 70% of China’s economy. Part of the reason for this gap is that the rich countries have denied India for 30 years the technology that they have allowed China to access. It is in the interest of the USA, EU, Japan and Russia to ensure that the technological and economic gap between India and China is closed as quickly as possible. They must lift the controls and restrictions on transfer of Dual use, nuclear and space technology to India, imposed after our first atomic test in 1974. The Bush administration seems to have recognized this imperative, as reflected in the statements of Secretary of State Condalezza Rice on her visit to India in March and the subsequent backgrounders by US spokesmen in Washington. India must use this opportunity to develop an ‘Indo-US partnership for peace’ that is mutually/equally beneficial to both. At the same time efforts to develop closer technological collaboration with Russia, Japan, France, UK and other countries must continue. We need to jettison the victim mindset engendered under the East India Company/British Raj and learn to act like a big power.
Normalization of relations between India and China will be critical to peace in the Tripolar World. We must enhance our economic ties through removal of bilateral impediments and development of inclusive structures such as an Asian Oil community and an (East) Asian Economic Community.
Friday, May 20, 2005
Can Oil Prices motivate Radical Energy Policy Reform?
Oil Prices touched $50 a barrel last year while the International Energy agency confidently forecast that prices could go below $25 a barrel. This year oil prices touched $57 a barrel. Though prices are currently down below $48 don’t be surprised if they again shoot up in the next six months. Will we passively watch these developments or take action to reduce our dependence on oil? If the latter, what can we do? The most important action is to reform our coal, electricity and oil policies. Otherwise we will continue to remain at the mercy of the oil cartel.
India is among the ten largest oil importers in the World. A rise in global oil prices is a tax on the nation paid to the oil cartel. So far we have tried to absorb this tax within the budget, either directly by lowering import duties or by reducing government owned oil company profits and consequently their dividends to the exchequer. This means that these revenues are no longer available to build infrastructure or carry out the social expenditures enumerated in the CMP. Further as the prices paid by consumers of Kerosine, LPG, Diesel and Petrol do not rise there is no incentive to be careful in their use. It is a known economic fact that short term price elasticity of demand for oil products is much lower than the long term elasticity. If oil price increases are not reflected in consumer prices the demand response and the technical change that it induces will be delayed even further. Thus oil dependence will continue to grow and so will the tax that citizen’s pay to the oil cartel.
The solution is to, (a) Allow complete and automatic pass through of international oil prices to domestic users. (b) Set all oil related import tariffs at the peak rate (now 15%) (c) Put a resource rent tax on domestic oil producers that applies above a base oil price (set in the exploration contract) and varies with the international price of oil. The revenues from this tax can be earmarked for development and introduction of energy conservation technology and alternative energy resources. (d) Replace differential pricing of Kerosene, whose adulteration of diesel is destroying Bharat III engines, by a direct subsidy to BPL house holds.
The nationalization of coking (non-coaking) coal mines in 1971 (1973) was justified (among other reasons) by the need to use our abundant coal reserves optimally for the good of future generations (50-100 years). The talk now, thirty years after nationalization, is about how coal imports are needed because the coal is of poor quality and how it will not last very long in any case. What happened? Nationalization created a monopoly, that along with the Ministry of Coal and the regulators appointed by it constituted itself into a monolith that has destroyed this great national resource. Greedy politicians (from coal mine areas or coal ministers), the coal mafia and the public coal monopoly have milked this national resource in the name of the people. A former vigilance head of Coal India confirmed to me that the stories one had heard and read about the ‘Coal Mafia” (which controls the labor force in the mines) are indeed true. Is it any wonder that the Coal Mine Nationalization Amendment Bill had been stuck in parliament since 2000 and was allowed to lapse, without re-introduction, in 2004!
The solution, (a) Amend the Coal Nationalization Act to allow private entry into coal mining. This will end the State monopoly and introduce true competition into the coal mining industry. It will allow specialized companies to come in, reduce demand risk through diversification of buyers, exploit economies of scale, make long gestation investments in mining & processing of high ash coal and in R&D for more effective use of available (quality/type) coal. (b) Sell 49.9% of the shares of public coal mining companies to the public/people. This does not disturb the government’s management control (mafia control?), but will provide an incentive to the people and the financial media to shed light on the worms operating under the stones. Hopefully the performance of the State companies will improve to the point they can compete with imports. (c) Reform and strengthen the coal regulatory system by making it independent and professional.
The electricity Act (2003) is an important step in the direction of electricity reform. But large private investments will not flow unless three critical problems are addressed and policy and regulatory risk is reduced. The most fundamental problem is electricity Theft. With 50% T&D losses Delhi electricity privatization will eventually loose support unless this problem is tackled. The Theft and Dacoity carried out by the electricity mafia is legendry. Several years ago, a central electricity minister, who had himself been a DESU union leader, had no hesitation in confirming this fact. This problem is not unique to Delhi but perhaps Delhi can show the way by taking on and destroying the electricity mafia and thus reducing the cost to honest users by about 40%. Full success would eliminate the need for cross-subsidies and allow a uniform price for all electricity users.
The second issue is that of the cross-tax subsidy to be paid by independent power producers for open access to the existing controlled government distribution system. Unless the methodology is clearly specified and is reasonable and limited by some upper bounds, the risk of arbitrary imposts will remain and deter investment. The third issue is the setting up of an independent and professional regulatory system. This requires regulatory law(s) ensuring sufficient delegation in all matters related to standards, norms, interconnection, pricing and quality of service and clear rules and procedures for financing of regulators, selection of chairman & members and adequate professional staff. State Governments and politicians are loath to loose control of the levers of power and pelf and the setting up of this system in the major states is going to be a long and painful process. Unless all this is done the regulatory and policy risks will remain.
With the best of intentions, these reforms will take about 10 years to fructify. In the meanwhile a radical solution is required. The government should declare a 10 year regulatory holiday for all new private generation, distribution and transmission companies (starting from date of first completed project). Producers/distributors would be free to supply electricity to any buyer at mutually agreed prices, terms and conditions. On completion of the regulatory holiday, normal regulatory systems, which by then will be fully in place across the country, would become applicable. By then the power shortage would be eliminated.
India is among the ten largest oil importers in the World. A rise in global oil prices is a tax on the nation paid to the oil cartel. So far we have tried to absorb this tax within the budget, either directly by lowering import duties or by reducing government owned oil company profits and consequently their dividends to the exchequer. This means that these revenues are no longer available to build infrastructure or carry out the social expenditures enumerated in the CMP. Further as the prices paid by consumers of Kerosine, LPG, Diesel and Petrol do not rise there is no incentive to be careful in their use. It is a known economic fact that short term price elasticity of demand for oil products is much lower than the long term elasticity. If oil price increases are not reflected in consumer prices the demand response and the technical change that it induces will be delayed even further. Thus oil dependence will continue to grow and so will the tax that citizen’s pay to the oil cartel.
The solution is to, (a) Allow complete and automatic pass through of international oil prices to domestic users. (b) Set all oil related import tariffs at the peak rate (now 15%) (c) Put a resource rent tax on domestic oil producers that applies above a base oil price (set in the exploration contract) and varies with the international price of oil. The revenues from this tax can be earmarked for development and introduction of energy conservation technology and alternative energy resources. (d) Replace differential pricing of Kerosene, whose adulteration of diesel is destroying Bharat III engines, by a direct subsidy to BPL house holds.
The nationalization of coking (non-coaking) coal mines in 1971 (1973) was justified (among other reasons) by the need to use our abundant coal reserves optimally for the good of future generations (50-100 years). The talk now, thirty years after nationalization, is about how coal imports are needed because the coal is of poor quality and how it will not last very long in any case. What happened? Nationalization created a monopoly, that along with the Ministry of Coal and the regulators appointed by it constituted itself into a monolith that has destroyed this great national resource. Greedy politicians (from coal mine areas or coal ministers), the coal mafia and the public coal monopoly have milked this national resource in the name of the people. A former vigilance head of Coal India confirmed to me that the stories one had heard and read about the ‘Coal Mafia” (which controls the labor force in the mines) are indeed true. Is it any wonder that the Coal Mine Nationalization Amendment Bill had been stuck in parliament since 2000 and was allowed to lapse, without re-introduction, in 2004!
The solution, (a) Amend the Coal Nationalization Act to allow private entry into coal mining. This will end the State monopoly and introduce true competition into the coal mining industry. It will allow specialized companies to come in, reduce demand risk through diversification of buyers, exploit economies of scale, make long gestation investments in mining & processing of high ash coal and in R&D for more effective use of available (quality/type) coal. (b) Sell 49.9% of the shares of public coal mining companies to the public/people. This does not disturb the government’s management control (mafia control?), but will provide an incentive to the people and the financial media to shed light on the worms operating under the stones. Hopefully the performance of the State companies will improve to the point they can compete with imports. (c) Reform and strengthen the coal regulatory system by making it independent and professional.
The electricity Act (2003) is an important step in the direction of electricity reform. But large private investments will not flow unless three critical problems are addressed and policy and regulatory risk is reduced. The most fundamental problem is electricity Theft. With 50% T&D losses Delhi electricity privatization will eventually loose support unless this problem is tackled. The Theft and Dacoity carried out by the electricity mafia is legendry. Several years ago, a central electricity minister, who had himself been a DESU union leader, had no hesitation in confirming this fact. This problem is not unique to Delhi but perhaps Delhi can show the way by taking on and destroying the electricity mafia and thus reducing the cost to honest users by about 40%. Full success would eliminate the need for cross-subsidies and allow a uniform price for all electricity users.
The second issue is that of the cross-tax subsidy to be paid by independent power producers for open access to the existing controlled government distribution system. Unless the methodology is clearly specified and is reasonable and limited by some upper bounds, the risk of arbitrary imposts will remain and deter investment. The third issue is the setting up of an independent and professional regulatory system. This requires regulatory law(s) ensuring sufficient delegation in all matters related to standards, norms, interconnection, pricing and quality of service and clear rules and procedures for financing of regulators, selection of chairman & members and adequate professional staff. State Governments and politicians are loath to loose control of the levers of power and pelf and the setting up of this system in the major states is going to be a long and painful process. Unless all this is done the regulatory and policy risks will remain.
With the best of intentions, these reforms will take about 10 years to fructify. In the meanwhile a radical solution is required. The government should declare a 10 year regulatory holiday for all new private generation, distribution and transmission companies (starting from date of first completed project). Producers/distributors would be free to supply electricity to any buyer at mutually agreed prices, terms and conditions. On completion of the regulatory holiday, normal regulatory systems, which by then will be fully in place across the country, would become applicable. By then the power shortage would be eliminated.
Sunday, May 15, 2005
Economic Reforms During The Past 12 Months
Soon after the UPA Government took office, the stock market crashed because investors expected a sharp slow-down in reform, given the UPA’s dependence on left parties. At that time, I had written that in areas in which markets were expecting a halt in reform namely labor laws and PSU privatization, there had not been little actual policy action in the previous 2-3 years. So even if there were no labor policy reform this would not amount to a slow down. Further, though privatization was ruled out, disinvestment of shares was still possible. These unjustified apprehensions were dispelled after the first budget and the market recovered and exceeded expectations in the subsequent six months.
Taking stock of the entire one-year period, the pace of reform has been in line with the average pace seen since 1992-93. Once the crisis driven spurt in 1991-92 was over, the pace of reform has been modest under every government. This slow and steady pace has continued under the UPA government. For instance, the SSI reservation list has been gradually reduced with the removal of remaining labor intensive textiles and other exportables. Similarly peak non-agricultural tariff reductions have continued with a reduction to 15% in the last budget.
There have also been sporadic policy reform initiatives from other ministries. Thus the FDI limit in domestic airlines was raised to 49% and in Telecom to 74%. In Telecom indirect channels of foreign investment were simultaneously closed thus increasing transparency. The permission given to private Indian airlines to fly on foreign routes and the open skies agreement with the USA could transform foreign air travel over the next few years. One hopes that private investment in upgrading major airports will finally get underway after 5 years of policy circumlocution. The SEZ law could similarly have resulted in a revolution in labor intensive exports, but the dropping of the labor clause has made this a little uncertain.
The performance on tax reform has been mixed. In CENVAT the reduction in rates on polyester etc. has been offset by a move away from genuine CENVAT in textiles. Income tax reform has been a mixture of simplification (saving exemptions) and new complexity (securities transaction tax, fringe benefit tax). The latter will have to be reformed 5 years later. The harmonization of States’ sales tax rates that passes under the name of VAT has finally got under way, a great political achievement. From the economics perspective however, a genuine equitable State VAT that simplifies the system by replacing all indirect taxes requires a uniform 10% rate on all goods and local services except food, drugs and medical equipment/ services. This has to be complemented with a handful of sales taxes on final consumer goods (e.g. entertainment, petrol, cars) as argued in Planning Commission Working Paper No 4/2002-pc.
One of the predictions that I made at the start of PM Manmohan Singh’s Government is that given his depth of understanding and commitment he would be a Prime Minister who would pay greater attention to long term and difficult issues like governance reform. This process has indeed been initiated and a few things like the ‘Right to information Act’ already passed. But there is still a long way to go and I expect that in the remaining four years further action will in fact be taken.
Most new governments take at least a year to find their feet and get going on policy reforms. As this was the first year of the Government and given the novel political arrangements in which the leader of the major government party is not the Prime Minister, it was perhaps inevitable that the Government would take a little time to settle down. It is hoped and expected that the pace of reforms will gradually accelerate over the next couple of years.
Taking stock of the entire one-year period, the pace of reform has been in line with the average pace seen since 1992-93. Once the crisis driven spurt in 1991-92 was over, the pace of reform has been modest under every government. This slow and steady pace has continued under the UPA government. For instance, the SSI reservation list has been gradually reduced with the removal of remaining labor intensive textiles and other exportables. Similarly peak non-agricultural tariff reductions have continued with a reduction to 15% in the last budget.
There have also been sporadic policy reform initiatives from other ministries. Thus the FDI limit in domestic airlines was raised to 49% and in Telecom to 74%. In Telecom indirect channels of foreign investment were simultaneously closed thus increasing transparency. The permission given to private Indian airlines to fly on foreign routes and the open skies agreement with the USA could transform foreign air travel over the next few years. One hopes that private investment in upgrading major airports will finally get underway after 5 years of policy circumlocution. The SEZ law could similarly have resulted in a revolution in labor intensive exports, but the dropping of the labor clause has made this a little uncertain.
The performance on tax reform has been mixed. In CENVAT the reduction in rates on polyester etc. has been offset by a move away from genuine CENVAT in textiles. Income tax reform has been a mixture of simplification (saving exemptions) and new complexity (securities transaction tax, fringe benefit tax). The latter will have to be reformed 5 years later. The harmonization of States’ sales tax rates that passes under the name of VAT has finally got under way, a great political achievement. From the economics perspective however, a genuine equitable State VAT that simplifies the system by replacing all indirect taxes requires a uniform 10% rate on all goods and local services except food, drugs and medical equipment/ services. This has to be complemented with a handful of sales taxes on final consumer goods (e.g. entertainment, petrol, cars) as argued in Planning Commission Working Paper No 4/2002-pc.
One of the predictions that I made at the start of PM Manmohan Singh’s Government is that given his depth of understanding and commitment he would be a Prime Minister who would pay greater attention to long term and difficult issues like governance reform. This process has indeed been initiated and a few things like the ‘Right to information Act’ already passed. But there is still a long way to go and I expect that in the remaining four years further action will in fact be taken.
Most new governments take at least a year to find their feet and get going on policy reforms. As this was the first year of the Government and given the novel political arrangements in which the leader of the major government party is not the Prime Minister, it was perhaps inevitable that the Government would take a little time to settle down. It is hoped and expected that the pace of reforms will gradually accelerate over the next couple of years.
Friday, April 29, 2005
China and India in a Globalised World
India has been a trading nation for centuries, as has China. China has, however, been much more successful since 1980 in exploiting the opportunities provided by a globalised world to enhance its own growth. Its trade, led by exports, has increased much more rapidly to seven times ours. Free, fair and open trade with any and every country in the World is in the interests of India. ICRIER studies have shown that in 2000 the potential for trade between India and China was about 2.5 times the actual trade. The India-China study group (of which I was a member) has identified constraints and barriers that impede the attainment of this objective and recommended solutions. If these are sincerely and speedily implemented, there will be a mutually beneficial increase in trade.
Should better trade relations be contingent on and hostage to building of trust? Do we need to trust the Chinese to trade with them? I don’t think so! The essence of modern markets is impersonality. The systems of laws and rules that constitute the market as an institution allow strangers to trade with each other. If we only traded with our friends and relatives, the modern industrial economy could not exist. Impersonal trade can however, lead to greater information flows and knowledge and therefore help remove misperceptions. If trade is good then is isn’t more trade, engineered through a Free trade agreement, even better? This is false logic: More trade based on removal of distortions (e.g. a general reduction of our very high tariffs) is good for the Indian public, more trade based on creation of new distortions (e.g. selective reduction in tariffs for China) is bad both for industry and the public.
International trade in services is much more important to India than it is for China. An FTA would benefit China more than India, but can’t we balance this by better access for our Service exporters? Possible, but unlikely during the next 3 years. Service trade is heavily dependent on domestic rules, regulations and procedures. Partly because of the language barrier and partly because China is still a Socialist nation run on the principle of the “Dictatorship of the proletariat” such rules and regulations can be extremely non-transparent to Indian exporters and subject to individualistic application and change. It would be serious mistake to assume that if we reduce our goods tariffs to zero (the essence of a Free Trade Agreement) China will allow India free access to its service exports and the associated movement of skilled personnel. This will require a clear understanding of our national interest, hard bargaining, clear and explicit agreements and forceful implementation. It cannot be based on trust. In the next five years China will open its economy to service exports in line with its accession agreement with WTO. This will open opportunities for Indian service exports and will also indicate how open China’s service market will truly be. During the same period, the gap between India’s and China’s general tariff rates will be narrowed perhaps even eliminated. The scope for a mutually beneficial bilateral agreement will be much greater and we can and should revisit the issue in about three years.
Trust is critically important in a broader ‘partnership’ in economic, technological or strategic areas. Larger trade volumes cannot act as a substitute for rebuilding trust where it has been destroyed. The basic source of mistrust is the undefined border and the supply of nuclear technology (e.g. atomic bomb designs, in violation of NPT) and material to countries/regimes hostile to us. Other issues impinging on ‘trust’ include, (a) Opposition to the entry of India into pan-Asian economic organisations such as East Asian economic organisation and ASEAN+3. (b) Implicit (through Pakistan) opposition to permanent membership of India in the UN Security Council. The fact that India supported replacement of Taiwan, China by China, PRC in the Security Council decades ago is merely proof of India’s soft and sentimental approach in contrast to China’s hard realistic approach. Trust can only be re-established by addressing these issues. The willingness, after a long time, of China’s leadership to realistically address the border issue gives hope. On the other hand, the supply of nuclear and strategic technology to hostile countries/regimes is not conducive to building trust. Trust cannot be compartmentalised. It can only be rebuilt by addressing the broad range of issues in a sustained way.
Should better trade relations be contingent on and hostage to building of trust? Do we need to trust the Chinese to trade with them? I don’t think so! The essence of modern markets is impersonality. The systems of laws and rules that constitute the market as an institution allow strangers to trade with each other. If we only traded with our friends and relatives, the modern industrial economy could not exist. Impersonal trade can however, lead to greater information flows and knowledge and therefore help remove misperceptions. If trade is good then is isn’t more trade, engineered through a Free trade agreement, even better? This is false logic: More trade based on removal of distortions (e.g. a general reduction of our very high tariffs) is good for the Indian public, more trade based on creation of new distortions (e.g. selective reduction in tariffs for China) is bad both for industry and the public.
International trade in services is much more important to India than it is for China. An FTA would benefit China more than India, but can’t we balance this by better access for our Service exporters? Possible, but unlikely during the next 3 years. Service trade is heavily dependent on domestic rules, regulations and procedures. Partly because of the language barrier and partly because China is still a Socialist nation run on the principle of the “Dictatorship of the proletariat” such rules and regulations can be extremely non-transparent to Indian exporters and subject to individualistic application and change. It would be serious mistake to assume that if we reduce our goods tariffs to zero (the essence of a Free Trade Agreement) China will allow India free access to its service exports and the associated movement of skilled personnel. This will require a clear understanding of our national interest, hard bargaining, clear and explicit agreements and forceful implementation. It cannot be based on trust. In the next five years China will open its economy to service exports in line with its accession agreement with WTO. This will open opportunities for Indian service exports and will also indicate how open China’s service market will truly be. During the same period, the gap between India’s and China’s general tariff rates will be narrowed perhaps even eliminated. The scope for a mutually beneficial bilateral agreement will be much greater and we can and should revisit the issue in about three years.
Trust is critically important in a broader ‘partnership’ in economic, technological or strategic areas. Larger trade volumes cannot act as a substitute for rebuilding trust where it has been destroyed. The basic source of mistrust is the undefined border and the supply of nuclear technology (e.g. atomic bomb designs, in violation of NPT) and material to countries/regimes hostile to us. Other issues impinging on ‘trust’ include, (a) Opposition to the entry of India into pan-Asian economic organisations such as East Asian economic organisation and ASEAN+3. (b) Implicit (through Pakistan) opposition to permanent membership of India in the UN Security Council. The fact that India supported replacement of Taiwan, China by China, PRC in the Security Council decades ago is merely proof of India’s soft and sentimental approach in contrast to China’s hard realistic approach. Trust can only be re-established by addressing these issues. The willingness, after a long time, of China’s leadership to realistically address the border issue gives hope. On the other hand, the supply of nuclear and strategic technology to hostile countries/regimes is not conducive to building trust. Trust cannot be compartmentalised. It can only be rebuilt by addressing the broad range of issues in a sustained way.
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