The India, China & Pakistan Bilateral Peace Overtures – the Crux

The Feb 10^th 2021 announcement on “synchronized & organized “Indo-China disengagement, from the North & South banks of the   Pangong Pso - in line with the consensus reached, during the 9^th Corp commander level talks, on Jan 24^th, with the region between Finger 3 & 8 temporarily becoming a no patrolling zone & removal of all constructions, since April 2020 – potentially, brings to an end a 9 month standoff.  Indians holding the commanding heights on the south bank of the lake, threatening the Chinese Moldo garrison, facilitated a compromise while the lack of a similar bargaining chip prevents Indians for effecting a similar Chinese withdrawal at the other friction points – Gogra, Hot Springs & Depsang. Chinese advantage at these points  threaten the DSDBO Road (Darbuk Shyok Daulet Beg Oldie Road) the lifeline to the critical Indian SSN (Sub sector North). Status quo ante, at these locations, is thus a mirage & likely loss of territory & “trust deficit” permanent. Sino-Indian relations, inevitably, shift from an era of “strategic competition” to “strategic rivalry”- the contours of which shall become more visible in the 2^nd half of the 21^st century.

Soon enough, on Feb 24^th, 2 days before the 2^nd anniversary of the Indian Balakot attack, a Joint statement was released by the Indo-Pak DGMOs (Director General of Military Operations). Such bonhomie, in quick succession, did evoke a considerable surprise. This statement alludes to respecting the Vajpayee-Musharraf LOC (line of Control) & IB (International Border) agreement, of 2003, & addressing “each other’s core concerns which have the propensity to disturb peace & lead to violence”. The “core concern” of Pakistan (Pak) is “Kashmir” while for India is “terror” & obviously, it is unlikely to find common ground.

Subramanian Swamy, the BJP’s rebel with a cause, has a point, when he tweeted: “Now you know the catch in the agreement.  Will we give up POK? Help Baluchis? Give autonomy to J&K? Scrap CAA? Or Pak will say we have broken the agreement” On the contrary, Swarajya, with its right wing slant opined that Pak facing the prospects of the likely drying up of  US aid - as the Afghanistan war nears conclusion - & the bitter experience of not finding support from the Gulf countries, on Kashmir, must have decided to follow a non-zero sum game. It is, however, more likely that the US forced the hand of both nations.

The Indo-Pak Detente

Avinash Mohananey, Ex Intelligence Bureau (IB), in his Economic Times article, suspects that the first policy statement of the US Joe Biden administration released on 4^th Feb 2021, on countering the growing ambitions of China to rival the US” & “determination of Russia to damage & disrupt our democracy” & keenness to restore the habits of rebuilding the muscle of democratic alliances, that had atrophied, heralds the genesis of a new cold war. While the Indian tilt towards the US is visible, the US must have initiated steps to woo Pak out of a tight China embrace, to aid its troop withdrawal from Afghanistan with the promise of Kashmir on the table when talks resume.

 The following sequence of events justifies the interpretation:

2^nd Feb 2020: Gen Bajwa’s calls for a “dignified & respectable solution as per the aspirations of the people of J&K” 

5^th Feb 2020: Imran Khan says that Pak is ready for taking 2 steps forward if India takes one. On the same day India restores 4G telecom connectivity in entire J&K – frozen since Article 370, was written down, in Aug 2019.

11^th Feb 2020:  Statement by Moeed Yusuf, special advisor on National security & strategic policy planning to Pak PM: “If we want peace, we have to move forward;” & “everybody has to be rational not ideological”.

25^th Feb 2020: US spokesperson Jen Psaki welcomed the agreement “which is in our shared interest & we encourage both countries to keep building upon this progress”.

Musharraf Zaidi, a Pak commentator, too, subscribes to the view that this deal has the blessings of the Western powers.

The immediate “tactical” advantages on offer:

(a)Afford Pakistan leeway to partially redeploy its forces back to FATA from the Indian borders as per Michael Kugelman- Deputy Director of the Asia Program at the Wilson Centre.

(b)Help the BJP concentrate its efforts on the impending state elections at Bengal, Tamil Nadu, Kerala, Pondicherry & Assam.

As per Ambassador Vivek Katju, an opening to normalize relations with India has eluded General Bajwa till date. The FATF (Financial Action task Force) pressures, crippling the Pak economy & the advantage of cooling the Indian borders, to play an end game, in Afghanistan, post the US withdrawal may have influenced his thinking. Just as India is not keen on a “hot border” with China as the latter is 5 times its economic size, Pak too could have calculated the costs of fighting India 10 times its economic size. Prof Happymon Jacob, of the JNU (Jawaharlal Nehru University) says that the Indian govt. too must have realized that a state cannot be run on escalatory rhetoric alone.

“History repeats itself, first as a tragedy, & then as a farce” said Karl Marx & the Indo-Pak relations have followed that template dutifully. The DGMOs, of both nations, made a similar promise, in May 2018, to respect the 2003 ceasefire pact in “letter & spirit” only to witness its violation immediately thereafter. Furthermore, Imran Khan, since the last 1 year, has been accusing Prime Minister Modi of fascism & the latter who takes his international image too seriously would not have taken it kindly. Similarly, as per the Indian Home Ministry, Pak ceasefire violations increased from 2140 in 2018, 3479, in 2019 to 5133 incidents in 2020; considering the huge upside, in 2020, it is safe to interpret that the increase, coinciding with the Indo-China Ladakh skirmish, proves yet again that Pak is a satellite state of China, more so after CPEC (China Pak Economic Corridor). Therefore, it is reasonable to factor in a ‘trust deficit” & the unlikelihood of the resumption of people to people contacts or trade – which anyway is meager, & gets, largely, routed through the UAE otherwise. India must, therefore, forever, be ready for a 2.5 front war - first enunciated by CDS (Chief of Defence Services) Gen. Bipin Rawat. The 2 fronts are China & Pak while the half refers to the internal secessionist forces operating within the Indian borders.

Takeaways from the Indo-China conflict

(a) The Indian side was led by Lt. Gen PGK Menon, Commander XIV corps – responsible for the LAC in Eastern Ladakh & Navin Srivastava, Additional Secretary (East Asia), Ministry of External Affairs, while the Chinese side was led by Major General Liu Lin – Commander of the South Xinjiang Military region. A Major General is one level below a Lt. General & hence a protocol violation, implying that China do not consider India an equal. India, prudently, should have downgraded the level of talks to that of a Major General & absence of such an action is perhaps, a quiet acceptance of the power differential.

(b)The Indians lack a bargaining chip to force a compromise from the Chinese in Gogra, Hot Spring & Depsang plains. Why did the Indians not occupy similar strategic areas - as they did in Pangong along the aforementioned areas, or elsewhere, along the 3488 Kms border- to force a Chinese compromise; is the power differential inducing caution?

(c)The DSDBO road took 20 years to complete & now India has to invest on an alternate route since this road is within the shelling range of the Chinese artillery.

 (d)The raw courage displayed by the Indian soldiers at Galwan, on June 15^th 2020, which led to the death of 20 Indian & 45 Chinese soldiers– as per the Russian agency Tass, even as the Chinese claim only 4 casualties – implies that the Chinese, going forward, are more likely to avoid a physical confrontation, but could employ use of either

(1)their technological superiority in the Cyber, space & electromagnetic domains to force Indian compromises OR

(2)Use the clause VIII in the 2005 agreement on the “guiding principles for the settlement of the India-China boundary question” which reads thus: “in reaching a boundary settlement, the two sides shall safeguard due interests of their settled populations in the border areas.”  China shall build new civilian settlements, in disputed border areas, as they have done at the Tsari Chu basin, Arunachal Pradesh & in Bhutan, recently, to achieve a fait accompli. 

(e)China share borders with 14 countries & they have settled them, largely, with 12 countries except India & Bhutan. Sun Yun, of the Stimson Centre, predicted that China is unlikely to settle the border with India since an Indian promise of neutrality in the emerging Sino-US conflict - even if made as part of a grand bargain on border settlement - can be violated by India while the boundary line, once marked, shall remain permanent. Expect China, therefore, to continue needling India to

(1)Force Indian troop concentration away from the Indian western border to protect “iron brother” Pakistan

(2)Weaken the emerging QUAD – the US-Australia-Japan-India – alliance, that largely is maritime focused.  Pressure on Indian land borders shall force India to spend more on the Army & less on the Navy – offering China space to strengthen itself even in the Indian Ocean, helping it expand beyond its traditional area of dominance in the Western Pacific.

Conclusion:

China, Pak & India entered into ,bilateral agreements aimed at cooling tensions, at the borders. While China now wants to focus its energies on the likely moves of the new Joe Biden US administration, either the US or China must have forced the Indo-Pak reconciliation.

While China has extended its control onto territory coinciding with its 1959 claim line & signaled to India to defer to its power superiority & put on notice, other nations, who wanted to prop India up either as a countervailing force to China or were hedging their bets. Having achieved both the objectives they have acceded to the disengagement in Pangong Pso – to eliminate the threat to their Moldo garrison even as they hold sway over Depsang, Hot Spring & Gogra. India is forced to pay the cost of creating an alternative to the DSDBO road - that now stands compromised. Shifting of resources to the Army would reduce the Navy's outlay & the effectiveness of the QUAD – which has more of a maritime significance - thereof. China now gets ready to engage the Joe Biden administration, perhaps, cooperate on climate change in lieu of reduced trade tensions - to prevent the success of the China+1 corporate strategy, of de-risking concentration of supply chains in China - which otherwise has the potential of strengthening countries in its neighborhood  like India, Vietnam, Indonesia etc. They shall be ready with a counter to the likely nit-pricks on human rights violations & suppression in Tibet, Xinjiang, Hong Kong & Inner Mongolia & further arms sales to Taiwan.

Pakistan would use the deal to partially shift forces from the Indian border to FATA to suppress internal revolts & play the end game, in Afghanistan, coinciding with the US troop withdrawal, to prop up the Taliban to power. They would be keen that US & China pressurize India, to resume the comprehensive dialogue – that puts Kashmir on the table; resumption of  people to people contacts or trade are less likely & even if agreed to only add up to signalling alone. Supplies of Covishield, from India, supplementing Sinopharm, from China, could help with their vaccination efforts; India could acquiesce to such a request.

India could be relieved with the reduction of tensions with China even as the BJP sparks a counter narrative to the opposition accusation on loss of territory- a likely issue in the impending elections across 5 states. Thaw in relations with Pakistan for the govt., though, could be a temporary tactical retreat as escalatory rhetoric with its western neighbor has yielded impressive electoral dividends. Despite the new administration identifying both China & Russia as enemies, India could be keen to continue engagements with Russia – despite it being in a Chinese embrace – as over 60% of Indian military equipment is of Russian vintage needing spares & supplies as well as to prevent Russian equipment from being supplied to arch rival Pak. She would relish a situation where the Sino-US cold war escalates & accords India an opportunity to play a “swing power” – securing concessions from both sides in lieu of neutrality thereby ring-fencing “strategic autonomy”. But it is easier said than done; patient building of economic & military muscle over the next 15 years is the key to Indian strategic ambitions.

Budget 2021-22

The stock market had dropped from about the 50,000 levels to 46000, in the week leading to the Budget presentation, on 1^st Feb, in anticipation of a tweak in the Long term Capital Gains (LTCG) tax or the imposition of a COVID cess thereof; no such tax announcements prompted a relief rally. The high fiscal deficit of 9.5% for FY 21, 6.8% by FY22 & a glide path towards 4.5% by FY26, however, spooked the bond markets though leading to yields, on 10 year bonds, rising from around 5.9% to around 6.1%. Despite the RBI (Reserve Bank of India) dovish stance on interest rates, the reduction of liquidity, phased increase of CRR (cash reserve ratio) from 3% to 4% by May 27^th 2021 & the commodity price increases are likely to push interest rates upward in the days to come.

Modi called it a “reformist budget” while former Finance Minister P Chidambaram chastised it for not even mentioning the Military budget during the Finance Minister’s speech & doing nothing for the BPL (Below Poverty Line) & the MSME (Micro Small & Medium enterprises) sectors  effected substantially during the pandemic.

The Budget Positives

Transparency: The budget scores high on transparency.  Food Corporation of India has a debt of 3.3 lakh cr. end FY20 with an interest outgo of 0.19 Lakh cr. to the national Small savings scheme; by incorporating the otherwise “off balance sheet” items of food subsidy  the budget ends up showing a fiscal deficit of 9.5%. Hopefully, the states budgets, too, replicate the “transparency” principle. As per the FRBM ACT (Fiscal Responsibility & Budget Management) 2003, the fiscal deficit of the centre should have been 3% & revenue deficit zero I.e. the fiscal deficit should fund capital expenditure in its entirety. While the centre under successive governments faltered, States’, surprisingly have displayed more fiscal discipline.

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. With centre itself at 9.5% & states given an additional 2% leeway due to the pandemic, the total fiscal deficit of the Indian Union could be closer to 15%. While the economic survey accused the rating agencies for being biased in assigning India the last investment grade rating – only one rung above junk status, the high fiscal deficit & the high debt/GDP as compared to its peers were cited as reasons by the latter; Moody’s says that India’s Debt to GDP was 72 % against its peers at 50% even pre pandemic which has since ballooned to around 90% & 60% respectively.

Nomura warns that a fiscal deficit of 9.5% is akin to “kitchen sinking” - lumping of all bad news together – that could invite a downgrade from the Ratings agency Fitch which had incidentally downgraded India from “BBB- Stable to Negative” in June 2020.

The 15^th Finance Commission recommended that the debt/GDP be reduced to 85.7% of GDP by FY26 indicating that India matching its peers, on this metric, is a discomforting decade away.

Counter cyclical Fiscal Policy: The size of the central budget which was about 15% of GDP in 2012 has dropped progressively since to 13.44% by FY 20 leading to central spends being less than the combined states budgets. Budget FY 22 at 15.6% addresses the demands of a countercyclical fiscal policy to aid growth.

Rise in Capital Spending: 26% rise in capital expenditure from 4.39 lakh cr. to 5.54 Lakh cr. is welcome.

Capital Expenditure (Lakh Crores in Rs.)
Item	2019-20	2020-21 RE	2021-22 BE	Growth
Defence	1.11	1.35	1.40	4%
Roads & Highways	0.70	0.87	1.08	24%
Railways	0.68	0.29	1.07	-2%
Loans to Railways		0.80
Ministry of Finance	0.75	0.45	0.96	113%
Communications	0.05	0.04	0.26	550%
Others	0.07	0.59	0.77	31%
Total	3.36	4.39	5.54	26%
RE: Revised Estimate
BE: Budget estimate

 

In Dec 2019, Nirmala Sitharaman had announced the launch of a Rs 102 Lakh cr. (later revised to RS 111 Lakh cr.) National Infrastructural Pipeline project, with a contribution ratio of 39%: 39%: 22% from the Centre: State: Private sector which envisaged  infra spent, over the next 5 years, on Energy (~25 L Cr.), Railways (~14 L Cr. ), Roads (~ 20L Cr. ) urban development, irrigation, mobility, education & health. With a spend of about 20 L cr. this year, the central contribution should have been 7.4 L cr. not clear if the difference (7.4-5.5) shall be contributed by Central Public sector enterprises (CPSEs).

Former Finance secretary SC Garg contests the 4.39 L Cr. shown as capital expenditure for FY21 as ~0.80 Lakh cr. was a “special loan for Covid related resource gap” as liquidity support to railways to meet its losses in the current year” which along with Rs 0.12 Lakh cr. given under the Budget head “Transfer to States” that lands actuals at 3.47 Lakh cr. This incidentally, is only 3.3% higher than the 2019-20 fig. of 3.36 lakh cr. much lower than inflation.

FDI Increase & Privatization: Increasing FDI from 49% to 74% in the Insurance sector is welcome. The promise of privatizing IDBI, 2 PSU banks, 1 general insurance bank & LIC is welcome. Success of the same is critical to achieve the disinvestment target of 1.75 lakh cr. Sameer Arora of Helios capital says that as per the LIC statute 95% of LICs profits accrue to the policy holders & 5% (~2500 cr.) to the govt.; unless the same is tweaked, LIC might attract a valuation of $35-40 billion only.

While a booming market is the right time for securing better valuations, & hence divestments, investor interest may be weak unless the employee pension liability is taken over by the govt., bad debts transferred to a “Bad Bank” & the Bank Nationalization Act is tweaked to make sale possible.

Consolidation of centrally sponsored schemes: Reduction of 131 centrally sponsored schemes by about 1/3^rd as per the expenditure Secy. TV Somanathan is welcome as it helps focus spends on specific schemes for impact rather than spraying small amounts  across multiple schemes. Former CEA Arvind Subramanyan has alluded to this kitty being about 5% of GDP.

Extension of incentives for Affordable Housing:  Extension of the 1.5 lakh deduction on buying affordable housing, till 31^st Mar 2022, is welcome. If states replicate the Maharashtra govt. lead in reducing registration & premium charges the revitalization of the real estate sector – with the consequent upside in derived demand of steel, cement, sanitary, paints, tiles industries etc. apart from the enhancing jobs market -can be aided.

The Budget Negatives

Military Budget: The Military budget at 4.78 lakh cr. is only about 1% higher than last year, insufficient when we have a belligerent enemy at the Northern gates.

Figs in Lakh Crores	2019-20	2020-21 RE	2021-22 BE	FY22 Vs FY20	FY22 Vs FY21
Revenue Expenditure	2.150	2.195	2.206	2.6%	0.5%
Army	1.468	1.496	1.529	4.2%	2.2%
Navy	0.230	0.249	0.240	4.3%	-3.6%
Air Force	0.315	0.334	0.319	1.3%	-4.5%
Ordnance factories	0.047	0.028	0.024	-48.9%	-14.3%
R&D	0.090	0.088	0.094	4.4%	6.8%
Capital Expenditure	1.110	1.345	1.350	21.6%	0.4%

The Pension bill of 1.15 Lakh cr. & MOD (civil) expenditure completes the total budget

Intriguingly, when there is a drop in revenue expenditure for all arms – hopefully due to manpower rationalisation vide increase in short service commission intake or cost reductions due to outsourcing of  services like transportation, the Army shows a rise – which could invite accusation that the Chief of Defence Staff is displaying favouritism since he is Ex. Army. The R&D spends appear meagre especially when it is universally acknowledged that wars are evolving into the cyber, space & electromagnetic domains

For details please read  

https://meetrk.blogspot.com/2018/04/war-machines-indias-options.html

Launch of a New Cess: The increasing propensity of the centre to launch new cesses – agriculture Infrastructure & development cess of 2.5% imposed in the current budget - is regressive since surcharges & cesses accrue, in entirely, to the central revenue pool with no legal obligation to share with the states -  that goes against the principles of “co-operative Federalism”  

Taxation on Provident Fund (PF) : From 1^st April 2022 employee contributions towards PF beyond 2.5 lakhs per annum shall attract tax. At 12% PF this shall effect employees drawing more than Rs. 1.73 Lakhs per month of basic salary which critics argue could effect only the creamy layer; however there are 2 caveats

(a)Many of the employees contributing above the mandatory PF, vide the voluntary PF, are being disincentivised from contributing & earning tax free interest. However a contribution to Public PF is outside the 2.5L remit & provides an escape hatch.

(b)The New wage code, which comes into effect from 1/4/21, has mandated that the basic salary has to be 50% of the total salary of the employee thereby automatically increasing the PF contribution of the individual & pushing many into the creamy layer.

The 2016 budget proposal of taxing interest accrued on 60% of EPF through rolled back then due to a massive outcry gives a peep into the govt. thought process. Budget 2020-21, incidentally, had already capped the employer’s contribution to PF, NPS & superannuation fund to 7.5 Lakhs. Personal Income tax which was 14% lower than corporate tax collection, in FY 20, is budgeted at a similar fig. of 5.5 Lakh cr. for FY 22.

	2019-20	2020-21 RE	2021-22 BE	FY22 Vs FY20	FY22 Vs FY21
Direct Taxes	10.37	8.93	10.95	6%	23%
Corporate tax	5.56	4.46	5.47	-2%	23%
Income Tax	4.80	4.47	5.48	14%	23%

 

Other  Omissions: Rs 35000 allocation for covid vaccination is welcome. But the cost of procurement of Serum Institute’ “Covishield” is Rs 200 per dose & Rs 280 for Bharat Biotech’s “Covaxin”, India has a population of 138 cr & with 2 doses costing an average of Rs 500 (say) needs Rs. 70,000 cr budget; that only 50% has been allocated indicates that the govt. assumes that either 50% of the population with pay privately or the vaccination shall last over a 2 year period.

There are 1.5 lakh health & wellness centres across the country which the centre had promised to upgrade a few years back.  It would have been prudent had the centre taken the initiative to front load the investment & used those centres as vaccination points in the immediate term & to provide better healthcare outcomes in the long term. Instead, the govt. has increased the insurance budget form Rs 3200 cr. to Rs 6400 cr. indicating its preference for the private model of healthcare.

Conclusion

The budget has kept the stock market happy which could help in govt. securing higher valuations, for PSU privatization, if they hurry the process before another “taper tantrum” – a 2013 redux of the US Fed suggesting a rate rise that triggered outflows form Emerging markets including India leading to a stock market crash & currency depreciation thereof.

The 1992 budget of Manmohan Singh was a “historic budget” that heralded liberalization of the economy & the abolition of the licence quota raj while the 1997 budget of P Chidambaram was a “dream budget” that reduced incomes tax rates to 10, 20, and 30% & reduced custom duties to East Asian levels to spur trade; the current budget is in comparison “workmanlike”. Unlike the governments of the past that balked at using the word “privatization”- using “divestment” instead to temper opposition – the current govt. has displayed courage using the aforementioned word surprisingly, though, only over last 6 months, pregnant with the promise of replicating UK’s Prime Minister Margret Thatcher ‘s moves during the 1980’s. Privatization, though, is no manna from heaven & conflating it with governance is erroneous.