The Chinese encroach into Ladakh – the 1962 redux?

In May 2020, while the world was distracted by the COVID -19  crisis, Chinese People Liberation Army (PLA) forces encroached into Ladakh, India, at 4 places – Pangong, Hot Springs, Galwan & Demchok, arguably, usurping about 40-60 sq. Kms of Indian territory. The Agreement on maintaining Peace & Tranquility along the Line of Actual Control (LAC), 1993, had thrown up 23 areas of dispute, during the Special representative (SR) meetings, over the years, between the two sides, on resolving border disputes that include Pangong & Demchok but not Galwan & Hot Springs or Naku La, Sikkim - another area where fisticuffs & jostling, between the security forces of the two sides was reported on 9th May -  adding credibility to the incursion theory. Capturing the strategic heights of Galwan, the Chinese forces threaten India’s Darbuk Shayok– Daulat Beg Oldie road – the only road link to Strategic Sub Sector North (SSN), Siachin & access thereon towards the Karakoram pass. Sino-Pak interoperability, in this sector, accentuates India’s security risks. Strategic expert & editor of “Force Magazine”, Praveen Sawhney, avers that the military level de-escalation talks that were held on 2^nd & 6^th June failed because the Chinese had taken Galwan off the table. Other reports claim Chinese unwillingness to withdraw from the mountain spur, finger 4, abutting the Pangong Tso - an 8 Kms ingress from finger 8.  However, unattributed leaks published since 9^th June claim “de-escalation” that runs counter to other reports of troop & equipment build-up indicating that the situation is tense. The absence of a joint statement  buttresses the viewpoint.

General Ashok Mehra, writing in The Wire, opines that "deescalation" could mean thinning of troops & material - tents, boats, guns tanks etc. - without the Chinese either being vacated/evicted from the disputed areas. Former Foreign Secretary & National Security Advisor, Shiv Shankar Menon, refers to the policy of "Two Steps Forward; One step Back" followed by China with a "net gain of one step". They could withdraw from certain areas but still retain certain strategic tracks.

Not surprisingly, the jingoism that marks Indo-Pak border tensions is missing from the discourse & has been replaced by calmer & nuanced positions.  There is a video clip, floating in the internet, of Ajit Doval – before he became the NSA, in 2014, stating that the Gross National Power differential between India & China is 3:1 & perhaps that explains the calm & the keenness to arrive at a negotiated settlement.

Pre Independence British India identified the McMahon line in the East – across Arunachal Pradesh - & McDonald’s/Johnson’s  line in the West – across Ladakh - as the border; the latter was breached, in 1962 & China occupied Aksai Chin – a territory of about 38000 Sq. Kms. With power differential, between the two countries, increasing across decades, the Chinese have resorted to a low cost "creeping acquisition" strategy to gain territory – initially nudging shepherds into “Indian” areas for grazing cattle to be later followed by Chinese patrols & finally the informal mud tracks converted into paved ones achieving a fait accompli.

Why Now? – The Timing of the Transgression

The inscrutable Chinese’s actions have been interpreted thus

(1)Drum Up Nationalism: Former Foreign Secretary, Nirupama Rao avers  that “adventurism & expansionism oxygenates China”; upping nationalism now when  China is suffering global condemnation, on the handling of COVID-19 crisis, helps  drum up support for the Chinese Communist Party & divert citizens attention from the economic downturn, jobs losses  & the consequent brewing subterranean angst.

That China has opened multiple fronts simultaneously – Hong Kong, Australia, US, East & South China Seas & India – which is otherwise a less than rational play, indicates, that China wants a violent skirmish - for invoking Nationalism or force the  enemy to genuflect without a fight & gain territory, thereby conveying an  image of “strength” both domestically & internationally. For the effected nations, though, it is a Catch 22 situation – whether to focus on combating the COVID-19 virus or an external aggressor, nothing short of a virus.

(2)Force Status Quo Ante On Article 370: A ‘disputed” J&K with demands for autonomy/ freedom, by local populace, nicely jelled into the Chinese playbook to keep India engaged in internal turmoil which was negated by the stripping of special status granted under Article 370, on 5^th Aug 2019; China objected to the creation of new Union territories (Federal areas) & carried the issue, along with iron brother, Pakistan, to the United Nations, but failed in securing much diplomatic success.

The mention, by Home Minister(HM), Amit Shah, in a parliamentary debate then, of taking  back Aksai Chin apart from POK (Pakistan Occupied Kashmir) that included Gilgit Baltistan - through which passes the China Pakistan Economic Corridor (CPEC ) – riled China no end as it challenges its strategic, geographic & economic interests; the  Indian Foreign Ministry tried, unsuccessfully, to douse flames by stating that  while internal changes are rights of a sovereign ,  they do not affect the Line of Actual Control (LAC ). An enraged China, ingressed, as soon as the snows melted, in Mar 2020, leading to the current stalemate. Takeaway: Either the HM should not have mentioned Aksai Chin – keeping it in the grey territory to accord plausible deniability - or should have gamed the likely Chinese response before making the announcement since rhetoric that has a potential to enthuse domestic cadre also carries with it likely deleterious foreign policy implications.

Likewise, Defense Minister, Rajnath Singh, inaugurated the strategic 80 Kms long Ghatiabaragh - Lipulekh road - towards the China-India-Nepal tri-junction -in May, creating a foreign policy crisis since Nepal has competing claims over the disputed territory. A low profile inauguration would have been a better choice. India today thus has China, Pakistan & Nepal breathing down its neck & insurgents in Kashmir waiting for an opportunity - a security challenge.

(3)Impede Indian Infra drive across the border: India till the turn of the last century, did not build infra across the Indo-China borders as an area access denial strategy to the Chinese; however, in response to increased Chinese infrastructure build-up reversed the strategy & has accelerated the process over the last few years inviting the dragon’s displeasure. That explains the increased skirmishes across the border over the last decade, accentuated by an undefined LAC.

Ambassador Gautam Bambawale believes that the Chinese incursion is aimed to accelerate the settlement of the festering border dispute. Do the Chinese presume that India of today can concede territory which a more resurgent one, 20 years later (say), shall not?

(4)Remind India of Chinese Red Lines– In May, BJP MPs Meenakshi Lekhi & Rahul Kaswan attended the swearing in ceremony, of Taiwanese Present Tsai Ing-wen, virtually while acting Director General of Indo-Taipei Association, Sohang Sen, was present physically. China might have viewed this as a case of India overstepping a Chinese red line of the “One China Policy” especially when Tsai has been vocal in opposing reunification with China.

Understanding the Chinese Mind:

A deep insight into the enemy’s mind is an essential prerequisite to predict, with accuracy, their likely moves & be ready with a more than proportionate response.  Better still: Pre-empt.

(1)Superiority Complex: Chinese rightly believe that they are a civilizational power but wrongly arrogate to themselves a superiority complex. Sarvepalli Gopal writes that Chinese Premier, Zhou en Lai expressed angst on how India – a third world power - can claims to have introduced a 1^st world power - China - to the Non Aligned Movement (NAM); this insight reveals that, China shall never accept India as an equal & with both of countries poised to leapfrog into preeminent powers, in the later half of the 21^st century, contestation more than co-operation is the likely way forward. The “Chinese dream” of being the numero uno power, by 2049 – commemorating 100 years of Chinese communist party in power – shall accelerate the inevitable.

Shekhar Gupta, of The Print, recollects Prime Minister Vajpayee disclosing that the Chinese, unlike others, do not believe in giving any concessions during a negotiation.

(2)Regime Preservation Through External Aggression: The famine &  people angst thereof consequent to the failure of the Great Leap Forward (1958-62) was diverted by attacking India in 1962, while the world’s attention was riveted on the likely nuclear Armageddon posed  the Cuban missile crisis; Aksai chin – a strategic territory through which the road connecting Tibet & Xinjiang passes through – was secured then. Earlier, anticipating World War II fatigue induced non-intervention, by the global powers, China gobbled up Tibet.  Now, with the world’s attention diverted towards COVID -19, India suffers another loss of territory while other South Easr Asian nations lose their Exclusive Economic zones.

Strategic Expert, Brahma Chellaney, avers that “”Chinese leaders have claimed military pre-emption as a strategically defensive act” & cites as examples their entry into the Korean War, in 1950 & skirmishes with USSR & Vietnam in 1969 & 1979 respectively. The “string of pearls” strategy of encircling India is operationalization of a Sun Tzu dictum: Contain an adversary by making its neighbourhood hostile. Strategic “deception, concealment & surprise” define Chinese actions.

(3)Shi: Michael Pillsbury, a former dove & now a Chinese hawk, in “The Hundred Year Marathon” lays out how the US was continuously betrayed by China. At the heart of Chinese strategy lies “Shi” – roughly translated into an “alignment of forces” which a skilled strategist can exploit to gain victory. This according to Sun Tzu is to nudge enemies to act in ways that work to his advantage. Ex Mao offered China as a US ally in 1969, against the Soviets, mediated by Pakistan & Singapore; Deng launched his charm offensive, in 1979, & induced the West to fund China's rise under the mistaken presumption, that with rising prosperity China would emerge democratic & accord greater respect to human rights.

He also avers that the Chinese strategies are distilled from the deception induced victories of the warring states period (475 BC – 221 AD). Deception & surprise - advocated by generals like Han Xin & Sun Tzu influence their thoughts. In the modern war theatre they have added psychological ops, legal wars & media wars to the mix making it more potent.

Needless to add, India & China are also fighting a civilizational battle. South Asian fables lionize the Pathans & Rajputs for being sticklers to "promises"even if it invites death (Pran Jaye, Par Vachan Na Jaye) -  while the Chinese accord a premium to ‘cunning” as practiced by the founder of the Han dynasty – Emperor Gaozi (Liu Bang). Perhaps, it is a “culture” thing. The clash of communism / “Socialism with Chinese characteristics: versus democracy is another.

India’s Strengths as seen by outside parties:

Huang Guozhi, senior editor of Modern Weaponry Magazine - affiliated to China North Industries Group Corporation Ltd (NORINCO) - in his article thepaper.cn opines that “the world’s largest & experienced with plateau & mountain experience is neither the US, Russia nor any European powerhouse, but India” & points to the 12 division, 2 lakh troop strong mountain division with plans to raise another 0.5 lakh strike force to buttress his argument.  With the highest outpost at 6749 m over mean sea level, in Siachen, the Indians have gained experience in high altitude warfare by adapting domestic weapons to be used across the plateau & mountains & complemented it  by importing from the US - M777 howitzers, to be transported by heavy lift Chinook helicopters & high calibre sniper rifles -  to boost its firepower & anti-armour capabilities. He cites shortage of ammunition & the lack of co-ordination between the Indian Army (IA) & Air Force(IAF) – forcing IA  to independently procure Apache helicopters, for the Army aviation corps (AAC) - as likely weaknesses.

The Harvard Kennedy School’s Belfer centre believes that both India & China have conventional force parity with about 2.25 lakh troops raged against each other. India has about 1.75 Lakh  troops (Including 1000 member strong Brahmos  cruise missile regiment) in the eastern sector,  15,500 troops  in the Middle sector & 34500 (including a 3000 member strong T-72 tank regiment) in the northern sector, forward deployed with a single China defense mission unlike the Chinese forces who are based more deeply inland. China has 0.4 lakh troops in Tibet, 0.7 Lakh troops, in Xinjiang & 0.9- 1.2 Lakh reserves at the Western theatre command at Baoji & Chongqing far away from the border; a significant part of these forces shall be unavailable, reserved as they are either for Russian tasking or combating insurrection in Tibet & Xinjiang.  

The PLA Air Force’s (PLAAF) Western Theatre Command has 157 aircrafts apart from other drone armoury arraigned against India while the latter has 270 fighter & 68 ground attack aircrafts across the three commands – Western, Central & Eastern.  The Chinese J-10 is comparable to the Indian Mirage 2000 & the Su 30 MKI is superior to the Chinese J 11 & Su 27.Furthermore, Chinese fighters constrained by the high altitude, in Tiber & Xinjiang, carry only around half their design payload & fuel unlike the Indian aircrafts that take off from the Indian plains with maximum payload & fuel capabilities.

China does have a superiority in missiles though & the likely attacks on Indian airfields has been gamed by the Indians who have a strategy in place - repaving a blast crater with quick drying concrete, in 6 hours, or using the runway replacement fibre-glass mats to make a quicker turnaround.  The Belfer centre concludes that the India is in a stronger conventional position vis a vis China.

India, thus, is no pushover after all.

Crisis Resolution: Options

The crisis can be resolved in 5 possible ways:

(a)Indian forces push back Chinese forces using firepower; a short duration war

(b)India encroaches on Chinese territory of strategic value & negotiates joint withdrawal of both forces

(c)Diplomatic Arm twisting: In 2013, with Chinese forces pitched tents in Depsang, India conveyed to China that in the unlikely case of Chinese withdrawal the upcoming visit of Premier Li Keqiang would be cancelled. The Chinese fell in line.

(d)Of the 4 areas of encroachments, India requests withdrawal in 1-2 areas & the media channels, in India, claim victory. India agrees to withdraw a notification, passed recently, that tightened takeover norms, for Chinese companies, in India, as an incentive.

(e)US-India-Japan-Australia declare QUAD as a military alliance & invite other South East Asian powers like Indonesia, Vietnam, Philippines etc. to join the alliance in a bid to protect sovereignty.

Option (d) if adopted shall depress India’s standing further; unable to secure Doklam for protectorate Bhutan, in 2017, has led to angst in the Himalayan kingdom. (a), (b) or (c ) if adopted shall help India gain stature with more countries – currently afraid of the dragon’s ambitions - seeking India’s cover. Option (e) is a medium term option & shall involve sacrifices on strategic autonomy. Democracies – 10 (D-10) proposed by UK Prime Minister Boris Johnson & endorsed by US President Trump as an expanded G7 into G10 – including India, South Korea, Australia – is worth joining.

The presence of social media now, unlike the earlier controllable traditional media,  has given the people of Ladakh, an outlet to voice their bitterness at 70 years of Chinese creeping acquisitions, of their lands. Sonam Wangchuk - on whom the movie "3 idiots" was made - suggests a civilian movement - #BoycottMadeInChina" - Software in a week; Hardware in a year - to hurt her, economically, & inspire an internal revolt.Ambassador Phunchok Stobdan, suggests, that the earlier strategy of Indian forces preventing local civilians from travelling into borderlands - to avoid conflict with the Chinese - should be replaced by allotting 'land ownership' to local shepherds, in the frontier areas, who shall serve, in a way, as the first line of defense. Both the suggestions are worth evaluating.

Way Forward

Strategic affairs expect, C Raja Mohan, writes that analysts who attribute the Chinese action to India’s tilt towards the US are wrong; both US allies, like Philippines or Non Aligned Countries, like Indonesia, have been at the receiving end of a Chinese muscular approach. Philippines – under President Duterte embraced China, by terminating an agreement - that let US troops operate from the country - in Feb 2020, while Indonesia did not subscribe to the US view on a “free & peaceful Indo - Pacific” & worked with the ASEAN to craft an alternate moderate viewpoint - to appease China - without success. China claims Natuna Islands, of Indonesia, now - that is outside their nine dashed line that claims nearly 80% of the South China Sea while also including some islands - on which the Philippines has competing claims,-  under a new Chinese administrative district.

Truth be told: unlike in the past, China has military power to make good its claims he avers & quotes Thucydides: “The strong do what they can & the weak suffer what they must”. The solution: Address power imbalance.

Conclusion

Ambassador Ashok Kanta believes that the Chinese have become more assertive & aggressive & the current incursion is neither localized nor an isolated incident. It is likely that the Chinese military has been asked to push back, replicating the performance of their wolf warrior diplomats. Ambassador Bambawale opines that the current SOPs & drills have failed & in the absence of an agreement on the LAC, such incidents could get triggered in future too.

Clearly, India & China - poised to emerge as the preeminent powers in the later half of the 21st century - are into a clash - both civilizational & of the political models they profess. Relationship between these two great powers shall be defined less by cooperation & more of contestation in the years to come; incursion in  Ladakh is just a trailer.

The Chinese respect power though. They tested India in 1967 at Nathu La & suffered a bloody nose & the border has not seen a bullet fired since 1975. The QUAD is hence the military solution for the medium term & market access denial vide D - 10 the other, to hurt the dragon economically. In coastal China lies the manufacturing infra & India should build capability of threatening same to desist Chinese misadventures; setting up a military base in Vietnam to threaten Canton could aid the objective.

India can get greater bang for the buck - use existing power better - by eliminating operational inefficiencies. The blame game, on intelligence failure, between R&AW & IB on one hand & Military intelligence on the other, that led to the Kargil War, in 1999 or in Ladakh now needs to be evaluated. IA not conducting its regular exercises, in the border areas, this year, due to COVID-19, giving the aggressors a free passage is also disconcerting. Such loopholes needs to be corrected at the earliest.

India has global power ambitions but is today barely a regional power unable to tame even Pakistan. India & Russia spend roughly the same amount - about $60 billion annually - on their military as compared to an US spent of over $700 billion & China $179 billion. But none would dare encroach on Russian territory because of its technological competence - that includes missile defense systems like the S-400 or cyber warfare capabilities - despite suffering from sanctions. Therein lies a clue; the traditional logic advocated about India accelerating its GDP growth that would translate into a higher military spent - even at a flat 2% of GDP military spent annually - though important is not all encompassing.

It is time to spend disproportionately on technology by trimming manpower & creating theatre commands of the army, navy & air-force to ensure optimum utilization of resources. While the Belfar centre data alludes to Indian conventional superiority over China, in the contact kinetic domain, Praveen Sawhney emphasizes need for India to catch up in the non-contact kinetic domain (Missiles) & non-contact non-kinetic theatres of cyber, space & electromagnetic domains. In the interim, manage the smaller bully – China – by aligning with the bigger one – US, even while strengthening QUAD Plus & D-10 / G -10.

Imagining International Relations In The Post Corona Virus World

The COVID-19 “shock therapy” shall herald a paradigm shift, in international relations, & the world as we know today shall transform considerably forcing policy makers & diplomats to weave a new strategic narrative. Power shifts are inevitable but the course & timeline uncertainty shall imperil the best laid plans.

The most likely structural changes are as follows

(1)Welcome to a Bi-polar world: The opprobrium faced by the Chief of World Health Organization’s (WHO) Chief, Tedros Adhanom, for apparent delay in gauging the extent of the virus spread, in China,  & warning the world, of pandemic,  only on Mar 11^th tempted POTUS Trump to suspend funding for the WHO – when it needs it most – accusing it of “mismanaging & covering up the spread of corona virus” & insisting on “full accountability”.

The conspiracy theory of China using corruption to wield power disproportionate to its contributions to international bodies does invite traction. The verbal sparring - with Trump calling corona virus the ‘Chinese virus” raised the dragon’s hackles while the Chinese Spokesperson, Zhao Lijian, claiming that the virus might have been spread by the US army while participating in the Military world games held, at Wuhan, in Oct 2019 – ended perhaps, after both countries agreed to a truce – the longevity of which is uncertain. The anti China chorus is reaching a crescendo; even while the on-going Sino-US trade war muddies the water further, the unprecedented initiation of class action suits in the US, against China, Australian demand, pinning down China, by asking for an independent investigation into the origins & spread of COVID-19, demand by the German tabloid, Bild, for Euro 149 billion as pandemic reparation to Germany etc. aided by the increased bellicose tone adopted by Chinese diplomats shall force many nations to choose sides.

Former US National Security Adviser (NSA) HR McMaster writing in “The Atlantic” refers to China’s leaders belief that their revisionist agenda  has a narrow window of opportunity :”before its population grows old”; before other nations realize its true intentions  -“national rejuvenation at their expense”; & “before China’s economy sours”. The Goldilocks moment is in!!

The world in COVID 19 turmoil offers, China, a unique opportunity to emerge as a saviour offering Personal Protection Equipment (PPE), masks, pharmaceuticals etc. & the debt trap inlaid through the Belt & Road initiative (BRI) grants them “client states” – 23 countries, as of 2018, in “debt distress’ of which 8 – Montenegro, Tajikistan, Kyrgyzstan, Mongolia, Maldives, Pakistan Djibouti, Laos “already have unsustainable levels of debt” as per McMaster. With Russia firmly in a Chinese embrace & an ambitious Xi Jinping keen to leave his mark on history a shift to a bipolar world order getting accelerated is inevitable.

(2)The Post World war II architecture under stress:US provides $ 400-500 million, annually, to WHO versus China’s $40 million. While the US action of suspending funding looks inhumane, it is in line with the precedent set by Trump, in 2017, of withdrawing from the United Nations Educational, Scientific & Cultural Organization (UNESCO), in 2017; this action, ironically, helps too, in conveniently distracting voters from his own mismanagement of the outbreak.

The post World War II architecture erected by the US consisted on the United Nations (UN) to handle politics & the Bretton Woods Sisters - World bank & International Monetary Fund - to handle economics. US could impose its world view either by offering access to its huge market - about a quarter of the World's GDP now - or threaten regime changes through a military intervention or make sanctions effective by having dollar as the world's reserve currency & controlling international trade payments through the SWIFT. Edward Snowden's revelations on snooping vide cyber dominance & control on data are other vectors that helped sustain global dominance.

The unilateral US pull-out of the Iran nuclear deal brought the EU, China & Russia together with a desire to move past the US dollar system of SWIFT payments. China - the world's 2nd largest economy & among the top 3 in military might, now has the New Development Bank (NDB) & Asian Infrastructure Investment bank (AIIB) was an alternative to the Bretton Wood sisters apart from State owned banks & hence is prepared to challenge the US. By denying entry to Google, Facebook et al, into China, the dragon created its own global data factories vide Baidu, Tencent & Alibaba & in Huawei has the Telecom resource to enlarge its snooping universe.

An isolationist US, withdrawing from UN institutions & making World Trade Organization (WTO) toothless signals a crumbing edifice on which China would be keen to erect its own.

(3)The European Union (EU) project weakens: Brexit was only a teaser for many of the 27 EU member nations’ quest to reclaim sovereign control on policy issues. Germany being viewed as a hegemon, for its tight fistedness, after the Global Financial Crisis, in 2008, by nations such as Greece, Portugal  etc. & Berlin’s  reluctance, now, to the issue of joint debt under “Corona Bonds” faces opposition from countries  like Italy.

Unless Germany & France take the lead & offer solutions, the internal dissonance could derail the EU project. Meanwhile, China & Russia are relentlessly pursuing an agenda to extend influence westward; China quickly responded to Serbia’s plea for medical supplies just as Russia sent doctors to Italy to help them address the COVID 19 challenges; this soft power play runs parallel to Putin’s cyber power intrusion to influence elections in western democracies & helping support the fringe parties emerge into the mainstream in an attempt to gain influence.

(4)Deglobalization: Governments shall now use the crisis to advocate import substitution, & re-shoring of manufacturing.  Japan has already announced a $2.2 billion fund to wean back Japanese supply chains operating in the Chinese mainland. COVID crisis has exposed the chinks in the national security, of relying on China, for manufacturing or pharmaceuticals, on India. Trump’s “America first” entails winning back manufacturing from China & Mexico & services from India & there is a broad agreement across the aisle, in the US Congress, on the same: regime change - i.e even if Democrats come to power later this year - hence shall not make a difference. India has already been at the receiving end of  H1B visa issues, in the US, & the latest immigration restrictions, for a temporary 60 days, imposed by Trump, is a predictor of things to come. The instinct to protect the supremacy of the White Anglo-Saxon Protestants (WASP) shall likely play out.

With a competitive advantage in services, India has been trying to push for “labour mobility” in trade negotiations & has been suffering a pushback including in the recently concluded RCEP (Regional Comprehensive Economic Partnership) negotiations. Deglobalization is in.

(5)Governments swing “Left” of centre: The communist revolution in 1917 nudged Western Europe towards creating a “welfare state” architecture; “big governments’ to deliver services & arrangement of a social security net followed. A weakening USSR prompted a Republican POTUS, Reagan, in the US & Conservative Party’s Thatcher, in the UK, in the 1980’s, to push for a leaner govt. vide privatization. The breakup of the USSR & the rise of prosperity in China after it introduced “socialism with Chinese characteristics”- a euphemism for Quasi capitalism under a single party rule-  prompted other nations to tread the same path; reluctant ones were nudged by the World Bank & IMF whose undeclared objective was to prise open virgin markets for western capital. Both the Democratic Party in the US & the Labour Party, in the UK, abandoned their “working class” origins & re-crafted their Party’s under Bill Clinton & Tony Blair, in the 1990’s, by moving right of center.

World trade & commerce were encouraged as long as the Western world gained but things have started to change during the last decade. The fear of the world economic epicenter shifting towards the East prompted, surprisingly, another Republican – Trump to champion the working class angst, in the rust belt, to win elections. Likewise, a Tory, Boris Johnson, rides on Xenophobia & job loss fears to break the Labour strongholds in the north. People like Bernie Sanders are now forcing the Democratic Party to rediscover their working class roots. In short, western democracies are turning “left of center”.

(6)Power Grab by aspiring autocrats: Viktor Orban of Hungary has used the crisis to make Parliament grant him sweeping powers – to rule by decree with no expiry date. Having packed the courts with allies, initiating attacks to silence civil society & armed with a law to punish “fake news” he has all the weapons to perpetuate his reign uninterrupted. Democracy & rule of law thus faces its most intense challenge in many countries.

(7)”Privacy”- the collateral damage to save lives : While China is a known surveillance state, many Governments, across the world,  have used this crisis to nudge citizens to download apps to help them dole out health tips, identify COVID -19 infected patients nearby etc. Without safeguards & a data protection law, it could regress into mass surveillance going forward. While this is a “health emergency”, a national security bogey, can be invented later, to push for continued additional surveillance impeding privacy. The EU model of clearly defining the scope of data collected & debarring collectors for using data for any other purpose is the model worth replicating.

Conclusion: Corona virus Crisis is an opportunity for aspiring autocrats – like Hungary’s Viktor Orban - to grab unbridled power & countries like China to nudge the world towards a bipolar world architecture. As recession looms, job losses shall accentuate xenophobia impacting global labour mobility; populist leaders shall resort to protectionism & “big governments” running a welfare state. Some governments could emerge into a “big brother” avatar, enhancing surveillance under the guise of saving lives but with “privacy” the collateral damage.

National security concerns shall prompt reshoring of manufacturing & services & import substitution leading to consumer price rises & perhaps a reduction in consumer choices. Deglobalization is ushered in. As international institutions like the WHO suffer a trust deficit, weakening -  if not outright disintegration of the post-World War II architecture - gets accelerated risking the world getting segregated into disjointed islands. We move from the Before Corona (BC) world, of global connectivity, to After death of Corona (AD) world of relative isolationism.

Corona Virus: The Action Plans

The Novel Corona Virus (COVID 19) emerged from Wuhan, Hubei province, China, end 2019, & as per Worldometer has since spread to infect over 3.16 lakh people resulting in 0.13 lakh deaths (Fatality rate 4.3%). As per the Centre for Disease Control & Prevention (CDC), United States, the virus causes serious illness to 16% of patients while 84% are only mildly effected; furthermore, fatality is high for people across ages with chronic medical conditions – heart, lung diseases or diabetes - & for those aged over 65 years. World health Organization (WHO), perhaps belatedly, has termed it a pandemic only on March 11^th. 

German Chancellor, Angela Merkel, has opined that about 70% of Germans shall be infected by the virus & it is reasonable to assume a similar spread rate in other countries too with the fatality rate linked to the strength of the country’s healthcare infrastructure. Italy, despite having one of the best healthcare infrastructure, is an outlier with a fatality rate of 9% while South Korea is at 0.1%. As per the Financial Times, 23% of Italian workforce is aged above 65 years, the largest in the European Union, & that explains its high fatality rates - 35% of deaths reported in Italy were in the 70-79 age group & 43% in the 80-89 segment. The corresponding percentage of Indians, aged above 65 years, as per the 2011 census, is 5.3% but that is no consolation since the absolute numbers are humongous.- higher than the entire population of Italy - & that makes India extremely susceptible. Likewise, Indians, like Italians largely live with their parents, under the same roof & that could increase chances of infection; as per the same Financial Times article 66% of Italians, aged 18-34 live with their parents unlike 48% for EU.

South Korea, with a population under 6 crores, has avoided massive lockdowns, & conducts about 20,000 COVID-19 tests daily, that helped identify clusters with the highest risk of transmission, to have more focused, targeted action - a different protocol that elicited WHO praise; they rationed weekly face mask sales from pharmacies to contain the pandemic & launched an app that helped identify patients violating home quarantine protocols. As per Business Insider, India with a population of 1.3 billion conducts 90 tests per day, perhaps, to avoid spreading panic & to keep healthcare costs low, buts risks downplaying the extent of the pandemic.

India should learn from the experience of other countries;following is the suggested response:

(1)Protect the Healthcare professionals: Indian Parliament was informed on July 2^nd 2019, that India has a doctor to population ratio of 1:1457 & Nurse to population ratio of 1:675 against the WHO norm of 1:1000 & 3:1000 respectively & hence inadequate. They form the first line of defense & if they crumble we shall, inadvertently, invite a disaster. In the current context - where this pandemic is wreaking havoc worldwide - healthcare professionals from friendly countries stepping in to fill the gap is unlikely, unlike 2014-16, when the world stepped in to help the Ebola struck West African states of Liberia, Guinea & Sierra Leone. Hence the need to provide more than adequate protective gear like - hazmat suits - to doctors & nurses; reports of shortage of N95 masks, if true, is thus disconcerting.

India too was ravaged by the Spanish Flu, in 1918, & as per the BBC killed 17-18 million citizens –about 6% of the population while a third of the world’s population was affected claiming 50-100 million lives. While the flu slowed its advance during summer, it emerged in a more virulent form later & India needs to be prepared for a similar trajectory, as a worst case scenario.

(2)Flatten the curve of pandemic spread: With no vaccine available yet, non-pharmaceutical interventions – like lock-downs & social distancing- are the obvious choices along with a nudge towards a ‘behavioural change” of incorporating basic hygiene of “hand wash” to prevent the spread of the virus. Doctors are now using a mix of anti flu, malaria, anti retroviral, anti HIV drugs - class of drugs known as "Protease inhibitors" - which block a key enzyme that helps viruses replicate, that was used for treating SARS (Severe Acute Respiratory Syndrome) earlier; they could have unintended side effects though. It might take about 18 months for an antidote to emerge & hence the need to flatten the curve to buy time for our epidemiologists to discover a vaccine.

While avoiding fairs, festivals, theatres, schools, public lecture halls & entertainment spaces is a valid ask, the natural propensity of citizens to visit places of worship, during such distressing times, needs to be curbed.

(3)Succor through Public Distribution System (PDS) or Income transfer: 94% of Indian workforce is in the informal sector – many without social security benefits - & the lock-down could eliminate their meagre savings in under a month or two. For basic sustenance, they need to have access to the either of the following

(a)Public distribution system (PDS): Supply basic cereals & pulses, if need be free of cost for 3 months (say). There is a possibility, though of such large congregations of people standing in a line, that violates the principle of "social distancing", accelerating the spread of the pandemic; expecting shortages, if crowds violate queue protocols, deaths vide stampede possible; police force deployed, for maintaining law & order at those locations, too could get infected with the virus, creating fresh law & order challenges.

(b)Income Transfer: Income transfers to the people could lead to a better alternative of maintaining social distancing vide lesser no. of people at each of the mom & pop store across the country to buy food essentials, thereby sustaining the retail trade too. Since India spends about 2 lakh crores on food subsidy - to aid 66% of population, as per the Food Act - & 75000 crores under PM Kisan each year, a quarterly transfer of these moneys, vide Direct Benefit Transfer (DBT), suggested. Handling a pandemic, such as this, is akin to war & if situation worsens, fiscal deficit targets, too, can be loosened. States too should pre-pone DBT of pensions & other welfare program benefits.

The above suggestion, however, assumes that essential supplies – cereals, pulses, milk, vegetables & fruits – can reach each town/village. But it is possible that despite Indian Railways & State Road Transport organizations doing the heavy lifting, the last mile connectivity to each store could still breakdown. Effectiveness of Income transfers is thus contingent on reducing, to the barest minimum, supply chain shocks & the consequent spurt in inflation resulting in increased prices of essential commodities. Furthermore, the 2nd trance of PM Kisan was delayed due to data issues; the problem, if still, unaddressed, makes DBT prone to errors. There still exists a segment of population without bank accounts  & beggars whom the state needs to provide succour directly.

Considering the above constraints, each of the Indian states might have to take an informed call on using a judicious mix of the above two options.

(4)Keep Essential services Going: IT infra to keep healthcare infra & online banking network going is critical. If schools remain closed, beyond the customary summer break, Telecom & the network backbone to run EdTech modules should remain robust. A Business continuity planning (BCP) for organizations in the field of IT, Telecom, banking, utilities etc. is thus critical.

Alternatively, since people above 60 years & under 10 years of age & those with a history of diabetes & cardiovascular diseases are most vulnerable, keeping such people quarantined at home & releasing the rest for duty with an emphasis on “social distancing” & “health hygiene” could be an arguable option. Else, we need to follow the South Korean model of no enforced lockdowns but increasing testing even if it means higher healthcare costs.

Conclusion:

Diseases such as these are now a periodic occurrence: Nipah 1999, SARS (Severe Acute Respiratory Syndrome) in 2003, MERS (Middle East Respiratory Syndrome) in 2012. While India has 1 doctor for 1457 people, averages hide the huge divergence across states; if this virus spreads to the BIMARU states, we are in irretrievable trouble. Investment in healthcare thus becomes a priority.

That the virus is part of a US-China war for supremacy is a conspiracy theory that is as widely circulated as is COVID-19 as nature’s reaction against its tormentors - performing its function of “natural selection” as it did to dinosaurs earlier. Ironically, humans are caged due to a lock-down & animals are moving freely out on the streets & that should prod the human race towards sustainable development. History, perhaps, shall still continue to be defined by the acronyms BC & AD but with a different connotation: “Before Corona Virus” & “After death of Corona virus”; death is an exaggeration here since the virus can always resurrect in a new form later.  A reduction in world population, from the current figure of 7.8 billion & a worldwide recession with consequent job losses, with a potential to head into social chaos, if badly managed, are chilling likely consequences. Optimistically, we shall live, to fight another day; together, we can!!

POTUS Donald Trump’s India Visit: The Takeaways

The 2 day India visit of US President Donald Trump, started at Ahmedabad, on 24^th Feb’2020 & concluded at Delhi, the next day, with a stopover, in between, at Agra – to see the iconic Taj Mahal. Trump, generally, is known to dislike long travel & would not have undertaken the India visit - a 8000 mile, 19 hour trip - if he wasn’t assured of benefits that would aid his re-election bid later this year; having escaped impeachment, he must have been keen to erase bad headlines, resurrect his image & assure his electorate that he is an immensely popular international leader capable of extracting trade/defense deals to “Keep America Great” – his likely 2020 election campaign slogan. Prime Minister, Narendra Modi, did not disappoint, either, by carefully curating the event: feeding into Trump’s ego with supporters & performers lining the streets of Ahmedabad, cheering President of the Unites States's (POTUS) cavalcade, soon followed with a grand reception, titled “Namaste Trump”, graced by a capacity crowd of 1.25 lakhs, at the largest cricket stadium in the world, at Motera. The defense deal worth $3 billion – consisting of 24 MH-60R Naval + 6 AH64E Apache helicopters - signed the next day- makes him a happy man; he would fervently hope that a significant part of the 4.4 million strong Indian diaspora, in the US, largely traditional Democratic Party supporters, would shift to the Republican party, helping him, especially, in the swing states like Florida & states like Texas where the contest appears to be tighter this time round.

“Event Manager’ Modi, rightly, capitalized on Trump’s weakness for flattery & spectacle, perhaps, learning from the Saudis who organized an elaborate “Ardah” sword dance at the Murabba Palace, in May 2017, the French, who  invited the POTUS for the Bastille day celebration, in July 2017, the Japanese, who invited him as the first state guest after the new King Naruhito’s coronation, in May 2019 or the British feted him with a 4 course meal, at the Buckingham Palace, with Queen Elizabeth, in June 2019. That Trump was delighted with the same is evident since he termed his reception “incredible”. The personal admiration was evident when Modi described Trump as a man who “Thinks Big” & the latter reciprocated by describing Modi as an “exceptional leader & great champion of India & my true friend” – during his Motera speech & “religious, calm man” but “strong” & confident that he “will take care of terrorism”, during the presser.

First Lady of the United States (FLOTUS), Melania,, was seen in a white jumpsuit with a green sash with golden threads – ticking 2 of the 3 colors of the Indian national flag; the missing saffron – a Hindu symbol - & the presence of green – identified with Islam - caused a minor internet outrage. Trump's speech, at Motera , however, compensated by ticking the right boxes: he assured that India & US shall jointly fight against “radical Islamic terrorism” while managing a balancing act by saying that “his administration has been working with Pakistan to crack down on terrorists & militants that operate on Pakistani borders” instead of using the words “on its soil”; after all US needs Pak to nudge the Taliban to sign a face saving deal to facilitate American withdrawal from a “very difficult & dangerous part of the world”, Afghanistan, without a loss of face. By proclaiming that every nation has a right to “secure & control its borders” & that the US & India are committed towards working together to “stop terrorists & fight their ideology” he, perhaps, expressed support for the Citizenship Amendment ACT (CAA); his reluctance, during the presser, to be drawn into the CAA issue, calling it “upto India” to handle buttresses the assessment.  He praised India – “a democratic, peaceful, tolerant & free” country” & perhaps drew a contrast with China – that “seeks power through coercion, intimidation & aggression”.

Interestingly, while Trump or Melania did not don their ear phones, while listening to Modi, speak in an unfamiliar Hindi, Ivanka did so & that perhaps highlights 2 issues: his lack of attention to detail unlike Ivanka & explains why she has emerged as his trusted adviser.

The speeches by the two leaders had their hilarious moments caused vide mispronunciations inviting memes galore; while Modi addressed POTUS as “Dolan Trump”, Trump lived up to his reputation with a series of gaffes: “Vivekananda” as “Viveka-mu-nand”,  Vedas as Vestas, “Sachin” Tendulkar as “Soochin”, “Virat Kohli” as “Virot Kolee”,  referring to Modi as “Chi wala” against “Chai vala”(Tea seller) but that is excusable especially when Indians too, while speaking, in their nonnative tongues, fall prey to a similar ignorance. Otherwise, he succeeded in pressing the right notes. His specific reference to Indian achievements in the space field is interesting & that explains why the US, generally, reticent in terms of sharing cutting edge technology, is keen to collaborate with India in the areas of space & drones.

Trumps remarkable stickiness to the script & his “conservative answers”,  calling CAA violence is “upto India” to handle & religious freedom, in India,  is better “relative to other places” would be seen by the ruling Bharatiya Janata Party(BJP) as a foreign policy triumph. The two jarring notes though: Trump’s offer for “mediation” with Pakistan, again, during the press meet - & averring that “Kashmir has been torn between a lot of sides” & “there are two sides to every story” - & his apparent refusal to have the vegetarian fare, including broccoli & corn button samosas, served to him, opting, instead, for non-vegetarian stuff.The Indian foreign policy & political establishment should never forget the negative consequences of a "no liquor" policy followed earlier & should serve food preferred by a visiting dignitary; after all the way to the heart passes through the stomach.

That the relationship has traversed a long way, since the cold war era, is reflected in the Indo-US joint statement’s  reference to a “Comprehensive Global strategic partnership” & “strategic convergence in the Indo-Pacific” & “US-India-Australia-Japan Quadrilateral consultations" - an euphemism to contain China - & the “partnership between USAID & Indian Development partnership administration”, perhaps, to counter China’s Belt & Road initiative, the “Blue Dot network”  & calling on “Pakistan that no area under its control is used to launch terrorist attacks”. While the statement reiterated India’s status as a “Major Defense partner”, the decision to reinvigorate the “homeland security dialogue” between the Indian Home Ministry & the US department of Homeland security & intent to establish a “counter narcotics working group” & “promptly conclude phase 1 of a comprehensive bilateral trade agreement” & expand the energy trade to coking/metallurgical coal – over & above the LNG, oil & nuclear energy already underway - is indeed welcome.

The Trade deal is a work in progress, perhaps, because Modi is a “tough negotiator” but Trump believes that “India is probably the highest tariff nation in the world” & “it has to stop at least as it pertains to the US”. This implies that the trade pressure on India shall continue; the Japanese realized that trade pressure did not cease despite the brilliant Trump welcome they served. Trump “admires” India & calls his visit a diplomacy of “great friendship & respect” with a potential to go places – a “natural beautiful enduring friendship”.

Development of relations, with India, has a bipartisan support, across the aisle, in Washington DC, but the “Howdy Modi” event in Texas, in Sept, 2019 & the “Namaste Trump” event, this month, risk identifying, the Indian govt., closely with the Republicans, leading to a Democratic Party backlash. The last 3 decades, have largely seen Democratic & Republican parties enjoy a 8 year revolving cycle of US Presidentship & it is probable that Trump could get a 2^nd term; however, the Indian foreign policy establishment should evaluate, if the benefits of a closer identification with Trump – who is only “transactional”, in his outlook – is helpful, in the short run, during the next 4 years, is worth imperiling India’s relationship with the Democrats. One fervently hopes that despite trade friction & the apparent unease in the Congress on Kashmir & the citizenship issue, the congruence of values, geopolitics & commerce shall help take this defining relationship of the 21^st century to new heights.

The State of the Economy & Budget 2020-21 Recommendations

India suffered 6 consecutive quarters of de-growth, culminating in a 4.5% GDP growth, in Q2 FY20 & is optimistically expected to clock a 5% GDP growth in FY20 & a 5 - 5.5% growth next year. Incorporating the former Chief Economic Advisor – Arvind Subramanian’s – claim that the growth rate, as per the new GDP series, overstates growth by 2.5%, reveals a shocking  growth rate of 2.5% only, requiring “antibiotics & not painkillers” as per the former head of the Prime Minister Economic Advisory council (PMEAC), Rathin Roy.

With nominal GDP at 7.5% & borrowing rates around 10%, there is no economic logic to seek credit for expansion. Furthermore, with capacity utilization trending between 72-76% (68.9% only in Q2FY20, 73.7% in Q1 FY20, 76% in Q4 FY19 as per RBI – Reserve Bank of India) there is no incentive for expansion, especially when assets are available at a steep discount, vide the Insolvency & Bankruptcy code (IBC).

Crony capitalists raided the banking network till 2014, & after Governor Raghuram Rajan instituted the Asset Quality Review (AQR), in Dec 2015, & put 11 PSU Banks under Prompt Corrective Action (PCA) - effectively debarring them from lending - they started raiding the Non-Banking Financial Companies (NBFCs) instead & the party ended with the Infrastructure Leasing & Financial Services (IL&FS) crisis, in 2018, prompting de-growth. This, perhaps, is a bigger root cause to decelerating growth as compared to Demonetization or a “faulty GST”. The Indian Banking, Finance Services & Insurance (BFSI) sector is thus fragile & “Loan melas” & “mudra loans” could only kick the can down the road.

The Periodic Labour Force Survey (PLFS), conducted by the National Sample Survey Organization (NSSO), pegs unemployment at 6.1% in FY18, a 45 year high. However, new jobs generated, as per NSSO, during FY2000 - FY2005 was 6 crore while FY 2005 - FY2012 was 1.5 crores only, indicating that India has been facing a problem of lack of good employment opportunities for quite some time, perhaps, because Indian Industry is more keen on putting up capital intensive rather than labour intensive industries, raising the spectre of the “demographic dividend” turning into a “demographic curse”, with the attendant consequence of social strife.

Faced with such a bleak economic commentary, RBI opened up the monetary policy tap, with a 135 point reduction in repo rate, in 2019, but faces issues of transmission; with current Repo rate at 5.15 % & inflation at 7.35%, in Dec 2019, RBI will be forced to pause. Furthermore, savings rate dropped form 37.8% in Mar 2008 to 30.5% in  Mar 2018 & hence the need to maintain a  Real interest rate of 1 - 1.5% - a good compromise between the needs of the depositors & the borrowers, even while the latter could demand a negative / zero real rate of interest.

Sector wise Health Matrix

The auto sector is facing stress with de-growth in sales starting, Oct 2018, roughly coinciding with the onset of the IL&FS crisis, impacting consumer credit to auto sales; this is also in line with the global secular trend of reduction in auto sales because millennials’ prefer ride hailing apps over auto ownership. Rajiv Bajaj, of Bajaj Auto, avers that increased insurance costs implemented from Sept 2018, making of additional safety features like Anti Braking System (ABS) mandatory, since Apr 2019 & the proposed leap from BSIV to BSVI, from Apr 2020, leading to at least a 30% hike in vehicle costs explains slowing sales in 2 wheelers. It is probable that the weak economic sentiment coupled with job losses & a wait for better electrical vehicle offerings are other causes forcing customers to postpone purchase. Auto sector contributes 15% to GST & 7.1% to GDP. While manufacturing contributes 15% to GDP, Auto at about 47% of manufacturing is critical to the health of the economy, impacting derived demand products: steel, tyre, paints, carbon black etc.

While the rise in protective tariffs & the resolution of stressed assets like Essar & Bhushan steel, vide Insolvency & Bankruptcy Code (IBC) has somewhat helped alleviate suffering of the steel industry, the pain in the power, aviation, telecom, BFSI, Real Estate  etc. sectors persists.

With states like AP dishonoring Power Purchase Agreements (PPAs), in lieu of buying solar power, at discounted rates, power plants running on fossil fuels, like coal, are seeing low utilization & could emerge as the next Non- Performing Assets (NPAs). The centre mandated opening of a bank guarantee/Letter of credit by discoms, in favour of power generating companies, since Aug 1^st 2019, to avoid addition to Rs 41,747 crores of outstanding dues, is impacting demand & generation. In the aviation industry, Jet & Indian Airlines are on the block while Indigo is facing headwinds. In the Telecom industry, Vodafone-Idea is threatening to throw in the towel. As per Knight Frank, India’s top 7 cities have 42 months of unsold stock of flats, end Q2FY20, an indication of the precarious situation in the real estate industry; while the govt. has announced a Rs 25,000 crore real estate fund, the quantum of unfinished projects in the top 7 cities alone is worth 4.6 lakh crores. The sordid list continues indicating that the economic recovery, with so many industries in the Intensive Care Unit (ICU), is way off.

With traditionally heavy capex spenders, like Reliance, busy deleveraging their balance sheets, expecting Indian industry to revive with a rise in private investment is foolhardy. Creating a “bad bank” as advocated by some, to accelerate credit,& hence investments, could actually be counterproductive when capacity building on project appraisal skills or erection of Chinese walls, between the govt. & the BFSI sector – to prevent “phone banking”- an euphemism for cronyism - have not been implemented yet. With low capacity utilization & with a weak demand scenario, characterized by diminishing consumption, the Indian private sector will be loath to invest, forcing the govt. to do the heavy lifting, for at least the next 4-8 quarters. Unless domestic demand rises, foreign investors too would prefer a “wait & watch” mode & hence foreign direct investment (FDI) too cannot come to the rescue.

Perhaps, because of the listed headwinds, the govt. increased custom duties, during the last few years, emerging into a “protectionist avatar” - maybe for some time - to increase capacity utilization.

Against this bleak economic scenario, it is important that the center release pending dues to the states so that states are not forced to cut expenditure which otherwise would accentuate a negative spiral of de-growth. This is critical since the combined budgets of all states is more than the central budget. Suggest the following further for reviving the economy:

(1)Revive Consumption:

Ideally a loose monetary policy is complemented by a tight fiscal policy but the current extraordinary situation, perhaps, demands a Keynesian stimulus. However, Sajid Shenoy, of JP Morgan, estimates the fiscal deficit of the centre (3.3% of paper but could be closer to 4.4% as per Rathin Roy), states (2.6% budgeted but could rise to 3% this year) & off balance sheet items at 9% leaving little fiscal space. However, a higher fiscal deficit, if used for capital spending, is still defensible. Fiscal & monetary taps opened up simultaneously, without structural reforms, though, would invite stagflation – high inflation & low growth. Hence the need for a loose monetary & fiscal policy with structural reforms, to prime growth, to be slowly moderated after 4-8 quarters. As structural reforms yield results only in the medium term, demand & consumption revival is the immediate ask by placing money in the hands of the citizens of the lower quartile of society who would perhaps, spend the entire amount on consumption, unlike others who shall have a greater propensity to save, more so during times of economic distress.

During the last 5 years, with investment & exports being weak, consumption emerged as a saviour which has since started weakening; Consumption has dropped to 57% of GDP & hence a need for revival. Rural demand can he enhanced by spending more under Mahatma Gandhi Rural Employment Guarantee Scheme (MNREGA) but knowing Modi’s disdain towards the scheme, it is unlikely to be approved. He could very well spend under “Har Ghar Nal”.

Modi had promised tap water, to all households, as part of his 2019 manifesto. Bringing river water vide canals to all villages/cities is capital intensive & the govt. – of all hues - record on relief & rehabilitation of the displaced has been pathetic.  Furthermore, climate change has led to the emergence of extreme climates. To address both the objectives, lakes can be dug, on govt. land, in the outskirts of villages/cities from where piped water can be provided to the nearest catchment under “Har  Ghar Nal”. The presence of these new water bodies shall serve as sinks to rain water/floods & moderate climate. Suggest a spent of Rs 50,000 crores, every year for the next 3 years, under this head.

Ideally, Direct Benefit Transfer (DBT), of the Rs 75000 crores, currently spent as fertilizer subsidy, directly into farmers accounts could help but transfers under PM Kisan have been tethered to clean up the database of beneficiaries; likewise, DBT of the 1.84 lakh crores spent as food subsidy. However, since the political economy was kept greased vide these subsidies, interest groups would torpedo moves towards DBT.

(2)Revive Investment: Investment rate dropped from a peak of 41.2% in Q2FY12 to 29.7% in Q2FY20. With Indian BFSI sector fragile, either FDI or govt. spending has to come to the rescue since the Indian private sector is unlikely to display the appetite for reasons explained earlier.

The govt. can raise revenues vide divestment with the promise that the entire proceeds of asset sales shall be used, entirely, for building new assets to avoid the accusation from the opposition of selling “family silver”; it is a case of selling one asset to erect another with the bonus of creating additional employment, they could reason. The Govt. has never achieved divestment target beyond Rs 1 lakh crore but needs to target an ambitious fig. of at least 1.5 lakh crores, during FY 21.

The reduction of taxes for manufacturing to 17.17%(15% basic Tax+10% Surcharge+4% education cess) for companies incorporated started after 1^st Oct 2019 & starting production by 31^st Mar 2023, meant to attract new supply chains from abroad, taking advantage of the US-China trade war, would be a slow burn, especially due to investor caution on slowing demand & news regarding social strife, in India, courtesy issues, like CAA-NRC & states like AP reneging on contracts.

It is important to learn lessons from Vietnam - the greatest beneficiary of shifting supply chains from China. Vietnam- with a GDP 1/12^th India’s, has exports 75% of India’s in 2018 against 6% in 1960 & 34% in 2000. The Prime Minister should task his commerce minister with a one point agenda: bring supply chains to India -a "once in a generation" opportunity" as per Dr Arvind Virmani.

(3)Exports: While an export policy comes under the realm of the Commerce Ministry, the FM should arrange for zero rating of exports, under GST, to prevent working capital lock up due to delayed refunds. However, this too shall come under the remit of the GST council & outside the budget.

GST revenues at around 1 lakh crores per month against 1.2 lakh crores target – about 20% shortfall. Arvind Subramanian recommended a revenue neutral rate of 15.5% while the average realization, at launch, was 14.4% which has progressively dropped to 11.6% (~20% shortfall), since govt. reduced GST rates for interested parties, for short term gains, before state elections – 5% on food before Gujarat elections etc.; Increase in GST rate to 15.5% - with 3 slabs –could be a recommendation to the GST council, to be implemented, only after the economy has started looking up.

(4)Infrastructure Focus: The govt. has already announced, in Dec 2019, that they plan to spend $102 lakh crores during the next 5 years on infra – 25 lakh crores in power, 20 lakh crores in roads, 14 lakh crores in Railways etc.; the FM could explain in the budget how she plans to raise resources for funding the same. Budget FY20 announced a capital spend of Rs 0.64 lakh crores for Railways & Rs 0.68 Lakh crores for Roads & Highways; this can be increased to Rs. 1 lakh crore each.

The govt. should announce a spend of Rs 25000 crores, with a matching contribution by the states, to buy new electric buses which shall not only help the auto sector but also the  steel, tyre & carbon black revival; better public transport & last mile connectivity shall also have positive environmental consequences.

(5)BFSI Reforms: With bank mergers announced, integration of all PSU general insurance companies the next step; listing of Life Insurance Corporation (LIC) could net additional revenues but since LIC is forced to emerge as a white knight to rescue the govt. in its divestment targets, impacting valuation, listing may be delayed.

It is time to clean up the mess in private banks like Yes bank; reforms in the shadow banking network – NBFCs – co-operative banks should happen over the next 5 year.  Announce Rs 25000 crores as a financial sector safety fund. Perhaps, additional allocations would be needed in the subsequent years too to nurse the sector back to health.

That Banks are reluctant to lend is buttressed by about 4 lakh crores lying under reverse repo. To address the issues of “phone banking” & Asset liability mismatches encountered by banks in project finance, suggest the following options:

(a)Revive Developmental Financial Institutions (DFIs) like the erstwhile ICICI, IDBI, IFCI etc. suggests Sajjan Jindal; Vinayak chatterjee, of Feedback Ventures,  suggests govt. contribute 2 lakh crore equity & raise 8-10 times that amount vide debt to achieve the purpose. Moneylife’s Sucheta Dalal, however, reminds us of the run on DFIs, in the 1990’s, by companies like Essar, Jindal, Usha etc. & challenges its viability

(b)Encourage creation of private DFIs with stakes held by international pension funds, sovereign wealth funds etc. to deter “phone banking”. Hopefully, they display more professionalism.

(c)Deepen corporate debt market & debar PSU banks from subscribing to corporate debt beyond 20% (say) of issue size.

(6)Encourage FDI:  The “dirty dozen” firms that were the first to be brought to the IBC, for resolution, were all run by Indian promoters, who caused Indian banks much harm unlike foreign firms, like HUL, Nestle etc. India attracted $61 billion of FDI last year – about 2% of GDP; perhaps time to increase it to 4% of GDP by Increasing FDI limit in Insurance from 49% to 74% & 100% under automatic route for all sectors except sensitive ones like defense.

(7)Reduce PIT: Reduction of corporate tax has led to a clamor for reducing personal income taxes (PIT) to ensure parity. As per an IMF paper, only 20% of tax savings, post reduction in corporate taxes in US, to 21%, has flowed into investments & the scenario is unlikely to be different in India; perhaps, the govt announced the measure as a hedge against joining Regional Comprehensive economic Partnership (RCEP).

Reducing personal income taxes, especially, during these times when tax collection is under stress is generally, thus, not a recommendation. However, reduction of taxes in the lower slab & compensation by introducing 35% & 45% slabs could be attempted; however, GOI would prefer continuance of surcharge & cess since they are not part of the divisible pool with the states.

With a rebate of Rs 12500, on incomes between 2.5 – 5 lakhs, no citizen with an income under 5 lakh pays tax while the 5-10 lakh slab attracts a 20% tax, which could be reduced to 10% to spur consumption. Promise a road map of reducing the tax, on incomes between 10 - 25  lakhs, from 30% to 20%, next year & recover losses by introducing higher tax slabs. Direct Tax Code, could be a better alternative, at simplification & removal of exemptions,  but since all governments, want to play God, on budget day & having experiencing the loss of power, post indirect tax reform with GST launch, no central govt. is likely to play ball. Therefore the proposed slabs

Income Tax Slabs	Current	Proposed
2.5-5 lakhs	5%; Rebate of Rs 12500/- ensures zero tax	Retain
5-10 lakhs	Rs 12,500 + 20% of income over 5 lakhs	Rs 12500 +10% of income over 5 lakhs; to be announced for FY21
10-25 lakhs	Rs 1,12,500+30% of income over 10 lakhs	Rs 1,12,500+20% of income over 10 lakhs; to be implemented from FY22
25-50 lakhs		Rs 4,12,500+30% of income over 25 lakhs; to be implemented from FY22
50-100 lakhs	Rs 1,12,500 +33% of income over 50 lakhs. 33% is due to a 10% surcharge over 30%	Simplify with a  35% slab
100 -200 lakhs	Rs 1,12,500 +34.5% of income over 50 lakhs. 34.5% is due to a 15% surcharge over 30%
200-500 lakhs	Rs 1,12,500 +37.5% of income over 50 lakhs. 37.5% is due to a 25% surcharge over 30%	Simplify with a 45% slab
500 lakhs & above	Rs 1,12,500 + 41.25% of income over 50 lakhs. 41.25% is due to a 37.5% surcharge over 30%
Currently a 4% Health & Education cess is applicable on all the slabs which needs to be eliminated

With no "wealth tax/Estate" tax in India, the 45% tax slab is not quite as regressive as it is generally made out to be.

Conclusion: India is facing a “silent fiscal crisis” as per Rathin Roy & the next 4-6 quarters are going to be a trial by fire; the Finance Minister can emerge victorious by unleashing steps, at demand revival, in the short run - vide DBT, spent of Rs 50,000 crores under "Har Ghar Nal", Rs 1 lakh crore each under Railways & Roads & Highways (against 0.64+0.68 Lakh crores budgeted last year), Rs 25000 crores for buying electrical vehicles with a matching contribution by the states etc. - & allowing, structural reforms - lower corporate taxes, opening up of FDI, factor market reforms etc. - to fire in the medium to long term. Adroit handling, is a prerequisite, & that shall determine if India emerges as a global powerhouse like Japan, South Korea or China or an “also ran” like Turkey, Brazil, Thailand or South Africa.

Welcome 2020!!

As we bid adieu to tempestuous 2019, we note,
US Congress impeach Trump, British Johnson vote,
Brexit, closer to reality, EU headwind trouble,
Even as Amazon fires turn it to savanna rubble.

Closer home, Modi wins handsomely & Article 370 goes,
Supreme Court Green lights Ram temple but economy slows,
CAA protests, in North-East, against granting citizenship to Bengali Non-Muslims,
While National NRC protests, against likely citizenship withdrawal to Muslims.

Pak-Turkey-Malaysia crescent axis created,
Pak-China iron brother hood further cemented.
Nepal with communists, Lanka with Chinese leaning Rajapaksas' lunge,
NRC fraying relationship with Bangladesh & Afghanistan, a foreign policy challenge

Right wingers, Bolsonaro, in Brazil & Viktor Orban, in Hungary, earlier  win,
Taking advantage of slowing growth & increased xenophobia sin,
Muslims interned in Chinese Xinjiang & Myanmar Rohingyas' driven out,
Force Nobel laureate, Suu Kyi, to defend herself in an international court bout.

Arabs, Kurds, Turks & Persians fight; Middle East burns,
A Yemeni Houthi attack on oil fields, Saudi Arabia earns,
Iran-US skirmishes increase, US withdraws from Syrian perch,
Allowing Turkey to displace Kurds, US leaves allies in violent lurch.

People's movements evict strongmen in Sudan & Algeria for a song,
While Student Protest extradition to China, in Hong Kong,
In Iraq, Iran, Chile, Nicaragua, Bolivia, Russia people on street,
Non peaceful, people movements explode, as we 2020 greet.