Far-reaching reforms may be inevitable to keep the economy from stalling
India’s deepening slowdown has now left the economy on the verge of stalling. The latest estimates for GDP show year-on-year growth in the April-June period slid for a fifth straight quarter to 5%, the slowest pace in more than six years. Disconcertingly, the mainstay of demand — private consumption spending — slumped to an 18-quarter low, with the expansion decelerating sharply to 3.1%, from 7.2% in the preceding quarter and 7.3% a year earlier.
Gross fixed capital formation (GFCF), a proxy for investment activity, grew a meagre 4%, less than a third of the 13.3% growth it posted 12 months earlier. The RBI had, in its annual report released on Thursday, noted that indicators of GFCF had shown either moderation or contraction in the fiscal first quarter and pointed specifically to gross value added (GVA) by the construction industry, which government data revealed had eased to a 5.7% pace, from 9.6% in the year-earlier period. With demand for manufactured products ranging from cars and consumer durables to even biscuits having sharply diminished, manufacturing GVA growth plunged to an eight-quarter low of 0.6%. In fact, save mining, electricity and other utility services and public administration and defence, all the five other contributors to overall GVA weakened from a year earlier. And as the RBI observed in its last monetary policy statement, consumer confidence gauged by its July survey has worsened appreciably, with 63.8% of respondents expecting discretionary spending to stay at the same level or shrink one year ahead. The comparable reading in June 2018 was 37.3%.
That the government is cognizant of the gravity of the situation is evident from its recent slew of policy pronouncements including tweaks to investment norms to draw more Foreign Direct Investment, moves to relieve the debilitating sales slump in the auto sector and a sweeping consolidation of public banks. Any beneficial impact from these measures will, however, take time to feed into the economy and time is a luxury that the faltering economy can ill afford, especially given the global headwinds. With the farm sector still stuck in a low income trap and this year’s mercurial monsoon rains, leaving some parts flooded and others still facing deficits and engendering a shortfall in kharif sowing, rural demand is unlikely to return any time soon. Also, with the RBI’s four interest rate reductions since the start of 2019 having, so far, failed to incentivise credit-fuelled consumer spending and business investment to any significant degree and with limited fiscal headroom to try and prime the pump with increased expenditure, big, bold structural reforms may be the only way out. The government must lose no time in consulting with the widest possible spectrum, including the Opposition, and then implement the agreed-on reforms prescriptions to reinvigorate demand and investment.
There was a time, not so long ago, when substantive disagreements marked debates on democracy. Minimalist theorists held that democracy is valuable; it enables the peaceful transfer of power through free and fair elections and grants legitimacy to the new government. Those who lose out do not ‘reach for the gun’, they impatiently wait their turn. Maximalist theorists argued that democratic governments are obliged to provide the basic preconditions for a life lived with dignity, from civil liberties to political, social and economic rights. Democracy ensures justice. This is what human beings are owed.
These disputes intensified when democracy expanded dramatically in the aftermath of the Cold War. For international lending agencies insisted that democracy was an essential precondition for financial aid. By the second decade of the 21st century, democrats were in for a rude shock. Even as they were busy debating its finer points, right-wing populist governments, across the world hollowed out democracy. Interestingly, they retained the language. Democracy is, after all, a ‘hurrah’ word. And the crucial question — what the impact of populism on democracy is — was propelled onto the agenda.
The answer is clear by now. Populists appeal to an indeterminate entity called ‘the people’ on two planks, a corrupt elite and an inefficient and useless institutional structure. They have succeeded. The consequences are momentous. Democratic theory holds that power should be vested in institutions and exercised according to procedures. But the populist embodies in his corporeal body the people and the country, the nation and the government. Not surprisingly, such leaders interpret criticism of their policies as anti-national. They respond much as Shakespeare’s Richard III responded to Lord Hastings who dared question him. “Talk’st thou to me of ‘ifs’? Thou art a traitor. Off with his head.”
Populists do not tolerate criticism either from individuals, or from forums of deliberation, such as Parliaments.
Parliaments are not only law-making bodies. They are forums that enable deliberation, encourage mediation, facilitate criticism of government policies, and make possible the hammering out of compromises and the offering of alternatives.
Today, powerful populists hold representative institutions hostage to their own projects of power.
Take the United States. A Republican-controlled Senate has succeeded in blocking progressive legislation debated and adopted by the House of Representatives. Members of the Democratic party, which controls the House since the 2018 elections, have initiated and passed a number of pro-democracy bills. These range from anti-corruption and pro-democracy reform measures, to net neutrality, to equal pay, to health care, to infrastructure, to re-establishing the role of the U.S., in Climate Change negotiations. Once these bills reach the Senate they are blocked by the Republicans. The majority leader in the Senate from Kentucky, Mitch McConnell, refers to himself as the ‘grim reaper’ of legislation promoted by the Democrats. The ‘grim reaper’, recollect, personifies death. It is represented by a skeleton clothed in a hooded cape that carries a scythe.
The Speaker of the House of Representatives, Nancy Pelosi, referred to the federal chamber as a grave of progressive legislation. Repeated stand-offs between the two Houses has led to legislative paralysis. Both parties have assented to a few Bills; for example, the decision to reopen the government after the shutdown initiated by U.S. President Donald Trump. He had shut it down after his request for funds to build a wall on the Mexico border was rejected.
Journalists and organisations allege that the Federal chamber concentrates on confirming Mr. Trump’s nominees to the judiciary. According to Lambda Legal Defense and Education Fund, or Lambda Legal, an American national civil rights organization that supports the rights of lesbians, gays, bisexuals, transgenders, and people living with HIV/AIDs, the President has packed the courts with the appointment of biased judges. The appointments are for life. Reportedly, the President has appointed 144 judges. Regrettably the Senate tradition that members of the minority party will have a voice in decisions affecting their home state has been replaced by rushed confirmations, without proper procedures of enquiry.
In July 2019, despite warnings from former Special Counsel, Robert Mueller, about the danger of foreign powers interfering in the 2020 election, the Republicans blocked an election security bill in the Senate once again. The Bill had been passed by the House of Representatives. A day earlier the Republicans blocked three related Bills. The autonomy of the Congress has been eroded despite the Separation of Powers doctrine.
Crisis of representation
On August 28, 2019, British Prime Minister Boris Johnson made a determined bid to curtail the debating powers of the British Parliament. He announced that Parliament will shut down for five weeks, from September 9 to October 14 of this year. Committed to a no-deal exit from the European Union (EU) on October 31, 2019, Mr. Johnson intended to pre-empt debate on the issue in the House of Commons. Law makers would hardly have time to debate on a fresh proposal, or on the desirability of abandoning the idea of a no-deal Brexit, or on the need to abandon Brexit altogether. Economists have warned the government that the country will descend into economic chaos if it leaves the EU without a deal. But Mr. Johnson persevered. However, he misjudged the political moment.
Last Saturday, thousands of people in the U.K. protested against the prorogation of Parliament. Conservative party members expressed outrage at this constitutional impropriety. Opposition parties moved quickly to thwart suspension of Parliament. On September 3, even as Mr Johnson was reporting to the House of Commons on the G-7 meet, one of his colleagues in the Conservative Party, the former Justice Minister, Phillip Lee, crossed the floor and joined the Liberal Democratic Party. Mr Johnson now runs a minority government.
Another constitutional outrage was committed by the Bharatiya Janata Party-led government on August 5, 2019 in India. On that day the Home Minister asked the Rajya Sabha to approve of a fait accompli, the dismemberment of Jammu and Kashmir which is a constituent State of the Indian federation. No one seems to remember that J&K existed several decades before India became independent and proceeded to integrate over 500 princely states into its territory. Every protocol that the territorial boundaries of an existing State in the federation cannot be altered without the assent of the representatives of the people has been infringed. Parliament, which in its majesty represents the Indian people, has been reduced to a handmaiden of the ruling party. When a democratic and representative institution like Parliament loses power and misplaces its capacity to challenge power, it ceases to represent the interests, the needs and the aspirations of citizens. We are deprived of the right to be represented. The right to participate is neutralized in the process.
Populist leaders have established their sway over large parts of the world.
They speak the language of democracy but their solutions to the problems of the people are rankly authoritarian. Once upon a time, democracy was a subversive term. Anti-feudal and anti-colonial movements deployed the vocabulary in their fight for their freedom. Democratic institutions replaced colonial and feudal bureaucracies. The wheel has turned full circle. We are back to the days of personalized power and suppression of democratic institutions. The person of the executive replaces representative government.
In February 2019, in the wake of the Pulwama attack, India decided to withdraw the Most Favoured Nation (MFN) status to Pakistan; subsequently, it imposed 200% customs duty on all Pakistani goods coming into India. After the Balakot airstrikes, again in February, India and Pakistan closed their airspace, with Pakistan keeping the ban in place for nearly five months. In April, India suspended trade across the Line of Control in Jammu and Kashmir citing misuse of the trade route by Pakistan-based elements. And more recently, post the Jammu and Kashmir Reorganisation Bill, Pakistan cut off diplomatic and economic ties with India — expelling the Indian envoy, partially shutting airspace and suspending bilateral trade.
Escalating tensions between the two neighbours naturally led to the announcement of retaliatory unilateral decisions, one after the other. Like in the past, the impact has trickled down to trade relations between both the countries; this time it is much more severe.
In 2018-19, bilateral trade between India and Pakistan was valued at $2.5 billion — India’s exports to Pakistan accounted for $2.06 billion and India’s imports from Pakistan were at $495 million.
India’s decision vis-à-vis withdrawal of MFN status and imposition of 200% duty has hurt Pakistan’s exports to India, falling from an average of $45 million per month in 2018 to $2.5 million per month in the last four months.
Western border trade
The quantum of loss that has been incurred by traders in both India and Pakistan has varied according to the nature of trade and the trade route. For example, through the Wagah-Attari land route, bilateral trade was heavily in favour of Pakistan; in the last two years, India’s imports from Pakistan accounted for 82% of the total trade through the land route. After February, most of this business has been badly affected with only a handful of items including rock salt, continuing to be imported.
Unlike national economies, border economies owe their existence to crossborder economic opportunities. These economies generally experience a sudden boom-bust cycle on account of political changes, trade bans, price and exchange rate and tax fluctuations. As seen elsewhere in South Asia such as via the inception of India-Bangladesh border haats, the costs and benefits are mutual to the border economies on both sides; much more in cases such as Amritsar where major economic activity is largely dependent on border trade with Pakistan.
Amritsar is land-locked, is not a metropolis and traditionally has no significant industry. Hence, any decision on India-Pakistan trade has a direct impact on the local economy and the people of Amritsar. Since February, according to estimates on ground, 5,000 families have been directly affected in Amritsar because of breadwinner dependence on bilateral trade. Traders and their staff members, customs house agents (CHAs), freight forwarders, labour force, truck operators, dhaba owners, fuel stations, and other service providers are closing shop and going out of business. Of the nearly ₹25-30 crore that was being added to the local economy of Amritsar every month, the estimate now is that three-quarters has been lost in the last six months.
Many a time, upsetting the trade apple cart can have more repercussions than intended. For example, Gypsum, imported from Pakistan, was being used in India as well as in Nepal for the cement plants there. To avoid empty backhauling on the return journey, trucks carrying these consignments brought back specific products such as yarn from mills in Uttar Pradesh to Punjab. In the absence of gypsum trade, the freight rate of trucks from Uttar Pradesh to Punjab, as per the ground reports, has increased from ₹3 to ₹7 per kg, with a single trip absorbing the cost of the entire journey. Earlier, prices of tradeable goods which were kept under check owing to the balancing out mechanisms of international trade, are experiencing fluctuations now because of the trade disruptions.
Pakistan takes a hit too
There is gloom on the Pakistani side too. With Pakistan deciding to completely suspend bilateral trade, exports of cotton from India to Pakistan are expected to be affected the most, eventually hurting Pakistan’s textiles; the lawn industry which will now have to source pricier cotton from alternative markets in the United States, Australia, Egypt or Central Asia; or there is a high possibility that Indian cotton, along with other products, will be routed through third countries such as the United Arab Emirates and Singapore, thereby increasing the share of indirect trade which is estimated to be more than double the direct trade between India and Pakistan.
Hence, while the overall economies of the two countries may very well manage to stay afloat despite the suspension of economic ties, it is the local economies that will suffer the most and are already perishing. In this connection, there has been a loss in business, rise in prices, lack of alternative sources of livelihood, as well as an expected increase in bank defaults. There are also individual cases, for example a CHA in Amritsar, who has no means to pay the equated monthly installment for his home loan, highlighting the hardship of locals dependent on border economies.
In the spirit of nationalism, the trade fraternity on both sides, by and large, has stood by their respective governments. But locals in border economies on both sides have mouths to feed, which calls for a solution. What are the alternative sources of livelihood that can be generated to keep border economies afloat? Is there a sword hanging over the future of other bilateral arrangements such as the transit of goods from Afghanistan through Pakistan into India?
While it’s about damage containment for now, one can only hope that the appetite for trade engagement still remains.
Eastern Economic Forum is an international forum held each year since 2015 in September, at Far Eastern Federal University in Vladivostok, Russ ia, for the purpose of encouraging foreign investment in the Russian Far East.
The Russian president and the Japanese premier have attended this forum since its beginning
National Policy on Biofuels-2018approved by the Government envisages an indicative target of 20% blending of ethanol in petrol and 5% blending of bio-diesel in diesel by 2030.
India is the third largest consumer of energy in the world after China and the US.
Currently, the country is dependent on imports for about 82.1% of its crude oil requirement and to the extent of about 44.4% in case of natural gas.
India is expected to need 10 billion litres of ethanol annually to meet the 20% blending target in 2030 if petrol consumption continues to grow at the current pace. At present, the capacity stands at 1.55 billion litres a year.
Ethanol Blended Petrol (EBP) Programme:
It was launched by the Government in 2003 on pilot basis which has been subsequently extended to the Notified 21 States and 4 Union Territories to promote the use of alternative and environmental friendly fuels.
It aims at blending ethanol with petrol, thereby bringing it under the category of biofuels and saving millions of dollars by cutting fuel imports.
Ethanol Blended Petrol Programme is being implemented by the Ministry or Oil Marketing Companies (OMCs).
This intervention also seeks to reduce import dependency for energy requirements and give boost to agriculture sector.