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The Hindu Editorial Analysis | PDF Download

Date: 08 February 2019

 

Governing India’s many spaces

  • Ill fares the land where wealth accumulates, but the social and natural environment suffer
  • As the general elections approach, it would be politic to take stock of the progress made by the incumbent party and look out for the areas that call for particular attention by the one that gains power. Without anticipating complete agreement on the indicators that ought to be used, I look at the changes since 2014 in three indices for India.
  •  These are the indices of the ‘Ease of Doing Business’ (EDB), ‘Human Development’ (HDI) and ‘Environmental Performance’ (EPI). They are self explanatory, and their importance unlikely to be contested, even though they may not exhaust all concerns. Published by separate international bodies, they are used to rank the world’s countries according to their performance in the related sphere. Rankings by themselves do not reveal the level of attainment but they do convey how far a country is from the global frontier.

The business ecosystem

  • The EDB, an indicator put out by the World Bank, is meant mainly as an index of the effect of government regulations on running a business.
  • It is also meant to reflect the extent of property rights in a society. Responses are sought from government officials, lawyers, business consultants, accountants and other professionals involved in providing advice on legal and regulatory compliance.
  • A country’s ranking is based on the extent to which government regulations facilitate the following: starting a business, obtaining construction permits, getting an electricity connection, registering property, accessing credit, protection of investors, paying taxes, trading across borders, enforcement of contracts and resolving insolvency. The Narendra Modi government has set much at store by India’s improved ranking in terms of the EDB index. Actually, the improvement is considerable. From a rank of 134 in 2014, India’s rank improved to 77 in 2018. As 190 countries were ranked in 2018, India was in the top 50%. The position is not spectacular but the improvement is, as said, noteworthy.
  • It is important to note that the use of the EDB has not been without controversy, with the World Bank’s Chief Economist, a Nobel Laureate, suggesting in an interview that in the past political bias may have crept into the ranking of countries.
  • Let us for a moment overlook this episode and assume that in the case of India the ranking reflects reality. Perhaps a bigger problem with the EDB is that it measures the effect of government regulations alone. While it is important to take this aspect into account, in any situation the ease of doing business is dependent upon other factors too. One of these is the availability of ‘producer services’, with electricity, water supply and waste management coming to mind. There is little reason to believe that this infrastructure has improved in India in the last five years. The Planning Commission used to release data on infrastructural investment, but we have had none since its demise. Despite all these shortcomings, it is yet important to be concerned with the ease of doing business in India, an aspect that has been given little or no importance in public policy for over 50 years, and to note that the EDB ranking for the country shows significant improvement since 2014.

 

A true measure

  •  We may turn next to the better known Human Development Index. It is the result of a rare India-Pakistan collaboration in the global discourse on public policy, having been devised by Amartya Sen and Mahbub ul Haq for the United Nations Development Programme.
  •  The HDI is a combination of indicators of income, health and education in a country. Its conceptual basis has been critiqued.
  •  First, it has been pointed out that the index combines incommensurate categories, as income, health and education are not substitutes.
  •   Second, while it does go beyond purely economic measures of progress, in that it looks at the health and education achievements in a population, it can say little about the ‘quality’ of development.
  •   As pointed out by Selim Jahan of the UNDP, data can “[tell] us only a part of the story about people’s lives. For instance, it is increasingly clear that it is not enough simply to count how many children are in school: we need also to know whether they are learning anything.” He could have had India in mind!
  • Nevertheless the HDI has now gained reasonable acceptance globally as indicative of the development strides a country has taken. When we turn to the HDI, we find that India’s ranking has not altered since 2014.
  • India was ranked 130 in 2014, and has remained in the same place out of 185 countries in 2018.
  • It is of relevance here that India’s HDI ranking has not improved despite it being the world’s fastest growing major economy in recent years, as the government often points out in its assessments. This despite income being a component of the index.
  • What this reveals is that an economy can grow fast without much progress in human development. Also, India’s HDI position in the bottom third of countries points to how much it needs to progress to earn the label ‘the world’s largest democracy’.

Environmental costs

  • Finally, we may look at India’s recent record on the Environmental Performance Index. The EPI is produced jointly by Yale and Columbia Universities in collaboration with the World Economic Forum.
  • The index ranks countries on 24 performance indicators across several ‘issue categories’, each of which fit under one of two overarching objectives, namely, environmental health and eco-system vitality.
  • The issue categories are air quality, water and sanitation, water resources, agriculture, forests, fisheries, biodiversity and habitat, and climate and energy.
  • These metrics are meant to serve as a gauge at a national level of how close countries are to accepted environmental policy goals. In 2018 India ranked 177 out of 180 countries, having slipped from an already very low rank of 155 in 2014. The country is today among the worst performing on the environmental front and its ranking has worsened over the past five years.
  • We now have indicators of the progress India has made in the past five years in the three crucial spheres of business, human development and the natural environment. A clear picture emerges.
  • The government has aggressively pursued an improvement in the business environment. This appears to have yielded fruit in terms of an improvement in the EDB index.
  • However, at a time when it has been the fastest growing economy in the world, India’s rank on human development has remained unchanged and on environmental performance has slipped close to the last place.
  • These outcomes would not surprise anyone familiar with public policy since 2014. The Narendra Modi government has marginally lowered health and education expenditure as a share of national income and distinctly lowered environmental standards.
  • An instance of the latter would be the Coastal Regulation Zone Notification of 2018 which allows construction and tourism development on land earlier considered inviolable due to its ecological value. This de-regulation is a setback for India. It is only one instance of the failure to recognize the plunder of India’s natural capital taking place at an accelerated pace. Political parties now fervently making a pitch to govern India must indicate how they will reverse it. Ill fares the land where wealth accumulates and nature frays.

The road to peace runs through Tehran

  •  The Iranian card could help India enhance its role in stabilizing Afghanistan
  • Even if an American military pullout from Afghanistan is on the cards, the U.S. will want to leave behind a stable country. And any peace settlement in Afghanistan will stand a better chance of staying on the rails if it is supported by regional powers. In other words, ties between Afghanistan and its neighbours, including Iran, will impact the security of southern and western Asia. Like India, Russia, China and the U.S., Iran would want to see a steady hand at the helm in Afghanistan. While lacking military influence, India can build on its good ties with the U.S. and Iran to secure Afghanistan.

Iranian continuity

  • Iran is not a newcomer to regional diplomacy in Afghanistan. First and foremost, India should try to dissuade the U.S. from dealing with Iran, Russia and China as enemies. In fact, U.S. President Donald Trump’s perception of all three as foes is at odds with America’s earlier engagement with them to end its military campaign in Afghanistan. For instance, from 2014 to 2016, Washington and Moscow quietly arranged talks on the Afghan peace process. The meetings, known as the 6+1 group, included representatives from Afghanistan, China, India, Iran, Pakistan, Russia, and the U.S. The 6+1 process assumed that each of these countries was essential to the achievement of a political settlement in Afghanistan. Moreover, last November, the U.S. and the Taliban joined for the first time the Russia-hosted conference in the hope of promoting a negotiated solution to achieve peace and national reconciliation in Afghanistan.
  • Regional powers could put their weight behind a negotiated settlement that will ensure Afghanistan’s stability. Iran, Russia and China — and the Central Asian states with which India and Afghanistan wish to cooperate in countering terrorism — fear that continued instability in Afghanistan could spill over into their countries. India will also be adversely affected if negotiations break down. In that event, extremist exports from Pakistan to Afghanistan or India would probably increase.
  • It could be worthwhile for India to explore the Iranian diplomatic options to secure Afghanistan. On good terms with Tehran, New Delhi would gain by developing the Chabahar port in southern Iran.
  • And looking beyond Chabahar, India, Iran and Russia were the founding countries of the International North-South Transport Corridor project — as long ago as 2002.
  • The corridor is intended to increase connectivity between India, Iran, Russia, landlocked Afghanistan and Central Asia — and Europe. It would also advance their trading interests.
  • India could remind Washington about the past coincidence of American and Iranian interests on Afghanistan. Together with the U.S. and India, Iran supported the overthrow of the Taliban in 2001. In the international negotiations which followed in Bonn that year, Iran supported the installation of Hamid Karzai as President and favoured the exclusion of the Taliban from his government.
  • Admittedly, U.S.-Iran ties have often been fractious. As the U.S. imposed sanctions on Iran after 2005, Iran saw the Taliban countering American influence on its borders and gave them arms.
  • Iran continues to oppose the U.S.’s presence in Afghanistan, largely because it fears that American troops in Afghanistan could be used against it. To allay Iranian fears, Afghanistan recently said that it would not allow the U.S. to use its bases in the country to conduct any act of aggression against Iran.
  • Last December, Iran also held talks with the Taliban with the knowledge of the Afghan government. But it should assure Kabul of its good intentions. In recent months Afghan officials have accused Iran, which the U.S. says is trying to extend its influence in western Afghanistan, of providing the Taliban with money, weapons and explosives. Iran denies the charge.
  • The U.S. and Iran could be advised of the mutual, and regional, advantages of improving ties. Such advantages could range from stability in Afghanistan, and beyond, to increased trade prospects, especially in South and West Asia.

Win-win prospects

  • Iran could gain by strengthening trading ties with a secure Afghanistan. In 2017 it supplanted Pakistan as Afghanistan’s largest trading partner. At a time when Iran’s economy is weighed down by American sanctions, it would want to build up trade ties with neighbouring states.
  • The U.S. would also gain. After all, Iran is the geopolitical hub connecting South, Central and West Asia and the Caucasus. The Strait of Hormuz, that crucial conduit, links Iran westwards to the Persian Gulf and Europe, and eastwards to the Gulf of Oman, South and East Asia. Moreover, an improvement in U.S.-Iran relations would be welcomed by America’s European allies, who are opposed to Washington’s unilateral sanctions on Iran.
  • The U.S. should not lose the chance to act in concert with Iran to improve Afghanistan’s security. And, as the U.S. airs the idea of withdrawal from Afghanistan, now is the right time for India to act as the honest broker between them and to play a larger role in regional security.
  • The status of India and Iran as regional powers as well as the stability of South, Central, and West Asia would simultaneously be enhanced. It is to be hoped that Mr. Trump’s display of America’s “superpower” in opposition to Iran — and Russia and China — will not block such an opportunity to stabilize Afghanistan.

 

Growth prop

  • As the RBI cuts the benchmark repo rate, concerns over the fiscal deficit remain
  • Barely four months after the Reserve Bank of India switched its monetary policy stance to one of ‘calibrated tightening’, signaling  interest rates were set to trend higher, it has reversed direction. Not only did the RBI’s monetary policy committee unanimously opt to revert to a ‘neutral’ posture, but the rate-setting panel unexpectedly decided, by a 4-2 majority, to cut the benchmark repo rate by 25 basis points, to 6.25%. The MPC’s reasoning has been fairly straightforward. With Consumer Price Index-based inflation having continued to slow and projected to stay well below the medium-term target of 4% till at least the October-December quarter, the MPC saw an opportune moment to pivot to a growth-supportive stance. That there is a need to bolster economic momentum is evident from the RBI’s downward revision of the forecast for growth in the first half of the next fiscal year. The projection has been lowered to a range of 7.2-7.4%, from 7.5% posited in the RBI’s December statement, as moderating global growth and slowing overseas demand add uncertainties to the prevailing domestic imbalances. Specifically, production and import of capital goods, which is a key gauge of investment demand, contracted in November/December and credit flows to industry remain muted. With an overall shortfall of 4% in rabi sowing across various crops, and storage in major reservoirs at just 44% of the full level, the slowdown in farm output growth may, worryingly, end up being more protracted.
  • The less-than-sanguine outlook for the rural economy is also reflected in the high-frequency indicators of the services sector.
  • Data on sales of both motorcycles and tractors in December underscore weakening demand in the hinterland. This weakness in the farm sector is undergirding the unprecedented softness in food prices. The December CPI data showed continuing deflation in food items.
  • While the RBI’s inflation calculus clearly benefits from the ongoing trend in price gains, the MPC is justifiably cognizant of the tenuousness of the assumptions it has made for its forward projections. Importantly, while it has assumed a normal monsoon this year, the central bank acknowledges that any variation in geographic spread or uneven distribution in terms of time could roil the inflation outlook.
  • Inexplicably, however, the RBI’s policy statement fails to make any mention of its hitherto abiding concern about fiscal prudence. With the Interim Budget showing some slippage from the fiscal roadmap and projecting a budget deficit of 3.4% for both the current financial year and the next, the risk of government borrowing crowding out private investment demand remains tangibly real.
  •  One must assume that the central bank will resume normal service on providing salutary caution to the government after the coming general election.
  • The country’s domestic aviation traffic recorded the fastest full-year growth globally for the fourth consecutive year with an 18.6% increase in annual demand in 2018, according to global aviation body IATA.
  • India was followed by China (11.7%), Russia (9%) and the U.S. (5.1%). The global average for growth in domestic traffic was 7%, the same as recorded in 2017.
  • Significantly, India was the only country besides the U.S. to record a faster growth than the year before.
  • “Domestic demand is underpinned by robust economic expansion and increasing numbers of city pairs,” the International Air Transport Association (IATA) said in its press statement about India, seemingly referring to the government’s UDAN scheme that aims to enhance air connectivity to tier-2 and tier-3 cities.