IASbaba’s Daily Current Affairs – 4th July, 2016

IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs July 2016, International, UPSC

IASbaba’s Daily Current Affairs – 4th July, 2016

INTERNATIONAL

TOPIC: General Studies 2

India and its neighborhood and International – relations.

Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests

Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.

India’s dynamic diplomacy: Pause for a reality check

The below article deals with following dimensions:

India_Iran_Afghan relations (focus on development of Chabahar port and trilateral transit corridor)
India’s present relation with West Asian countries (in focus with strategic dimension)
Comparison of India’s development of Chabahar port in Iran with China’s development of Gwador port in Pakistan
How India’s diplomacy is changing in current existing global scenario

India’s changing diplomacy:

India’s diplomatic relation with world countries and among multi-lateral ladder is said to be under-performing or volatile, even though it has huge potential.
Indian diplomacy in the past was careful to operate “under the radar” (low visibility and presence), which was advantageous to our country in gaining consensus and maintain cordial relationship with all the countries.
But of lately, there has been a tendency to depart from this low visibility and attempts are been made to impart high visibility to achieve its development interests.
India’s recent failure to bid for membership of the Nuclear Suppliers Group (NSG) is an example which highlights the perils of high visibility and volatility in diplomatic negotiations.
However, a step towards this kind of high visibility and volatile diplomatic negotiations might make other countries to take us as a threat.

India’s present relation with West Asian countries (in focus with strategic dimension):

Recent visits of our Prime Minister to the West Asian countries (United Arab Emirates, Saudi Arabia, Iran, Afghanistan and Qatar) have, undoubtedly, helped strengthen relations with these countries, especially in the area of economics and trade.
Each one of these countries has also been desirous of partnering India in development-related activities, recognising India’s current importance in Asia and the region.
However, the same cannot be said of strategic and security relations. i.e. mere mention in joint statements of shared security and strategic concerns, common ideals and convergence of interests, enhanced defence ties, etc do not translate into a strategic relationship
Here, India’s foreign policy and diplomacy have to move with caution.

Caution against exuberance:

Most countries of West Asia have their own security and strategic construct. India is not visualised — nor does India see itself — as a “net provider of security” in the region and, consequently, India does not figure prominently in these countries’ security and strategic plans.
There are again certain limits to intelligence and counter-terrorism cooperation, as serious differences exist between many of these countries and India on what constitutes terrorism and who can be described as a terrorist.

India-Iran nexus may hurt Saudi Arabia and Saudi-Pak nexus hurts India:

Saudi Arabia, for example, needs to be seen as a dilettante in security matters — flirting with different nations, most noticeably the U.S., and frequently leaning towards Pakistan.
Hence, when the India-Saudi Arabia joint statement talks of the two countries’ responsibilities to promote peace, security and stability in the region, it conveys different meanings for the two countries.
For Saudi Arabia, locked in a near existential conflict with Iran — with which it has ideological, doctrinal and hegemonistic issues — Iran is the main enemy.
For India, Iran is a friend, and the threat of terrorism emanates from Pakistan, which remains intent on employing terror as a strategic instrumentality to destroy India. Hence, it is best to avoid an excess of exuberance in such matters.
Much of this applies in equal, if not greater, measure to the current euphoria regarding our relations with Iran.

India and Iran relation:

India and Iran share very strong cultural relation. India is home to the second largest Shia population in the world is well known.
The umbilical links between Qom (Iran) and centres of Shia orthodoxy in India may be less known, but do exist.
Yet, Iran maintains a certain wariness in its relations with India.

Reasons:

Many attribute this to India’s negative vote in the Atomic Energy Agency earlier on, and
India’s implicit adherence to U.S. sanctions against Iran more recently.

Other reasons possibly exist, but clearly New Delhi needs to work far more strenuously to regain Tehran’s confidence. One high-profile visit by the Prime Minister, or the inking of the Chabahar port agreement, may not be enough.

Chabahar port and Trilateral Transit Corridor is viewed as a threat:

India’s development of Chabahar port is being mistakenly viewed by some people as a declaration of strategic intent.
Chabahar port was solely intended to be an alternate trade and transit route to Afghanistan and conceived as such at the turn of the century. It aimed to circumvent Pakistan’s embargo on movement of goods from India to Afghanistan with no strategic overtones.
The transit corridor involving Chabahar to Zaranj to Delaram (Afghanistan) was to be complemented by another International North-South Transit Corridor from the Iranian port of Bandar Abbas into Central Asia.
The delay in setting up Chabahar port has, however, reduced its economic value and utility, with China’s One Belt One Road (OBOR) initiative — to which both Pakistan and Iran subscribe — threatening to outflank it.

Chabahar versus Gwadar:

Another impression that the establishment of Chabahar port gives India a strategic advantage vis-à-visChina is equally misleading.
Comparison with Gwadar port makes this obvious. China’s investment in Gwadar port dwarfs what India proposes to invest in Chabahar. Moreover, China’s relations with Iran are today on an upswing.
Chinese President Xi Jinping was the first major world leader to visit Iran after the lifting of sanctions, signing more than a dozen deals, including the OBOR initiative. Iran has openly welcomed both China’s OBOR initiative and Maritime Silk Road initiative, and sees major economic benefits to itself once they are completed.
China’s trade with Iran is of the order of $52 billion, much higher than the $9 billion trade between India and Iran. China expects to raise this to nearly $600 billion over the next decade.
Not to be ignored is the Pakistan factor, adding further grist to China’s efforts. This includes dangling the possibility of an Iran-Pakistan-China gas pipeline.

Challenges in Afghanistan:

Unfortunately, Afghanistan, for which Chabahar port was intended to be the lifeline, is in dire straits today and its future in jeopardy.

India’s poor investment:

India’s investment in Afghanistan has been substantial (for which it paid a heavy price in terms of both development assistance and the loss of human lives), including the Rs.1,700 crore Salma dam in the strategically vital Herat province (opened by the Prime Minister on June 4 this year); the new Afghan Parliament building; and the 218-km long Zaranj-Delaram Highway in western Afghanistan — but it faces the prospect of losing out on all that it has invested.
Currently, large swathes of Afghanistan are under Taliban control. Constant attacks on government and other targets have eroded the credibility of the National Unity Government.

Afghanistan’s changing politics and Taliban:

Some parties are aligning more with Pakisthan and some Afghan leaders now seem to be leaning towards the China-dominated Shanghai Cooperation Organisation and give it a key role in a future security architecture. Only, Hamid Karzai government displays little preference for India.
Some Collapse of the National Unity Government will almost certainly lead to a surge in Taliban-directed activity.
Countries that have propped up the National Unity Government might even offer an olive branch to the Taliban and involve Taliban members in a future Afghan government.
This would then enable the Tehrik-e-Taliban Pakistan, the Haqqani network and the Islamic State (IS) to further enlarge their presence inside Afghanistan.
A Talibanised Afghanistan could well become a staging post for launching attacks against India. The possibility of regional instability, which Pakistan could use to its advantage and to India’s detriment, cannot also be disregarded.

Conclusion:

These developments constitute a strategic reversal for India. In the new order of things, India faces the danger of being relegated to a “bit player”, with little or no influence.
India has been kept out of the newly created Quadrilateral Coordination Group which consists of the U.S., China, Pakistan and Afghanistan to discuss Afghanistan’s future.
Left with few options and with the anticipated proliferation of Islamist extremist groups including the al-Qaeda and the IS, India’s focus would need to shift from development to finding ways and means to ensure that Afghanistan does not turn into a major crucible for myriad terrorist groups, specially the IS and the al-Qaeda in the Indian Subcontinent (AQIS).
Consequently, the dividend that India expects from the development of Chabahar port may well prove to be highly evanescent. Hence, premature celebrations are best avoided. As India’s prospects recede, the economic advantages accruing to China from the OBOR — which incorporates Pakistan, Afghanistan and Iran — would increase. This would further diminish whatever elbow room exists for India in that country and in the region.

Connecting the dots:

What are the implications of India’s highly visible changing diplomacy in regard to the development of Chabahar port? Discuss the issue highlighting the difference between China’s development of Gwadhar port and India’s development of Chabahar port.
Examine the India’s recent developments in strategic dimensions with West Asian countries. Why India’s foreign policy and diplomacy have to move with caution?

ECONOMICS

TOPIC:

General Studies 2:

Government policies and interventions for development in various sectors and issues arising out of their design and implementation; Governance issues

General Studies 3:

Indian Economy and issues relating to mobilization of resources, growth, development; Banking Issues

Tightrope walk—for the new RBI Governor

FCNR (B) Redemption

The redemption pressure of the Foreign Currency Non-Resident (bank) deposits, or the FCNR (B) deposits will increase as the outflow would start in September.
Usually it is considered to be a non-event; however, if foreign exchange flows dry up due to Brexit (as banks will struggle to deliver more than $10 billion of forwards to the RBI after maintaining nostro balances of $10 billion to $15 billion) it may inflict damage on the Indian financial sector.

Scheme:

These deposits were raised in 2013 to accumulate foreign currency due to the worsening balance of payment conditions—when the rupee was depreciating sharply and went on to hit its lowest against the dollar in August 2013
RBI offered a special window to the banks to swap the fresh FCNR (B) dollar funds, mobilised for a tenor of three years to five years at a fixed rate of 3.5 per cent annually for the tenor of the deposit.

Way Ahead:

Need to take a closer assessment as we reach closer to the time of maturity of the FCNR (B) deposits.
The liquidity tightness that time would have to be replenished by stepping-up open market purchases
RBI has entered into currency swaps and forwards, and that should take care of the dollar requirement and be neutral for the reserves
RBI will keep systemic liquidity at ease and additionally could consider a combination of three options — arrange for a sizable amount of higher tenor term repo; followed by OMO purchases; and reduction in daily cash reserve ratio maintenance from 90 per cent to 70 per cent of the net demand and time liabilities for the stipulated period.
Besides the swap arrangements and forex flows from exports, RBI can utilise the foreign exchange reserve, which stands at $363 billion as of April 29, 2016. Additionally, RBI can also use the line of credit arrangement with other central banks

Monetary Policy Committee

New rules: MPC is a departure from the present practice where the entire onus rests on the governor for any rate decision. While the governor will have the casting vote if there is a tie, the responsibility will be shared by the committee. The governor has to ensure that he does not opt for the casting vote frequently.
The transition to the new policy framework would require more discussion and better discipline, to ensure with this committee approach which will improve credibility of decision-making

Refer: Clipping RBI’s wings: On deciding monetary policy

Burden of Expectations

Expectation of sharp cuts in interest rates: Difficult to manage rate cut expectation of the government and the industry at a time when inflation is on the rise

This at a time when retail inflation accelerated to a near two-year high of 5.76 per cent in May, driven by surging prices of food products such as pulses and sugar
The Consumer Price Index-based and the Wholesale Price Index-based inflations are climbing.
Food inflation rose by 100 basis points, headline inflation moved up by 60 basis points, and after excluding food, fuel, petrol and diesel, inflation edged up marginally and remained sticky in April.
To counter food inflation, RBI can only cut liquidity and keep interest rates high. With 7^th Pay Commission handing more money in the hands of the consumers, it’ll be difficult to cut liquidity

Refer: India’s Inflation Outlook

Cleaning up Banks

Bad loans have skyrocketed to Rs 5.8 lakh-crore— Crisil has downgraded nine banks since March and expects stressed loans to rise to Rs 7.1 lakh crore by the end of 2016-17.
Banks must be recapitalised after the write-offs and additional capital brought in to meet Basel-III norms.
Recapitalisation involves political decision as the bulk of the bad loans, roughly 90 per cent, are in public sector banks but the responsibility would still stay with the Central Bank—which if not managed properly, could lead to structural problems that can cripple the entire economy.
A massive overhaul and reform of banking processes is required to prevent this sort of bad loan situation building up again and RBI needs to give advices in a well-thought politically acceptable ways.
With public sector banks burdened with bad loans, it will be a challenge to kick-start lending in the economy for growth to revive

Refer: Fashioning a Banking Turn- Public Sector Banks