Selected Articles from Various News Paper: Civil Services Mentor Magazine - November + December 2015

Selected Articles from Various Newspapers & Journals

A last chance for Syria

In early August, the Foreign Ministers of Iran (Mohammad Javad Zarif) and Syria (Walid Muallem) and Russia’s Deputy Foreign Minister (Mikhail Bogdanov) met in Tehran to discuss the Syrian war. The Iranians, now emboldened by the nuclear deal, presented a plan for a solution to the fratricidal Syrian war. Iran’s plan has four steps: 1. Forge an immediate cease-fire; 2. Create a national unity government; 3. Rewrite Syria’s Constitution with a more expansive inclusion of minorities; 4. Hold national elections under international supervision. These points are not new. The call for a ceasefire has been on the agenda since 2011, and the other steps have been discussed in the United Nations and in various regional gatherings over the past four years. What is novel is that the proposal comes from Iran, with Russian and Syrian backing. The idea of a national unity government implies that President Bashar al-Assad would not have to withdraw from politics. But it does suggest that Damascus has softened in its view that President Assad must be allowed to serve out his new term in office.

Western capitals should look at this proposal as an olive branch. This proposal does not roll out a complete path toward peace, but it does open the door to negotiations. Other Western approaches toward Syria have failed. The most recent attempt to create a moderate rebel force to take on both the Islamic State (IS) and the Assad government collapsed. The al-Qaeda affiliated Jabhat al-Nusra easily trounced Western-trained Division 30, seizing its arms and killing many of its fighters. That Western intelligence believed that Division 30 and its predecessors could hold their own on the dangerous battlefields of Syria, shows how out-of-touch they have become. The U.S. has now decided not to spend the $500 million it had allocated for the creation of a new rebel army. Western diplomatic attempts to isolate Damascus have also not borne fruit. Confounded by the resilience of IS, even Saudi Arabia has opened discussion with the Assad government — Syrian intelligence chief Ali Mamlouk visited the kingdom in early August to discuss, among other things, the new proposals for a ceasefire. Saudi intelligence cables released by Wikileaks show the kingdom obsessed with Iranian power. But the fear of IS remains greater than their paranoia over Iran. This has come as a surprise to the West, which assumed that Saudi Arabia would be the least liable to alter its Syria strategy.

The IS remains in control of its swathe of territory across northern Iraq and Syria. Neither the Western air strikes nor the Iraqi military advances have been able to break through and clear IS from its major urban centres. Along the spinal cord of western Syria, the main advances are being made by al-Qaeda backed insurgents, such as Jabhat al-Nusra, Ahrar al-Sham and Jund al-Aqsa. Western strategy to contain and defeat the growth of IS and al-Qaeda in Syria has utterly failed. Matters are so poor that Washington’s military and intelligence community has now taken to debate which is more of a threat — IS or al-Qaeda.

Meanwhile, the Syrian government’s forces suffer a severe crisis of manpower. Recruits are not easy to find. Reliance upon Lebanese and Iraqi militias as well as Iranian specialists is not enough. Assad admitted that his forces are exhausted. But so are the troops of the rebels. The IS cannot any longer easily recruit from the reservoir of the international jihadis . Access to Syria is harder than it was. The war is at a standstill though it does not seem like that for the fighters who are at the edge of their territories. For them the sound of gunfire is now normal, and yet terrifying. If a deal is on the horizon, will these fighters — who have given so much for so little — be able to understand the deals being made beyond the range of their rifles?

On August 3, Iran’s Foreign Minister Javad Zarif, confident after the successful nuclear talks, published an opinion piece in leading Arabic language newspapers (Egypt’s al-Shorouk , Kuwait’s al-Rai, Lebanon’s As-Safir and Qatar’s al-Sharq ). He called for a regional discussion to solve regional problems. Wars in Syria and Yemen, alongside the spread of extremist groups such as IS, poses a significant problem to the region. Mr Zarif went to Damascus to discuss the overture directly with President Bashar al-Assad. His visit came just as Turkey and Iran helped broker two crucial forty-eight hour ceasefires in Zabadani and in two towns in Idlib district. Such events indicate a willingness by the regional actors that needs to be supported. Every once in a while, the various parties to the war in Syria and their sponsors seem amenable to regional talks. The formation of the Syria Contact Group (Egypt, Iran, Saudi Arabia and Turkey) in 2012 was one such moment. This is another. The West and its Gulf Arab allies should take the démarche from Iran seriously. It might be the last chance for Syria.

Remembering Hiroshima and Nagasaki

When Japan started its Official Development Assistance (ODA) in 1950s, India became the first recipient of its Yen Loan Assistance. In the subsequent decades, the Japanese ODA expanded to include a wide range of areas and projects, such as the Delhi Metro and the Indian Institute of Technology in Hyderabad (IIT-H). Two Japanese doctors, Dr. Matsuki Miyazaki and Prof. Mitsugu Nishiura, led the research and treatment of leprosy in India at the India Centre of Japan Leprosy Mission for Asia (JALMA) in the 1960s and 70s. The institution was built in Agra in 1963 with donations from Japanese citizens and was handed over to the Indian government in 1970s. The graves of the two doctors are located on its premises.

We have also helped each other in times of need. In 1991, Japan extended the balance of payment support to India. When the Great Earthquake hit Japan in 2011, India extended a helping hand to Japan by providing donations and relief goods and by sending a National Disaster Response Force (NDRF) team to disaster-stricken areas in Japan. As these positive episodes with India show, Japan has devoted itself to development and prosperity as well as stability in the region and the rest of the world in a consistent manner since the end of the war. In his August 14 statement on the 70th anniversary of the end of World War II, Prime Minister Shinzo Abe stated that Japan has the great responsibility to take the lessons of history deeply into our hearts, and to make all possible efforts for the peace and prosperity of Asia and the world. He also expressed Japan’s heartfelt gratitude to all the nations, including India, and all the people who made every effort for reconciliation after the war.

In the decades-old friendly relationship between Japan and India, marked progress and expansion have been made in recent years. We are now the second and the third largest economies in Asia. We share fundamental values such as democracy, rule of law and respect for human rights. We are located in crucial positions in the Indo-Pacific region, which is of growing strategic importance. Our relationship has now been elevated to the Special Strategic and Global Partnership. As Prime Minister Abe called it, our relationship is “blessed with the largest potential” for further development. The ever growing relationship between Japan and India is beautifully symbolised by the magnificent Bodhi tree on the premises of our Embassy in New Delhi, planted in 1960 by Their Imperial Highnesses, the Crown Prince and Crown Princess of Japan, now Their Majesties the Emperor and Empress. The two countries’ relationship remains firmly rooted in a long history of cultural ties, mutual respect and goodwill and we need to work together to let it further flourish and branch out to incorporate new domains of partnership.

Going beyond inflation targeting

In a commendable infusion of transparency into policy making, the Government of India has uploaded on the net a draft of the proposed Indian Financial Code (IFC). Within days of its being made available, it had received critical attention in the media. However, though the Code will apply to a wide range of matters financial, much of the response has concerned the monetary policy function. Within this, the focus has been on the relative power of the Reserve Bank of India (RBI) and the government in setting the policy interest rate. The draft, in effect, proposes that the government should have the greater say as, numerically, the government’s nominees are set to dominate the Monetary Policy Committee envisaged in it. This issue is easily resolved in principle. There can be no question that if the RBI is to be held accountable for monetary policy it should have full power to set the interest rate. An impression has been given that the proposal is itself only a manifestation of the government’s attempt to cut the RBI leadership down to size. Naturally, this gives rise to some excitement among the public, but there is a much more fundamental issue at stake in the draft IFC, and this has received less than its due attention. It concerns the goal of monetary policy, and it is worrying that on this there is actually no disagreement between the government and the RBI! The draft IFC proposes that the goal of monetary policy shall be inflation targeting. “Inflation targeting” implies that the Central bank will give priority to the rise in prices. This had been the substantive recommendation of The Expert Committee to Revise and Strengthen the Monetary Policy Framework, constituted by the RBI in 2013.

Going by recent history, there is reason for some scepticism about the RBI’s ability to control the inflation rate. From 2008 onwards, inflation had shifted gear upwards for five years. It would be difficult to square this with the suggestion that it reflects the Bank’s efforts to maintain growth, for growth has actually been lower in this period. While we have a complete explanation of the phenomenon of rising inflation and slowing growth, and it rests on the role of agricultural output fluctuations, it need not detain us here. The point of recounting this history is to suggest that it is far from clear that the RBI can fine-tune the inflation rate as is conveyed in the Draft IFC which states that the objective of monetary policy in India should be “price stability”, in the context to be understood as a stable inflation rate. However, let us set aside our scepticism and assume that a Central bank can control the inflation rate. Would inflation targeting be desirable now? We can best answer this by looking at recent experience in the United States. For a decade from the mid-1990s, the inflation rate there had been low and steady, eliciting the epithet “the Great Moderation”. But this phase had masked the brewing of a financial crisis in the form of an asset bubble, responsibility for which American commentators trace to the Federal Reserve that had, in view of the low inflation, maintained unusually low interest rates. A feeding frenzy had followed with credit fuelling house price increases. It is in the nature of inflation targetting that sectoral-price increases are ignored. When the bubble finally burst and house prices collapsed, the banks that had financed their purchase found themselves holding worthless assets. A spectacular intervention by the Federal Reserve, termed “unconventional monetary policy”, saved the day for the U.S. economy. This episode demonstrates two things. That financial crises are possible even with low inflation and that the Central bank can make a difference with respect to output. Though a U.S.-style crisis is unlikely in India given so large a presence of the public sector, it does point to the need for the Central bank to be concerned with financial stability.

The policy response in the U.S. following the financial crisis was also mediated by the political consideration that an output collapse should be averted at all cost. Collective memory has a role to play in the political choices nations make. Thus the Americans are perhaps haunted by the experience of the Great Depression when unemployment exceeded 25 per cent. This makes them unemployment averse. On the other hand, the Germans appear to be inflation averse, and you can hardly blame them for it. Inflation in the Weimar Republic had, at its peak in 1923, reached a vertiginous 32,000 per cent per month. There is a lesson in this for us, that India’s institutional architecture should reflect its own peculiarities and goals rather than be guided by pure theoretical constructs allegedly based on universal truth. When the idea of inflation targeting had gained prominence in academia, the Federal Reserve had been lectured for not focussing on inflation. However, it is interesting to note that the U.S. has done far better than Europe in terms of employment post-crisis. Moreover, its record as far as inflationary expectations, and thus inflation, is concerned is no worse than that of countries with central banks that pursue inflation targeting. This is not surprising, for, as stated on its website, the Federal Reserve “is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices and moderate long-term interest rates”. By contrast, the Draft IFC declares that “The objective of monetary policy is to achieve price stability while striking a balance with the objective of the Central Government to achieve growth.” The point is that if the RBI is to pursue an inflation target set by the government it must accept the growth that is got.

So, what should the RBI be doing? Well, it should focus on output at least as much as it does on inflation, but this sits uncomfortably with the mandate of inflation targeting that is proposed in the draft IFC. Then it should continue its historic role of supervising the financial system, in which task it has done the Indian citizen proud by discharging itself without fear or favour. But there is a task on which it may have slipped a bit of late. Amid the highfalutin talk of “anchoring expectations”, “forward guidance” and “the natural level of output”, it seems to have been forgotten that the RBI has the monopoly on the note issue, one granted with a view to facilitating economic exchange. Today, extreme hardship is caused by a shortage of small denomination currency notes in the bazaar. This raises transaction costs as agents struggle to make payment. And when the notes of the desired denomination are finally to be had they are so worn and soiled that it takes the joy out of truck and barter. Money may be a store of value, but it is also a medium of exchange. Surely the thought of sparkling rupee notes should be enough to bring together a proudly independent RBI and a government sworn to swachtha .

Admirable show of restraint

In August 2013, exactly two years ago, 40 experts, comprising the most senior former diplomats, police officials and retired military officers, wrote a letter to the then Prime Minister Manmohan Singh on Pakistan. “The policy of appeasement has failed,” they said at a press conference. “A new bipartisan policy is needed that will impose costs on Pakistan for terrorism,” they added. Their letter urged the Prime Minister to cancel the planned talks with Pakistan Prime Minister Nawaz Sharif on the sidelines of the U.N. General Assembly in September 2013, and to call off dialogue with Pakistan altogether. So, it is ironic that one of the chief signatories to the letter is now the man who will lead the next round of talks with Pakistan, National Security Advisor (NSA) Ajit Doval. In his memoir Kashmir: The Vajpayee Years , former advisor to the Prime Minister on J&K, A.S. Dulat, recounts how in October 2003, Mr. Vajpayee announced that the Centre would talk to the Hurriyat leadership. As the former Intelligence Bureau Chief once posted in Pakistan and later head of Vivekananda Foundation, the right-wing think-tank, Mr. Doval’s tough views are well known. That both Mr. Modi and Mr. Doval have moved from “no talks until terror stops” to “talk about terror” is proof of the inevitability of engagement in any Indian government’s Pakistan policy.

In his new role, Mr. Doval has been protecting the talks from multiple challenges. When Pakistan began mortar shelling just days after the Ufa summit, it was the NSA who picked up the phone and called Pakistan High Commissioner Abdul Basit three times to try and lower tensions. After the Gurdaspur attack, it was the NSA and the PMO that ensured that the narrative pointed to terrorists “from Pakistan” as opposed to terrorists “sent by Pakistan.” Again, after Udhampur, the government sent the same message, with a senior official telling the media: “The Pakistani government’s endorsement is not visible in the Gurdaspur attack.” With every provocation that has followed, from the deadly shelling at the LoC that killed several civilians last week to even the Pakistani High Commissioner’s surprisingly sharp speech on Kashmir on Independence Day — the government has responded with restraint.

There is no question, however, that regardless of all that is on the agenda, it is the LoC that needs attention immediately. Casualties on both sides of the LoC have been rising at an alarming rate, and the ceasefire is practically ‘deceased’. A study by the U.S.-based Stimson Center finds that “that the Kashmir divide has become far more volatile since late 2012.” According to the study, the “rate of ceasefire violations” has more than doubled in 2014-15 over preceding years. The two NSAs would do well to hasten the Ufa agreement on holding a meet of the Director Generals of Military Operations, and perhaps include the MEA and even intelligence officials. On the main issue of terror, there is no question that Mr. Doval will have a stockpile of evidence for Mr. Aziz. However, India must focus on the ongoing 26/11 trial in Pakistan, for two reasons. First, because the trial is under way and represents the hope, however slim, that some of the perpetrators may be brought to justice. Second because it represents a unique case where Pakistani investigators have independently confirmed all that India has said about terror groups inside that country.

None of these issues can be discussed, however, unless there is a steady channel for talks between Indian and Pakistani interlocutors. A key takeaway from the NSA-level meeting could be an agreement to set up such a channel, whether a ‘back-channel’ of the kind Prime Ministers Vajpayee and Manmohan Singh set up with Mr. Musharraf, or regular meetings of the NSAs, Foreign and Home Secretaries. Prime Ministerial meetings like the one at Ufa, while helpful for the atmospherics, cannot substitute for legwork and hard negotiations. Nor can they substitute for India’s own national security considerations, as those opposed to talks often warn. The government must continue to carry out its responsibilities, whether at the border or anti-terror operations. Only then can India and Pakistan start work on the last part of the Ufa agenda — to construct a basket of agreements and announcements that would make Mr. Modi’s 2016 visit worthwhile. Many of these, such as a new visa regime, Most-Favoured Nation (MFN)-status from Pakistan, and the Sir Creek settlement, have already been negotiated and require only political will to be implemented.

Cynics of Track-1 diplomatic efforts between the two countries could take heart from the resilience of the Track-2 process. The Chaophraya Dialogue that met this month for the 16th Round (of which this writer was a part), for example, continues to draw in diplomats, generals, and other officials who till recently were inside Indian and Pakistani establishments. These are men and women with decades of public experience and meet regularly to discuss the issues confronting India-Pakistan relations. Despite differences, they continue to meet and build a conversation that is eventually conveyed back to their respective governments. Interestingly, they now include some of those who wrote that letter in August 2013. Ahead of the NSA-level talks, one of them described the predicament well. “There is so much ice in India-Pakistan relations, every high-level meeting is seen as an ice-breaker,” he said. It’s time to start chipping away at the ice and shaping building blocks for a lasting solution instead.

Much-needed reform

The move by the United States to oppose any large-scale reforms in the United Nations Security Council does not match the promise President Barack Obama made to India, that it would back New Delhi’s candidacy for a permanent seat at the global decision-making body. Though U.S. Ambassador to India Richard Verma later said his country remained committed to its promise, Washington’s policy towards UNSC reforms still lacks clarity. If the U.S. is keen on reforming the Council, why did it, in the first place, team up with Russia and China to oppose negotiations on reforms? And the assertion by these countries that the prerogatives, including the veto power, of the existing permanent members should remain intact even if there are reforms, is tantamount to pre-empting any major reform. The UNSC, created in the post-War context, doesn’t actually reflect the changes that have occurred in the international system after the end of the Cold War. In a quarter century, the global economic architecture has undergone massive changes. The developing nations, including India, now play a bigger role in international affairs. But within the UN, the five permanent veto-wielding members still effectively take all the crucial decisions. The Indian position is that this “democracy deficit in the UN prevents effective multilateralism” in the global arena. The way the UNSC handled — or failed to handle — some of the recent crises would underscore the soundness of the Indian position. Take the examples of Libya and Syria. While the western nations are accused of distorting the UNSC mandate in Libya, the Security Council failed to reach a consensus on how the Syrian crisis may be resolved. This clearly points to a worsening institutional crisis within the UNSC.

Meaningful reform of the Council to make it more representative and democratic would strengthen the UN to address the challenges of a changing world more effectively. India’s demand for a permanent seat has to be looked into, duly considering the merits of the case. It is the world’s largest democracy and Asia’s third largest economy. The Indian Army is the largest contributor to the UN peacekeeping mission since the inception of the mission. More important, India’s foreign policy has historically been aligned with world peace, and not with conflicts. As a permanent member of the UNSC it will be able to play a larger role concerning pressing international issues. But the latest development shows the path will not be smooth. New Delhi should continue its efforts to build a democratically evolved global consensus on restructuring the Security Council, at the same time pursuing bilateral diplomacy with the big powers. The permanent members ought to realise that there are much more serious issues at stake globally than their own so-called prerogatives, and they should be flexible in addressing those issues.

The sprouting of the ‘Look West’ policy

The foundation for Mr. Modi’s successful outreach to West Asia was in fact laid by his predecessor when India invited the King of Saudi Arabia to be the chief guest at the Republic Day Parade, in 2006. This was followed by Prime Minister Manmohan Singh’s visit to Riyadh and the India-Saudi defence cooperation agreement signed in 2014. Growing India-Saudi cooperation in the field of terrorism may have also contributed to India’s relatively mild response to Saudi aggression in Yemen, but it did set the stage for wider engagement at a strategic level with the other states of the Gulf Cooperation Council (GCC). Mr. Modi’s visit to the UAE was preceded by significant visits to other GCC states by External Affairs Minister Sushma Swaraj. That Ms. Swaraj made Bahrain her first stop in the region, last September, was welcomed by Bahrain’s India-friendly leadership and showed growing sophistication in Indian thinking about the region. With a minority Sunni leadership and a majority Shia population, Bahrain has tried hard not to get drawn into the wider sectarian conflicts in West Asia. Moreover, with half of the island kingdom’s working population hailing from India, mostly Kerala, and given the very cordial people-to-people relations between Bahrainis and Indians, the visit showed that India had a special relationship to the region that few other major powers can ever lay claim to. Finally, over the last year, the Modi government has put forward a nuanced view of the region openly declaring friendship with Israel, seeking better relations with Iran and, at the same time, cementing a thriving relationship with the GCC states.

While all this fits into a pattern, one should not underestimate the transformational significance of the UAE visit and the Dubai declaration. The Joint Statement between the United Arab Emirates and India is an important articulation of a significant shift in the Arab world’s view of India. The statement is truly comprehensive and wide-ranging. It talks of historic ties of “commerce, culture and kinship”, drawing attention to the unique history of Arab interaction with Indian communities of the west coast, from Gujarat to Kerala. The joint statement, outlining closer government-to-government (G2G) relations, draws attention to the vibrant business-to-business (B2B) and people-to-people (P2P) relationships and commits the UAE to a sharp increase in its investment in India. What is striking to an observer of India-West Asia relations is the assertion of not just a “shared” past but of shared challenges in the present and a shared future. It then proceeds to state: “A shared endeavour to address these challenges, based on common ideals and convergent interests, is vital for the future of the two countries and their region.” The statement expresses the hope that: “Proximity, history, cultural affinity, strong links between people, natural synergies, shared aspirations and common challenges create boundless potential for a natural strategic partnership between India and UAE.”

It is in the nature of things that any visit of an Indian Prime Minister to a Muslim nation has a domestic resonance. Every Prime Minister has been aware of this. Often, even the timing of visits to Muslim nations is defined by the domestic political calendar. So it would be part of a pattern if Mr. Modi had, among other things, the elections in Bihar and even Kerala on mind when he visited the Sheikh Zayed Grand Mosque in Abu Dhabi and spoke eloquently of the Arab world’s rich cultural traditions and friendship towards India. His address in Dubai was aimed at not just an Indian audience but a wider Southern Asian audience and, of course, the global audience of diplomats and strategic policy analysts. The Prime Minister made it clear that he did have the audience in Pakistan in mind when he spoke about working together with the UAE in fighting terrorism. Mr. Modi and his political managers should be satisfied that the Prime Minister’s visits to the capitals of neighbouring Muslim nations — Bangladesh and the UAE — and to the Central Asian republics went well. That all of this may have been planned with the domestic political audience in mind is to be expected, given the history of India’s relations with the Islamic world. It remains to be seen how much and how lasting an impact all of this would have on domestic politics.

What is significant about the new strategic partnership outlined by the UAE and India is the fact that it is defined not just by India’s “Look West” policy, based on its energy and financial needs, but that it is equally defined by the GCC’s “Look East” policy, soliciting greater Indian engagement with West Asia. Several factors have contributed to this fundamental shift in West Asian strategic thinking. First, the structural change in the global energy market with West Asian oil and gas increasingly heading to South and East Asian markets rather than to the Trans-Atlantic markets. Second, partly as a consequence of this change in flows and partly owing to the fiscal stress faced by the trans-Atlantic economies, West Asia is looking to India and other Asian powers to step in and offer security guarantees to the region. Many GCC states have welcomed defence cooperation agreements with India. Third, in the wake of the Arab Spring and the mess in Egypt and Iraq, the Gulf states find India and China to be more reliable interlocutors than many western states. Fourth, under pressure from radical and extremist political forces within West Asia, most states in the region have come to value the Indian principle of seeking and securing regional stability as an over-riding principle of regional security.
In the specific case of India-UAE relations, it appears the Emirati have come to appreciate India’s view that state-sponsored or supported cross-border terrorism poses a grave threat to regional security and so must be curtailed and stopped. Mr. Modi’s bold public statements on terrorism could not have been made in Dubai if they did not have the implicit endorsement of his hosts. In short, it would seem, the India-UAE strategic engagement is the product of a mutual “look-at-each-other” policy. If China’s rise offered the backdrop for South-East Asia’s “look at India” policy, the West’s failures and weaknesses, and a weakening of the strategic trust between the West and West Asia may have contributed to the GCC’s “look at India” policy.

Stepping away from religious extremism and accepting pluralism and multi-culturalism as the defining principles of a modern state is the only way forward for each of the countries of Asia — from West to East. India’s appeal to Asia as a whole is built on these foundational principles of its Constitution.

Yuan makes its first market move

China sprang a surprise on world markets last week. The Chinese currency renminbi (less formally known as yuan) lost its value against the U.S. dollar by nearly 3 per cent between August 11 and 13. This was its sharpest weekly fall in over two decades. With the devaluation, China’s manufactured products are going to get cheaper. In other words, with one U.S. dollar — whose value relative to renminbi increased from 6.2 to 6.4 following devaluation — you can now purchase more Chinese goods than before. The devaluation announcement came within days of China’s export figures for July recording a negative growth, owing mainly to the slow pickup in demand from developed-country markets. Naturally enough, one interpretation was that the devaluation was an attempt by the Chinese authorities to boost export demand for its manufactured goods. Some commentators argued that the Chinese action might trigger a new global currency war — where other countries too devalue their currencies to compete with China — as had happened during the Great Depression of the 1930s. The People’s Bank of China (PBOC), China’s central bank, soon stepped in to clarify. It said that the devaluation marked the transition to a flexible, more market-based system of determining China’s exchange rates. In contrast, the system that existed until now was one in which the value of the Chinese currency (especially in relation to the U.S. dollar) had largely been fixed by the government. If PBOC’s claims are true, it is likely to be a component of a larger, national strategy to internationalise the renminbi. China wants to see the renminbi emerge as a currency for international trade and finance, like the dollar. It also plans to build Shanghai into a global financial centre, rivalling New York. As a preliminary step, China is trying to get the renminbi included in the basket of currencies in International Monetary Fund (IMF)’s Special Drawing Rights (SDRs).

It is to be noted that China has had strict controls on foreign capital movements across its borders, at least until recently. Such controls have been effective in filtering out volatile, short-term capital flows, which are often harmful to the economy, while at the same time encouraging Foreign Direct Investment (FDI). In contrast, India has, over the years, liberalised its capital account substantially, attracting relatively large volumes of short-term capital flows. China’s remarkably fast export-led economic growth during the 2000s occurred in an enabling environment provided by a stable exchange rate and tight capital controls. In fact, the stability in China’s currency rate has been a factor that helped other East Asian economies to achieve steady and fast growth.

China’s strategy to break free of its mutually dependent relationship with the U.S. has multiple prongs. One, China aims to derive its future growth more from domestic markets and services rather than from exports of cheap manufactured goods. Two, Beijing is trying to strategically deploy its large foreign exchange assets into initiatives such as Asian Infrastructure Investment Bank (AIIB) and the ambitious ‘One Belt One Road’ project. It would also like to replace the ‘dollar-zone’ in East Asia with a viable ‘renminbi zone’. By opening the doors to global finance as part of its plan to internationalise its currency, China, however, may be forsaking the very stability that has been the hallmark of its economic ascent. The boom in its stock markets and the subsequent crash last month is clearly a sign of things to come. Many Chinese firms are highly indebted. According to one estimate, China’s debt to GDP (Gross Domestic Product) ratio is as high as 282 per cent. China has also witnessed substantially large outflows of foreign capital this year.

China’s economic and investment growth has slowed down in recent months. The country has poured billions of dollars into investments in infrastructure and other basic industries, especially after the 2008 global economic downturn. But this has not been matched by rising demand for these industries, either domestic or foreign, leading to the creation of excess capacities. For instance, the rising numbers of unsold flats have resulted in a slowdown in construction activities and a reduction in the demand for its steel and cement industries. Wholesale prices in the country have been on a downward spiral. The slowdown in China is threatening economic prospects in many other parts of the world too, particularly in countries that are suppliers of commodities to China.

India, meanwhile, has a large trade deficit with China, accounting for as much as a quarter of India’s overall trade deficit. With the devaluation of the yuan, imports from China are going to climb up, worsening India’s deficit. The competitive disadvantages of Indian manufacturing sector vis-à-vis the Chinese one arise mainly from India’s poor infrastructure, which translates into higher costs for Indian firms in areas like power and transport. These disadvantages can be overcome only with massive investments, especially public investment, of the kind that China has made for over two decades. The continuing stagnation in demand for Chinese goods, especially from developed countries, underlines the importance of domestic markets for economic growth in India as well. Therefore, like China, India too needs policies that enable better employment creation, greater redistribution of incomes, and rejuvenation in domestic demand.

Courtesy: Various News Papers

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