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IASbaba’s Daily Current Affairs – 26th January 2017

INTERNATIONAL RELATIONS

TOPIC: General Studies 2

India and its neighbourhood- relations.

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

Growing Chinese Presence in South Asia

Introduction

Growing Chinese influence in South Asia has been very evident in the past few years. When Sri Lanka decided to develop the Hambantota port and areas around it, the Sri Lankan government was not very keen on taking assistance from India or the Western nations. During this time, China grabbed the opportunity and initiated major investments in the region.

Similarly, Gwadar Port in Pakistan is another hub for Chinese investment and for the military to have base and access to the connected regions. China’s interest in both these regions has raised quite a few questions in the mind of India and political thinkers about its impact on India.

China and Sri Lanka

Chinese presence in Hambantota is a result of the Indian inclination towards developing Colombo port and China’s financial strength which made its investments in Hambantota more viable. China has also acquired naval facilities in Hambantota to show its military might.

Why Hambantota has been a domestic failure?

Other than the port construction, China’s Exim Bank offered loans for projects such as a southern highway, a tele-cinema park and an airport of which all the projects ended up as financial failures. The reasons for this are:

As compared to Hambantota, Colombo is a natural port and a better location from where goods are exported to and imported from India.
Hambantota has very limited share of imports entering Sri Lanka.
Similarly, no international flights are using the Hambantota Airport even though free landing facilities have been offered.
Financial liabilities far outweigh the revenue.

Opportunities for China

As a result of the above situation where the domestic financial viability of development of Hambantota has been very poor, China has been able to get access to lot of opportunities which are as follows:

Ownership of Norochcholai power plant has been transferred to China, under a debt swap agreement, due to no repayment of debts incurred on its construction.
Due to overflowing debt and increasing liabilities, Sri Lanka has sold 80% of the Hambantota port to China.
Sri Lanka has also offered an investment zone to China in the same region.
As a result of this entire scenario, China will now manufacture in Sri Lanka and export to India making best use of the advantages arising due to the free trade agreement between Sri Lanka and India.

China in Gwadar and related Concerns

Just like Hambantota is set to become an essential element of China’s Maritime Silk Route, China intends to use Gwadar to develop on the China-Pakistan partnership and strengthen maritime control over the sea-lanes used for oil/gas supplies from West Asia.
The China-Pakistan Economic Corridor (CPEC) being developed by China in Pakistan. It connects China’s Xinjiang province to Gwadar through Gilgit-Baltistan. This region is a part of the Pakistan Occupied Kashmir which is actually a part of India’s territory.
The CPEC is being developed with much more favourable financial conditions for Pakistan and lacks transparency as well.

Challenges for China

Lack of clarity regarding the intended beneficiaries of CPEC. Baluchistan is against the project because of people of the region are getting no benefits out of the project.
Baluchistan is also unhappy with the returns that they will receive from the investment by China in Saindak copper and gold mining projects.
Fear of outsiders coming into the province and putting immense pressure on the resources is also prevelant as a result of the CPEC and the development of Gwadar port.

India’s Concern

Chinese activities in Hambantota are of both strategic and economic interest to India.
India has to be vocal about the fact that it does not accept China’s growing control in the region and the use of Hambantota for parking Chinese warships and submarines.
Combined control and influence over Gwadar and Hambantota will give China the chance to interdict vital oil supplies.
Increasing militarisation by China and threats to militarily equip India’s neighbours is a major concern.
China and Pakistan together will be able to get easy access to the Gulf of Hormuz. This will create obstacles in smooth movement of energy resources from West Asia to India and put questions on energy security as well.

Connecting the dots

Throw light on China’s growing presence in South Asia and the Indian Ocean region. Discuss its impact on the geopolitics of the region. Also suggest what should be India’s approach towards these developments justifying your stand with reasons.

ECONOMY

TOPIC:

General Studies 3

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

General Studies 2

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

The need to adhere to FRBM targets

In news: the Fiscal Responsibility and Budget Management (FRBM) Committee submitted its report recently. Though it has not been made public, news reports say that the panel has recommended fiscal consolidation, but not at the expense of growth. Let us have a look at how macro environment affects micro level decisions.

Budget and fiscal management

At the time of budget, the household level is more concerned about individual tax rates and prices of goods as they change in response to taxes that the government levies.
However, seldom the macro part of the budget- fiscal deficit and tax-to-gross domestic product (GDP) ratio- is taken into consideration at household level. It is important to know what they mean as they affect at the household level.
Fiscal deficit
- When the government spends more than what it collects as revenue.
- Revenue= Taxes (like personal income, corporate, excise, customs) collected by government
- If revenue is equal to the expenditure, the government’s budget is balanced, but most governments run on a ‘deficit’ or spend more than they collect.
This ‘deficit’ is financed by ‘borrowing. The market loans in Budget 2016 were Rs. 4.25 trillion or 21% of the budget of Rs. 19.78 trillion. The fiscal deficit was 3.9% of GDP against target of 3.5% for 2016-17.
The FRBM targets are 3% fiscal deficit and a zero revenue deficit.
In simplistic terms, revenue deficit is like credit card debt which finances current consumption, hence it is a bad loan. The fiscal deficit can be understood as home loan which leverages future income to build an appreciating asset.
So, the government will borrow responsibly (as loans are debt) with fiscal deficit being 3% and revenue deficit being zero.

Government needs to borrow

India’s tax-to-GDP ratio is just 16.6% as compared to emerging market economy average of 21% and OECD average of 34%.
Tax-to-GDP ratio= it is the ratio of tax collected compared to national gross domestic product (GDP). Some countries aim to increase the tax-to-GDP ratio by a certain percentage to address deficiencies in their budgets.
Tax on income in 2016-17 budget was 18% of the budget. Only 1% of the Indian population pays income tax. However, looking at the lifestyle changes and the means through which money is spent shows the gigantic number of cases of tax evasion.
Hence, to finance the budget deficits, the government needs finances which it ultimately borrows from market.
In 2009-10, fiscal deficit was 6.6% of GDP and government’s borrowing programme spiked. Large government borrowing programmes usually lead to financial repression
Financial repression is the ability of the government to attract household saving to itself by fixing the rules. Here, the government fixes the investment rules of banks and insurance firms so that it can have steady income that goes into G-Secs.
That is why, the savings rate are usually low, FD rates are usually below inflation and a traditional life insurance policy gives around 3% return a year over a period of 15-20 years.
Atleast 24% of total bank deposits are invested in government bonds because of the formation of rules. Even the insurance companies ensure that a large part of the premium is invested in government securities.
Thus, reforms in the capital market have been much easier than in banking or insurance as there are no fixed investment rules that take household money through mutual funds or other market-related products.
The government worries when bank deposit rates slow down or the insurance premiums fall as people will divert their savings elsewhere, thereby making it difficult for the government to finance itself easily.

Committing to FRBM targets

A high fiscal deficit that goes to finance current government consumption or pre-election freebies as well as low tax-to-GDP ratio is a worrisome trend as it affects the individuals who is the taxpayer, the investor and the inflation-hit consumer.
If the government commits to the FRBM targets irrespective of pre-election year or not, will help the government in maintaining finances.
Setting up of public debt management authority (PDMA) is inevitable as it will take the conflict of managing the government borrowing programme out of an inflation-targeting central bank.
Better tax compliance will increase tax-to-GDP ratio. If the tax evasion continues, government will be forced to borrow more which will ultimately affect the
If the FRBM targets are complied with, the ground is set for ending the financial repression carried out by banks and instead should be done through insurance companies.
Thus, FRBM shows how macro numbers relate to micro lives and individuals and households should act more responsibly.

Background

The concept of a fiscal responsibility framework was first mooted in 2001 as the government was close to fiscal deficit of 6% of GDP
The roadmap was laid down as part of the Fiscal Responsibility and Budget Management Act, 2003 which asked that the government’s revenue deficit be eliminated by 2008 and fiscal deficit reduced to 3% of GDP.
The framework saw early success and the central government managed to bring down its deficit to a 30-year low of 2.5% of GDP in 2007-08.
Following the global financial crisis, the fiscal deficit once again surged to above 6% of GDP. Since then, the government has failed to bring the deficit back down to 3%.
In 2016, the Government had constituted a Committee to review the Fiscal Responsibility and Budget Management (FRBM) Act under the Chairmanship of Shri N.K. Singh.
Fiscal management becomes all the more important post-demonetisation and the resultant slump in consumption expenditure. The view is that the government could be tempted to increase public spending to boost consumption.