What to make of India’s surgical strike?

India’s punitive strike across the Line of Control could set a new norm

Whatever might be the consequences, it is clear that the Indian Army’s operation across the Line of Control in retaliation to a militant attack on its Uri camp is a landmark development. Now, it is common knowledge that both the Indian and Pakistani armies cross the LoC for tactical operations, and have been doing so for a long time.

Such operations, usually, have three characteristics: limitations in the depth of incursion, the extent of damage they cause and the level at which they are officially admitted. While we do not have all the details as of now, last night’s operation appears to have been deeper and more damaging. What distinguishes it from other tactical incursions along the LoC is the level at which they have been admitted: perhaps for the first time, New Delhi has officially announced that Indian troops carried out an attack authorised by the highest political authority.

This is significant because it changes the norm to one where India will use military force across its frontiers to respond to aggression by Pakistan’s proxies. Depending on the Pakistani reaction, the act might vindicate the arguments made by some strategists that India does have space for such punitive operations, within the escalation framework. If so, an important Pakistani bluff — that nuclear weapons will shield its terrorist proxies — will be called. [Related: See this detailed analysis of the India-Pakistan conflict escalation framework]

This, however, is only the story so far. The ball now is in Pakistan’s court. If the Pakistani military establishment continues to hold the position that there was no ‘surgical strike’ at all, and just the usual cross-border firing, then New Delhi would have succeeded in setting a new norm. However, if the Pakistani army decides that it cannot let this insult go unpunished, and responds tit-for-tat — operationally and in public posturing — then it will be up to the Modi government whether it wants to up the ante. There are good reasons for either course of action.

The Pakistani army’s initial reaction is what it is, an initial reaction. It could be used to obfuscate matters to cover a retaliatory attack. Or it could be a signal of not wanting to escalate the situation. At this time, therefore, it would be prudent for the Indian government and media to hold off excessive triumphalism.

Why the Modi government must ignore Pakistan

High level engagement of Pakistan is a waste of diplomatic capacity and political capital

Pakistan’s decision to ‘suspend’ the peace process with India along with the ‘co-operation’ on investigating the terrorist attack on Pathankot air station came suddenly. It should, however, come as a surprise only to those who believe that Pakistan is a normal nation-state where the elected government is in charge of state policy. In reality, Pakistan’s government and the military-jihadi complex are two separate entities vying for control, with the latter usually having the upper hand and the last say, especially on foreign policy. [See Understanding the military-jihadi complex]

Here’s a deconstruction of the events since before Narendra Modi’s surprise visit to Pakistan to attend Nawaz Sharif’s family function.

The Pakistani military establishment was clearly not in favour of the Nawaz Sharif’s overtures to India, and authorised attacks on the Pathankot air station in view of Sushma Swaraj’s visit to Pakistan in December 2015. Why would the military establishment do this? Because any reductions of tensions with India would not only reduce damage the military-jihadi complex’s interests but also strengthen Nawaz Sharif’s vis-a-vis the military establishment. A spanner had to be thrown into the works. This is not dissimilar to 26/11, which had the effect of halting President Asif Zardari’s conciliatory engagement of India.

However, what complicated matters for the army was Nawaz Sharif’s decision to ‘co-operate’ with India on the investigation of the Pathankot attack, and further getting Pakistani investigators to visit India to collect evidence. By this time, the Jaish-e-Mohammed and it’s leader Masood Azhar had already been identified as prime suspects in the case. If events were to take their course, in due course, Azhar or his close associates would find themselves under arrest, with the Pakistani authorities compelled to curb their movements (much like in the case of the Lashkar-e-Taiba’s Zaki-ur-Rehman Lakhvi after 26/11). Such a move would tilt the domestic balance of power in favour of Nawaz, and Gen Raheel Sharif would have none of that.

So we had the drama of the ‘capture’ of an Indian spy in Balochistan and China’s blocking of international action against Masood Azhar at the United Nations. The claim that Kulbhushan Jadhav’s capture is cause to ‘suspend’ the peace process and halt the investigations into Pathankot is laughable: the Pakistani establishment has long been claiming that India is stirring the pot in Balochistan and has even presented ‘evidence’ to foreign officials of this. Whatever the facts of the Jadhav case, they do not present any compelling new information to cause Pakistan to walk out of the peace process. The drama only makes sense when seen as providing an excuse for the military establishment to move to protect its jihadi assets from scrutiny, investigation and punishment.

Much of this drama is Pakistan’s domestic politics. The military-jihadi complex put the civilian government in place and restored its own supremacy. New Delhi’s fault was to walk into these murky waters and end up with a terrorist attack and a red face after being played out by the Pakistani establishment. Mr Modi did well to try engaging Pakistan positively from the beginning of this term — where he erred was in believing that he could force the pace of relations. Unless New Delhi realises that there are two Pakistans, the civilian government and the military-jihadi complex, and has a policy sophisticated enough to engage both simultaneously, it will come a cropper.

But why bother? Pakistan is irrelevant to India’s development agenda. It is a distraction (See this article in OPEN). Instead of wasting limited diplomatic capacity and political capacity on the Pakistan project, it would be much more prudent for Mr Modi to ignore Pakistan, and let it sort itself out. New Delhi ought to invest in protecting the homeland from terrorist attacks, creating political conditions that will minimise its impact and cranking up the economic engines to achieve rapid growth. Mr Modi should practice the necessary art of ignoring Pakistan.

Related Link: Takshashila’s discussion document on the dynamics of engaging Pakistan.

Modi in the Valley

There are lessons and reflections for Narendra Modi in Silicon Valley

This is the original English version of an op-ed published in Hindi, in Nai Dunia, Indore, today.

If California were an independent country, it would be one of India’s important trading partners: last year we imported more than $5.3 billion worth of goods from that state. While IT services exports catch most of the limelight, India also exports items like cashew nuts, coffee, tea, engine parts, metal screws, rice and vegetable extracts. California hosts more than 4,75,000 Indian-Americans and is deeply connected to our technology industry. Silicon Valley companies have invested heavily in India over the last twenty years, and their presence contributes to the livelihoods of several lakhs of people in India — from IT & BPO employees to the taxi drivers who drive them to work. So much is Bangalore’s technology sector connected to America’s that we like to joke that the traffic in the city is lighter during public holidays in the United States.

So there are very good reasons for Prime Minister Narendra Modi to visit California, instead of limiting himself to the usual New York-Washington circuit that India’s political leaders usually do. Reaching out personally to top investors and business leaders helps promote India as a destination for investments, where we are in competition with China, East Asia and Eastern Europe. Whatever may be the domestic criticisms of the “Digital India” initiative, it is a good calling card for the Indian prime minister as he engages the some of the world’s most influential technology leaders. His personal charisma and public speaking skills make him a fantastic salesman and marketer of the India story.

Also, unlike our own businesspeople, it is likely that foreign business leaders will be more straightforward in telling him why they find it hard to do business in India. The country will benefit from such candid feedback, especially if Mr Modi diligently follows up on it once he is back in New Delhi.

That, essentially, is the real problem. Even without Mr Modi visiting Silicon Valley, it is a well-known fact that India has the talent, the resources and the market to make it a potentially exciting destination for investment. Yet, much of this potential cannot be realised because of the government gets in the way. Complicated tax laws, for instance, raise costs of doing business, increase corruption and invite political rent-seeking. Poor contract enforcement is merely the tip of the iceberg of a pervasive lack of trust in society, which deters investors. Lack of attention to basic public services, like water, electricity, education, health and transportation shifts the costs onto the private sector. This not only raises costs for investors (and makes India more expensive a place to operate from than it should be) but also creates social divisions, because others do not have them. We all know the problems with land acquisition and labour reform.

Mr Modi can’t be unaware of these issues. In his interactions with investors, he would probably have reassured them that his government will address these challenges. While he might get away with these responses as this is his first visit, he might not receive a patient hearing the next time. In other words, he has staked his personal credibility on addressing the challenges faced by investors and he will now have to deliver on them. This is not easy because it is unclear if his government realises that the entire Delhi Straitjacket has to be removed from our economic lives, not mere tweaking at the margins. We have not seen any sign of that since the Modi government came to power. Worse, even as Mr Modi promotes Digital India, his government scores such shocking self-goals like the recent one concerning a very poorly drafted National Encryption Policy that it was forced to withdraw after strong public criticism. The Modi government has done nothing to repeal the horrible IT Rules (including the infamous Section 66A) that were introduced by the UPA government.

After the success of the visit, Mr Modi will have to pay attention to the essential task of economic reform. Whether to satisfy the aspirations of the domestic population or demands of foreign investors, the answer is the same: economic liberalisation on a much bigger scale than Prime Minister Narasimha Rao’s in 1991.

While no one might have told him this, but Mr Modi would do well to reflect on why Silicon Valley creates companies like Google, Tesla or Facebook that have a global mindset. Most startups there begin with a plan to capture the global market. Their dreams are big. Of course, the ecosystem enables them to fulfil those dreams, but the big dream is the starting point. Most of our entrepreneurs in contrast, limit their dreams to the borders of our own country. The Delhi Straitjacket is partially responsible for this, but there is also a mindset problem, in that we are content to think within our “narrow domestic walls”. Elon Musk wants to transform the way the whole world travels. He wants to even transform the way humans travel to space. If there is something Mr Modi should learn from Silicon Valley is the need to unshackle our richest, most capable and most talented people to open their minds and push the envelope of human achievement.

Those who criticise Mr Modi for going on too many foreign trips miss the point, for his trips help raise India’s profile abroad. What we should discuss is whether his government delivers on the reforms necessary to meet the additional expectations he has created at home and abroad.

Why a Swachch Bharat cess is a bad idea

A tax break will work better

Prime Minister Narendra Modi’s initiative to clean up the country showed that he was prepared to tackle the most difficult problems India faces—cleanliness, hygiene and sanitation are Mahatma Grade Problems, caused by a simultaneous combination of individual, social, market and government failures. The Swachch Bharat initiative has come about because he used both his popularity and power to try and change mindsets and attitudes. To succeed, it needs the government, business and social leaders to change peoples’ minds and moral incentives. If it becomes yet another government programme, it is bound to fail.

So the Modi government’s proposal to impose a cess on telecom services to finance the Swachch Bharat campaign should cause us disappointment and alarm. It is the wrong approach to the problem, using the wrong method. Here’s why.

Levying a cess dilutes the moral incentive that a borderline conscientious citizen faces. Instead of a gnawing feeling when she sees garbage in public places, the marginal citizen is likely to feel the same-old, “I’ve done my part but the government is not doing its job properly”. There is evidence that compliances rates (for tax payments and other rules) goes up when citizens see the government delivering honestly and effectively. Similarly, the perception that government is inefficient and corrupt reduces compliance. In other words, levying a cess on citizens is not only likely to cause them to outsource their guilt and responsibility, but also try and avoid having to pay the cess. Swachch Bharat should be about emphasising that hygiene and sanitation are about personal honour and dignity, not about pay-tax-and-forget.

That’s not all. A cess is a bad way to raise revenues. A cess on an unrelated activity is a terrible way to implement a bad way to raise revenues. As this blog commented on the previous government’s use of a cess on restaurant bills to finance education, there is no better way to signal that a government has confused public finance priorities than a cess. If a programme is important, it should be financed through the core budgetary revenues. Clearly, one of the prime minister’s most important priorities ought to be enough of a priority to be funded through the conventional budget.

If at all a cess has to levied, it should be on non-essential spending. Furthermore, a specific tax on an unrelated economic activity merely to raise revenues is a very bad idea. Telecommunication services are already subject to heavy price regulation, leading to very bad quality of services across the board. An additional tax on these services will burden consumers, impact telecom service provider revenues (and hence the license fees they pay the government) while doing nothing to improve service quality. Telecommunications services appear to have been chosen for the cess mainly because it is easy to collect from them, and people will have to make calls and access the internet anyway.

Why could the tax not have been levied on entities and industries that dirty public spaces? At least that would have attempted to recover the cost of the negative externalities.

But here’s an even better idea to implement Swachch Bharat: give a Swachch Bharat tax break to all income tax payers. When filing their taxes, let taxpayers tick a box saying “I have done my best to make India clean”. Of course, a lot of people will claim the tax exemption without changing their behaviour, but a some will. It is better to trust the citizens more to do the right thing, than to tax them more on the premise that they will do the wrong thing. That’s the only way Swachch Bharat can work–when the relationship between the citizen and the country changes into one of mutual trust and mutual concern. The campaign is about capturing hearts and minds, not more rupees.

The Modi government would do well to resist the temptation to use age-old sarkari methods to solve a nagging social problem.

G-20, East Asia and high-profile foreign policy

The focus on G-20, East Asia and raising India’s foreign policy profile are all the right things to do, and long overdue.

Notes for my television appearance on CNN-IBN at 9am IST today:

The Brisbane G-20 statement is so closely aligned with India’s own growth agenda: India must capitalise on this opportunity.

G-20 should become India’s most important international engagement (as my Pax Indica article from June 2010 argues). What the UN was to newly independent India, G-20 should be for a newly resurgent India. New Delhi should invest in high forums that India is already a member of is more valuable than pleading to enter stodgy old clubs like the UN Security Council.

India must contribute to the Asian Balance because it is in our interests to do so. As China and the United States contest for global power, India must project power in regions like East, West and Central Asia to defend its interests. [This is the central argument of The Asian Balance, my monthly column in Business Standard.]

It is good for Prime Minister Narendra Modi to invest time in international engagements: India’s growth is influenced by the world and the world’s situation influences India’s growth [This is the subject of an ongoing research project between Takshashila and the Hudson Institute]. India’s policy discourse will benefit from the prime minister’s international engagements & exposure.

(Point made in response to other panelists)
Mr Modi’s personal popularity among expatriate Indians and the enthusiasm they have shown around his visit to Australia help elevate India’s foreign policy profile. However, it is important for the media to not hype it beyond a point. It is in India’s interests for Indian-Australians to be good Australians: by being loyal, responsible and successful members of their communities.