Slain Soldiers and the Afghan-end Game

Four inter-related incidents happened in the course of this eventful week. First, a Pakistan army border commando force ambushed an Indian Army patrol on Indian soil, very near the border in Kashmir  and killed 5 soldiers. Then the government did a flip-flop over pinning responsibility on who exactly did the slayings – the Pakistan Army or irregulars dressed in Pakistan Army uniforms.  A first day statement by defence minister A.K.Antony drafted by the National Security Advisor suggested it was by unknown assailants dressed in Pak Army fatigues. The uproar  that followed forced the government to eat its own words and go back to the original press release issued by the Army which blamed the Pakistan Army’s border action team.

4 Bihar regiment martyrs being brought back

Then came two contrary messages from across the border – terror group Lashkar e Toiba chief Hafeez Saeed in a pre-Eid rally at Karachi threatened more attacks on India and followed it up by tweeting on Eid day : “time is near when those oppressed in Kashmir, Palestine and Burma will celebrate Eid in the air of freedom”. On the other hand, the Pakistan Prime Minister’s special envoy to India, Shahryar Khan in an interview in London blamed Pakistani extremists for the Kashmir killings and said Saeed needs to be checked.

Before Saeed unleashed his terror threat,  India’s hawkish television anchors and former generals had of course unleashed their own verbal `jihad’ demanding a fitting response to Pakistan’s perfidy. While India’s peaceniks launched a counter `love jhad’ going blue in the face reminding everyone of Gandhi’s famous line : `an eye for an eye would  make this world  blind’.  The hawks who were joined by the opposition BJP had a point – Pakistani soldiers had beheaded an Indian soldier ambushed on patrol earlier this year and prime minister Manmohan Singh had then promised a `robust’ response  – no one could see that response on the ground. And then came this killing followed by  a flip-flop.

The argument which came from many in the defence community was - An armyman is mentally readied to die defending his country in war. However, is he expected to become a martyr even when the country is ostensibly at peace? In that case should we accept this `phony’ peace?

In the din of this televised battle no one sought to probe the whys of the story – why did the Pakistan Army chose to do what it did at this stage? Why did the Manmohan Singh government act as it did in the face of strong provocation in an election year, knowing fully well that such a stance could boomerang on its face?

Despite misgivings on our peaceniks part and denials by the Pakistan government who would like to blame `non-state actors’ for the mischief, it should not be doubted that what happened at the border was the doing of the Pakistan Army. For there is no way anything like this can happen without the Pakistan Army sanctioning it. The Kashmir border is one of the most heavily fortified and militarized borders in the world, with concrete bunkers and artillery  batteries abounding. Nearly a lakh Pakistani troop – regular 10 corps as well as the paramilitary Northern Light Infantry are stationed along it or behind it.

Line of Control on the Kashmir front
 

The `Kashmiri militants’/`terrorists’ (mostly recruited from the Punjab and Multan  by organisations like the Lashkar-e-Toiba) who are regularly pushed through that border, crawl across thickly forested `No-man’s land’ while regular Pakistani troops give them covering fire.  They are never allowed to wear Pakistani Army fatigues as that would defeat the denials Pakistan always trots out when challenged on this unique `cold war’.

Why then did the Pakistan Army which really runs the country’s foreign and defence policy regardless of whoever is the civilian prime minister, do this at this time of the year? Especially when Pakistan’s economy is nearly crippled, it desperately needs electricity and gas from India and is under intense international pressure to be friendlier towards its larger neighbour.

The answer perhaps  lies in the Afghan end-game.  The US, with whom the Pakistanis have reluctantly and unwillingly agreed to be partners in the fight against terror, wants Pakistan to keep its troops focused on the Afghan border and its own tribal areas in the North-West, giving protection to the American lines of communications as they pull out. But if  Pakistan guards these lines, it is also expected to see to it that the Taliban which it has been sponsoring does not snipe at the retreating Yanks and/or walk into the spaces vacated by the Americans in Afghanistan.

It pays Pakistani interests if its’ Army can excuse itself from the second part of the task allotted to it, by being `forced’ to withdraw part of the troops posted on its western border on to the Indian border.  The Taliban can then either battle its way to Kabul or threaten the Karzai regime sufficiently to agree to share effective power with it. Talks being held with Taliban to share power, have as yet from the Taliban point of view, yielded nothing much more than just the respectability which comes when an insurgent group is invited for talks by any ruling power.

If the Americans can be `stampeded’, that is forced to quicken their pull-out from Afghanistan and persuaded by mounting casualties not to leave any forces behind to support the Karzai regime, so much better for Pakistan, which wants to use Afghanistan as its strategic backyard. If in the process of `quicker’ withdrawl, the US forces leave behind heavy artillery and equipment, it could prove a boon for the resource starved Pakistani Army.

India which is USA’s unmentioned `other’ ally in the war against terror,  of course does not want to give Pakistan any excuse to pull troops away from the Afghan border and is also under considerable pressure from its new-found Super-power ally to keep the peace with Pakistan, so that the pull-out goes on undisturbed.

This would explain Dr Singh silence on the issue and the flip-flop by his defence minister, who many have sarcastically dubbed `St Antony'. There was perhaps a conscious attempt to give Pakistan a way out from the embarrassment  and uproar caused by the sneak attack.

However all this leads on to another set of questions  – does helping out USA pull out quietly from Afghanistan help India? What will Pakistan do once the Americans have pulled out, leaving  it in the undisputed position of being the strongest military force in all Pashtun speaking lands (which includes  most of Afghanistan and Pashtun speaking provinces and tribal territories in Pakistan)? Will India’s huge investments in Afghanistan remain safe after the Americans pull-out ? (attacks have been mounting on Indian diplomatic posts in Afghanistan as well on Indian built roadways and other ventures by Pakistani supported terror networks) How will all this impact India’s Kashmir region? Or for that matter the terror attacks that India regularly faces from across the border? Can it really count on the Nawaz Sharief government to have the strength or the real desire to reign in Pakistan’s hawks who demand that it feeds terrorists into Kashmir and even to attack targets in Indian cities using `non state actors’ ?

To be concluded

The Rupee Conundrom

 

On June 5, 1966, the then prime minister, Indira Gandhi, had already taken the decision to go ahead and devalue the rupee by a huge 60 percent the next day. People close to her say she watched Dr Zhivago to get over her nervousness over the momentous decision. It was a big step. she would be devaluing the Indian rupee which stood at about Rs 4.76  to the dollar by to Rs 7.50 to the dollar – everything India bought from the international market would become that much costlier.

In the words of B.G.Verghese, her information advisor “the storm broke the next day.” Till 1966, the Indian currency which was pegged to the British pound, was officially or unofficially acceptable tender over a large part of Asia and Africa, ranging from Beirut to Hong Kong. Aden, Oman, Bahrain, Qatar, Trucial Gulf states ( present day UAE), Tanganikya (former name for Tanzania), Uganda, Seychelles and Mauritius were among nations where the rupee was legal tender.



With the devaluation, Indian rupee suddenly turned global pariah, with few takers anywhere. What prompted Mrs Gandhi to take the step included a huge trade and fiscal deficit, an end to aid from the West ( a punishment for defending itself against an unprovoked attack by Pakistan) and a rising oil bill. The idea was that the devaluation would help India sell more abroad, earn much needed dollars to pay for its imports of oil, food and machinery. 

Mrs Indira Gandhi being sworn in as Prime Minister

 

Exports did not surge as expected and Indian financial prestige suffered even further. The conservatives within the Congress including K.Kamaraj felt it was a disaster. Import substitution, and austere curbs on import of most goods helped Mrs Gandhi’s government stave off embarrassing foreign exchange flows problem. 





Cut to July 1991, Dr Mammohan Singh managed to persuade his boss, the then prime minister,  P.V Narasimha Rao to agree to devalue the rupee by some 20 per cent in two steps to Rs 25.95 in an operation code-named `Hop-Skip and Jump’. Rao, too was nervous, he remembered the criticism, his former boss Mrs Gandhi had, had to face. Since 1975, the rupee had been pegged to a basket of currencies which included the Dollar, Yen, Pound and Deutsche Mark.

Dr Singh walks the reforms path

That time round, however, the ` jump’ happened. The slew of reforms which followed, including partial decontrol of the rupee, trade and investment liberalisation, unleashed the “caged tiger”, that India had become. Though the trade deficit quickly rose after falling for a few years, a surge in foreign investment inflows saw India’s financial fundamentals strengthening and global prestige rising.

June 2013 is no different. India’s fiscal and trade deficits have risen to unmatched levels. India’s annual fiscal deficit has hit an all time high of Rs 4,90,00 crore, while its trade deficit for 2012-203  stood   at over $ 190 billion. For just the single  month of May, the trade deficit  was $ 20.14 billion.

This time round however, the rupee is not pegged, it was on free float and the market decided what it’s worth was.  One month of aggressive selling by global financial giants in India’s bond market had helped push the price down by 12 per cent, with the currency losing 1.4 per cent in just one single day – Thursday, June 20.

The question uppermost in many people’s minds, is will Dr Singh be able to recreate his 1991 magic and match the fall of the rupee with unleashing a wave of reforms which will take India forward or will it be a 1966 story, a drop in value followed by more economic disasters.

The problem for the good Doctor and his lieutenant, finance minister P.Chidambaram, is that they are hamstrung by two major problems – lack of sufficient support in Parliament to push through significant reforms like raising the foreign investment cap in insurance and paucity of time – general elections are slated for early next year and in a few months from now, the government will have to slip into populist mode and forget about taking hard headed economic steps which may be unpopular.

Some tweaks can be expected – increase in gas prices, raising the cap on foreign investment in defence and telecom industries – decisions which do not require legislative approval. However, the biggest obstacle  to reform remains red tape – a $ 12 billion investment plan by Korean giant Posco remains on paper as departments battle it out over forests which may or not be cut down for mining and steel plants.

Indians' appetite for gold increasing

However, to give credit to Dr Singh and his team, at least some wise decisions have been taken. There is no move to ban gold imports or to raise taxes on it. Despite the fact that a fall in gold prices coupled with debasement of the Indian rupee’s value, can be expected to further whet appetite for bullion among domestic customers, many of whom see gold as a hedge against inflation and financial market turbulence.

However, the Singh’s government seems to have ruled out any quantitative curbs on gold imports or of higher taxes. Gold imports are already being taxed at 8 per cent and this has started telling with increasing reports smuggled gold being intercepted at airports.

Reduction in duty in the 1990s, had virtually killed gold smuggling. However, a recent increase in duty on gold from 6 to 8 per cent is being seen as a cause for increased smuggling.

More common sense decisions could save the day for the Congress-led government.

One simple policy prescription which the government is believed toying with is allowing upto 49 per cent FDI in most sectors which are security non-sensitive without the mandatory clearance by foreign investment boards.

Diwali, China, India and the Asian Trading Bloc Dilemma

The lights on Delhi’s streets this Diwali were mostly shipped out of China’s Shanghai port and many of the plastic images of Goddess Lakshmi, the Hindu godess of wealth, being sold in its bazaars, were  made out of dingy factories in Guangde in South China.
The cheap lights and shiny images may bring cheer to many Indian homes, but for its policy makers led by prime minister Manmohan Singh, they are a pointer to the dilemma Singh will face in Phnom Phnem next week. Those trinkets imported from India’s largest trading partner, have already driven thousands working in small scale lighting and decorations factories in western Uttar Pradesh into the ranks of jobless over the last decade-and-a-half. 
Rising Chinese imports and falling Indian exports have meant that in the first ten months of this calendar year, India has already run up a trade deficit of $ 23 billion. India imports finished goods ranging from cheap lights and mobile phones to stainless steel and consumer durables to electricity plant gear from China, but mostly sells raw materials like iron ore, chrome, lead,  copper and cotton to its northern neighbour.
At the Cambodian capital, Singh will join leaders from China, Asean and East Asian countries in talks to create the RCEP – or Regional Comprehensive Economic Partnership – an Asia-wide trading bloc which China wants to forge as a counter to US President Barack Obama’s Trans-pacific trade bloc which shuts out China and draws Asia closer to the Americas in a trade partnership.
Till now, for nearly a decade, China had sought to keep a trading bloc it sought to create, restricted to East and South East Asia, by involving Asean, Japan and Korea, while shutting out India, Australia and New Zealand.  India and Japan on the other hand had long been resisting China’s attempt to forge a trade pact, which it would dominate, by demanding a Pan-Asian trading block of Asean + 6 (Asean, China, Japan, Korea, India, Australia & New Zealand).
Possibly to trump Obama’s proposed trade block, China has suddenly changed tack and adopted the Indo-Japanese proposal as its own. With this comes India’s and many other potential RCEP members’ dilemma.
If they do not join in, they could lose a first mover advantage to be part of the world’s most powerful trading block which would control nearly 30 per cent of the global GDP. However, joining it could mean reducing tariff walls and letting cheap Chinese imports flood local markets killing off domestic industry.
Analysts say Chinese industry benefits from dirt cheap finance, almost no labour laws, hidden subsidies by way of capital costs often underwritten by provincial or central government besides unfair price under-cutting. 
The Indian government’s  Standard Board of Safeguards will hold a meeting on November 15 to decide whether China is dumping stainless steel products in India, causing huge losses for Indian manufacturers, acting on a complaint by Jindal Stainless Steel. The Directorate General of Safeguards has already supported Jindal’s case. India had earlier too been forced to raise import duty on steel to protect domestic manufactures from dumping by Chinese steel firms.
Last year in a speech, Eximbank President Fred Hochberg had pointed out  “In India, (Chinese telecom equipment maker) Huawei grew to $2.5 billion in sales from $50 million in one year. Folks, that kind of growth takes more than just good sales and marketing strategies",  and went on to blame Chinese "state-directed capital" for that growth. It's well known that telecom operators and private power plant owners in India ordered Chinese gear after availing of extremely low cost loans from Chinese banks.
The result has been disastrous for our industry. Latest industry data shows India’s capital goods sector contracted 12.2 per cent in September, a fact which has caused considerable alarm in North Block  and Udyog Bhawan home to India’s  finance and Industry ministries which for long have been beset by representations from India’s top chambers cautioning against dumping of capital goods by China.
On the other hand, these chambers also complain of non-tariff barriers are shutting out their exports of manufactures from China’s markets. The challenge this `unfair’ trade poses was best summed up by commerce minister Anand Sharma in an interaction at last week’s World Economic Forum “We will continue trying to create a balance because there is an adverse balance of trade and we are seeking market access for Indian IT companies and pharmaceuticals and I hope it will come …  we have talked to the previous (Chinese) Prime Minister. We would continue our dialogue and engagement. China is an important partner for India."

Manmohanics is Back

Manmohan Singh is back as `Salman Khan' aka `Tiger' !*

 

Manmohanics is finally back. On Friday night, a cabinet headed by prime minister Manmohan Singh, the original reforms man, decided to allow foreign direct investment into India's $ 600 billion retail market, albeit with riders and limited to willing states,.

It also agreed to let power exchanges sell stake to foreign owners, allow foreign airlines to buy into Indian carriers, hike FDI levels in non-news broadcast services and disinvest in 4 blue-chip public sector firms which could rake in about $ 2.5 billion.

Hit by charges of sleeping on the job and of ushering in an era of policy paralysis, Singh’s cabinet, which earlier this week cut subsidy on diesel, by hiking price of the auto-fuel and reduced supply of subsidised coking gas, decided to gamble that a wave of reforms would be too many for recalcitrant allies to take on.

The prime minster, who is credited with having introduced the first big burst of economic reforms in the early 1990s ( an early burst of import-export reforms in the early 1980s by then finance minister Pranab Mukherjee is believed to have helped build the stage for his big leap), is believed to have been keen these decisions should be passed and passed in one shot to dispel notions that his government did not have the belly to take hard-nosed decisions and to kick-in an economic climate where Indian and foreign investors would be enticed to invest.

Especially as India’s GDP growth had slowed down from over 9 per cent a few years ago to just over 5 per cent in the last quarter and a threat from global rating agencies of marking India out by giving it the dubious distinction of having its credit rating downgraded to that of junk bonds.

While the Trinamool Congress which boycotted the reform agenda cabinet meet, was busy sending a 72 hour ultimatum for a roll back of diesel prices, the Congress led coalition decided to risk her and another key ally Samajwadi party’s ire by going ahead with FDI in retail.

The idea seems to be that the government will bow down later to Mamata and roll back diesel price hike by 20-25 per cent or increase the number of subsidised cooking gas cylinders allowed per family, letting her claim victory, while going ahead with the bouquet of reforms. ** 

Friday, September 14’s decision will allow foreign retailers like Walmart, Carrefour and Tesco to take up to 51 per cent stake in large format departmental stores, which Indian officials have dubbed multi-brand retail, but will be limited to states which have agreed to allow them. As yet some 11 states and union territories including Delhi, Maharashtra, Assam, Haryana, Andhra Pradesh, Uttarakhand, Rajasthan, Manipur and Jammu and Kashmir.

"The series of policy decisions announced by the Government today signal that India is on the move (and) they send out a clear message to the global investor community that the Government is committed to taking forward next generation economic reforms,”  said an exuberant Sunil Bharti Mittal, who has a tie-up with US giant retailer Wal-Mart.

However, the reform burst did not come just because of a desire to attract investments and check a slowdown in the economy. Many analysts saw this as an attempt to cash in on a period when elections were not on the anvil. The next round of state elections are in Gujarat in November-December. Nearer to that date, the Congress led government will have to go back to being populist and not reformist.

Earlier suggested rules of limiting foreign owned retailers to cities with 1 million plus population have been junked, allowing state governments to decide which cities to allow retailers entry into. However, new terms which ask retailers to invest 50 per cent of funds in back-end infrastructure such as cold chains and processing plants in rural areas have been brought in, making the retail proposition attractive to any state with large agricultural production.

West Bengal does happen to be the largest producer of rice, vegetables, fish and pineapples and second largest producer of potatoes in the country and accounts for about 10 per cent of edible oil produced in the country. However, potatoes often sell at as low as Rs 2 a kg at farm market in the state, while they retail at over Rs 20 a kg in most metropolitan cities and at Rs 10 a kg in Calcutta.

Farmers in West Bengal as in other parts of the country rarely benefit from their huge surpluses the way they would have if middlemen could be eliminated from the supply chain and retailers buy directly from farmers. Commerce Ministry officials hope that big states like West Bengal, Tamil Nadu and Uttar Pradesh will be forced to change tack on foreign retailers once they see the direct benefit to their large farmer communities. 

The reforms burst, is expected to be followed by a cut in interest policy rates or a cut in the cash reserve ratio, the amount banks have to keep with the Reserve Bank, despite inflation still ranging at over 7.5 per cent. The RBI it is believed will be told that the government is making sincere efforts to cut subsidies and hence borrowings and this should give the central banker room to manoeuvre on interest rates. ^

But in all this flurry of grand reforms – one little economic logic does not seem to be working out. New jobs and thence fresh demand needs to be generated to make the old economy to jump to new rates of growth.

* The picture taken from The Telegraph newspaper, is a spoof based on the Bollywood Movie `Ek tha Tiger' (Once there was a tiger) where actor Salman Khan plays the role of a Bond-style super-agent, nicknamed `Tiger'. Here Dr Singh is shown as the new `Tiger'.
** At the end of a week after this was written, a `deal' on partial roll-back did not happen after both sides hardened stands and Mamata hit out accusing the Congress of trying to cover up scams such as Coalgate and of tapping her cell-phone. This seemed to be proverbial Rubicon and the Congress decided to call her bluff and let go of her and her party from the coalition in favour of more pliable allies such as Mayawati's BSP.
^ Three days after the article was written - The RBI stuck to its stand on not lowering interest rates, but it did cut the CRR, pumping in some Rs 170 billion or $ 320 billion into the marketplace, thereby encouraging banks to lower lending rates. 

Pranab Boss Again

Vintage Pranab Mukherjee

In 1974, when a 39-year-old Pranab Mukherjee was appointed minister of state in the key ministry of finance, he met a studious-looking economist who was three years older than him and then the ministry’s chief economic adviser.

Mukherjee and Manmohan Singh worked together on the first tentative revenue reforms in the late ’70s after the former was made junior minister with independent charge of revenue and banking and Singh appointed finance secretary.

In 1982, when Mukherjee came back to North Block as finance minister at the young age of 48, he remembered Singh who had by then shifted to Yojana Bhavan as member-secretary. Mukherjee recommended Singh for the job of Reserve Bank of India governor.

The recommendation from Mukherjee, who counted then Prime Minister Indira Gandhi as his mentor, was accepted. Singh got the job.

Decades later, in 2004, Mukherjee joined Prime Minister Singh’s cabinet as minister, first for defence and then for external affairs before eventually returning to his old portfolio of finance in 2009.

From tackling the Telangana crisis to the spectrum scandal, Mukherjee became his party’s man for all seasons — so much so that by 2012, he headed some 25 Groups of Ministers and Empowered Groups of Ministers.

However, by 2012, Singh had probably started getting a little wary of his former boss, who had a different take on some issues. Sources said Singh often felt cramped by Mukherjee.

Mukherjee is now set to depart his North Block office to try and take up residence in the house atop Raisina Hill, giving Singh, widely regarded as the father of India’s reforms programme, a chance to retake his original ministry and try to shape the economy in his own way.

Mukherjee said as much to reporters, who wanted to know how the government would tackle the economic slowdown, after the announcement of his candidature for President.

“The Prime Minister himself is an eminent economist and under his leadership we will overcome this crisis,” Mukherjee said.

India’s Constitution is vaguely worded on the powers of the President, which has often led to tiffs between Prime Ministers and politically driven Presidents (such as the ones between Jawaharlal Nehru and Rajendra Prasad and between Rajiv Gandhi and Zail Singh).

However, many analysts believe that perhaps this very vagueness may lend Mukherjee more powers than usual to solve India’s myriad problems, in working together with Singh.

Becoming President at a time the country is going through a period of crisis could also give Mukherjee more influence than he would have had in an earlier decade. An added advantage is that he could use the prestige of his office to draft Opposition parties’ support.

With the economy in slowdown, he could play a lead role in resolving the deadlock between the government and the Opposition on key pieces of legislation such as the land acquisition, insurance and pension bills, the goods and services tax and the value-added tax.

Usually, the President’s office does not get down to resolving legislative imbroglios. But with the economy in the doldrums and Parliament numbers often proving elusive for the ruling alliance, a pro-active President may well be the answer to the frustrating wait for reforms to unfold.

Constitutional experts say that the rules of business do not preclude the President from acting as an elder statesman.

They cite how the Supreme Court had ruled that the President is not a mere figurehead but a moral authority who may stay in touch with the Prime Minister on matters of national importance and policy.