Is Strategic Containment of China a Possibility?

Recently, in Sept. 2018, the US trade representative Robert Lighthizer & his counterparts from the EU, Cecilia M & Japan, H Seko issued a “statement on non-market oriented policies on practices of third countries” with specific emphasis on industrial & state subsidies & forced technology transfers – a clear dig at China.  While the USMCA (US-Mexico-Canada) Agreement was signed to replace NAFTA (North Atlantic Free Trade Association), in Nov’18, a thaw in the US relations with EU & Japan, if achieved, could help co-ordinate the “Strategic Containment” of China. The Big “IF” remains.

Post the 2^nd world war, the US, formed a military alliance NATO (North Atlantic Treaty Organization) in 1949; they even rejected the USSR’s offer, in 1952, of withdrawing from East Germany & allowing for German reunification in lieu of Germany forbidden to join NATO. They rebuilt the vanquished, West Germany & Japan, under the Marshall plan & imposed on them a pacifist constitution to constrain their military rise. Under clause 5 of the NATO Act, US was treaty bound to provide mutual security which Trump refused to ratify, in July 2018, at the NATO summit sparking off  unease among allies. He further demanded the doubling of EU nations spent on defence from the NATO target of 2% of GDP, & undiplomatically, left soon after perpetuating his tempestuous reputation. Incidentally, only 5 of the 28 NATO nations-US, UK, Poland, Greece & Estonia,  have fulfilled even the 2% target with France spending 1.8% & Germany 1.2% & the latter planning to touch the 2% target only by 2030. Trump railed against the German plan to construct a gas pipeline to Russia- who supplies 60% of German needs- perhaps, seeking a share of the pie to be fulfilled by US shale gas companies.  He, resents, rightly,  Germany saving on defence while funding an export drive & accumulating a trade surplus.  While there is bipartisan consensus, in the US, on “burden sharing”  impetuous Trump’s  brusque treatment of allies with a potential to distort transatlantic- EU - & transpacific - South Korea, Japan etc.- partnerships  is being viewed with trepidation.

Trump's unpredictability & revisionist policies are forcing EU to explore for alternatives & revise roadmaps since it faces a precarious situation of doubtful NATO trust, US-EU trade war & unilateral US withdrawal from the P5+1 nuclear deal with Iran & Brexit on one front & Russian interference of propping up a fringe - extremist Left or fascist Right & malignantly influencing democratic processes - on the other. Trump might become the “unintentional force behind the creation of a new western order” opined German Foreign Minister Heiko Maas while French President Emanuel Macron averred that EU should seek “Strategic autonomy” after the US “with whom Europe built the post –war multilateral order seems to be turning its back on this shared history” & advocated building strategic partnerships with Russia - contingent though on the resolution of the Ukrainian crisis - & Turkey - subject to Erdogan managing his pan-Islam, anti -Europe project - since neither China or the US think that Europe has a strategic autonomy comparable to theirs; building on the advances in EU defence  integration during the past year, he passionately envisioned a greater European role in resolving conflicts in MENA(Middle east & North Africa) - especially Syria, Libya & Sahel. In an interview to Europe 1, in Nov 2018, Macron called for a “real European Army” to protect the continent from Russia, China & even the US after the US pulled out of the 2016 Paris treaty for climate change & the 1987 intermediate range Nuclear forces treaty with Russia-imperilling European security; Trump called the proposal "insulting".

While Trump's actions that upend the relationship with allies is under legitimate fire, there is some method to the madness of the US launching a trade war with China. Of the $352 billion Chinese trade surplus in 2018, US accounts for $323 billion implying that the US is funding a competitor’s rise to challenge the unipolar world architecture. Even if US actions cool world trade growth for some time, squeezing China on trade, forcing them to drop export subsidies, reducing non-tariff barriers & denying hi technology loot or forced transfers makes eminent sense. Likewise, is opening up to North Korea - a client state of China - taking advantage of President Kim’s distrust of China post the Middle kingdom’s  complicity in Kim’s uncle, Jang Song Thaek’s plot, to assassinate him. However, Kim seeks control of some nuclear weapons & delivery systems for regime preservation while the US wants capping on both, delaying closure of an agreement; Trump reneging on the Iran deal & US forcing regime change of Gaddafi , in Libya, in 2011,after he agreed to freeze his nuclear ambitions,  legitimately creates distrust.

Trump’s revisionist foreign policy is costing allies across the world; lack of support, when India took on China, during the Doklam imbroglio, in Aug 2017, forced Prime Minister, Modi to quietly seek a “Wuhan reset” with President, Xi.  Similarly, Japanese Prime Minister, Shinzo Abe, reciprocated to Chinese rapprochement efforts seeking hi technology as a counter to western technology denial.

Against this background, the US-EU-Japan joint statement is interesting despite questions persisting on whether it is a strategic rethink or a tactical retreat by the signatories. Putin wants a weakened NATO to stop its eastward expansion & a compromised Trump is seen as delivering on the same; paradoxically, EU, now, wants greater engagement with Russia as a counterbalancing force, even while Trump himself is keen on a reset of the US-Russia relations against the advice of his bureaucracy, driven as it is by a cold-war ideology & agenda, largely underwritten by a military industrial complex. Russia is compelled into a Chinese embrace, post the UN sanctions, to keep its economy afloat by military & energy sales; if EU & US agree to target only China & open up to Russia, with EU offering  alternative markets to diversify Russian energy sales, Russia - concerned with China’s encroachment into its perceived sphere of influence in central Asia,  could extricate itself from the dragon’s bosom; perhaps, Russia could then  be induced to reduce meddling in EU internal affairs as a quid pro quo.

US, EU, Russia, South Korea, Japan, Vietnam, Australia & India could emerge as a QUAD PLUS to tame China into following a rule based world order, with a consequent  reduction of conflict in the South China Sea & beyond, if only Trump does not suffer from a “short attention span”. He should quickly close a trade deal with the EU & Japan & keep his focus on targeting China alone. Since President Xi, can remain head of state for life - after he secured a removal on term limits for himself - the trade attack should be sharpened to weaken Xi’s position to encourage domestic challengers to his suzerainty; else the “liberal” world  order would face the gravest challenge - from "Mao reborn" & what is euphemistically called “socialism with Chinese characteristics" .

The Re-Election Budget 2019

Interim Finance Minister (FM), Piyush Goel, standing in for the ailing Arun Jaitley, presented the NDA- II government’s final budget, of the current term. “Popular & not a populist” budget averred his colleague, Commerce Minister,  Suresh Prabhu while former Finance Minister, P Chidambaram (PC), played with words, calling it a “Account for vote” & not a ‘Vote on Account” - a thinly veiled criticism on an “interim budget” announcing  poll sops, masquerading as a policy statement, that could not wait for the formation of a new govt.; however, the 70,000 crore farm loan waiver announced, in the 2009 budget, by  PCs UPA govt. could legitimately invite a return jab. “Machiavellian budget presented by a “vulnerable govt. opined “Michael Kugelman of the Wilson centre.

The FM announced that the fiscal deficit (FD) has been pegged at 3.4% for FY 19 & the next with Revenue Deficit (RD) at 2.2%. Credit rating agencies are not amused at the frequent deviations from the glide path of achieving 3% FD by 2008- as mandated by the FRBM Act of 2003 – first due to the financial stimulus undertaken to manage the 2008 financial crisis & later due to political expediency.  All governments – UPA or the NDA - have resorted to creative accounting that include off balance sheet financing that understates govt. debt, roll over of subsidies etc. leading one to borrow the former Finance Secretary Geethakrishnan’s word “Fudget” to describe the Budget;  Food Corporation of India has unpaid bills of over 1 Lakh crore. Sajid Chinoy, of JP Morgan, has calculated the fiscal deficit of the centre, states & the off balance sheet items to be about 8.2% of GDP for 2017-18. This combined with the muddled nos. emanating from the CSO (Central Statistical Organization) could put India in the elite league of China, whose official economic nos. are always taken with a pinch of salt. Liberating institutions from becoming “caged parrots” is thus essential.

The Budget At a Glance

A-Actual, RE Revised Estimate, BE-Budget  Estimate				Growth
All Figs in Lakh Crore Rupees	FY 2018 A	FY2019 RE	FY2020 BE	FY2019	FY2020
Revenue Receipts	14.35	17.30	19.78	20.5%	14.3%
Revenue   Expenditure	18.79	21.41	24.48	13.9%	14.4%
Revenue Deficit	4.44	4.11	4.70
Revenue Deficit %	2.6%	2.2%	2.3%
Capital Receipts	7.07	7.28	8.07	2.9%	10.9%
Borrowings	5.91	6.34	7.03	7.3%	10.9%
Capital Expenditure	2.63	3.16	3.36	20.2%	6.3%
Total Expenditure	21.42	24.57	27.84	14.7%	13.3%
Recovery of Loans + Other Receipts	1.16	0.93	1.03
Fiscal Deficit	5.91	6.34	7.04
Fiscal deficit %	3.5%	3.4%	3.4%
Interest Payments	5.29	5.88	6.65
Primary Deficit	0.62	0.47	0.39
Primary Deficit  %	0.4%	0.3%	0.2%
GDP	169	187	207

The takeaways

(a)The budget projects an anaemic capital expenditure growth of 6.3%; 70% of the 3.36 lakh crores capital budget is spent in three areas: Defence (1.03L Cr); Railways (0.64L Cr), Roads & Bridges (0.68L Cr).

(b)Borrowings pegged at over 7 lakh crores, in FY 2020, prompted a sell-off of treasury bills by financial institutions, fearing a “crowding out”  effect leading to a rise in gilt yields from about 7.26% to 7.38%. With an “expansionary” fiscal policy, RBI may be forced to adopt a “neutral “monetary policy without any change in Repo rate – a “Long Pause” - despite a chorus for a rate reduction.

(c )Total tax filers between 2013-14 & 2017-18 shot up from 3.79 crore to 6.85 crores while personal income tax filings increased from 3.31 crores to 5.44 crores with  govt. claiming it as a consequence of Demonetization.  Since the govt. has mopped up a gross of Rs 8.74 Lakh crores & a net of Rs 7.44 Lakh crores - post adjusting for refunds, till Dec 2018 - & achieved a  gross growth of 14.8% in corp. Tax & 17.2% in personal income tax – it is conceivable that direct tax projection could be met; the same cannot be said about indirect taxes. The FD, thus would surely be higher than 3.4%.

	Figs in Lakh crores (A-Actuals, RE-Revised estimate, BE-Budget estimate)
Revenue Receipts	2014-15 A	2015-16 A	2016-17 A	2017-18 A	2018-19 RE	2019-20 BE
Corporate Tax	4.28	4.53	4.84	5.71	6.71	7.6
Income Tax	2.58	2.87	3.49	4.08	5.18	6.07
Other Taxes				0.1
Total Direct Taxes	6.86	7.4	8.33	9.89	11.89	13.67
Revenue Receipts Growth %
Corporate Tax		5.8%	6.8%	18.0%	17.5%	13.3%
Income Tax		11.2%	21.6%	16.9%	27.0%	17.2%
Other Taxes
Total Direct Taxes		7.9%	12.6%	18.7%	20.2%	15.0%

(d)While the GST receipts are growing at 9%, the govt. projects a revenue growth of 21%, in the budget, which needless to say is unachievable. Likewise, the “Union Excise” budgeted at 2.6 Lakh crores, accruing from petroleum, is unlikely to be achieved if the product is brought under GST.

	Figs in Lakh crores (A-Actuals, RE-Revised estimate, BE-Budget estimate)
Revenue Receipts	2014-15 A	2015-16 A	2016-17 A	2017-18 A	2018-19 RE	2019-20 BE
Central GST	1.88	2.88	3.81	2.03	5.03	6.1
UT GST				0.01	0.03	0.03
IGST				1.77	0.5	0.5
GST				0.63	0.9	1.01
Union Excise				2.59	2.6	2.6
Service Tax	1.68	2.11	2.54	0.81	0.09
Taxes excluding Customs	3.56	4.99	6.35	7.84	9.15	10.24
Customs	1.88	2.1	2.25	1.29	1.3	1.45
Total Indirect taxes	5.55	7.11	8.78	9.13	10.45	11.69
Revenue Receipts
Central GST						21.27%
Taxes excluding Customs		40.17%	27.25%	23.46%	16.71%	11.91%
Total Indirect taxes		28.11%	23.49%	3.99%	14.46%	11.87%

Election Budget

The “Modi” chorus in Parliament, after the announcements, by the ruling coalition members is a reflection of their belief that the “political budget” laced with freebies is sufficient to entice the electorate to re-elect the coalition in the general elections, tentatively poised for May 2019. The 3 large population segments targeted - accounting for about 25 crore citizens or about 125 crore if family members are counted too- are as follows

Agriculturalists: The budget announced Rs 6000/- to be transferred vide DBT (Direct Benefits Transfers) into the bank account of the 12 crore small & marginal farmers – defined as those having less than 2 hectares or 4.94 acres of land - in 3 instalments of Rs 2000/- each.  The first instalment shall hit the bank accounts before Mar 31^st 2019, lending itself to criticism that it is a bribe paid from the public exchequer for securing a private vote for the BJP.

An amount of Rs 20,000 cr has been budgeted in the current year & Rs 75,000 crores for the next, effectively increasing the fiscal deficit by 0.1% this year & 0.3% the next. Critics acknowledge that the farm distress is a reality & an intervention was necessary but criticise govt. action on following grounds:

(1)Telangana & Odisha have better income support schemes. Telangana Government’s “Ryuthu Bandhu” scheme arranges for the transfer of Rs 8000 per acre, across 2 instalments - coinciding with the Rabi & Kharif crop sowing season. Odisha’s KALIA scheme (Krushak Assistance for Livelihood & Income Augmentation) assures financial assistance of Rs 10000 per family to vulnerable cultivators & landless agricultural labourers – either due to old age, disability, disease etc.

 Rahul Gandhi lambasted the scheme since it translates into a paltry Rs 500/- per month or Rs 16.67 per day or as Yogendra Yadav averred “less than Rs 3.5/- per a family member, per day,  that cannot buy even a cup of tea.”

 (2)While the economic situation of landless labourers, share croppers & tenant farmers is worse off than small & marginal farmers, they have been excluded from the scheme. Under KALIA though, financial assistance of Rs 12500 is provided to each landless agricultural household for funding agricultural allied activities like goat rearing units, duck units, fishery kits for fisherman, mushroom cultivation, bee keeping, mini layer units etc.

Salaried Employees: BJP is traditionally well entrenched in urban areas due to the support of the middle class through a measured outreach program strengthened by articulate spokespersons on national media. The Modi govt. has kept this segment in good humour, throughout this term, & strengthened the relationship further by offering an income tax rebate of Rs 12500 under sec. 87A. While the benefit is meant to target the small tax payers in the 2.5 - 5 Lakh slab, a good tax planner can help a citizen up to a salary of 8.15 lakhs or beyond (if he avails of an additional housing loan & interest payment thereof) to pay zero tax. About 3 cr tax payers shall benefit under a giveaway of Rs 18500 cr.

All Figs. in Lakhs of rupees	Earlier	Now	Explanation
Salary	8.15	8.15
Standard Deduction	0.4	0.5
Deductions under  Sec 80C	1.5	1.5	EPF. PPF with a 15 year lock in, Tuition fees, Housing Loan principal, NSC,ELSS with a 3 year lock in, Senior Citizens Savings Scheme, Life Insurance premium, Bank FDs for 5 years & above, 5 year term deposits with post offices, ULIPs with a 5 year lock in, Sukanya Samriddhi scheme, Stamp Duty & registration charges, School fees for kids
New Pension Scheme Sec 80CCD(1B)	0.5	0.5
Medical Insurance for Family Sec 80D	0.25	0.25	Family is self, spouse & children; if one of the family members is over 60 years the deduction can go up to Rs 30000. If one of the parents is over 60 another Rs 30000 can be claimed; thus a total of Rs 60,000 can be claimed as deduction
Medical Insurance for elderly parents: Sec 80D	0.3	0.3
Deduction on Interest income: 80TTA	0.1	0.1	While TDS deduction was applicable on interest income over Rs 10k which has now been increased to Rs 40K, deduction is retained at Rs 10,000
Total Taxable Income	5.1	5
Tax	0.145	0.125
Education Cess 4%	0.0058
Rebate under Rec 87A		0.125
Total Taxable Income	0.1508	0

Prior to the scheme announcement  super senior citizens -aged above 80 years - & senior citizens –aged between 60 to 80 years - were exempt from  tax upto an income of 5 lakhs & 3 lakhs respectively; the differential tax slabs based on age is thus effectively removed. 

The other benefits

(a)Notional rent imposed on a 2^nd dwelling has been revoked to encourage the upper middle class to make an additional investment in housing;

(b) No capital gains, upto 2 crores, imposed if house sold & re-invested; instead of restricting benefit of reinvestment to one new house, benefit extended to 2 houses

Both the benefits for the farmers & the small tax payers – with amounts ranging from Rs 6000 to Rs 12500 would boost consumption; stocks of consumer staples & textiles would see a spurt. Irrational exuberance of discretionary consumption auto stocks especially 2 wheelers is likely. Burdened with huge inventory real estate stocks, ideally, should  not see as much of an interest as banks, housing finance stocks, paints  & home furnishing stocks . 

The urban middle class will thus root for the Modi re-election.  

Unorganized workers: India has about 42 crore workforce in the unorganized sector of the total of 50 crores. For workers with a monthly income under Rs 15000 per month, a pension of Rs 3000/- per month on retirement, at age 60 years, has been announced. About 10 crores workers are expected to avail of the scheme by contributing Rs 55, per month, if he joins scheme at 18 years & Rs 100/- if at 29 with a matching contribution from the govt.  An amount of Rs 500 cr has been committed in the budget. Just like the Amma canteen in Tamil Nadu or Ayushman Bharat – the health insurance scheme launched by the govt. – this scheme, despite low spends, has tremendous propaganda value; after all the pension payment for a worker aged 29 today would start off only after 31 years in 2050.

Workers registered under EPFO (Employee Provident Fund Organization) are paid a minimum pension of Rs 1000 per month today& the above announcement could trigger a demand from them to at least match the benefit promised to unorganized workers.

Gratuity limit has been increased from 10 lakhs to 20 lakhs enhancing goodwill.

Conclusion  

Modi’s foes would chafe at his disdain for institutional integrity & lack of respect for conventions.  But there is no denying that he is the sharpest political mind that India has seen for many years. With a meagre spend of Rs 20,000 crores & a promised spend of about Rs 94000 crores (Rs 75000 crores for farmers, Rs 500 crores unorganized workers & Rs 18500 crores for salaried employees) he has captured the mind space of 12 crore farmers, 10 crore unorganized workers & 3 crore salaried & five times the no. of you include the family members of the beneficiaries. If he hasn’t yet, his untiring grass root cadre will do the job or he will, with his uncompromising direct communication style. “Modi Brahmastra” sing his admirers & “jumla” cry his opponents but he could win at the hustling, unless leaders on the other side of the aisle display imagination & aptitude to design a fiscally prudent UBI (Universal Basic Income).