Chinese inroads

The new silk road is being built faster than the world’s ability to grasp its consequences.

China has worked out a railway route to Afghanistan and, from August this year, begun operating two trains a month from Nantong (China) to Hairatan (Afghanistan) passing through Kazakhstan and Uzbekistan along the way. This remarkable achievement suffers from a temporary hitch — the trains have to go back empty to China because Uzbek authorities are yet to give permission for Afghan goods to transit their territory.

Last week, Chinese trucks drove south-west across the Himalayas, passing through the Karakorum pass into Pakistani territory. They transited through Gilgit-Baltistan and Balochistan before unloading their cargo onto a Chinese ship at the Chinese-built, Chinese-operated Pakistani port of Gwadar. [Gwadar is finally in Chinese hands, after Washington released its pressure on the Pakistani government due to an inability to persist or out of a lack of interest.]

On the eastern side of the Indian Ocean, analysts in Singapore are concerned over what appears to be a commercially dubious proposal to build a new port in the Malaysian town of Melaka (Malacca) that sits at the northern side of the important Straits of Malacca. The Malaysians have pulled out the stops to enable the project to take shape quickly. In typical fashion a little-known local firm is partnering a Chinese company to build the port.

Since there’s enough capacity in existing Malaysian ports, and it is relatively easy to expand them, the Melaka Gateway project is of questionable business value. But a foothold that commands the Straits, the Bay of Bengal and the Indian Ocean makes a lot of geostrategic sense if someone is willing to foot the $10 billion bill. And China is.

It appears that Xi Jinping’s One Belt, One Road (OBOR) is proceeding at a pace faster than the region’s policymakers can handle.

Connectionistan
Building transport connectivity in Central Asia is likely to unleash economic potential in the landlocked region, and depending on where the roads and railways lead, to other regions too. This will come with the usual political economy of Chinese overseas economic expansion: newly enriched local entrepreneurs, strengthened local political strongmen and grumblings due to Chinese labourers imported en mass. This will also be accompanied by fears of a demographic invasion from China into the sparsely populated Central Asian states.

The Chinese railway through the Central Asian states to Afghanistan presents India with a tantalising opportunity, if it were possible for Indian cargo and passengers to use the route. Pakistan would be deeply concerned, of course. Indeed, Pakistani strategists would already be worried that for the first time, China can trade with Afghanistan without having to transit through Pakistan.

New Delhi should explore arrangements with China, Kazakhstan, Uzbekistan and Afghanistan to connect to this railway. At the very least, Beijing’s intentions can be put to test.

Another port in the straits
The Chinese interest in Melaka comes at a time when the United States is likely to rebuff the painfully negotiated Trans-Pacific Partnership. Singapore, among other East Asian states will be unhappy with the turn of events. Another port along Malaysia’s west coast abutting the Malacca straits implies further competition to the island’s own ports. With the projected overcapacity, it gets worse.

While there is little New Delhi can do to ameliorate this, there is an emerging convergence of interests between India and Singapore. So too, we are likely to see, with other East Asian countries as they grapple with the undesirable prospect of having to jump onto the Chinese bandwagon given the increasing unreliability of the United States. This has been true for much of the past decade. Now, however, it has gotten all the more intense. The Modi government is clear that it seeks to engage East Asian states with greater boldness and purpose. Whether this will prove adequate or fast enough remains to be seen.

Double talk on double-digit

India doesn’t need to buy peace from its neighbours to sustain economic growth

At a talk I gave recently, one person asked if the numerous crises in India’s immediate neighbourhood limit India’s growth. This was some time after Prime Minister Manmohan Singh, at a press conference in May, asserted that “India would be unable to realise its full economic potential if it couldn’t reduce tensions with its neighbours, especially Pakistan”.

“Not at the moment, and not for the foreseeable future” I replied, “because the biggest bottlenecks to sustainable economic growth are domestic.” Only after the most important reforms—creating a national common market, unshackling agriculture, liberalising labour laws and fixing the education system—run their course might the situation in the neighbourhood begin to matter.

In a recent paper demographics and India’s labour force, Tushar Poddar and Pragyan Deb of Goldman Sachs estimate that they see the Indian economy growing at a base rate of 8% per annum. With the required reforms, the growth rate will increase to 9%. With wrong policies, there is a risk that the growth rate will fall to 6.5%. [See recent articles by Niranjan Rajadhyaksha & V Anantha Nageswaran for a discussion on sustaining high growth rates].

The neighbourhood doesn’t register much in these assessments. In fact, Dr Singh himself concedes as much. “A number of inherent strengths in the country’s economy,” he said this month “can contribute to rapid growth in the future and they should be harnessed to push up economic growth to double digits.” In other words, Dr Singh the economist contradicts Dr Singh the geopolitical strategist.

The prime minister’s concession underlines the simple fact the most brazen of Pakistan’s skulduggeries are but a pimple on the posterior of the India economy. You don’t need to have grand “composite dialogues” with Pakistan’s impotent politicians to sustain India’s economic growth.

On the contrary, the question for India’s neighbours is whether or not they want to benefit from India’s growth process? It’s their decision. Sri Lanka and now Bangladesh appear to have embarked on trajectories that make the most out of opportunities provided by both India and China. Pakistan—perhaps because its unaccountable elite are buttressed by liberal Western aid—is unconcerned with improving the lot of its own people. That is its own problem. This does not mean it is not in India’s interests to improve trade with its crisis-ridden neighbour. It only means that it won’t hurt the Indian economy much if it doesn’t happen.

Once the Indian economy exhausts all the potential from the necessary next wave of reforms the condition of the neighbourhood might begin to impose constraints on its further growth. That point is at least two decades away. And it is by no means certain that it’ll matter even then, for it is possible that the neighbourhood will matter even less.

The Sonia Gandhi-led Congress Party is equivocal (okay, very unwilling) on using its political capital to carry out the reforms that are necessary for sustainable double-digit growth. Dr Singh is committed to losing his political capital on pursuing talks with Pakistan that are unnecessary for that purpose. Don’t be fooled.

From the archives: The Reagan Parallel, June 2004

Where are our defence economists?

Defence budgeting would do well with more economic reasoning

One of the topics discussed at the Takshashila Executive Programme on Strategic Affairs in New Delhi earlier this month was the issue of defence budgeting. Mukul Asher and Sushant K Singh have an op-ed in DNA today that covers one aspect of it—the need to have competent defence economists in New Delhi’s policy & budget planning establishment.

Here’s an extended excerpt:

The current focus in defence sector budget formulation, in parliamentary approval process, and in post-budget assessment is almost solely on accounting procedures and practices. Even these are outdated as neither outcome nor accrual budgeting, which permits both income-expenditure flows and balance sheet assets and liabilities to be formulated, are utilised. The capital component of the defence budget involves multi-year expenditures and planning, which annual budget cycles are unable to accommodate effectively.

The current defence budget formulation largely involves incremental budgeting (e.g. 10% increase in nominal terms over the previous period), with usually no separation between inflation-induced and real increase in expenditure. No groups at the planning or strategic levels, whether at the Planning Commission or at the Prime Minister’s Economic Advisory Committee appears to be analysing the defence budget from forward strategic planning perspective incorporating current and prospective threat perceptions. The budget proposals are also not subjected to analysis from the perspective of defence economics as a distinct sub-discipline and profession.

This is a serious gap, which needs to be urgently addressed in an era when geo-politics and geo-economics are increasingly inter-related. While this is recognised by other major powers, particularly China, India has been relatively slow in integrating the two to enhance its economic and security space and leverage.

An important step towards integration of the two would be to give greater prominence to the role of defence economists at every level of the defence sector, and encourage their coordination with economists in other sectors.

There are three critical aspects of defence economics: projecting national resources available now and in the future; working out the proportion of these resources which should be allocated for internal and external security and division of resources within each of the two areas; and tracking the efficiency with which the resources so allocated are used.

The above requires developing a competent group of analysts specialising in defence economics. Currently, no university in India, to our knowledge, offers such specialisation at any level. The need is particularly acute at the post-graduate levels. The absence of such expertise in defence related think tanks is also striking. The media and professional military and economic journals have also not promoted this branch of economics.

In the short run, such specialists would need to be trained (or recruited from) abroad; particularly in the US where defence economics is a thriving discipline. But there is no substitute for developing indigenous capacity to train its own defence economists and analysts.

As India revamps its higher education sector, and Knowledge Commission advances the scope for applying knowledge and technology to a wide variety of sectors to bring about greater economic efficiency, the need to subject the defence sector to greater economic reasoning and analysis should receive deserved consideration.[Asher & Singh/DNA]

Kerry-Lugar, not much sugar

The United States has set the rules of good behaviour for Pakistan. It has assigned indicators to measure progress. The devil lies in between

There is a deluge of ‘analyses’ of the Kerry-Lugar bill in the Pakistani commentariat: barring some exceptions, you will find high polemic, rhetoric, idiom, metaphor and bravado. There is little by way of asking and answering who else is willing to provide financial life-support for the Pakistani government on more relaxed terms. After all, all the Friends of Democratic Pakistan met in New York last week, swore eternal goodwill and friendship, posed for the cameras but did not add much to what they had already promised. For all the outrage, it is rather unlikely that the Pakistani elite will suddenly stop cheating on their taxes and begin paying their water & electricity bills to help stand their broken republic, as the metaphor goes, on its own feet.

If, as expected, President Obama signs it into an Act, the legislation will require the US State Department to certify that the Pakistani government is on the straight and narrow in winding down nuclear proliferation and cross-border terrorism. Now, the Pakistani mindset sees these conditions—especially the mention of preventing attacks by “Lashkar-e-Taiba” and “Jaish-e-Mohammed” on “neighbouring countries”—as a sign that the United States has bowed to India’s concerns. But the hard-headed politicians in the US Congress don’t insert clauses on behalf of other countries—however friendly or strategic they might be—unless those clauses are first in the United States’ own interests. However, the Pakistani reaction, to the extent that the commentariat represents popular opinion, should rightly cause thinking Indians to challenge the lofty-softy premise that at the popular level, the Pakistani people—as against their ruling military-jihadi establishment—are against terrorist attacks in India originating from their soil.

From an Indian perspective, while a bill with such conditions is better than a bill with no such conditions, the fact remains that the Obama administration’s certification of Pakistan’s compliance will be subject to Washington’s foreign policy positions. Like the late 1980s when successive US presidents lied to Congress about Pakistan’s nuclear weapons, like the famous State Department list of state-sponsors of terrorism that still doesn’t include the worst of them all, certifications under the Kerry-Lugar legislation will depend on factors that transcend truth and factual accuracy.

The extent of the gap between fact and certificate will be an indicator of the Obama administration’s own exigencies. Periodic reporting requirements also allows US interlocutors to exert regular pressure on their Pakistani counterparts. But none of this will result in the military-jihadi complex abandoning its old agenda, strategies and tactics. If the Washington’s metrics are any good, they will reflect this. And then what? Another policy review?

Hurting the Pakistani economy

…shouldn’t be an objective in itself

R Vaidyanathan, a professor of finance at the Indian Institute of Management – Bangalore, suggests twelve steps to shock and awe the Pakistani economy. Many of them are, in and of themselves, powerful instruments to destabilise Pakistan. Many of them can make credible threats, because carrying them out will hurt India, albeit to a much lesser extent that they hurt Pakistan.

The problem, though, is that Prof Vaidyanathan’s arguments are premised on a stable Pakistan not being in “the interest of world peace, leave alone India” and that if “Pakistan is dismantled and the idea of Pakistan is gone, many of our domestic (religious) issues will also be sorted out.”

The counter-argument is that it is an unstable Pakistan—unstable since 1947—that is the cause of much of India’s, and the world’s security problems. It is the lack of an internal reconciliation, a sense of purpose beyond being India’s doppelganger and a lack of stability that lies at the root of its ending up as an “international migraine”. Plus, unless it is possible to be very sure that the post-Pakistan set-up will somehow be more stable, and less jihadi export-oriented, dismantling Pakistan cannot be in India’s interests. [See this article]

So while attempting to bring about a collapse of Pakistan is undesirable, many of Prof Vaidyanathan’s prescriptions lend themselves for coercive diplomacy. They allow India to pursue a variety of punitive and coercive policies in a calibrated manner, without raising military tensions. For instance, it would be untenable for the international community to disagree that all economic aid to Pakistan must be made contingent on its government meeting concrete deliverables, like extraditing terrorists that live in the open in its territory. In fact, The Acorn has long argued that the greatest failure of the “peace process” was that it distracted attention from the important objective of creating a range of flexible policy instruments that could not only be turned on and off, but also fine-tuned and targeted.

To modify B Raman’s words a little, the capability to cause “a divided Pakistan, a bleeding Pakistan, a Pakistan ever on the verge of collapse without actually collapsing—-that should be our objective till it stops using terrorism against India.”