Appointment of Judges and Independence of Judiciary

Appointment of Judges and Independence of Judiciary

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Dr M N Buch, Dean, Centre for Governance and Political Studies, VIF

Though India is a Union of States we have a judicial system which is hierarchical, from the court of first instance right up to the SupremeCourt. In all legal matters competent judicial officers can pronounce judgements on both Central laws and State laws. By contrast, in the United States, federal laws are interpreted and adjudicated upon by Federal courts and State laws by State courts. In India, the Supreme Court is at the apex, but under Article 227 of the Constitution, the power of superintendence over all courts and tribunals throughout the territory over which a High Court has jurisdiction vests in the High Court. At the same time, under Article 141, the law declared by the Supreme Court is binding on all courts and, therefore, the position ofall courts, including High Courts vis-a-vis the Supreme Court is one of judicial subordination.

The appointment of judges to these two courts is strictly defined by the Constitution. In the scheme of things there is separation of powers between the three organs of the State which, nevertheless, are equal, that is, the Executive, the Legislature and the Judiciary. In order to ensure the balance of power, the Constitution provides for the Legislature to be constituted through a process of election, the Executive through a process of recruitment governed by an independent constitutional body called the Public Service Commission and the Judiciary to be completely free from interference by the Executive or the Legislature by giving the judges complete independence. Article 124 governs the appointment of judges to the Supreme Court and Article217 does the same for the appointment of judges of a High Court. In the case of the Supreme Court, Article 124 (2) reads “Every judge of the Supreme Court shall be appointed by the President, by warrant under his hand and seal, after consultation with such of the judges ofthe Supreme Court and of the High Courts in the States as the President may deem fit… Provided that in the case of appointment of a

judge other than the Chief Justice, the Chief Justice of India shall always be consulted”. In the matter of judges of the High Court under Article 217, the President is required to consult the Chief Justice ofIndia, the Governor of the State and the Chief Justice of the High Court. The Supreme Court, in its wisdom, decided that consultation of the President with the Chief Justice means that a Collegium of Judges to be constituted by the Chief Justice will vet every case and on its recommendations the Chief Justice will give his advice to the President. This is an internal matter of the Supreme Court and need not be commented upon. As it is, there is a move to legislate for the setting up of a Commission for recommending judicial appointments, butthis is still only at the proposal stage. Despite opinions to the contrary I would suggest that the system as it has evolved has served us quite well and we should not hasten to alter it.

The process of appointing judges to fill present vacancies in the Supreme Court had begun quite some time ago. Apparently in Septemebr 2013 Arun Jaitley wrote to the then Prime Minister, Dr Manmohan Singh,that the name of Gopal Subramaniam who, incidentally, had to resign asSolicitor General of India in an unconnected matter, was under consideration and, in the opinion of Arun Jaitley and the party of which he was Leader of Opposition in Rajya Sabha, there were strong reservations about this name. As has been reported, Arun Jaitley said that initially Gopal Subramaniam had offered his services to government in the Sohrabuddin case, which was pending before the Supreme Court. When it was decided that the Attorney General would handle the case, Gopal Subramaniam offered to assist the court as amicus curiae and though the court never formally invited him to do so, Gopal Subramaniam acted as if he was the amicus curiae and gratuitously advised the Supreme Court that (1) The investigation of the Sohrabuddin case be transferred from the Gujarat Police to CBI and(2) If Amit Shah was given bail, which had already been granted by Gujarat High Court, he should be restrained from entering the State ofGujarat. The Supreme Court ordered accordingly. In his letter, Arun Jaitley is reported to have said that this indicates the bias of GopalSubramaniam and, therefore, he is not fit to be considered for appointment to the Supreme Court.

In a parallel development, it seems that CBI very foolishly had earlier recorded a note that Amit Shah should be arrested because thiswould cause Gujarat Police officers to be intimidated and through themCBI could reach its real target, Narendra Modi. This view was endorsedby Ashwani Kumar, then Director of CBI. Whereas I cannot vouch for theveracity of this report I would not be surprised if it were true because this is how CBI seems to function. Normally one should not interject a personal experience in an essay of the present sort, but Iam forced to quote a personal experience in my official capacity as Head of the Delhi Development Authority to show that the notes recorded in the Sohrabuddin case are about par for the course for CBI.I received a letter from CBI in 1978 seeking permission under section 197 Cr.P.C. to prosecute Jagmohan, Ranbir Singh and other officers of DDA in what was known as the Kapashera, Samalkha and Andheria Mor demolition case. Sanjay Gandhi, Jagmohan and others were accused of mischief under section 427 IPC, criminal trespass under section 447 IPC, criminal intimidation under section 506 IPC, read with sections 34 IPC, that is, common intention and 120B IPC, that is, criminal conspiracy. I asked CBI to send me the case diary so that I could takea decision about giving permission to prosecute and after much hesitation and correspondence it was sent to me. I was horrified to find that the supervising officer’s note was also attached, which stated the purpose of the investigation was to bring home charges of criminal trespass, mischief, criminal intimidation, etc., against Sanjay Gandhi and others. This note itself indicated bias because the purpose of any investigation is to arrive at the truth and not try andfit the facts to arrive at a predetermined conclusion. The investigation was obviously tainted.

The case diary itself made strange reading. The demolitions were carried out at the behest of and as an agent of the Municipal Commissioner of Delhi, B.R. Tamta. He, therefore, was the main accused. In the case diary itself the investigating officer recorded that because B.R. Tamta had agreed to give evidence on behalf of the State he was not being named as an accused. Under Chapter XII Cr.P.C. the police has no power to drop from the list of the accused a person against whom there is prima facie evidence, nor can the police add to the list of accused a person against whom there was no prima facie

evidence. Regarding pardon, that is governed by section 306 Cr.P.C. The Chief Judicial Magistrate, Metropolitan Magistrate or Magistrate First Class may tender pardon, but only in cases triable exclusively by the court of session or the court of a special judge and only wherethe offence is punishable with imprisonment of seven years or more. The police cannot tender pardon and in any case the maximum penalty for the offences for which Sanjay Gandhi, Jagmohan, etc., were chargedonly carried imprisonment for a maximum of two years. In such a case pardon cannot be tendered. I wrote to CBI that sanction could not be issued unless B.R. Tamta was also made an accused in the case. R.D. Singh, Special Director of CBI met me and threatened me with dire consequences if I did not issue sanction, on which I not only threw him out of my office but also finally rejected the application for sanction. The accused were never charge-sheeted or prosecuted in this case, but it did leave a lasting impression in my mind that CBI is notan ideal police force whose objective is to fight crime. Therefore, the attitude of Ashwani Kumar and his officers probably represented the reality of the matter, that is, CBI’s objective was not justice but to fix Narendra Modi so that he could be politically finished.

To return to the issue of appointment of judges, the Chief Justice of the Supreme Court recommended to government that four names, those of the Chief Justices of the Calcutta and Orissa High Courts and Gopal Subramaniam and Rohinton Nariman had the approval of the Chief Justiceand the Collegium of Judges for appointment as judges of the Supreme Court. The President ultimately approved three names, but expressed reservation about Gopal Subramaniam. On this Gopal Subramaniam withdrew his assent for the post and in the process made scathing remarks about government. His allegation is that he was amicus curiae in the Sohrabuddin case and on this account he has been targeted by government for denial of the post of a judge of the Supreme Court. According to him, the Government of India is prejudiced against him and further, by denying him the post, has proved that it wants convenient judges on the Bench. He has further alleged that this will affect the independence of the Judiciary and will have harmful long-term effects.

Without going into the merits of the Gopal Subramaniam’s charges one cannot help but feel that in making an allegation that government wants to reduce the independence of the Judiciary there is a hint of slander. This is not the first time that government has rejected some names recommended by the Chief Justice of India or denied elevation tothe Bench to certain judges of High Courts and to lawyers. In the United States of America, it is a well known practice to try and pack the Supreme Court with judges whose political views are in consonance with the philosophy of the ruling party. Franklin Delano Roosevelt, struggling with the Great Depression and wanting to push the New Deal,wanted liberal judges in the Supreme Court. President George Bush and President Ronald Reagan wanted conservative judges. Certainly Indira Gandhi wanted judges like A, N. Ray who, with Justice P.N. Bhagwati and others forming a Constitutional Bench of the Supreme Court ruled that when a proclamation of Emergency under Article 352 was in force the fundamental rights stood suspended, which meant that the right to life under Article 21 also stood suspended. Of course, the court did not clarify whether this meant that the Executive could arbitrarily and without trial put a man to death, but in effect that is how it canbe read. Justice H.R. Khanna, in the lone dissenting judgement, strongly opposed this view and upheld the right to life and further ruled that the fundamental rights could not be suspended. Indira Gandhi never forgave him and he was not elevated to the post of Chief Justice. During the Emergency in the Bhimsen Sachar case, Chief Justice Tatachar of the Delhi High Court ruled that though the fundamental rights may have been suspended, the Code of Criminal Procedure remained intact, section 482 Cr.P.C. gave the High Court theinherent power to secure the ends of justice and, therefore, using thepower of habeas corpus, he ordered the release of Bhimsen Sachar, Kuldip Nayyar and others. Similarly, the Gujarat High Court, in the case of Himmat, a journal produced by Rajmohan Gandhi, ruled against censorship and Himmat published without censorship thereafter. The Chief Justices of Delhi and Gujarat High Courts were denied elevation to the Supreme Court. Despite this, what is proved is that even duringthe Emergency, our Supreme Court and High Courts did not compromise ontheir independence, especially the High Courts, which proved that the independence of the Judiciary is strong and zealously guarded. Is it

Gopal Subramaniam’s case that what could not be done in the Emergency,that is, bringing the courts to their knees has become possible because Gopal Subramaniam has not been elevated to the Bench? He is too eminent a lawyer to be pardoned for even suggesting such a thing.

The method of appointment and the autonomy of an organisation may be interconnected, but they are not inter-dependent. In any case, the scheme of the organisation of the State in India is such that the three major pillars, the Executive, the Legislature and the Judiciary are all autonomous within their own spheres. The Legislature has untrammelled powers of legislation, subject only to constitutional validity, approving the budget, calling the government to account through the collective responsibility of the Council of Ministers and through the various mechanisms worked out for legislative control. TheExecutive power vests in the President, who exercises it through officers appointed by him, but on the aid and advice of his Council ofMinisters. The business of government is conducted according to the Business Rules framed under Article 77. This applies mutatis mutandis to the States also. In the exercise of executive powers, the Executiveis autonomous, but subject to accountability to the Legislature and tosuch pronouncements that courts may make if adjudication is called for. Similarly, the Judiciary is autonomous, appointment of judges is not within the exclusive purview of the Executive, they cannot be removed except through due constitutional process and they are free inthe matter of adjudication to pronounce judgement according to law. There is no encroachment on this autonomy nor ever has been. At the same time, the Legislature is constituted through election, a process under a constitutionally created Election Commission of India. Despitethis the House is constituted by the President, who also summons it tosession. The officers of the Executive are selected by a constitutionally created Public Service Commission, but their appointment is made by the President and protection is provided by Articles 311 and 312. In the case of the Judiciary, the selection is made by the Chief Justice of India and the appointment is made by the President. In all three cases, there is convergence at the level of the President. Article 124 makes consultation with the CJI mandatory, which means that a person not recommended by the CJI cannot be appointed to either the Supreme Court or a State High Court. That,

however, does not mean that the President, on the advice of his Council of Ministers, cannot reject a name suggested by the CJI. Therewould be interference with independence if the President arbitrarily appoints judges. There is no interference if the President rejects a name suggested by CJI. That has happened in the past and may happen inthe future also, which is precisely why Article 124 provides for a process of consultation.

Gopal Subramaniam is a legal luminary whose erudition and brilliance is universally recognised. He is eminently qualified for elevation to the Bench, which would be richer by his presence. Conversely his absence from the Bench is not tantamount to jeopardising the autonomy of the Judiciary. This last remark is made because by suggesting that the independence of Judiciary is in danger, Gopal Subramaniam has doneno service to government, the Judiciary or even to himself.

Mandate 2014: Why the BJP Won and the Congress Lost?



The 2014 elections will certainly be considered a landmark in the Indian polity because of the manner in which the two main antagonists,the Congress and the BJP, went into battle. Whereas for an actual battle, the Order of Battle formulated by the contending commanders isof great importance, of even greater importance is the political structure of the country and the organisation of its armed forces. Forexample, Germany entered the Second World War holding the advantage ofgreater preparedness, clear-cut objectives and the best tactical use of manpower and equipment. That is why Germany met with initial success in which Europe lay prostrate at its feet and the Soviet Unionreceived the hammering of its life. In the first two and a half years of war, Germany went from victory to victory. But it was not only a dictatorship, its Fuerher was a megalomaniac who, so long as he was victorious, gave his Generals a free hand, but when any crisis occurred all rationale was thrown to the winds, all decision making even of a tactical nature centred in Hitler and, having surrounded

himself with a bunch of yes men such as General Keitel and General Jodl, all professional advice was brushed aside and the most irrational orders were issued from Hitler’s headquarters. The defeat at Stalingrad and the surrender of three and a half lakh German troopsunder Field Marshal Paulus was a direct consequence of Hitler’s stupidpolicy and absolutely idiotic orders to Paulus. A stage came when, as Churchill put it, “Before Alamein we won no victory and after Alamein we suffered no defeat”. That is because Britain, with its democratic tradition, evolved the military strategy and tactics which enabled thecommanders in the field to take on the Germans on their own terms and defeat them. A democracy will always bounce back after initial setbacks; a dictatorship cannot survive a disastrous defeat.

But why talk of war when one is discussing the electoral struggle between the Congress and BJP? For this, it is necessary to take a lookat how the Congress is organised. The party founded by Hume and later welded into an unbeatable weapon for fighting against the British for our Independence by Mahatma Gandhi was based on a leadership in which the Mahatma created around him giants like Sardar Patel, Jawaharlal Nehru, Maulana Azad, G.B.Pant, B.G. Kher, Morarji Desai, C. Rajagopalachari, Dr. B.C. Roy, Gopinath Bardoloi, Rajendra Prasad, Lala Lajpat Rai and other stalwarts who gave the party stature, strength and a structure in which everyone had a voice. To lead India to Independence and then to democracy was the task that the Congress performed, but only because it was a party which embraced all. In his own way, the Mahatma was also a dictator when it came to matters of fundamental principles in which he believed. On Ahimsa and Satyagrah there could be no compromise. But he was also a great democrat in thathe was aware of his own fallibility and not only heard people but atoned for every mistake he made. That was the greatness of the Mahatma and of the Congress Party.

For the first twenty years after Independence, it was the Mahatma’s Congress which ruled India. Jawaharlal Nehru was the son of Motilal Nehru, but Motilal did not found a dynasty because Jawaharlal Nehru came to power not on account of birth but by voluntarily embracing therole of a freedom fighter, which won the heart of the Mahatma, who virtually counted on him as his successor. The Mahatma’s word carried

great weight, but ultimately Nehru came to power through a democratic process and he stayed in power till 1964, a total of seventeen years, because the people elected him. No doubt Indira, his daughter, became the Congress President during Nehru’s lifetime, a step which Nehru could probably have avoided. However, she did not become Prime Minister on Nehru’s death because first Gulzarilal Nanda pro tem and then Lal Bahadur Shastri through the party’s choice became Prime Minister. Indira became Prime Minister only after the unfortunate demise of Lal Bahadur Shastri at Tashkent. Undoubtedly being Nehru’s daughter helped, especially because the Kamaraj Plan had eliminated people like Morarji Desai, but nevertheless this was not a dynastic succession.

At what stage did dynastic succession overtake the Congress Party? In 1967, when the country went through a period of purchase of power through corruption, United Front governments were formed and in the case of Madhya Pradesh. at least had the blessing of Indira Gandhi whodid not like D.P. Mishra, the M.P. Chief Minister did not mind his displacement. Politics took a very ugly turn because power suddenly became a commodity instead of a means of service and like all commodities, power too became purchasable. That marked the beginning of complete and absolute commercialisation of politics and the introduction of widespread corruption across the board. The J.P. movement of Sampoorna Kranti (Total Revolution) was a direct reaction to this and as a consequence thereof, as a means of self defence, Indira started looking for support within her own family because she did not trust her own party leaders. Her natural choice was her son, Sanjay and it is not necessary for us to recount here in detail what this led to, culminating in the proclamation of Emergency under Article 352 of the Constitution and Indira’s attempt, at the behest ofher son, to introduce authoritarian rule just short of an outright dictatorship . This attempt failed because our Constitution was too strong to be destroyed by such extra constitutional means and the institutions which we inherited from the British, the Civil Service, the Judiciary and the Armed Forces by and large stood firm and prevented authoritarian rule from degenerating into absolute rule. Forthis we must thank the British who gave us such institutions, which came under immense pressure, which sometimes succumbed, but ultimately

recovered enough to force Indira Gandhi to hold elections in 1977, at which she was defeated.

On return to power in 1980, after losing Sanjay in an air accident, Indira turned to her elder son, Rajiv Gandhi and brought him into politics despite his initial resistance. With Sanjay followed by Rajiv, Indira Gandhi was well on the way to establishing dynastic rulewithin the Congress Party. The entire top leadership of the Congress Party was decimated and replaced by sycophants and courtiers such as Debakanta Barua, or by leaders who would never resist Indira Gandhi, nor give her unpleasant advice. The party’s democratic structure totally eroded because now it had become the personal fiefdom of Indira Gandhi and her family. Sanjay certainly had no democratic instincts and inhibitions and though Rajiv was more gentle and gentlemanly than Sanjay, he was caught in a web in which despite his pronouncements that he would rid the party of sycophancy and restore ademocratic structure, the courtiers who surrounded him ensured that hewas never able to do so. Barua had chanted the slogan, “India is Indira, Indira is India”. Now the slogan in the Congress Party was that the party centred around Rajiv Bhaiyya only. Under these circumstances, a grass-root leadership can never evolve. After Rajiv was assassinated, the Congress, instead of reinventing itself as a grass-roots party, fell back on Sonia Gandhi, his widow. She, in turn,brought her son, Rahul into politics and the chorus from that day has been, “Sonia is our leader and Rahul must be Prime Minister”. Occasionally fluttering her wings on the sideline is Priyanka, Sonia’sdaughter and now the effort is to bring her into a leadership positionin the Congress.

This slightly long analysis has been done because the Congress Party went into the 2014 general election not as a democratically structuredparty but as a caucus, a clique, a coterie of which Sonia and Rahul were the leaders and everyone else was the willing servitor. That is why the campaign of 2014 was so heavily dependent on Sonia and Rahul and there was virtually no other known and respected face of the Congress as a leader of the campaign. In a way we could state that theCongress went into the fray not as a party but as the jagir (fiefdom) of the Nehru-Gandhi family. What is why the tried and tested

shibboleths which were used more than forty years ago were repeated instead of being discarded, including the one which advocated that theMuslims must come together and vote against the BJP, which is a “communal” party. Whereas this failed to completely polarise the Muslim vote, it certainly led to a reaction from a section of the Hindus, resulting in a marginal polarisation of the Hindu vote. Even amarginal polarisation of 82 percent of the population represents a huge number and this doomed the Congress campaign. Had there been a wide-based Congress leadership, it would have advised against such tactics and the Congress would have put up a much better showing.

The problem with the Congress Party is that it has no one to give saneadvice or ask the questions which could force the party to do rethinking on its leadership. No Congressman dares to suggest that Sonia Gandhi is simply not up to leading a major national party because she has neither the charisma of Indira Gandhi, nor the organisational skills of Sardar Patel, nor the popular backing of Jawaharlal Nehru. An objective analysis would have done to her what the Conservative Party did to Margaret Thatcher. She would have been advised to step down. When the Labour Party had a series of electoral defeats that party opted for young Tony Blair to lead it and he virtually reinvented the Labour Party. When, however, the Labour Partyfelt that Tony Blair was no longer at his best, it forced Blair to step down and selected George Brown as Prime Minister. That is how a democratic party functions. Had Congress been a party and not a clique, questions would have been raised about the manner in which Rahul Gandhi led the election campaign and he would have been asked tostep aside. Instead, Congressmen are falling over each other in begging Sonia and Rahul to lead them. Unless the party reinvents itself, by 2019 it would have made itself irrelevant.

The other antagonist, the BJP, went into battle with a completely different strategy. It became clear that the old guard of BJP had outlived its utility. This included L.K. Advani, Murli Manohar Joshi, Kalyan Singh and other old leaders who had failed to deliver in the past and could be depended upon to fail in the future. Because the BJPdid not carry the dynastic baggage of the Congress, it could take an objective view of its leadership. That is why in Rajasthan a ticket

could be denied to Jaswant Singh despite his seniority and when he walked out of BJP, the party could find a candidate not only to replace him but to defeat him in his own constituency. Had sentiment ruled, had emotion been given play, Jaswant would never have been denied a ticket, but in politics there can be no room for sentiment and emotion. Here there is room only for hard headed reality. Obviously, not being tied to the apron strings of a particular family,the BJP could take an objective view and take hard decisions on leadership issues. Much doubt was expressed by our media and others that if the senior leadership of BJP was ignored or sidelined there would be an internal revolt and the party would be crushed during elections. That did not deter BJP. How did BJP get this strength to change the entire top leadership?

The mentor of BJP is RSS. RSS has always denied that it has a political face or is openly involved in politics. It has always contended that it is a socio-cultural organisation which wants to restore pride of the people in the nation, encourage nationalism and, incidentally, protect Hindu interests. RSS has close links with BJP, most of whose top leaders have a RSS background. It is the general refrain of those who are anti RSS that RSS actually determines every move of BJP and that in government it calls the tune. RSS has always denied this. However, the fact remains that whereas a BJP Chief Minister may not totally ignore the RSS, that organisation, in turn, does not try and impose its will on a daily basis on how the government conducts itself.

One great advantage that BJP has over the Congress is that RSS is the mentor, which has kept itself outside the details and nuts and bolts of BJP politics. Therefore, the emotional bond that Congressmen have with the Gandhi family has no place in the RSS – BJP system, permitting the RSS leadership to take an objective view of matters pertaining to BJP. That is why when L.K. Advani returned from Pakistanafter making a controversial statement on Jinnah, he could be summonedto Nagpur and advised to step down from the presidentship of BJP. Advani had to obey. That is why the present RSS leadership could do a review of the BJP old guard and come to the conclusion that the time for change had come. There was a new generation of voters and that

generation did not relate to the old leadership of BJP. Under goading by RSS, BJP had no option but to take hard decisions about the replacement of the old leadership by a younger group led by Narendra Modi. Modi was not necessarily the first choice of RSS because he has an independent streak in him, but because the RSS leadership was objective, it accepted Modi without reservation. The result has been spectacular. RSS gave to BJP its large army of grass-root workers who spread into the field right down to village level. Modi gave a messageof development and hope which appealed to voters across the board, especially to the young. BJP went into battle not only with a well thought out order of battle but also with its formation commanders andits unit commanders right up to the last unit being properly briefed, motivated and trained. There could be only one outcome to the battle of Alamein, with victory going to Montgomery. In 2014, Modi was Montgomery but unfortunately Rahul was not even a shadow of Rommel. Inbattle he was a wraith, a pale shadow and Congress has paid the price for its own unfortunate blindness in waging a war under a leadership which is no longer relevant. When will the Congress have the objectivity to realise this, eliminate a failed leadership and bringing people of the calibre of Tony Blair? When will Congress reinvent itself? Right now it is game, set and match to Narendra Modi and his party.

One wishes the new government success in dealing with India’s problemsand leading us along the path of progress and prosperity. But for the sake of democracy, for a middle of the road benchmark, Congress must revive itself. If Sonia and Rahul are really as patriotic as they claim, they must step down and let a new, dynamic team, firmly rooted in ground realities, take over. However, Modi and BJP can rest easy for in the near future the Gandhi family is unlikely to retire and theCongress to see sense.

A Roadmap for Sino-Indian Cooperation in Afghanistan


Dr Shisheng Hu , Director, South Asia & Oceania Studies, CICIR

Lt General (Retd) R K Sawhney, Distinguished Fellow, VIF

Raffaello Pantucci, Senior Research Fellow, RUSI

As NATO and Western powers begin to take a backseat in Afghanistan’s future, one of the most pressing questions is what role the region canplay in helping Afghanistan to become a prosperous and stable nation. Numerous efforts are already underway through multilateral and bilateral forums, yet the key to regional cooperation for Afghanistan’s future lies through closer interaction between Beijing and New Delhi. Drawing on a research project spanning a number of workshops in Beijing, New Delhi and Qatar and involving influential thinkers and experts from China, India, the UK and Afghanistan, this paper will try to map out specific ideas that policymakers in Beijing and New Delhi can explore as avenues of cooperation. Post-2014 Afghanistan will remain a major regional concern for at least the short to medium term. The earlier China and India can develop workablecollaborative undertakings, the sooner they can forge a stable and prosperous neighbourhood.

Sino-Indian ties

Heralding 2014 as the ‘Year of China-India Friendly Exchanges,’ Chinese State Councillor Yang Jiechi declared, ‘Since the beginning ofthe 21st century, China and India have both embarked on a modernization drive and become the world’s most dynamic emerging markets.’ This declaration was followed by the visit to China of Indian Foreign Secretary Sujatha Singh who, in the middle of election season, visited Beijing as part of a blossoming strategic dialogue between the two countries. While longstanding tensions over a disputedborder and differing relationships of both countries towards Pakistan continue to act as irritants to bilateral relationship, the past year has seen some notable diplomatic successes that both sides seem eager to carry over into the new Modi administration.

Both sides have made progress on the border dispute through the creation of a code of conduct – the Border Defence Cooperation Agreement – that promises regularised dialogue between special

representatives from both sides. An agreement was also signed to renewand even enhance their hydrological information sharing, which, while going nowhere to address the deeper concern over China’s damming of the Yarlung Zangpo or Brahmaputra (as it is known in India), at least allowed authorities on both sides to claim they are talking about the problem. Progress has also been made through a regularised counter-terrorism dialogue, which now allows Special Forces from both sides toconduct regular joint-exercises. In April, a visit to India by a senior PLA delegation headed by Deputy Chief of General Staff Lt. Gen.Qi Jianguo also paved the way for closer military-to-military ties that have been in deep freeze during recent years. The trend in the Sino-Indian relationship, despite the occasional hiccups, is towards closer coordination on a wide spectrum of issues. And while the election season in India placed something of a hiatus on any major initiatives between Beijing and New Delhi, both sides agree that thereexists a potential for a better relationship between the two Asian powers. Commenting to media persons prior to going into meetings with his visiting Indian counterpart, Chinese Vice Foreign Minister Liu Zhenmin stated ‘we are confident that promoting the China-India friendship is a shared consensus of all political parties in India.’1

Coming to the present, the Chinese government have extended their greetings and best wishes to the new Indian Prime Minister Mr NarendraModi on his resounding victory in the just concluded elections. Vice Minister Liu pointed out that Modi was ‘not an unknown quantity’ to China.2 The new Chinese administration under Xi Jinping has placed a particular premium on its border relationships and there has been a clear signal in the past few years that China is increasingly focused on what Professor Wang Jisi has termed the ‘March Westward.’3 Both powers have increasingly looked to their common Central Asian backyardas an area in which they see possible trade links, as well as a regionin which security concerns might emanate from.

There is a perceptible convergence of interests of both countries in Afghanistan where both Asian giants have invested a great deal and areincreasingly seeking to find ways of cooperating together. So far, this cooperation has remained at a largely rhetorical level, but as NATO and western interest draws down, the two Asian powers will

increasingly find themselves in a position to help steer Afghanistan into a more prosperous and stable future. This task may not be as daunting as it seems. On quite a few issues, there is a sufficient amount of unanimity on Afghanistan between China and India. Both countries agree that the rehabilitation of Afghanistan should be “Afghan-owned and Afghan-led”4; and there is a strong convergence on the importance of investment and economic development. Even cooperation on Afghanistan’s security, where the picture is obscured by the differing attitudes that both countries hold towards Pakistan and its militant proxies, Delhi and Beijing see eye-to-eye on a numberof fundamental issues. Both confront a similar domestic threat from terrorism and extremism and worry about overspill from Afghanistan, yet neither country sees the answer to this problem in sending troops.Cooperation between China and India, therefore, is best structured using a three-pillar approach: security, economics and politics, with a fourth pillar of regional cooperation playing a supporting role thatfeeds all three main pillars. Taken together, these three aspects offer a stable platform upheld by China and India on which Afghanistancan construct its future.

Security

The key to Afghanistan’s future is security. Without security, economic and political stability is unlikely to come about and the country will remain unattractive to external investors. The recent first round of the election campaign was relatively secure, demonstrating that the nation’s security forces are becoming more capable at maintaining their own security, but they still face considerable difficulties. Ultimately, Afghanistan is a country with significant economic potential that has so far remained underdevelopedin part due to an environment that is dominated by warlords or insurgents. But the problems of insurgency and warlordism are in part fed by an underdeveloped economy that weakens the central state. The elimination of these problems and the solution to this dilemma is not immediately apparent, but Afghanistan’s long-term stability is ultimately contingent upon the as yet distant goal of a strong economy- something that will be dependent to some degree on the cessation or reduction of violence. For China and India, bolstering what green

economic shoots are visible needs to be a priority to guarantee the country’s long-term stability.

However, in the short-term, more direct measures can be taken by both China and India to strengthen the government and the Afghan National Security Force (ANSF). India has already instituted a program with Russia to bolster ANSF capability5 and China has provided some soft military and policing support in the form of equipment6. And both China and India already play a role in supporting and training the ANSF: following Zhou Yongkang’s visit in September 2012, China agreed to train some 300 police personnel over four years7while India has provided training to at least 650 Afghan Special Forces and officers.8

But when taken within the context of broader ANSF numbers, which currently stand at 352,000 and will probably shrink to 228,500 (in line with the 2012 Chicago declarations),9 China and India’s contributions to training are minimal. So while both China and India are the countries most likely to feel the immediate impact of the growth of instability from Afghanistan (given their physical proximity), their contributions do not reflect this fact. This is at least in part because neither power is eager to involve itself within the difficult quandary of Afghan security too deeply – having watched as NATO and the West have struggled for the past decade. The way forward is to strike a path that means China and India contribute moreto Afghanistan’s security, but do it in a way that supports an Afghan-led solution.

In practice, this could mean maintaining a light touch in terms of deploying kinetic forces, but expanding the number of all ranks that China and India train for the ANSF. The current numbers are small, andboth countries have suggested that they are willing to contribute more. These words need to be turned into practice. If both countries increase their current contribution to an annual figure rather than a cumulative total over a period of years, this would provide a boost tothe ANSF’s capability both physically and psychologically. Focusing these training missions on units that might be of direct support to Chinese and Indian interests might be a way of strengthening the rationale for the missions. This could involve training an elite unit

to provide diplomatic security at embassies or consulates, or to provide training for ANSF on border-securing and crisis management. Ifthis plan succeeds, China and India could grow the program by traininga mineral assets protection force – potentially drawing on the over 100,000 men currently under arms who are due to be de-mobilized. Theseforces could then provide security at the many Chinese or Indian-ownedmining sites around Afghanistan. These sites are likely to be a focus of future Chinese and Indian economic activity in the country for the immediate future and will also form a substantial part of the tax basefor the future Afghan economy. Both countries could discuss their future cooperation in security in post-2014 Afghanistan reconstructionthrough the many already existing mechanisms, including the Diplomaticlevel Strategic Dialogues, or the Defence and Security Consultation between the Ministries of National Defence.

Of course, China and India do not agree on all security-related issues, and these differences can feed into mutual suspicion or even hostility. Beijing and Delhi maintain opposing views on whether the Afghan Taliban can be reconciled; to what extent the insurgency is being directed by the Pakistani state – as opposed to rogue elements within it; and whether Kabul should prioritise a predominantly counter-insurgency-based army as opposed to one capable of fighting conventional war.

Yet at the same time, China, India and Afghanistan also agree on the need to counter terrorism from Afghanistan and the threat posed by a renewed and strengthened Taliban. As President Xi Jinping put it aftermeeting President Karzai in Sochi, Russia, on the fringes of the Winter Olympics, ‘China is ready to strengthen cooperation with Afghanistan in fighting the ‘three evils’ of separatism, extremism andterrorism as well as transnational crime.’10 India has regularly founditself the target of terrorists in Afghanistan, with its Embassy hit by suicide bombers in 2008 and 2009, its consulate in Jalalabad in 2013, and its consulate in Herat was attacked in May 2014. In 2010 a guesthouse known to be popular with Indian doctors in the city was attacked by a suicide bomber and shooting attack. A number of Indian nationals died in these incidents that were clearly aimed at Indian interests, highlighting how India finds itself in the particular

crosshairs of the anti-state insurgency in Afghanistan. While China has been spared this level of direct attacks, the reality is that Chinese nationals also work under threat in the country and some have died11. Both clearly see the threat of terrorism in and from Afghanistan as a problem and cooperation in countering it would be a sensible next step. This concurrence in concern about terrorism has already been translated into practical action elsewhere, with China and India having already undertaken three rounds of ‘Hand in Hand’ bilateral training and counter-terrorism training drills.12

It is unlikely that China and India will be willing to deploy forces in great strength on the ground to counter terrorist threats in Afghanistan (or to help stem the insurgency within the country), but working together to help develop a specific Afghan counter-terror force that is able to deal with specific threats both nations see brewing on the ground against their interests offers a way they might build on this bilateral cooperation in a regional framework. The existing bilateral channel for counter-terrorism training exercises could be used for this purpose; yet the Shanghai Cooperation Organization (SCO) could also be made to play a greater role in Afghanistan. Under Chinese chairmanship in 2012, Afghanistan was finally brought into the organization when it was granted Observer Status. And while India is also still only an Observer in the organization, India’s diplomats have never hesitated to highlight the potential benefit the SCO could bring to Afghanistan. In a speech at the Heads of Government meeting in December in Tashkent, Indian Foreign Secretary Sujatha Singh called ‘for a greater role’ for the SCO in ‘rebuilding Afghanistan.’ She also conveyed that ‘India has always held the position that full-scale cooperation by the SCO could be vital for stabilising Afghanistan.’13 Reflecting this, at Sochi in February, President Xi told President Karzai, ‘China is also ready to push the Shanghai Cooperation Organization to play a bigger role on the Afghan issue.’14

In practice it is easy to wonder about the practicality of these statements. The SCO has historically been relatively ineffective: but the organization does provide a useful forum in which members can negotiate over border disputes, conduct training drills and exchange

information about terrorist groups and organised crime. These are all issues that China and India (as well as Afghanistan and most members of the SCO) see as common concerns that lie at the heart of potential Sino-Indian cooperation on Afghanistan. The idea could be to push the SCO to become more than simply a regular meeting place, but rather a centre for regional coordination on security measures to help stabilize Afghanistan. Concerns might be raised by other SCO members who prefer to keep their relationship with Afghanistan at a bilateral level: but these issues can be mitigated by the fact that not all SCO activities have historically included all members. For example, China regularly undertakes bilateral military training exercises with individual SCO members, and not all powers have opted to participate in some activities. And finally, China and India could both play a more active game politically within the SCO to try to influence the organization – appointing senior, well-connected and effective diplomats to roles within the organization, or as representatives to meetings. This would create the impetus from within that is required for the SCO to offer practical solutions to Afghanistan’s problems.

Economics

Encouraging security cooperation will help Afghanistan in the short-term, but as highlighted before, the long-term solution for a stable and prosperous nation is a thriving economy. This is also an area in which Chinese and Indian interests overlap. Both are currently invested heavily into Afghanistan, through aid (where India is the largest contributor) as well as through infrastructure projects and investment in the country’s mining potential. This trend is set to accelerate as the Xi Jinping administration in China develops its ‘Silk Road Economic Belt’, which envisages the creation of a vast network of transport arteries and trade routes between China’s westernregion of Xinjiang, Central and South Asia and, ultimately, Europe. India, meanwhile, launched its own ‘Connect Central Asia’ strategy in 2012 that envisions Afghanistan as a regional trade hub, crisscrossed by energy pipelines and air, rail and road links which it is hoped will one day link up with the subcontinent.

On the ground, Chinese state owned firms MCC and Jiangxi Copper have taken the lead in trying to exploit the Mes Aynak copper mine in Logarprovince, while in the north, CNPC has paired with the Afghan Watan Group to develop the oil fields in the Afghan part of the Amu Darya basin. India has trodden more gingerly into Afghanistan’s mining sector, with SAIL AFISCO holding back on committing to the contract itwon to exploit the Hajigak Iron ore mine, waiting to hear the resolution of Afghanistan’s mining legislation.15 The Chinese firms, which invested and started working on the projects in Amu Darya and Mes Aynak, have increasingly found themselves facing problems on the ground and sought to hold off much further work until the political situation becomes clearer and the mining law is passed16.

The problems China and India face in these cases are very similar. First, of course, there is the security situation. This in part can beresolved by some of the security measures highlighted above, in particular in the fostering of a specific ‘Minerals Security Force’ that could draw on the substantial numbers of demobilized ANSF men andthe dissolution of a 17,000-strong guard force (that protects militarysupply convoys, international aid programs and foreign installations) that are expected in the wake of the West’s drawdown in Afghanistan. Yet the problems that both sides face also concern Afghanistan’s youngand inefficient bureaucracy. While there are many smart Afghans who have returned home to help their country grow, the country continues to suffer from a brain drain. This problem is particularly prevalent in the white-collar class that provides the managers, technocrats and scientists who act as the motor for a modern economy. This is a community that China and India could take an active role in helping grow, offering scholarships for young Afghans to take courses at Chinese and Indian technical colleges, with a surety built into the program that guarantees they spend at least three years working in Afghanistan after they finish the course.

A secondary problem that Chinese and Indian firms often encounter is local corruption, be this in terms of partners that fail to deliver orthose that offer themselves as short cuts through the system. As the two largest external investors in Afghanistan’s mining industry, Chinaand India have an opportunity to establish some of the ground rules of

how business is done. Since India and China are the biggest investors and potential consumers of Afghan resources and goods, both countries should look to cooperate and discuss their respective views for Afghanistan’s economic future, and work with the Afghans to help them map out national development master plans, urbanization plans, five-year like economic development plans, stock markets, market based rules and regulations, quarantine criteria and other practical economic structures. Both countries could highlight their respective support for Afghanistan’s economic development by holding in turn an annual Afghanistan Investment Forum. Given that Chinese and Indian investment in Afghanistan is being led by state owned enterprises, therespective governments in Beijing and New Delhi are in a position to issue edicts to their firms seeking to invest in Afghanistan that theyhave to adhere to some basic code of conduct that prevent them from paying bribes or using corrupt methods to undercut competition. While both nations already have strong codes of conduct in place for their companies operating abroad, the reality is that in a difficult countrylike Afghanistan, these measures can sometimes get lost in the difficult terrain. But establishing strict rules for national firms, and agreeing them between Beijing and New Delhi means that two of Afghanistan’s largest prospective investors (and likely competitors inmineral mining tenders) will be on the same page from this perspectiveand this may help reduce problems and accusations of corruption on larger mining concessions.

Yet Afghanistan’s economy will not thrive if it is only able to mine and export its natural wealth. The extractive industry is not very labour intensive, and the overwhelming majority of Afghanistan’s economy is built on agriculture and textiles. However, at the moment, bad infrastructure and unfair competition from neighbouring countries stifles the ability of Afghanistan’s farmers to profit from their workand encourages communities to grow more profitable opium instead.

Greater collaborative efforts could also be undertaken in infrastructure development in Afghanistan. Longer-term collaboration in this direction could see regional infrastructure being developed ata multilateral level, strengthening regional trade and cooperation between China, India and, Afghanistan.

At a multinational level, China and India are already engaged in the many World Bank (WB) and Asian Development Bank (ADB) driven initiatives in the region: CAREC, CASA 1000 or even TAPI. The Heart ofAsia process (to be hosted in Tianjin, China this year) runs in parallel to the WB and ADB initiatives, and is aimed at reconnecting Afghanistan to its region. Even the SCO, which was founded on the principle of border security and counter-terrorism, has been looking into developing more as a vehicle for regional cooperation on joint resource exploration; infrastructure projects and regional finance. Both China and India work alongside each other in all of these formats– but greater coordination between both countries on their positions in these organisations would improve the chances of projects being implemented. Currently, there has been little progress towards achieving this – something that is likely driven by uncertainty over Afghanistan’s future, but is also due to a lack of leadership. As the Asian giants with the wealth and companies to actually implement theseambitious infrastructure projects, China and India should play a more forward role in making them move from rhetoric to action. This is something that would fundamentally be to both China and India’s full advantage, not only because of the positive effect these projects would have on Afghanistan’s stability, but also because they would help secure Chinese and Indian access to the Afghanistan’s mineral wealth – something both countries need to support their domestic economic growth. It would further help provide their national firms another region in which they can win major and lucrative infrastructure projects – projects that will help connect China and India to Middle Eastern markets and their further potential.

Politics

The third important pillar for a stable and prosperous Afghanistan in the longer-term is political reconciliation. This is possibly the mostdifficult pillar of all three, partially because the current politicalprocess in Afghanistan is highly uncertain. It is hard to know what impact the presence of NATO and western forces has on this process andto what extent their removal might change the political environment. Similarly, Hamid Karzai, a politician who has built up considerable negative political capital abroad currently dominates Afghan politics.

What Afghan politics will look like with the change of government is unclear, making it difficult to make any quick judgements on how political reconciliation process will unfold post-2014.

But Karzai or no, some realities on the ground will not change. In particular, Pakistan’s fraught relationship with Afghanistan will continue to play a significant role in the country’s future and the political process in the country. This is something that both China and India can play a role in mitigating – for China, to continue to use its close relationship with Pakistan as a way of ensuring that Pakistani concerns and interests in Afghanistan are maintained, while the new government in India could reiterate that their relationship with Afghanistan is not in any way directed against Pakistan.

Ultimately, both China and India believe that the reconciliation process should be Afghan-led. And while outside powers like Pakistan undoubtedly have a role to play, they cannot maintain a veto over the process. Both China and India should help Afghanistan in facilitating this process to the extent possible. Using their regional great power status, Beijing and New Delhi can use their joint influence to bring Afghanistan’s other border partners like Iran or Turkmenistan into anypolitical process.

Conclusions

Standing on the cusp of western withdrawal from Afghanistan, China andIndia will soon find themselves in a position where they are called upon to help resolve Afghanistan’s problems. This may be because they will be seen as the only regional actors with the capacity to take effective action or perhaps because they are the countries that stand to lose most if things in Afghanistan turn out badly. Either way, bothAsian powers need to start thinking now about what they can do to helpAfghanistan in the future. The outline offered here is by no means a comprehensive one, but rather a framework with practical ideas that decision makers and policy actors in Beijing and New Delhi could use as the basis for their future interactions with Afghanistan. Kabul hasshown that its security capability is growing and has responded positively to many of these ideas and actively called for both nationsto help the country in this difficult transition period, but what has

been missing are some ideas for what shape cooperation between the twoneeds to look like.

As the two biggest and most prosperous BRICS countries, the question of what role China and India will play in the future world order is a question at the heart of current conversations about international relations and politics. By focusing on Afghanistan as an area for collaboration and cooperation, Beijing and New Delhi offer a glimpse into what the future might look like and what the world can expect from an increasingly Asian world order, as well as helping a deeply troubled Afghanistan to finally come out from its long night.

Dr Shisheng Hu , Director of South Asia and Oceania Studies at the China Institute for Contemporary International Relations (CICIR)

The Dreaded Emergency: How the Constitution was Mutilated


Dr. A Surya Prakash, Distinguished Fellow, VIF

June 25 marks yet another anniversary of the Internal Emergency imposed by Prime Minister Indira Gandhi in 1975, leading to the eclipse of democracy and 19 dreadful months of dictatorship, suspension of fundamental rights, incarceration of politicians and journalists critical of her regime and even forceful sterilisation of the population in rural India.

Ms.Gandhi took recourse to article 352 of the Constitution to turn a vibrant democracy into an autocracy just to remain in office after theAllahabad High Court held her guilty of corrupt practice in the previous Lok Sabha election and barred her from contesting elections for six years. The Supreme Court stayed this order but barred her fromspeaking or voting in Parliament, thus making her continuance as PrimeMinister untenable. Unwilling to step down, and egged on by power-hungry colleagues, Ms. Gandhi spotted an un-used provision in the Constitution and with the help of a pliable President – Mr.Fakruddin

Ali Ahmed – transformed herself into a dictator. This encouraged lumpen members of the Congress Party to crush dissent, ride roughshod over government officials and declare Indira Gandhi the supreme leader. This regime also wrought havoc on the Constitution and shackled every institution including Parliament, the Judiciary and themedia.

The story of the Emergency is a long and painful one, but it must never be forgotten if we are to preserve the Constitution and the democratic system that we regained after the Indira Gandhi regime was thrown out by the people in the Lok Sabha election held in March, 1977. This article however will confine itself to the manner in which Indira the Dictator subverted the institution of Parliament and coerced MPs into amend the Constitution just so that she may remain inoffice as Prime Minister.

Fearing coercive action by Indira Gandhi, ruling party MPs vied with one another to pass some of the most shameful amendments to the Constitution, drafted exclusively to help Indira Gandhi wriggle out ofthe election corrupt practices case. These amendments were pushed through both Houses of Parliament because the government had jailed a number of opposition MPs. Further, the Congress Party got the support of the Communist Party of India (CPI).

The first of these, the Constitution 38 th Amendment barred judicial review of the emergency proclamation, judicial review of ordinances promulgated by the President or Governors and judicial review of laws that contravened fundamental rights.

Then came the Constitution 39 th Amendment, which was meant solely to pre-empt the Supreme Court, which was hearing India Gandhi’s election case. This extraordinary amendment prohibited the Supreme Court from hearing election petitions against the Prime Minister, Speaker, the President and the Vice- President. It said parliament would establish a body to hear such petitions. Further, it placed all laws pertaining to elections in the Ninth Schedule (to bar judicial review) and declared that with the passage of this amendment, all election petitions before courts would abate. This was followed up with the Election Laws Amendment Act passed on August 5, 1975 specifically to

nullify the points upheld by Justice Jagmohanlal Sinha of the Allahabad High Court against Indira Gandhi. This amendment said anyonefound guilty of a corrupt election practice could go “to the Presidentfor determination … whether such person should be disqualified and, ifso, for what period”. One of the charges upheld by the Allahabad High Court judge was that Indira Gandhi, in violation of law, took the assistance of a government servant in her election campaign. In order to overcome this, the law was amended to say that if a government official while on official duty assisted a candidate in an election, he “shall not be deemed to have assisted” the candidate. It also changed the legally effective date for an official’s resignation from government service.

But this was just for starters. More was to follow. In the days and months that followed, parliament was thus consumed in just one activity – making laws to save Indira Gandhi. If this meant a blow against the Constitution, so be it. After the 39th Amendment came the Constitution 40 th Amendment which placed an anti-media law in the Ninth Schedule to bar judicial review. Then came the Constitution 41 Amendment Bill. Introduced in the Rajya Sabha on August 9, 1975, two days before the Supreme Court was to hear India Gandhi’s election petition, it amended Article 361 to say: No criminal proceedings “whatsoever” could lie in court against a person who is or who had been the President, Prime Minister, or Governor for acts “done by him,whether before he entered upon his office or during his term of office”. Also, no civil proceedings can lie against persons holding these offices “in respect of any act done before or after he entered office”. This is a typical fascist amendment. It was passed by the Rajya Sabha on the very day of introduction.

Can any democratic Constitution have a provision like this, which places some citizens above or beyond the law? The meaning of these amendments was that there was no way in which we could proceed againstthe Prime Minister if he or she were to commit murder either before orafter assuming office. Similarly, if the Prime Minister had taken a loan and failed to repay it, there could be no civil proceedings against him or her. This shook the very foundation of our Constitutionbecause equality before law and equal application of all laws is the

basic premise of a democratic Constitution. Fortunately, though the Rajya Sabha passed this amendment with undue haste, there was some rethinking and the Bill was kept on hold.

Among the amendments made to the Constitution during the Emergency, the 42 nd Amendment was the most comprehensive and its primary aim wasto clip the wings of the judiciary. It was introduced in the Lok Sabhaon September 1, 1976 and after passage through the two Houses of Parliament received the President’s assent on December 18, 1976. This amendment declared that henceforth any amendment to the Constitution cannot be questioned “in any court on any ground”. It declared that the amendments to the Fundamental Rights Chapter was beyond judicial review and that Parliament’s power to amend the Constitution is unlimited “ by way of addition, variation or repeal”.

This meant that Parliament henceforth had the unfettered power to preserve or destroy the Constitution. Some of the other provisions were: Barring High Courts from ruling on the constitutionality of central laws; barring High Courts from issuing stay orders relating to“any work or project of public utility” ; insertion of Article 31 D prohibiting “anti-national activity” and stating that creating “internal disturbance” and “disrupting harmony” is anti-national; declaring that no law made in this regard is unconstitutional merely because it is inconsistent with fundamental rights in Articles 14, 19,31. Further, in order to avoid any debarment of MPs for electoral malpractices (as in the case of Indira Gandhi), the 42 nd Amendment said courts cannot disqualify MPs found guilty of corrupt election practices. Henceforth, the President would decide on disqualification after “consulting” the Election Commission. The amendment also weakened the federal structure when it empowered central forces to operate under central control when sent to a state to preserve order.

As if all this was not enough, the 42 nd Amendment abolished the need for quorum in Parliament and state legislatures. Until this amendment,the Constitution stipulated that the quorum to constitute Parliament and state legislative bodies was 10 per cent of the strength of each House. Once this was done away with, it became technically possible for a single MP to make law for the entire country!

Finally, the most shocking and reprehensible provision in the 42 nd Amendment was the power it vested in the President for two years to amend these provisions in the Constitution, through an executive order! It said if there were any difficulties in giving effect to the Constitution as amended, the President may, by order, for up to two years, “adapt or modify the provision to remove the difficulty”. Through this provision, Parliament had passed on its exclusive power to amend the Constitution to the executive.

Working under the shadow of a dictatorship, parliament adopted break-neck speed to amend the Constitution specially when the amendment was meant to bail out the Prime Minister from the election malpractices case. The 39 th Amendment will go down as the fastest Constitutional Amendment in India’s History. It was introduced in the Lok Sabha on August 7, 1975 and passed that very day after a two hour “debate”. It was introduced in the Rajya Sabha on August 8, 1975 and passed that very day. On August 9, a Saturday, all state legislatures were summoned to ratify this amendment and on August 10, 1975 it received the President’s assent. The reason for this over speeding was the Congress Party’s desire to pre-empt the Supreme Court which was to begin hearing Indira Gandhi’s appeal against the Allahabad High Court judgement on August 11, 1975. Taken together, these amendments robbed the Constitution of its soul and turned India into a dictatorship.

Fortunately, the Congress Party was routed in the 1977 Lok Sabha election and the Janata Party, a rag-tag coalition of disparate parties which was brought together under one flag and symbol by leaders of these parties while in jail, was swept to power. This regime collapsed within three years, but one thing the Janata Party, which had stalwarts like Morarji Desai, Jagjivan Ram, Atal Behari Vajpayee, Nanaji Deshmukh and Madhu Dandavate, did for India was to restore the country’s democracy and its independent institutions through the Constitution(44 ) Amendment.

Therefore, come June 25, we must thank the Janata Party for putting our democracy back on track and remember the millions of citizens who suffered during the Congress Party’s dictatorship. We must also remember gratefully the resistance put up by political and social

workers, including cadres of the Rashtriya Swayamsevak Sangh, the Socialists and the Communist Party of India (Marxist), because those who forget history are condemned to repeat it!

The Senkaku/Diaoyu Islands Dispute: A Preliminary Analysis


Shikha Aggrawal, Research Associate, VIF

In his seminal work, ‘The War Puzzle’ John Vaquez establishes that territorial issues constitute the fundamental cause of interstate warsin the modern global system since 1495. Elaborating further upon his thesis, Vasquez argues that territorial issues per se do not constitute a direct causal variable in leading to wars. However, the very presence of ‘territoriality’ as a contentious issue makes wars more probable.1 As such, a thorough study of territorial disputes institutes a core dimension within the domain of international and security studies.

With international politics no longer governed along ideological faultlines, territorial equations today are often rooted in geopolitical contexts and are thus regarded as manifestations of perceived nationalinterests (political, economic, and security) of the states. Due to this close association with these national concerns, territorial disputes frequently assume a nationalistic dimension. The sentiment ofnationalism acts as a dualistic construct of cause and effect in determining the course of territorial conflicts, and their relative importance in a country’s political and strategic calculus.2

The Senkaku/ Diaoyu Islands dispute in the East China Sea is a conflict that entails implications not only for the East-Asian regional dynamics, but has rather become the euphemism for Great PowerPolitics. This situation owes to the existence of a complex conflict structure involving ‘assertive’ positioning (attitudes and behaviour) by the parties (structures) involved in the dispute3: the People’s Republic of China regards the Islands as their ‘core national interests,’4 and hence is committed to recover the Islands through

diplomatic or military means; Japan refutes the very existence of any sovereignty debate over the Islands and bought three of the disputed Islands from their private owners in 2012, thus, further intensifying the conflict; the United States of America, though claiming a neutral stance over the sovereignty debate, is committed to defend the Japanese interests under the Treaty of Mutual Cooperation and Securitybetween the US and Japan.

Though both China and Japan have, by far, refrained from resorting to direct armed confrontation for settling the Senkaku/Diaoyu dispute, any military resolution to the issue would render a precursor to the future of the power transition theory between China and the United States of America. This inference is rooted in the psychological underpinnings associated with the outcome of wars, and their effects upon the ‘power equations’ between states. In case of a Sino-US war over the Senkaku/Diaoyu islets, a resolution in favour of China would undermine the confidence of the East Asian nations in America to preserve their interests in the region. This situation would destabilize the very existence of US pivot in Asia. Moreover, the military victory would consolidate China’s position as the ‘hegemonic power’ in East Asia. This would further narrow the ‘power gap’ betweenthe PRC (revisionist state) and the United States of America (hegemonic state), and thereby satisfy the cardinal precept for the onset of “hegemonic war” as described in Organski’s thesis. 5,6

Furthermore, any solution to the issue would set a precedent, in both normative as well as symbolic terms, for the settlement of other sovereignty claims upheld by Japan and China vis-à-vis other countries. As such, the conflict presents a crucial study from the strategic point of view.

Most importantly, the Senkaku/Diaoyu problem in several ways highlights the fundamental inconsistency between the claims of sovereignty based in 14th century Asia, and the norms of internationaldispute settlement developed in Europe centuries later. This divergence owes to the fact that the traditional East Asian international system that existed until the late 19th century entailedextremely different connotations regarding the concepts of sovereignty

and territorial boundaries than those enshrined in the modern Westphalian system. Unlike the Westphalian system that institutionalized norms regarding the notions of sovereignty, diplomacy, nationality, and commercial exchange, traditional East Asian international system operated within the dynamics of the Confucian world view. As such, the traditional East Asian regional order was patterned along a hierarchical construct, with China as the hegemonic power. Within this system, states derived their status and ranking from their cultural achievements, rather than military or economic prowess. Moreover, as David C. Kang has demonstrated, demarcation of uninhibited rocks in the middle of water bodies was nota practice in the East Asian region five hundred years ago. Therefore,Kang asserts that most of the current debates over different Islands in East Asian waters are political disputes and not historical issues per se.7 Therefore, it is imperative for IR analysts to explore the dynamics of the East Asia regional construct pertaining to this period, and argue the legitimacy and applicability of the concept of ‘sovereignty’ based upon this ancient regional order.

The Senkaku/ Diaoyu Dispute: Core Issues

The Senkaku/ Diaoyu Islands refer to a tiny group of islands, comprising a land area of 6.3 Km2, in the East China Sea. The islands consists of eight tiny insular formations, of which only two are over 1 Km2 (the Diaoyu/Uotusri Island is the biggest one with a land area of 4.3 Km2), five are completely barren, and none are currently inhabited or have had any kind of reported human activity.

Table I: Islands appertaining to the Senkau/Diaoyu archipelago8

At the outset, the Islands dispute primarily involves two fundamental issues: the question of sovereignty over the disputed islands; and theissue of demarcation of the maritime boundary between Japan and China.These issues are further exacerbated due to a complex construct involving security, economic, and political concerns.

The “territorial” aspect of the conflict essentially emanates from a divergent reading of history by both China and Japan. It is within the

context of historicity that the dispute assumes a symbolic significance. For the Chinese, the Senkaku/Diaoyu dispute represents yet another legacy of Japanese war-time aggression against China.9 As such, any resolution to the islands issue from the Chinese side would be conceived within the dynamics of convergence between pragmatic concerns of economics and security, and the politics of Chinese nationalism derived from a collective memory of past humiliation.

Similarly, Japan regards the developments of the late 19th century pertaining to its annexation of Ryukyu Islands, Bonin Islands as well as the Senkaku/Diaoyu Islands to be lawful territorial consolidations,and unrelated to its overseas military ventures or imperial expansion.10 As such the sovereignty dispute over the Senkaku/Diaoyu Islands is associated with the idiom of national pride for the Japanese. This interplay between territorial disputes and popular nationalism serves to limit the policy choices for resolving the sovereignty debate by both countries.

The issue of demarcation of the maritime boundary is rooted in the specific geographic features of the East China Sea. Under the 1982 United Nations Convention on the Law of the Sea (UNCOLOS), the territorial waters of states extend up to a limit of 12 nautical milesfrom their baseline. Further, the states can also claim a sea area of 200 nautical miles from the baseline as their Exclusive Economic Zone (EEZ).11 However, this delineation becomes complicated in the case of East China Sea as the coast-to-coast distance is less than 400 nautical miles (only 360 nautical miles). Ownership of the Senkaku/Diaoyu Islands would enable China to exert sovereign rights over the continental shelf along with the EEZ to the north and east ofthe disputed Islands. This would allow China exclusive economic rightsto the entire southern portion of the East China Sea. Likewise, sovereignty over the Senkaku/Diaoyu Islands would entitle Japan to extend its EEZ to the north and west of Islands, beyond the Okinawa Trough.12

The maritime boundary aspect of the Islands dispute is further rendered difficult due to the differing interpretations of international laws pertaining to the seas by the claimant states.

Whereas, Japan stresses on the ‘equidistance principle’ to demarcate the maritime boundary between China and Japan, the Chinese insist on the ‘principle of natural prolongation’ to solve the boundary question.13 As per Article 76 of the UNCLOS, a coastal state can claiman area up to 350 nautical miles from its baseline as its extended continental shelf under the principle of ‘natural prolongation’. The coastal state has the sovereign rights to explore mineral and non-living resources in the subsoil of the continental shelf. China arguesthat the Okinawa Trough in East China constitutes the natural maritimeboundary between the PRC and Japan, and hence claims the Senkaku/Diaoyu Islands as falling within the 350 nautical miles area of its continental shelf that extends from its coast to the Okinawa trough. However, Japan insists that the Okinawa Trough is only an “incidental impression in an otherwise continuous continental shelf” and therefore, cannot constitute a natural maritime boundary. Accordingly, Japan favours an equitable division of the waters of the East China Sea by drawing a median line that is equidistant from the baseline of Chinese coast and the baseline of the Ryukyu Islands.14

For the feasibility of this study, the Paper will restrict itself to exploring the political, security and economic dimensions of the problem. In order to achieve this stated objective, the study shall explore and debate the historical documents cited by the both China and Japan to justify their claims over the Senkaku/Diaoyu Islets.

Various Dimensions of the Issue: Interplay between Political, Security, and Economic Concerns

The Senkaku/Diaoyu Islands are located approximately midway between Taiwan and the Ryukyu Islands, around 120 nautical miles northeast of Taiwan, 200 nautical miles southwest of Okinawa, and 230 nautical miles east of China. This particular location of the Senkaku/Diaoyu Islands underscores the security dimension of the dispute. Sovereigntyover the contested Islands would enable Japan or China to project its military prowess along a prolonged and enlarged frontier, thereby putting the other side into a disadvantageous position.

Furthermore, the Senkaku/Diaoyu dispute also entails geopolitical implications for both China and Japan. The sovereignty issue over the

Islands involves a crucial relationship with PRC’s ‘One China’ policy.China regards the Senkaku/Diaoyu Islands as part of Taiwan, and validates its rights over the Islands on the basis of its claim over the ROC. As such, loss of sovereignty debate over the disputed Islandswould jeopardise its concerns in Taiwan as well. It is in the context of Taiwan that the Senkaku/Diaoyu dispute gets associated with the notion of regime stability in China. In the words of Chinese scholar, Zhongqi Pan, “If the Chinese government wavers in its position on the Diaoyu (Senkaku) Islands, its legitimacy would be immediately challenged by the Chinese people in both the mainland and Taiwan.” 15

Moreover, as stated above, any solution to the Islands issue would seta precedent for the resolution of China’s claims in the South China Sea in particular, and its territorial disputes with other countries in general. Similarly, for Japan the issue holds consequences for its differences with Russia over the “Northern Territories” and with Koreaover the Dokdo (Takeshima/Takdo) Island.

Notwithstanding the security and political significance of the Islandsto the claimant states, the current dispute traces its origin to the 1968 report by the United Nations Economic Commission for Asia and FarEast (ECAFE). The report by the ECAFE suggested the possibility of large hydrocarbon deposits in the waters off the Senkaku/Diaoyu Islands. As such legal control over the Islands would confer upon the owner nation the “exclusive rights” to exploit the natural resources in the vicinity of the Islands. The economic value of the Islands should be of particular concern to China whose oil consumption is already the second largest in the world. According to some estimates, China’s oil consumption is expected to reach 590 million metric tonnesby 2020, nearly three-quarters of which will be imported by that time.

The Dispute: Legacy of Post-Second World War History

The recent history of the Senkaku/Dioyu dispute is located within the dynamics of international politics in the post-World War II period. This international political scenario is characterized by international treaties concerning the status and transfer of various territories, trans-regional alliances, and the changing contours of East-Asian politics and economy.

The current dispute over the Senkaku/Diaoyu Islands began with the 1969 US-Japan joint statement16 that culminated in the Ryukyu Reversion Agreement of June, 1971. 17 As per this agreement, the Senkaku/Diaoyu Islands were returned to Japan as part of the Okinawa. Previously, the Senkaku/Diaoyu Islands had been placed under the US administration as part of the Nansei (Ryukyu) Islands in accordance with Article III of the 1951 San Francisco Treaty. Article III of the San Francisco Treaty stated18,

“Japan will concur in any proposal of the United States to the United Nations to place under its trusteeship system, with the United States as the sole administering authority, Nansei Shoto south of 29 north latitude (including the Ryukyu Islands and the Daito Islands)…. the United States will have the right to exercise all and any powers of administration, legislation and jurisdiction over the territory and inhabitants of these islands, including their territorial waters.”

The US-Japan joint statement immediately triggered nation-wide protests by Chinese students in the United States.19 On June 1, 1971, the Republic of China (ROC) Ministry of Foreign Affairs issued a formal statement laying down Taiwan’s claim over the Senkaku/Diaoyu islets on the basis of history, geography, and the principle of long usage of the Islands by the Taiwanese peoples. The ROC further adducedthe provisions of the 1943 Cairo Declaration, the Potsdam Declaration of 1945, and the1952 Treaty of peace between the ROC and Japan to legitimize its claims over the disputed Islands 20 This aspect of the problematic involving the relationship between the Islands dispute andaforementioned treaties will be discussed in detail later in the Paper.

Meanwhile, in November 1970, the Japanese government had proposed the ROC and South Korea to carry out ‘joint development’ of the undersea resources in the East China Sea. This joint development exercise was to be conducted without any reference or prejudice to the sovereignty claims of the participant nations in the East China Sea.21 It was at this juncture that the PRC entered into the dispute through an articlein the Peking Review in December 1970. The article accused the United States and Japan of setting up a “liaison committee” to plunder

Chinese and Korean seabed resources in “collusion” with the “Chiang Kai-shek Gang and Pak Jung Hi puppet clique”. The article further stated that “...supported by US imperialism, the reactionary Sato government is also seeking various pretexts for incorporating the Tiaoyu, Huangwei, Chihwei, Nanhsiao, Peihsiao and others, as well as water areas which belong to China, into Japan’s territory.”22

The PRC Foreign Ministry issued its formal statement with respect to the Senkaku/Diaoyu issue in December 1971. The statement for the firsttime stated China’s legal status on the dispute, and declared:23

“…..the Tiaoyu and other Islands have been China’s territory since ancient times. Back in the Ming dynasty (A.D. 1368-1644), the Islands were already within China’s sea defence areas; they were islands appertaining to China’s Taiwan but not to Ryukyu….Like Taiwan, they have been an inalienable part of Chinese territory since ancient times….The Chinese people are determined to recover the Tiaoyu and other Islands appertaining to Taiwan.”

As can be inferred, the statement inextricably linked the Senkaku/Dioyu dispute to China’s claims over Taiwan, and thus renderedthe issue a central significance within China’s political apparatus.

The year 1972 served as the watershed year for the Senkaku/Dioyu Islands dispute. In 1972, the US ended its trusteeship of the Islands and formally returned the Islands to Japan. Following U.S President Richard Nixon’s rapprochement towards China and the subsequent visit to Beijing in 1972, both China and Japan embarked on the negotiations that led to the establishment of diplomatic relations between the two countries.24 Pursuant to this development, Japan severed its relationship with the ROC in 1972. This political realignment thus changed the contours of the conflict from being a ROC-Japan issue to adispute between the PRC and Japan.

It is within the ‘apparent peace’ build-up between China and Japan that yet another strand of the Senkaku/ Diaoyu dispute emerged. The Chinese claim that during the normalization talks in 1972, there was a‘tacit agreement’ between Japanese Prime Minister Tanaka and Chinese Premiere Zhou Enlai to shelve the Island issue. However, Japan argues

that it never reached an agreement with China about "shelving" or "maintaining the status quo" regarding the Senkaku/ Diaoyu Islands.25 As such, Japan does not recognize the existence of any issue regardingthe territorial sovereignty of the Senkaku/Diaoyu Islands.

On the Contrary, the Chinese version of the same conversation, made public only in 2012 through an article in the People’s Daily argues that both Zhou and Tanaka decided to stall the issue for future negotiations and deliberations.26 Through this interpretation of the conversation, China attempts to showcase the Senkaku/Diaoyu Islets as a ‘mutually recognized’ disputed territory.

Understanding the Claims: The Politics of History

Within the framework of the dispute both China and Japan agree on the fact that Japan exercised the de facto control of the Senkaku/Diaoyu Islands from1895 until the end of the Second World War. While Japan emphasizes this period of undisputed Japanese administration to assertits claims over the disputed Islands, the Chinese base their argumentson the pre-1895 period when they claim to have occupied the Islands. To support their claims, both countries take recourse to various international and bi-lateral treaties. This divergence in interpretation of history and legal documents pertaining to the issue necessitates a study of the arguments of both claimants.

In 1870s, Japan annexed the Ryukyu (present day Okinawa) Kingdom. However, it refrained from laying any claims to the Senkaku/Diaoyu Islands till 1895, when it finally annexed the Islands through a Cabinet decision (Appendix I). During the period between 1895 and the Second World War, Japan administered the disputed Islands as part of the Okinawa prefecture.

China argues that Japan took possession of the Islands after the defeat of the Qing court in the 1894 Sino-Japanese War. The PRC asserts that as the Senkaku/Diaoyu Islets appertained to Taiwan (formerly Formosa), the Islands were ceded to Japan as part of the Formosa Island under Article II of the Treaty of Shimonoseki, concluded between Qing China and Japan in May 1895. Article II of the Treaty of Shimonoseki stated:27

“China cedes to Japan in perpetuity and full sovereignty the followingterritories, together with all fortifications, arsenals, and public property thereon….2(b) The Island of Formosa, together with all islands appertaining or belonging to the said island of Formosa…..2(c)The Pescadores Group, that is to say, all islands lying between the 119th and 120th degrees of longitude east of Greenwich and the 23rd and 24th degrees of north latitude….”

Hence, China stresses that the Islands should be returned to it as perthe provisions of the 1943 Cairo Declaration, and the Potsdam Conference of 1945. Signed in November 1943, The Cairo Declaration proposed,28

“They [the Allies] covet no gain for themselves and have no thought ofterritorial expansion. It is their purpose that Japan shall be stripped of all the islands in the Pacific which she has seized or occupied since the beginning of the first World War in 1914, and that all the territories Japan has stolen from the Chinese, such as Manchuria, Formosa, and The Pescadores, shall be restored to the Republic of China. Japan will also be expelled from all other territories which she has taken by violence and greed.”

The Potsdam Declaration, signed in July 1945 further reinforces the terms of the Cairo Declaration. Article 8 of the Declaration reads:29

“The terms of the Cairo Declaration shall be carried out and Japanese sovereignty shall be limited to the islands of Honshu, Hokkaido, Kyushu, Shikoku and such minor islands as we determine.”

However, Japan refutes the Chinese assertion that the Senkaku/ Diaoyu Islands were included as part of the Taiwan and Pescadores (Penghu) Islands annexed by it under the Treaty of Shimonoseki. As per the Japanese claims, the cabinet decision to occupy the Islands in 1895 was the result of a 10-year-long survey on the disputed Islets, which confirmed that the Islands showed no trace of having been under the control of China. Based upon this argument, Japan claims that the Islands were occupied by it under the principle of terra nullius (landwithout owners) as enshrined in the modern international law on territorial acquisition. As such, Japan maintains that the

Senkaku/Diaoyu Islands were never included in Article II of the 1951 San Francisco Treaty, whereby Japan denounced its claims over ‘Formosaand the Pescadores Islands’ or the 1952 Treaty of Peace between the ROC and Japan which reiterated Article II of the San Francisco Treaty,and further declared that “…all treaties, conventions, agreements concluded before December 9, 1941, between China and Japan have becomenull and void as a consequence of the war.”30

Japan further argues the PRC and Taiwan only began laying their claimsover the Senkaku/Diaoyu Islands after the discovery of the prospectivepetroleum resources in the Senkaku/Diaoyu seabed. To consolidate this argument, Japan stresses the fact that neither Beijing nor Taipei everraised any objections against the exclusion of the disputed Islands under Article II of the San Francisco Treaty. Also, both China and Taiwan never protested against Article III of the said Treaty, wherebythe Senkaku/Diaoyu Islets were transferred to the US as part of the Okinawa. However, this argument from the Japanese side is refuted by China on the grounds that the San Francisco Peace Treaty cannot exert finality on the dispute as neither the PRC nor Taiwan were signatoriesto the treaty.

To justify its claims, Japan cites historical documents which describethe disputed Islands as its territory. Two such documents pertain to the maps published in the Republic of China New Atlas, and the World Atlas, both published in China in 1933 and 1958 respectively. Both these maps depict the disputed Islands as the “Senkaku Islands” and not Diaoyutai Islands (See Appendix II, III).

Other documents put forth by Japan to reinforce its claims include a 1953 article that appeared in the People’s Daily and which describes the Senkaku/Diaoyu Islands as part of the Ryukyu Islands (See AppendixIV). Another important article cited by Japan vis-à-vis their claims over the disputed Islands appertains to a 1920 ‘Letter of Appreciation’ by the Consul of the Republic of China in Nagasaki to the Japanese citizens to thank them for helping the Chinese fisherman in distress. The letter refers to the Senkaku Islands as part of the Okinawa Prefecture (Appendix V). However, it must be noted that China refutes the relevance of this evidence on the grounds that since the

Senkaku/Diaoyu Islands, along with Taiwan were already under the Japanese control from 1885, the Consul referred to them as being Japan’s territory.

In addition to employing maps and official correspondences, Japan alsotakes recourse to historicity to justify its claim over the Senkaku/Diaoyu Islands. Japan posits that Formosa was not exactly under the control of the Fujian province during the Ming dynasty. It was only in 1683, under the Qing that Formosa was included in the Chinese territory.31 Through this interpretation of history, Japan seeks to nullify the Chinese claim that the Islands were China’s territory during the Ming rule.

As against the Japanese arguments, the Chinese claims to the Islands emanate from the historical narrative of the Ming (1368-1644) and the Qing (1644-1911) periods. Chinese historical records detail the discovery and geographic features of the Senkaku/Diaoyu Islands as early as 1372. During this period, the Islands were used as navigational aid for the official Chinese missions to the Ryukyu Kingdom, which was in a tribute relationship with China at that time. As per the Chinese records, during the period from 1372-1879, the Chinese Emperors sent some 24 investiture missions to the Ryukyu Islands to confer the title of Zhongshan Wang (the Chung-shan King) ontheir new rulers.32 China also argues that the name “T’iaoyutai” firstappeared in a Chinese book entitled Shun-feng Hsiang-sung (May Fair Winds Accompany You) published in the fifteenth century.33

China insists that the Islands were incorporated into its maritime defence as early as 1556. Some of the documents cited to support this claim by the Chinese include the Illustrated Treatise on Coastal Defence. Compiled in 1562, the volume recorded all Chinese military deployments in the coastal areas on the mainland and offshore Islands.The disputed Islands were recorded in two maps labelled Fu7 and Fu8 inthe first scroll of the volume whose title is “Atlas of the Islands and Shore of the Coastal Region.” (Appendix VI). Likewise, the RevisedGazetteer of Fujian Province complied in 1871 indicates the presence of the “Diaoyutai” behind Taiwan, and their utility to anchor large ships (Appendix VII).

Interestingly, China employs studies by certain Japanese scholars to augment its claims over the Senkaku/Diaoyu Islets. Two prominent worksin this regard are the 1785 map drawn by noted Japanese cartographer, Hayashi Shihei, titled the Illustrated Survey of Three Countries; and a study by Japanese historian Inoue Kiyoshi, “Senkaku” Islands: A Historical Explanation of the Diaoyu Island. The map by Hayshi Shihei uses the traditional four pigment colouring method, with Chinese territories, including the Senkaku/Diaoyu Islands marked in red (Appendix VIII). This map was further translated into French and published in 1832 by a German scholar of Oriental studies, Heinrich Klaproth. The book by Inoue Kiyoshi cites several documents pertainingto the Ming period to establish Chinese sovereignty over the Senkaku/Diaoyu Islets.34

In addition to this, China cites certain official Japanese documents which indicate that Japan was aware of the fact that the Islands were not terra nullius. One such document relates to an October 21, 1885 letter of response by the Foreign Minister of Japan to the Home Ministry (Appendix IX). The letter states that the Islands bear Chinese names and that a Chinese newspaper has already carried a report regarding Japan’s intentions to occupy the Islands near Taiwan.It further requests the government to wait till the “appropriate” timeto establish its claim over the Islands.

China also argues that the ten years investigation by Japan to ascertain the status of the Senkaku/Diaoyu islets was never completed.This assertion is supported through a letter written by the Okinawa Prefectural Governor 1892. In the letter, the Governor states that since the initial investigations of 1885, no subsequent field surveys have been conducted on the Islands (Appendix X).

The Chinese also refer to some usage of the disputed Islands as evidence of their claim. One such interesting record is that in 1893, just two years before Japan occupied the Islands, Dowager Empress Tsu Hsi of Qing issued an imperial edict through which the Islands were awarded to a Chinese alchemist who had gathered rare medical herbs on the Islands.35

Analysis of the Claims:

In addition to establishing the authenticity of the documents producedby both China and Japan to assert their claims over the Senkaku/DiaoyuIslets, the dispute calls for an examination of the concept of ‘ownership’ over the Islands within the dynamics of the antiquated historical narratives of the countries. Within this context, a carefulstudy of China’s claims reveals that the disputed Islands have been mentioned in the Ming historical records only for the purpose of navigational aid between the imperial court and the Ryukyu Kingdom. Moreover, China never established a permanent settlement of civilians nor of military personnel on the Senkaku/Diaoyu Islands. Therefore, itcan be deduced that China never established any ‘direct’ ownership over the Senkaku/Diaoyu Islands. On the contrary, Japan exercised de facto control over the disputed Islets for a period of fifty years, beginning from 1895 to the end of the Second World War in 1945.

The second aspect of the problematic concerns the economic dimension of the dispute. In this respect, it is significant to question China’sfailure to object to article II, and III of the 1951 San Francisco Treaty. The Chinese argument that neither Taiwan nor the PRC were signatories to the Treaty fails to explain China’s silence on the matter for almost two decades. It is within these dynamics that China’s claims over the Senkaku/Diaoyu Islands, originating only afterthe discovery of possible hydrocarbon deposits in the waters off the disputed Islets, indicate a classic case of economic opportunism.

India’s economic diplomacyIn October 2013, during the early days of his campaign, when candidateNarendra Modi said “a strong economy is the driver of an effective foreign policy,” it was a sign of things to come.

Since then, ‘economic diplomacy’ has become the buzz-phrase, put into action by Modi himself. Inviting the SAARC heads of state to his inauguration ceremony, conducting hydropower diplomacy with Bhutan and soon, practising some international investment relations with

Japan, China and the U.S. are acts of Modi’s economic diplomacy to be used for India’s growth agenda. Within the week of his being sworn in as Prime Minister, prestigious intellectual and industry institutions in the capital like the Centre for Policy Research and FICCI held meetings focused on understanding and using economic diplomacy to India’s benefit.

It’s not a moment too soon. For too many years, India’s intellectual elite and foreign policy establishment have ignored economic statecraft, focusing instead on the ‘immediacy’ of the security and political compulsions of diplomacy. For a brief moment in 2006, when India’s growth rate was 8.5% and the India-U.S. nuclear deal was signed, it seemed like economics would dominate politics. But growth fell to 4.5%, the nuclear deal moved not an inch towards implementation, and with electoral politics once again in the foreground, economics was forgotten.

The global financial crisis hit soon thereafter, investments dried up and even our political and security diplomacy touched new lows. It wasparticularly poor judgement, as economic diplomacy was the need of thehour and India could have shown some leadership.

Now a determined, focused push to gain lost ground seems likely – and the role that Indian business can play is vital. The conditions are conducive. First, trade is already 50% of our GDP – up from 35% in 2006. This is largely due to export of software services and raw materials.

Second, Indian direct investment abroad is an impressive $105 billion – and catching up with the $186 billion of foreign direct investment into India. This means corporate India is already a significant globalplayer, with businesses from oil to tea located across the world – a benign and as-yet-unused resource abroad.

Third, our aid diplomacy has made some impact around the world and andearned us goodwill. India’s lines of credit are upwards of $10 billionand especially popular is our ITEC programme which provides training in accounts, IT, English, rural management and so on, in 120 developing countries. Stepping up this engagement can open doors for our business interests.

Modi can only take advantage of this if he can persuade Indian business to move beyond individual corporate objectives and fashion a joint effort with government to achieve strategic national objectives.This will require policy and mindset changes by government and business.

India Inc can show good intention with some immediate moves. It can support the build-out of independent intellectual think tanks, endow study centres and university chairs. These will build policy and research capacity and incubate much-needed India-centric ideas, databases and global trends analyses – an activity Modi will appreciate. Indian business can accelerate deputations to state or central departments of domain and legal experts in statistics, contracts and tax, financing, trade negotiation, energy, technology – areas where government is lacking. These deputations can be project-specific or for a limited period of three years, on the corporate payroll, with a binding secrecy contract.

Private business can work with our public sector on foreign projects. Gail is a globally respected multinational giant with major operationsabroad. A syndicate with India’s private energy and infrastructure players can help counter our rival, the Chinese state juggernaut. An alignment with India’s interests abroad has helped many an Indian company become globally competitive.

Finally our chambers of commerce must grow beyond event management: they must boost their presence and expertise overseas, and become experts in articulating India’s global business interests.

The government too must overcome its timidity and shortcomings. Enlarging the size of the tiny, 700-person ministry of external affairs and populating it with commercial counsellors and trade services experts is an imperative. Free trade agreements (FTAs) are languishing without negotiating expertise, as is our participation in regional trade fora, all substitutes for the World Trade Organisation (WTO), which collapsed because of Indian and U.S. differences.

We can regain global stature by reviving, humbly, the WTO talks along with the U.S. And we must bring down our tariffs closer to global averages. This will be possible only with inter-ministerial co-operation – now at a dismal low. The foreign and commerce ministries must deepen their teamwork both at home and at missions abroad.

Modi has made it clear that he will support those who support India’s strategic intent. If think tanks, business and government combine to put their best ideas forward, India’s diplomacy can bring to the global table, the full benefit of its intellectual, economic, political and security capacity.

Dimensions of Cyber Security in India


Lt Gen (Retd) Gautam Banerjee, Executive Council, VIF

Preamble

This is the information age and therefore like all lucrative assets ofthe past ages, information assets must be an object of competition andconflict – and in extreme cases, warfare. This conflict is being played out in a new domain: the cyber-space. With increasing dependency on the cyber domain for every aspect of human endeavours, it is obvious that like all national assets, India’s cyber-space has to be secured against all forms of espionage, subversion, sabotage andattack.

In this article, it is proposed to discuss the theology of cyber security and the fundamental considerations that might lead to its effective implementation in the Indian context.

Civil and Military Functions of Cyber Security

There are five domains in which the civil as well as military functions of national security have to be performed, viz, land, sea, air, space and cyber- space. In reference to the last named, it is a common supposition that there is singular convergence of civil and military functions. The misconception is reflected in the use of undefined terminologies and loose semantics which lead to confusing juxtaposition of concepts that govern the issue of cyber security. Factually though, the said convergence is no more prominent than it isin the context of civil-military interplay in all of the other domainsof inter-state competition and conflict. In order to make the best useof our resources in achieving a fair degree of cyber security therefore, it is important to promote clarity and consistency in ruling definitions and concepts in the Indian context.

We understand that every nation nurtures its own set of specific aspirations in consonance with a given set of geo-political, social and natural assets. These aspirations go to define the path for national prosperity which are then sought to be protected by the triumvirate of national power, viz, socio-political, economic and military security. The first two of these aspects of security are civil functions whereas the third takes recourse to warfare to performits role. The distinction to note here is that the civil functions of socio-political and economic security of a nation is bound by inter-state ideological differences, geo-political adversities, competition

for resources and business rivalries - all aimed at extracting more and more self-advantages. This is a continuous process. Military security, on the other hand, is an extreme step that is performed as alast resort to force the adversary to desist from his unbearable animosity either by threatening to, or by actually inflicting physicalpunishment on him. For the intervening periods of no-war, the purpose of the military institution is to prepare for that extreme eventualitycalled ‘war’. This distinction between the civil and military functions of national security influences the domain of the cyber-space just as it does in others domains of competition and conflict; it has universal applicability.

Appreciation of the afore-stated distinction is more relevant in the Indian context. This is so because in the Indian dispensation, military power is not seen as a fulcrum of nationhood as it is in the case of America or China and a host of other countries. Recognition ofthe distinction would obviate emergence of discrepancies between the civil and military functions that is caused by use of undefined phraseology like ‘cyber security’, ‘cyber-attack’, ‘cyber warfare’ etc.; our cyber policies must clearly convey as to what is intended tobe accomplished.

Cyber Security and Cyber WarfareIn general, civil functions of national security involve fierce inter-state machinations that are marred by economic usurpation, industrial espionage, technology denial, geo-political ganging etc. – all carriedout under a façade of civility. These machinations, vicious as these may be, are yet not described as ‘warfare’ simply because there is no element of force-imposition here. In the civil domain therefore, cyber-intrusions, disablers, corrupters, theft, sabotage etc., and thecounter-measures against these, may not be termed as cyber warfare. Conversely, ‘cyber warfare’ is a military function and its prosecutionis but a military operation, to be conducted in the spirit of extreme measures - just as it is in the case of conventional, sub-conventionalor nuclear warfare. Notably however, when it comes to cyber security skills and resources, there is near-total commonality between the

civil and military domains. In view of these subtle-yet-salient distinctions, formal apportionment between the civil functions of ‘cyber security’ from its military counterpart, ‘cyber warfare’, is obligatory to obviate emergence of policy irrationalities.

Civil Functions of Cyber Security

Civil functions over the cyber-space have four denominators :-

Public Services (health, education, civil-supplies, social security schemes, essential services),

Financial Services (banking, subsidy funding),

Industry (manufacturing, service sector, R&D, trade),

Governance (policy, procedure, statistics, survey, records, administration).

The burden of cyber security is driven by inter-state political and ideological differences, competition for resources including ‘knowledge’ itself, business rivalries and even terrorism. Accordingly, civil functions of cyber security aim at securing the cyber-space in a manner as to prevent inimical acts of the following kinds :-

Sabotage of ‘National Information Infrastructure’ (NII) through intrusion into electro-magnetic spectrum,

Inducing collapse, corruption or diversion of the nation’s InformationTechnology (IT) driven public service, administrative, economic, technical and industrial infrastructure.

Psychological subversion of the society to manipulate public opinion.

Cyber-threat in civil domain may emanate from foreign or domestic sources, both adversarial or friendly. These sources could be state intelligence agencies, economic and technological competitors, foreignmilitary establishments as part of their war preparedness, and lastly,rogue non-state elements perpetrating acts of cyber-terrorism. The threats are characterised as follows:-

Paralysis of cyber intensive systems at the national level to freeze the adversary’s ability to function unencumbered.

The saboteur may not be easily identifiable. Even if identified, the perpetrator’s system architecture may be difficult to decipher, thus hampering effective counter-action.

Once triggered, even the perpetrator will not be able to control the intended degree of paralysing effects upon the adversary, neither is it possible to contain the damage from affecting unintended parties. To that extent cyber-sabotage is like terrorism.

It would be banal to expect a nation to submit to launch, or the threat of launch, of cyber-sabotage. Therefore, it is not a civil deterrence like economic sanction, technology denial etc.

Dependence on global cyber-assets like the Internet, GPS, digital information, satellite images etc. has some advantages too. Due to itsworld-wide connectivity, cyber-sabotage on one party would also cause collateral damages to the cyber-assets of unintended public and private sectors at the global arena – and that imposes caution upon the saboteurs.

Notably, in the matter of cyber security, only a thin line separates the passive and defensive measures with the active and offensive ones.Therefore, there must be a strong pro-active as well as reactive element of offensive built into the civil functions of cyber security.However, in instituting these measures, the problems of role-overlap and mix-up of organisations would arise. It would therefore be necessary to formally define the civil functions of cyber security activities to distinguish these from their more intense and destructive military counterpart, and so obviate defocus and redundancy. This end could be met through promulgation of a comprehensive ‘National Cyber Security Protocol’ (NCSP), a part of which may remain confidential.

Cyber Security Mechanisms

Considering India’s policy orientations, protection of the cyber-spacefrom manipulations and intrusions from inimical parties would mostly be sought to be achieved through passive measures; execution of pro-active disabling actions seems to be rather farfetched in our context.Accordingly, the civil functions of cyber security in our context would involve the following mechanisms:-

Warning and response to cyber-attacks,

Retrieval of cyber-assets – primary, secondary and tertiary data, protocols and processes, and,

Restoration of the compromised cyber driven systems – economic, industrial, technological, societal systems.

It will be noticed that first of the three mechanisms involves adoption of pre-emptive and retaliatory counter-measures. The problem,however, is that in the cyber domain, defensive actions come the cropper unless coupled with pre-planned, debilitating cyber-intrusions. Therefore, notwithstanding any reluctance over policy endorsement, the mechanism must have an element of pro-active offensive to be able to warn and respond to an impending cyber-attack.The other two mechanisms are skill, process and resource intensive in nature. Obviously, all three mechanisms have to be operative at full gear at all times.

For judicious and overarching control over these complex and widespread mechanisms, India will have to go beyond just promulgating rhetorical cyber security policies. Indeed, formal enunciation of an elaborate NCSP would meet that end. Further, to implement and control the NCSP, it would be sensible to construct an organisation, duly empowered in terms of authority over policy direction, coordination, legal scrutiny and enforcement across the public as well as private sectors.

Cyber Warfare in the Military Domain

In the military domain, operations that are undertaken to gain information superiority fall under the ambit of ‘Information Warfare’ (IW). Within that ambit, offensive and defensive ‘Information

Operations’ (IO) are waged by means of weaponised intervention, electronic warfare etc., ‘cyber warfare’ being one such mean that is prosecuted in the cyber-space. Cyber warfare therefore is truly a ‘military operations of war’, to be conducted as an element of offensive and defensive IO, and waged in the same spirit of ultimate measures. It is distinguished by predominance of offensive content andis to be prosecuted through military-dedicated IT-based satellites, data warehouses, maps, communication net-works, GPS, UAV, AWACs, PGM etc. However, while civil functions are to be operational at all times, the military function during peace-time is to prepare and test continuously, letting go at war-time to disable the opponent’s military, quasi-military and civil infrastructure. Herein lies the distinction between the civil and military functions of cyber security. Conversely, there are many commonalities between the two functions with respect to the above discussed civil cyber security mechanisms as well as the software skills, hardware and processes.

Objectives of Cyber Warfare

The purpose of cyber warfare is to degrade the adversary’s surveillance, reconnaissance, command, control, communication and intelligence systems through cyber-attacks on his operational nerve centres. These are ‘disabling’ attacks which must be complemented with‘disorienting’ attacks which are aimed at registration of false information to the enemy and make him 'see' non-existent battle groups, missiles, bridges, etc, thus inducing him into irrelevant committal of his forces. The combined result is expected to lead to disruption and dislocation of the enemy’s orchestration for war.

As an element of IO in defensive as well as offensive modes, cyber warfare would focus upon the following aspects: -

Command and Control Warfare (C2W): The objective is to attack the adversary’s ability to generate and communicate commands to its forcesand disable or corrupt his Defence Information Infrastructure (DII).

Intelligence Based Warfare (IBW): It is the integration of sensors, processors and data-links to achieve efficient reconnaissance,

surveillance, target acquisition, target engagement and finally, damage assessment.

Electronic Warfare (EW): Communication as well as non-communication combat to achieve degradation, disorientation, interruption and corruption of the adversary’s electro-magnetic emissions is classifiedas EW. In other words, it implies domination of electro-magnetic spectrum.

Psychological Warfare: This is aimed at targeting the adversary's mental orientation and perception, and thereby influence his intent.

Hacker Warfare: This is defined as destruction, degradation or corruption of adversary’s computer data-base and automated decision support and executive processes.

Infrastructural Warfare: Under the civil functions, this involves ‘information blockade’ and ‘information imperialism’ to derive political and economic advantage. Under warlike conditions, its extreme manifestation leads to attacks on the adversary’s primary infrastructure – railways, power plants, oil sector etc. for example.

The Regime of Cyber Security

Most advanced countries have instituted robust mechanisms to protect their cyber domain. In this respect, USA enjoys overwhelming superiority even if she takes care to keep her elaborate activities under wraps. Besides passive measures, she secures her cyber-space by technology driven barrage of highly complex cyber-intrusions and backsit up with deliberate enticement of cyber-attacks from adversaries andfriends alike to break into their algorithm. To do so, civil and military functions of cyber security are seamlessly enmeshed to produce the best results, cyber- attacks like ‘Gauss’, ‘Stuxnet’, ‘Duqu’, ‘Flame’ etc. being a few known ones. China, on the other hand,depends upon her innovative mass of cyber operatives, reportedly two million strong, to support her cyber security regime, much of which iscommitted on internal surveillance and the rest being devoted to intrusive hacking. The score for the European nations stands even despite many reported hacking attacks from China and Russia, not to speak of their all-weather ally, the US. In any case, not being at the

centre-stage of global circus, the European stakes are mainly limited to economic cyber-assets.

India is a novice in comparison, even if there have been some tentative attempts made to venture into the realm of cyber security. These attempts are however, more or less confined just to work-stationaccess-denials, blocks against hacking and back-up storage. Whereas the private sector has taken few baby-steps to maintain a facade of security of its IT-based assets, the state, nonplussed as it seems to be in the matter, is not motivated enough to proceed beyond promulgating a policy-outline that cries out for more serious substance. Of course, certain laudable efforts have been made in the Government’s intelligence set up and the ‘Department of Electronics and Information Technology’, but these are individual rather than institutional initiatives, and therefore confined just to specific bands of the threat-spectrum.

A Structure for Cyber Security

Having discussed the functions of civil cyber security and military cyber warfare and the differences as well as commonalities between thetwo, it becomes apparent that: One, there would have to be a substantial degree of congruence of resources and efforts in protecting the Indian cyber-space; and Two, when it comes to prosecution of cyber warfare, it would have to be a purely military venture. Thus appears the necessity for an apex body to coordinate these primary and secondary functions at the national level. Accordingly, we may conclude the discussion with a brief look at some of the measures that might afford the desired level of protection to the indigenous cyber-space. These measures could be:-

Establishment of a ‘National Cyber Regulatory, Control and Security Authority’ (NCRCSA), to coordinate between the civil NCSP and the military ‘Cyber Warfare’. Incorporation of a ‘Cyber Research Department’ would also be necessary.

Regulation, coordination and strengthening of the civilian cyber activities of the ‘National Information Centre’, ‘National Crisis Management Centre’, ‘National Cyber Response Centre’, ‘National

Information Infrastructure Protection Centre’, ‘Computer Emergency Response Teams’, NDMA, NTRO, Department of IT, DOT, MHA, MoD and the private sector under the aegis of the proposed NCRCSA. The responsibility and wherewithal for cyber security is too diffused at present to be able to prevent cyber-attack, and respond to it quickly and effectively.

‘Cyber Command’ may be formed to plan and prepare prosecution of CyberWarfare across the service barriers, and in coordination with the national level authority. A ‘Cyber Warfare Research Establishment’ must form part of this Command. NCSP and Cyber Warfare must be permanent and continuously performing commitments, with permanent set ups and flexible recruitment and training rules, and as stated, function under the overarching management of the proposed NCRCSA.

Conclusion

The stage when creation of cyber-assets becomes contingent upon its robust protection has arrived in India. It is time therefore to accordhigh priority to cyber security even if it means some compromise with proliferation of the nation’s cyber domain. The foremost considerationin seeking that end is that if our cyber security has to remain inviolable, the security measures have to be tailored to Indian conditions and devised by native genius. This consideration further reinforces the cause of formal apportionment of roles and responsibilities between the civil and military functions of cyber security.

BIMSTEC and BICM: Two Competing Sub-Regional Frameworks?


Brig (Retd) Vinod Anand, Senior Fellow, VIF

Prime Minister Manmohan Singh recently visited Myanmar to attend the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation summit (BIMSTEC). This sub-regional framework came about

in 2004 as part of India’s overall strategy of restoring its traditional links and integrating India with its immediate and extended neighbourhood besides responding positively to the imperatives of globalization.

Thus the vision of BIMSTEC is to improve connectivity between India, Bangladesh, Myanmar, Thailand and other members through a network of multi-modal transport corridors. These networks would facilitate trade, exchange of energy through oil and gas pipelines, promotion of tourism and increase of communication links leading to what can be termed as a zone of co-prosperity.

It also needs to be noted that BIMSTEC contains most of the major SAARC countries except Pakistan. Further, India also has a Trilateral Dialogue with Myanmar and Thailand addressing the same issues. It can also be said that because SAARC has not made any progress due to intransigence of Pakistan, BIMSTEC was another alternative to include most of the other South Asian countries to promote economic cooperation. There is also a Ganga –Mekong Initiative to link countries of Mekong Basin (Myanmar, Thailand, Cambodia, Laos and Vietnam) with India. All these are in addition to the major organisation in South East Asia i.e. ASEAN. Even though there is an overlap in goals and objectives of a number of regional and sub regional groupings, BIMSTEC remains an important sub set of India’s ‘Look East Policy’ set in motion in the mid 1990s.

So far as Bangladesh, India, China and Myanmar (BCIM) forum is concerned, it has been in works for over a decade now (since 1999). Infact it was a Track II platform, known earlier as Kunming Initiative, that was formed for sub-regional cooperation revolving around trade, commerce and connectivity. The BCIM grouping gained some traction whenit was first mentioned in the Joint India-China communiqué during PM Li’s visit to India in May 2013 and it was again discussed between thetwo during PM Manmohan Singh’s visit to Beijing in October 2013. Thus,it became a Track I initiative with the prospects of the objectives ofBCIM being realized. As a follow up of Heads of State meetings, a Joint Study Group of BCIM to chart out the modalities for achieving the goals of BCIM economic corridor was set up and it held its first

meeting at Kunming in December, 2013. However, the question remains asto whether this sub regional grouping would make some headway in the coming years because of the perceived geo-political competition between the BCIM and BIMSTEC.

Even though India has agreed in principle for a BCIM Economic Corridorbut it appears highly unlikely that it would be realized in an early timeframe in any meaningful manner. The Indian establishment’s security apprehensions about activities of several insurgent and rebelgroups in North East India and their links with some Chinese elements still persist. These groups are involved in a host of anti national activities like gun running, drug trafficking and media reports have indicated they are also being used by foreign intelligence agencies (e.g. Anthony Shimray incident where Chinese intelligence agencies were alleged to have been involved in fuelling insurgency by sending ahuge consignment of Chinese arms to NSCN(IM) in the NE; there have also been reports of some Chinese intelligence agents being active there; ISI has also been involved in sending arms).

Further, China lays claim to Arunachal Pradesh and therefore dangers of throwing open the North East to exploitation of Chinese economic juggernaut cannot be overemphasized; it would have its own negative strategic connotations. Tirap district of Arunachal Pradesh is inhabited by Nagas and there is an insurgent activity there. The insurgents have been getting Chinese origin arms through Kachins residing across the Myanmar’s border and beyond from Sino-Myanmar border regions. Even though some funds for constructing Ledo/Stilwell Road have been earmarked yet it would be against India’s security interests to revive the old Burma/Stillwell Road linking India’s NE toYunnan through Myanmar. This is despite the fact that enormous commercial benefits (especially with reduction of transportation costs) might accrue.

While there is a dire need to develop the North eastern states of India and China can provide the wherewithal for infrastructure development including the much needed funds, Japan remains a better alternative as a source of funding and development for the North East.During the visit of Japanese Prime Minister Shinzo Abe in January

2014, Japan has been invited to take part in the infrastructure development of NE States. It also needs to be noted that China had prevented the Asian Development Bank in 2007 from giving loans for development projects in Arunachal Pradesh.

Additionally, there is a growing trade imbalance between India and China and any free flow of trade and commerce through the envisioned BCIM economic corridor or China’s ‘Southern Silk Road’ would only increase the trade imbalance against India as China has not been able to practically address India’s grievances on this issue in any meaningful way despite remonstrations by India to this effect during summits and other bilateral exchanges.

China has also expressed its desire to join BIMSTEC and there have also been talks of merging or combining of BCIM and BIMSTEC. In a practical sense, it would not be worthwhile to add China to a regionalsub-grouping that would be dominated by China taking away India’s central role in this sub-regional initiative. Another contradiction between the objectives of BCIM and BIMSTEC has been that while BIMSTECaims to develop west to east connectivity, BCIM’s objective is to forge connectivity in North-South direction. The motivating strategic impulse between the two remains at variance thus giving rise to the perceived geopolitical competition.

While Manmohan Singh might have agreed to move towards realizing the BCIM corridor, its prospects do not seem to be bright. Unless there isa fundamental change in the nature of Sino-Indian relations except forhosting some Kolkata to Kunming car rallies and some other peripheral activities the substance in BCIM would remain absent. Substantive issues of BCIM would only receive attention when the geo-politics between both nations move towards a positive resonance.

Indian policy makers should not involve China in such Indian projects that would enable China to influence the local people in the North East in many ways that might prove to be detrimental to Indian interests. If China were allowed access to this region, then Chinese economic influence would become predominant leading to strategic influence in the politically sensitive region. In contrast, India needs to pay more attention to BIMSTEC, put more money and efforts in

this regional framework and finish some of the projects at a fast clipas India’s record in implementing such infrastructure projects leaves lot to be desired.

BCIM Economic Corridor: Prospects and Issues


Brig (Retd) Vinod Anand, Senior Fellow, VIF

Introduction

One of the cornerstones of India’s strategy has been to develop India economically and technologically. Another facet of India’s policy has been to seek partnerships on the strategic, economic and technologicalfronts to widen its policy and development options in order to safeguard its interests. The strategy adopted to meet these policy objectives is to restore our traditional links and integrate India with its immediate and extended neighborhood besides responding positively to the imperatives of globalization. This translates into an Indian vision of being well connected to Afghanistan, Iran and Central Asian Region and beyond on the western flank and to Bangladesh, Myanmar, Thailand and beyond on the eastern flank through a network of multi-modal transport corridors.

These networks would facilitate trade, exchange of energy through oil and gas pipelines, promotion of tourism and increase of communication links leading to what can be termed as a zone of co-prosperity. Towards this end, a number of regional and sub regional initiatives have been undertaken by India to improve connectivity, promote economic and technical cooperation, enhance people to people relationsand usher in peace and prosperity.

Therefore, India is involved in a number of regional and sub-regional initiatives and frameworks. BCIM (Bangladesh, China, India and Myanmar) framework is one such initiative which has recently been given a push both by India and China.

However, there are also other groupings like Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) which is one such initiative for sub regional integration. Further, India also has a Trilateral Dialogue with Myanmar and Thailand addressing the same issues. There is also a Ganga –Mekong Initiative to link countries of Mekong Basin (Myanmar, Thailand, Cambodia, Laos and Vietnam) with India. All these are in addition to the major regional organisation in South East Asia i.e. ASEAN.

Similarly, China has also been involved in a number of regional groupings i.e Greater Mekong Sub-region initiative that was founded inYunnan in 1992.

Even though there is an overlap in goals and objectives of a number ofregional and sub regional groupings, there is a need to critically analyze whether multitude of such cooperative efforts are beneficial or otherwise.

BCIM Evolution

So far as the BCIM forum is concerned, it has been in works for over adecade now (since 1999). In fact, it was a Track II platform, known earlier as Kunming Initiative, which was formed for sub-regional cooperation revolving around trade, commerce and connectivity.

It was considered as a provincial initiative and did not have much resonance among at least the policy makers and the MEA officials. Someof the earlier meetings that were attended, for instance, by India’s Secretary (East), Mr. Rajiv Sikri in 2006 questioned its utility when several other similar initiatives existed in the region. On the other hand, later in 2011, a Kolkata-Kunming car Rally that was expected to encourage the concept of BCIM found official mention in the Joint Statement between China and India.

However, it was only last year that the BCIM grouping gained some traction when it was first mentioned in the Joint India-China communiqué during PM Li’s visit to India in May 2013 and it was again discussed between the two during PM Manmohan Singh’s visit to Beijing in October 2013. Thus, it became a Track I initiative with the prospects of the objectives of BCIM being realized.

As a follow up of Heads of State meetings, a Joint Study Group (JSG) of BCIM to chart out the modalities for achieving the goals of BCIM economic corridor was set up and it held its first meeting at Kunming in December, 2013. JSG has outlined a number of steps to be taken to convert the concept into a reality. A Joint Working Group was also proposed to be established for improving the working mechanism. The Final Report is expected to be submitted by end September and by end December 2014, it is expected to be adopted and signed for inter-governmental cooperation. Cooperative areas between the four members would include:-

(a) Physical Connectivity

(b) Trade in goods, services and investment including finance

(c) Environmentally sustainable development

(d) People to people contacts

Assessment

However, the question remains as to whether this sub regional groupingwould make some headway in the coming years and what are Indian perceptions on the issue. What are its future prospects?

Even while the top leadership has come to an understanding that BCIM has plenty of potential and it needs to be encouraged, there are several difficulties and problems in imparting a degree of substance to achieving the objectives of the forum.

Security environment is one major negative factor inhibiting the successful realization of the forum.

For instance, in February, the influential English language Chinese daily, Global Times commenting on the BCIM Economic Corridor pointed out that even though it has been put on fast track, the border areas are characterized by poverty, ethnic division and collision and rampant transnational crimes. It talks about difficulties of security and development taking place simultaneously. (Construction of rail androad networks, logistics centres, industrial parks and development of scenic areas etc). ‘Thorny security challenges have to be resolved-

ethnic conflicts, drug & human trafficking along Sino-Myanmar borders’. This situation is present on all the borders shared by the four countries. Security first or development first or both simultaneously is not an easy question to be answered.

Conflicts between the armed ethnic groups and Myanmar have negative impact on creating conducive climate for investment and development. Sino-Myanmar border has a number of ethnic conflicts and issues which are well known. Transnational crime gangs in the Golden Triangle create many obstacles for bringing peace and stability and law and order in the area.

Similarly, on the Indo-Myanmar border, there are ethnic people who reside on both sides of the borders and some elements continue to remain hostile to either India or Myanmar or both. While Indian and Myanmar security forces have coordinated their patrolling and operations against such groups, peace and stability continues to be atrisk in these areas.

Sino-Indian tensions along the border are well known and despite the fact that a new Border Development Cooperation Agreement has been signed, the incursions and misperceptions along the borders continue to take place.

Bangladesh and Myanmar borders have with the problem of Rohingyas crossing over to Bangladesh and the Myanmar government refusing to grant them citizenship rights. Thus, conditions for trade and commerceare not conducive.

The prevailing security situation thwarts the successful outcome of BCIM forum and work against building trust and mutual confidence. China and India, both major countries in the group, could take the initiative to improve mutual trust and confidence between the members of this forum.

Indian Approach

Even though India has agreed in principle for a BCIM Economic Corridor, it also has some apprehensions.

Firstly, there are still several insurgent and rebel groups in North East India which are involved in a host of anti national activities like gun running, drug trafficking; they are also being used by foreign intelligence agencies (e.g. Anthony Shimray incident where Chinese intelligence agencies were alleged to have been involved in fuelling insurgency by sending a huge consignment of Chinese arms to NSCN(IM) in the NE; there have also been reports of some Chinese intelligence agents being active there; ISI has also been involved in sending arms).

Secondly, Sino-Indian border problems are well known and therefore Indian sensitivities concerning the claims and possible insecurities on that account. Tirap district of Arunachal Pradesh is inhabited by Nagas and there is an insurgent activity there. Even though some fundsfor constructing Ledo/Stilwell Road have been earmarked, India is not in favour of reviving the old Burma/Stillwell Road linking India’s NE to Yunnan through Myanmar because of security reasons. This is despitethe fact that enormous commercial benefits (especially with reduction of transportation costs) might accrue. There are apprehensions that this might give China advantage in case of a military conflict.

Thirdly, while there is a dire need to develop the North eastern states of India and China can provide the wherewithal for infrastructure development including the much needed funds, the Indiangovernment remains reticent in involving China in ways that might be detrimental to Indian interests.

Further, during the visit of Japanese PM Shinzo Abe in January 2014, Japan has been invited to take part in the infrastructure development of NE States.

Fourthly, there is a growing trade imbalance between India and China and any free flow of trade and commerce through the envisioned economic corridor would only increase the trade imbalance against India as China has not been able to practically address India’s grievances on this issue in any meaningful way despite remonstrations by India to this effect during summits and other bilateral exchanges.

Additionally, India has several bilateral and multilateral initiativeswith the regional countries to address precisely the same issues. For instance, India has Bay of Bengal Initiative for Multi Sectoral Technical and Economic Cooperation (BIMSTEC), Mekong Ganga Cooperationinitiative and Trilateral between India, Myanmar and Thailand for improving connectivity; all such initiatives involve either cooperation with Bangladesh or Myanmar or both that have similar objectives to that of BICM.

There is an overlap in goals and objectives of a number of regional and sub regional groupings that remain an important sub set of India’s‘Look East Policy’ set in motion in the mid 1990s. That is why India had not been very keen to add another sub-regional grouping to its kitty where, possibly, the central role of India in some of these platforms could be undermined. There have also been talks of merging or combining of BCIM and BIMSTEC but regional geo-political environment does not appear to be conducive for acceptance of such proposals.

Conclusion

Though, in the recent conversation between Prime Minister Narendra Modi and Premier Li Keqiang on 29th May, the Chinese leader pushed forrealization of BCIM yet it would not be easy to realize the objectivesof BCIM Economic corridor or a Southern Silk Road in the short term tomid-term period. While it may be possible to address the security challenges along the borders and there are some signs of improvement along Indo-Myanmar and Indo-Bangladesh borders yet, for some progress to be made, there has to be a fundamental change in the nature of Sino-Indian relationship.

However, the way forward could be to start small joint projects in secure areas along the envisaged economic corridor which benefit the local population and which are not based purely on profit motive. Suchjoint projects could be initiated in Myanmar and Bangladesh by combined efforts of India and China. This would contribute to confidence building and possibly the goals of BCIM could be realized to some extent in the mid-term period.

Otherwise, except for hosting some Kolkata to Kunming car rallies and some other peripheral activities, it would be difficult to exploit thefull potential of the grouping.

Substantive issues of BCIM would only receive attention when the geo-politics between both nations move towards a positive resonance. Whilespecific programmes of BCIM Corridor may be discussed as part of keeping some positive atmospherics alive because of the confabulationsat the top level yet implementation of the programmes would take theirown time.

(The following is an updated version of the presentation made at Institute of South East Asia Studies during an international conference held at Yunnan University, Kunming, PRC).

India's Security Challenges: Perspectives and Prospects

-Nancy Jetly, Senior Fellow, IDSA

The profound changes in the world wrought about by the end of the Cold War have made for a fundamental restructuring of international relations. The end of ideological rivalry provided an objective opportunity forevolving a better security environment. However, there isa great deal of uncertainty and fluidity all around, as the new global equilibrium gets in place. Two or three factors would deserve attention in this regard.

(i) The Cold War bipolar structure has been replaced by a"polycentric" world with the United States, Japan, China,the European Union and Russia emerging as the main partners in power.

(ii) Technology and economic power has moved to the forefront of international relations, emerging as a crucial factor in global realignments in the new setting.

The near symmetry in power capabilities and global reach between the two superpowers in a tightly bipolar world has given way to a certain disaggregation in the levels of power and capabilities among the new centres of power,given their uneven spread of techno-economic power, military capabilities and political influence. Even the United States, the most powerful nation today, has neither the will nor the capability to play a global roleof the earlier order and magnitude. China, Japan, the European Union and Russia are in a process of defining their role in the new world order. Relationships between and among these centres of power are increasingly marked by elements of both engagement and containment.

(iii) Notwithstanding a broad shift from confrontation toconciliation at the global and regional levels, new points of pressures are unfolding themselves even as someold conflicts remain unresolved. For the developing countries, there is also evidence of new concerted pressures in economic, security and nuclear fields.

It is clear that there are manifold pressures emanating from the international environment which make for a complex and multilayered set of challenges and opportunities for India in the changed world order. Indiawould have to respond to, if not anticipate, the new challenges and maximise its strategic political options, drawing essentially from its own power potential and bargaining leverages. This would at the least call for proactive strategies in terms of both restructuring old

ties and forging new relationships at the regional and global levels.

II

India's security perspectives would inevitably be governed by the interplay of its domestic imperatives, regional balance of forces and the global challenges which impinge on its role and capabilities. India with its size, resource potential and strategic location is being increasingly seen as a regional influential poised on the threshold of emerging as a centre of power in the new international order. This is as much a recognition ofits credible democratic functioning as the potential of its vast economic resources and political clout. India isa large multiplural society which has been able to successfully manage the challenges emanating from regional, linguistic and religious diversities without damaging its national cohesiveness. The remarkable resilience of its democratic functioning in a secular federal framework, despite some distortions, has continued to bely the scepticism of its worst critics. India's democracy remains fundamentally secure, underpinned as it is by an active judiciary, free media and a functioning and vigilant Opposition. India's economic development has also remained steady over the years. In the last couple of years, the Indian economy has registered an impressive growth rate of 7 per cent. The expansion and diversification of its industrial capacity have made important strides. Currently India ranks among the topmost industrialised nations of the world. It has the distinction of having the third largestpool of trained and scientific manpower in the world. Agricultural production has also shown substantial growthresulting in not only self-sufficiency in food grains but

also reserves of impressive buffer stocks. Today with itsburgeoning middle class, huge untapped markets for trade and industry, and large scale foreign investments, India has emerged as an economic power of some significance on the global scene. India has also built an impressive level defence capability. It has the fourth largest Army in the world with an impeccable professional record. It has a credible and self-reliant defence structure which has been built assiduously over the past three decades. India's missile development programme has also grown apace underlining its indigenous technological capabilities.

It is clear that India is slated to play an increasingly larger role in the coming decades. Its future as a credible power would, however, depend as much on its ability to manage the present stage of transition as on the projection of its strategic perspectives and policy options for the future. Two or three points deserve mention in this regard. First, India's status and power projections remain essentially contingent on its nationalsecurity in terms of political stability, economic development and military strength. Second, although the asymmetrical power structure in South Asia ensures India's centrality, its regional power and influence tends to get circumscribed by the neighbouring countries'sustained pressure to counter its pre-eminence. In particular, Pakistan's unceasing search for parity with India makes for a deep-rooted strategic dissonance in theregion which effectively reduces its capacity to shape orinfluence events in its neighbourhood. Third, continued involvement of external powers in the region remains an integral part of South Asian geo-political realities. Theend of the Cold War has weakened the inevitable link up between regional conflict and Great Power rivalry.

However, the inability of the states of the region to evolve a credible bilateral and regional framework for cooperation would continue to play an important role in reinforcing the pattern of external involvement--primarily in pursuance of their own stategic interests--in the region. This is bound to impinge on India's security perspectives, both short-term and long-term.

III

An overarching framework of India's national security hasto take cognisance of military and non-military dimensions in terms of both external threats and internalchallenges to its territorial integrity and national unity. Threats to a nation emanate as much from external aggression as from internal strife but at times internal factors can erode national security more critically than any external danger. National power based on political stability, societal cohesion and economic development would thus remain central to the future of India's national security.

India is passing though a crucial period of its post-independence history. Successively fragile coalition governments at both the central and state levels are affecting India's political, social and economic stability at a time when it is facing major challenges toits unity and integrity as a nation. The Indian politicalsystem is being subjected to manifold pressures from the progressive collapse of political and public institutions; incipient erosion of democratic norms; social unrest and corruption underlining a growing malaise in Indian polity. Increasing demands for power bymore and more socio-economic groups, on the one hand, andlimited resources and capabilities for redistribution of

wealth, on the other, make for growing political and social turmoil. Widening economic disparities and growingrate of unemployment pose a major challenge for India's economic development notwithstanding a credible economic performance. It is estimated that by the year 2000, the total number of people living below the poverty line willmore than the entire Indian population at the time of independence.

India's growing inability to manage political and economic challenges on the domestic front is a cause of deep concern. Although India's national integrity remainsfundamentally secure, pressures from fissiparous cleavages in growing challenges of communalism and religious fanaticism have acquired disturbing dimensions.Political manipulation of religious sentiments for narrowpolitical ends has long-term implications for the future of India's secular federal framework. The incipient threats to Indian federal polity in many parts of the country are putting growing strains on the political structure. Although India has been so far able to manage these challenges with a certain skill and patience, thereis growing anxiety about the pressures getting intensified at a time when there is a steady erosion in the state's role in resolving conflict and bringing aboutsocial transformation. This is accompanied by a decline in the mediating role of the governing elite and party system. Decline in the state's order and authority has led to greater violence outside the established politicalchannels, compounding the general law and order situation.

Continuing civil strife and incipient secessionism poses a major problem for India's national security. The north-east continues to be characterised by an uneasy peace.

Although there is no full scale armed insurrection for secessionism as resorted to by the Nagas and Mizos in theSixties, the problem of insurgency in Tripura, Manipur and Nagaland continues. Assam which had settled to a period of normal political functioning after the volatileagitation on the influx of foreign nationals in the earlyEighties, is once again going although the fire of violence perpetrated by the United Liberation Front of Assam (ULFA) which is committed to armed struggle for theformation of a sovereign "ASOM". Punjab went through the unfortunate agony of sustained armed violence for over a decade before normal political processes were restored after heavy-handed crushing of Khalistan terrorists. The people of the state have, however, paid a heavy price forthe then government's short-sighted policies for narrow political ends which changed what was essentially a partyagitation to a Sikh movement encompassing divergent orientation and rationales. This has important lessons for the future of Indian federal polity which can only beignored at one's own peril.

The situation in Kashmir remains a cause for deep and continuing concern. Mishandling of a brewing political crisis brought about by the state government's dismal performance, marked by rampant corruption and inefficiency, led to an explosive situation in the sensitive valley. The eruption of violence in 1990 servedto underline the appalling failure of the intelligence agencies and the complete isolation of the political and administrative machinery from the ground realities. In the event, alienation of large sections of the civil population and their growing sympathy for the militants left little meeting ground between the people and the government. The recent restoration of political processesin the state following Parliamentary and Assembly

elections and the increased weariness of the people with economic dislocation and high-handed intrusion of outsidemilitants is leading to a slow change in the equation of forces on the ground. But the overall situation remains precarious. The process of rebuilding the sundered economic and political fabric in the state and winning over the confidence of its people for any worthwhile and lasting solution continues to remain in uphill task. There is no gainsaying that the problems facing Indian polity are enormous as evidenced by the persistence of insurgency and slow entrenchment of terrorism in several parts of the country. If left unresolved, these could critically jeopardise India's national sovereignty and territorial integrity from within.

It is self-evident that the foremost task for India is toovercome the challenge to its nation building and national security. India's real autonomy in working out its destiny as an independent centre of power would lie in its internal strength and cohesion. There is no getting away from the urgent task of upholding its unity and integrity as a nation state through a credible framework of secular federal democracy. The need for reinvigorating its democratic functioning and strengthening the role and efficiency of the state remains imperative in this regard. India would also have make sustained efforts to vitalise its economy through optimisation of its vast resources, manpower and technical knowhow. The need for redefining the role of the state in terms of eradication of poverty and greater economic equity remains self-evident. At the same time, India would have to raise itself to a new level of efficiency and competitiveness to acquire necessary leverages to stand up to growing global pressures and to hold its own in a friendly competitive world.

India can also not afford to drop its guard on building an adequate defence capability to counter any vulnerabilities which can be manipulated by external forces. There is some concern regarding growing deficiencies in India's conventional capability due to reduced defence expenditure in recent years. The need foradequate defence expenditure and defence allocation, constant modernisation and updating of its defence acquisitions for its defence preparedness remains imperative in this regard. A credible defence capability would provide an effective guarantee for maintaining its territorial integrity in the face of both external aggression and also externally engineered internal subversion that has emerged as a primary threat in recentyears.

In the final analysis, it is only a politically stable, economically prosperous and militarily strong India whichcan seek to play its legitimate role in the world community, commensurate with its size and vast power potential.

IV

Issues of regional peace and stability continue to loom large on India's strategic horizon. South Asia is today on the threshold of a new era of democratisation as the process of evolving democratic structure is under way in almost all the countries of the region. The peaceful electoral transfer of power in Pakistan four times in a brief span of nine years reflects a growing commitment todemocratic norms in that country. Bangladesh is firmly back on the track of democratic functioning after a long paralytic spell of negative agitational politics. Notwithstanding ups and downs, Nepal also continues to

manage its democratic experiment credibly. At the same time, there are vested and deeply entrenched authoritarian interests in all these states, particularlythe ones which have been under military rule for long years. For instance, the continued dominance of bureaucratic military oligarchy in the political set-up in Pakistan makes for a fundamental dysjunctive in its policy. Given the fragile democratic institutions in all these countries, the democratic process itself is releasing new pressures. It is thus that the domestic environment in South Asia continues to remain generally characterised by political unrest and regime instability.

Pressures from ethno-sectarian conflicts and religious fundamentalism are also rising in all countries of South Asia. Pakistan is sitting atop an ethnic cauldron as pressures simmer, threatening to tear apart the fabric ofIslamic identity from below. The challenge in Sindh underscores the disturbing dimensions of large scale violence between ethnic groups. The continued Punjabi domination in the power structure spells a certain uncertainty for the future of Pakistani federal polity. Running feuds between Shias and Sunnis in various parts of Pakistan have become a common feature on the Pakistaniscene. Sri Lanka remains mired in prolonged ethnic conflict as the continued intransigence of the LiberationTigers of Tamil Eelam (LTTE) makes for a virtual civil war in the strife-torn island. Sinhalese resistance to grant of effective and substantive devolution power to the Tamils only queers the pitch of ethnic politics in the multi-ethnic society of Sri Lanka. Even Bangladesh which has a relatively homogeneous society is facing problems in overcoming difficulties in integrating its small tribal minority. The likelihood of the region remaining in a state of crisis due to rising scale of

political and social discontent is thus going to be a part of South Asian realities for quite some time. This not only poses a threat to state structures within these countries but also has an adverse impact on the matrix ofinter-state relationships in the region.

The overlap of a large number of ethnic, linguistic and religious groups across essentially porous borders in South Asia makes for a cross-border spill-over movement of refugees, guns and drugs which generates inter-state tensions. The steady movement of refugees, following prolonged domestic conflict in the countries of origin, has emerged as a multi-dimensional problem which affects regional security. Refugees who tend to settle down in the host countries, given the intractable nature of ethnic conflict, put an intolerable burden on the demographic, financial and social sectors which has long-term implications for national security of the host country. Pakistan is still reeling under the impact of 3.5 million Afghan refugees who sought refuge following the Afghanistan crisis in the Eighties. Thousands of refugees are living in camps in Nepal as a result of ethnic conflict in Bhutan. Bangladesh has also had to cope with the Rohingyyas fleeing from Myanmar.

For India particularly, which has been the host to the largest inflow of refugees with practically no outflow, the magnitude and frequency of refugee movement has been a vexing problem. This has particularly grave implications for the social, economic and political stability of the sensitive north-east. The presence of a large number of Chakmas in Tripura is intensifying tensions among the local inhabitants who are resenting encroachment on limited jobs and resources and scarce land. Thousands of Sri Lankans who sought refuge in Tamil

Nadu in the Eighties are continuing to stay on, creating pressures with the attendant problem of anti-social and criminal activities. Induction of arms and anarchy with refugees is becoming a growing political liability. Internecine conflict among militant refugees groups and their continued links with trans-border militant groups intensifies social unrest and level of violence with grave implications for the future of civil society in these regions.

Growing linkages between drug trafficking and organised violence and the magnitude of the proliferation of small arms are also becoming major sources of instability in the region. In India there is growing concern regarding inter-state linkages between militant organisations, on the one hand, and between states and militant organisations on the other, adding to the complexity of secessionist movements. The crucial link-up between hostile external forces and domestic forces of political subversion poses a serious challenge to India's national security by giving impetus to secessionist forces. Terrorism in Kashmir since the Nineties, and earlier in Punjab in the Eighties, has acquired disturbing proportions with Pakistan's unabashed manipulation and support through planning and coordination, training of militants, and unlimited supply of arms and finances. Thesupply of sophisticated weaponry in particular--includingrockets and explosive devices--has undeniably helped to raise the level of conflict to a new high. By some accounts, the number of men lost in combatting the low intensity conflict in the sensitive state of Kashmir has outstripped the number of casualties in all the full scale Indo-Pak Wars put together. It may be mentioned here that internal political dynamics in Pakistan would continue to make for increasing domestic compulsions to

keep the pot boiling in Kashmir, both in terms of diverting attention from pressing domestic problems as well as the inherent stakes of the military establishmentin retaining the primacy of calling the shots in Pakistan. In the strategic north-east ringed as it is by Myanmar, China and Bangladesh, incipient secessionism remains vulnerable to external manipulation. Although China which had offered arms and sanctuaries in the Sixties is no longer doing so, its unchanged stand on recognising the grant of statehood to Arunachal Pradesh and its military presence in Myanmar underscores its potential to foment trouble at a time of its own choosing. Bangladesh's involvement--albeit low key--is well-documented. Pakistan's Inter-Services Intelligence (ISI) is also carrying out anti-India activities from Nepal and Bangladesh adding to India's security concerns in view of persistently unsettled conditions in the north-east. Today the growing incidence of insurgency, fomented and abetted by hostile external forces has in some way emerged as a major problem for India's security establishment. The statement of the former Chief of Army,terming the low-intensity conflict as the foremost challenge for India's national security only serves to underline the growing intensity of the problem.

Proliferation of small arms in the region is yet another disturbing dimension of cross-border terrorism. The inflow of weapons is a direct fall-out of the Afghan conflict and the siphoning of major chunks of arms sent by the US, China and Saudi Arabia for onward transmissionto the Afghan Mujahideen. It bears pointing out that "small" arms is a mere euphemism for progressively more sophisticated and lethal weapons. The weapons circulatingin the region include automatic rifles, machine guns as also landmines, sophisticated explosive devices, and

communication systems. Even more worrisome in the fact that these lethal devices are finding their way to non-state actors and terrorist groups. This has significantlyaltered the level of internal conflict in India's troubled regions, making for deep concern for the inevitably long-drawn and prolonged conflict in sensitiveborder states with major implications for the deployment and engagement of security forces.

Unwholesome linkages between the drug barons and arms dealers comprise yet another cause for concern. The enormous funds generated by drug sales are being increasingly used to finance purchase of sophisticated weaponry by terrorist groups in South Asia. South Asia isabutted by two of the largest drug producing areas on itswestern and eastern flanks. The growth of narcotics tradehas been exponential in Pakistan, with the presence of a reported 1.5 to 2 billion heroin addicts. Infiltration ofdrug money into the Pakistan economy and political systemis now well documented. There are also growing reports ofsignificant penetration by the narcotics network in Pakistan's law enforcement agencies and military intelligence. The widespread Kalashnikov culture in Pakistan is a function of the mutually supportive phenomenon of drugs and weapons. Vast quantities of thesearms have found their way to Punjab and Kashmir. These weapons have also been used to create internal unrest in urban centres as evident by the vicious bomb blasts in Bombay in 1993. India is also fast emerging as a transit route for the narcotics trade, given its strategic location between two major narcotics producing areas. Drugs from Pakistan and Myanmar are being transmited fromIndia for onward transmission to European markets. It is no mere coincidence that the most critical challenges of insurgency in India are located in the sensitive border

states in the north-west and north-east which adjoin the drug generating regions. More important, the growth of a flourishing criminal underworld underpinned by a nexus between illegal traders, drug peddlars, and gun dealers in tandem with internal security forces and law enforcement agencies is a cause for increasing concern. The enormous toll in human and economic terms as a consequence of mindless violence and narco-terrorism getting entrenched in civil society has implications which have yet to be comprehended fully.

The complexity of these transnational problems defies strictly national solutions. The urgency for building bilateral cooperative relationships and promoting a coordinated regional perspective on these critical developments which are cutting across the sanctity of national borders, remains, if anything, self-evident. TheSouth Asian Association for Regional Cooperation (SAARC) Conventions on curbing drug trafficking and terrorism in the region are important steps forward in evolving suitable regional mechanisms to tackle the twin menace. The conventions, however, remain presently at odds with the ground realities. The political push to add substanceto declarations of intent obviously awaits a qualitative improvement in the political climate in South Asia. Till such time, the challenges of narco-terrorism would call for sustained vigilance on India's part to counter the insidious threat to its national security.

IV

South Asia has been generally characterised by a great deal of political and strategic complexity. To understandthe complex South Asian phenomenon, one or two factors deserve special attention. First, India with its

undeniably greater power potential and centrality looms large on the South Asian scene. Second, the legacy of common civilisational heritage has lent a sharper edge toneighbouring countries' sensitivities regarding their national identity in a clearly uneven setting. India withits looming presence and power potential is often projected as a core threat by these countries.

India's relations with practically all its neighbours have been strained over a whole range of issues be they of trade, or water sharing or migration or ethnic sensitivities. At the same time, there have been no even patterns of relationships in the region. India's relations with Bhutan and Maldives have been generally smooth and rancour-free. India's relations with Bangladesh, Nepal and Sri Lanka have witnessed significant ups and downs over the years but have never been allowed to dip to an unmanageable low. Indo-Bangladesh relations which had become extremely strained over the Farakka issue and the Tin Bigha controversy havewitnessed a dramatic improvement with the signing of the historic agreement on sharing of Ganga waters. India and Nepal have also been able to put the unfortunate events of the Eighties behind them. Today they are set for a qualitatively improved relationship with closer economic ties and better political understanding. The signing of the Mahakali Treaty and grant of overland transit route for its trade with Bangladesh by India underlines the positive shift. The Indo-Sri Lankan relationship today isa far cry from the palpable antagonism of the Eighties.

However, the Indo-Pak relationship has been characterisedby a virtually unbroken record of sustained hostility. Indo-Pak discord which to some extent has been rooted in the bitter legacy of partition became more sharp with the

conflicting national interests and ideologies of the two states. Pakistan's inability to work out a viable form ofnationalism and its eternal quest for achieving parity with its larger neighbour remains at the core of Pakistan's hostility towards India. The three Indo-Pak Wars--the only intra-regional wars in South Asia--were all motivated by Pakistan's desire to alter the status quo. Pakistan's military relationship with the United States in the Fifties was also directed to counter-balance India and erode its prominence in the region. This not only brought Cold War politics to the region, irretrievably puncturing the area of peace that Nehru hadsought to build, but also considerably aggravated India'ssecurity concerns. Pakistan's continued overtures to external powers, particularly the United States and China, for diplomatic backing and augmentation of defencecapabilities remains directed towards eroding India's pre-eminence and power. It is not necessary here to go into the details of unresolved issues between India and Pakistan except to mention that Indo-Pak relations have remained lockjammed over a wide range of issues--Kashmir,Siachin, the Afghanistan crisis and the nuclear issue. For the past five decades, Kashmir has, however, remainedthe central and overriding concern for Pakistan. Pakistansees Kashmir as an unfinished agenda of partition which must be resolved on the basis of the UN Resolutions whichhave long been overtaken by the realities on the ground. India has made it clear that Kashmir is an integral part on which it can countenance no compromise. This is so notonly for obvious strategic considerations but also because it would deal a blow to India's secular frameworkand open the floodgate to demands for separation. India, however, remains willing to discuss Kashmir and all otheroutstanding issues on the basis of the Simla Agreement which expressly enjoins bilateralism and non-recourse to

force by both countries which is not what is on the Pakistani mind.

Meanwhile, Pakistan's continued support--money, training and sophisticated weaponry--to secessionists in Kashmir makes for grave tensions for India. This is not to underestimate the urgent need for India to take steps to put its own house in order but to point out that Pakistan's proxy war in Kashmir represents a direct and immediate threat to India's security. It is also important to bear in mind that Pakistan has never given up the option of going to war with India to get back Kashmir. This has its own implications for India's security planning notwithstanding a growing recognition in both countries that the realities of a crumbling economy and sustained international pressure would militate against a full-fledged war. The world opinion has also decisively veered towards a peaceful solution ofthe Kashmir problem, with both the United States and China recognising the inevitability of a bilateral negotiated settlement. There is also a section of opinionwhich considers nuclear deterrence itself as a stabilising factor in Indo-Pak relations. Nevertheless, Pakistan's declared nuclear capability makes for India's heightened security concern, given Pakistan's less than peaceful intentions towards India. There is no gainsayingthat India is faced with Pakistan's nuclear challenges ata time when the absence of a credible Russian nuclear guarantee in the post-Cold War world makes it more vulnerable than at any time before. This also aggravates the existing pressures emanating from Chinese nuclear might and United States' insidious nuclear presence in the region. Although India has made it abundantly clear that it has the capability to respond effectively to any nuclear misadventure by Pakistan, India's security

perspectives would have to reckon with a nuclearised subcontinent in all its future calculations. It also needs to be borne in mind that while the Indo-Pak Agreement on not attacking each other's nuclear facilities is a positive step foward in confidence-building, this or any other such confidence-building measure would remain essentially meaningless unless simultaneous exploration is made of the ways and means toresolve the underlying problems between India and Pakistan.

It is thus that the recent resumption of Indo-Pak dialogue at the Foreign Secretary level, after a long period of tense silence, is a welcome development for thefuture of Indo-Pak relations. However, even as New Delhi's call for initiating a qualitatively new chapter of amity underlines its sincere desire for a more forwardlooking and constructive approach, Pakistan's usual styleof blowing hot and cold and its recent efforts to militarily activate the ceasefire line do not at present give much cause for optimism for Pakistan's similar response. There is, however, no denying that it is in India's long-term interests to reduce hostility with its important South Asian neighbour. This would at the least call for proactive strategies to build greater trust and cooperation with Pakistan in a framework of mutual goodwill.

India's long-term security hinges perhaps in a larger measure on the future of Sino-Indian relations. It is, therefore, in India's abiding interest to work for peaceful and cooperative relations with its most powerfulneighbour with whom it shares a long disputed border. A stalemate in Sino-Indian relations during the Sixties and

Seventies only served to limit India's diplomatic manoeuvrability and potential role in the region.

Rajiv Gandhi's visit to China in 1988 marked a significant breakthrough in thawing the stalemate betweenthe two countries. The agreement signed during the visit on maintaining peace and tranquillity on the Line of Actual Control (LAC), pending a final solution of the border dispute, was a momentous step forward in normalisation of ties between the two neighbours. Re-emphasis on Panchsheel and the decision to initiate confidence-building measures to reduce tensions on the borders underlined a new forward looking approach on the part of both countries. The formation of a joint Working Group at the level of Ministers to carry forward negotiations on the boundary question reflected the new political thrust at the highest level. The process of normalisation has been since carried foward by a number of steps. Agreements have been signed to re-establish theConsulate General in Shanghai and Bombay and to resume border trade across specified points along the Tibet border. A set of confidence-building measures have been set in motion: agreeing on joint verification of the LAC,meetings between the local commanders, mutually agreed pull-back of troops from forward areas and prevention of aerial violations. These measures have not only helped toeffectively defuse tensions on the borders but have also considerably eased India's defence burdens. More important, for the first time since the Sixties, India does not have to reckon with the nightmarish prospects ofa two-war front with China and Pakistan.

At the same time, India can ill afford to have a let up in its defence preparedness to meet the long-term Chinesechallenge. Although China would be hard put to challenge

India a la 1992 because of changed correlation of forces on the ground, there is no underestimating the challenge of China's emergence as a formidable power in conventional as well as nuclear capabilities which has resulted in a vast power gap between the two countries. China's defence modernisation is continuing to move apace. China also continues to be engaged in augmenting its nuclear arsenal as its launching of inter-continentalballistic missiles and underground nuclear tests amply underline. Notwithstanding China's foreswearing of "firstuse," India can hardly ignore the implications of a totalnuclear asymmetry with China. China's major military build up in Tibet--reportedly deploying ballistic missiles of medium and intermediate range--makes for long-term strategic concerns for India's security.

It may be pertinent to note here that China's remarkably growing economy, which has received additional boost withthe reversion of Hong Kong in July 1997 also gives it a definite leverage in international affairs as underlined by its manoeuvrability in its relations with the US. It has been in recent years showing greater willingness to assert its power in pursuance of its interests in the adjacent regions. China's flexing of muscles in the SouthChina Sea and its increasing assertiveness vis-a-vis Taiwan illustrate this. Although at present China has great stakes in not upsetting its carefully structured political and economic equilibrium or aggravating tensions in its neighbourhood, given its growing economicand military power there would be continuing uncertainty regarding its future moves and projections.

In recent years, more than posing a direct military threat, China continues to represent a challenge to India's role in South Asia. China has, of course, visibly

refrained from engaging in anti-Indian rhetoric in terms of its relations with its neighbours. It has also apparently softened its stand on Kashmir, urging Pakistanto virtually shelve the issue while working for improvement of relations with India in other areas. At the same time, it has remained committed to strengtheningits political relations with all of India's neighbours. It continues to sell arms to Bangladesh, Pakistan, Sri Lanka and Burma which tends to hem India in a subtle way.In particular, its politico-strategic collaboration with Pakistan shows no appreciable change. China's help to Pakistan in developing its nuclear weapon capability is well-documented. Its recent supply of ring magnets and M-11 missiles has disturbing implications for India, seeking to threaten as it does the present balance of power in the region. China's supply of arms worth 1.6 billion dollars to Burma and its help in construction of naval and electronics facilities, and modernisation of its naval bases are also of concern to India in its strategic north-east and the adjacent seas.

China has, of course, come a long way since the Sixties in its national perspectives and world view, engaged as it is in consolidating its economic development, promoting regional peace and establishing a "just" new world order. This has led to a growing convergence of views with India which remains committed to world peace and a just and equitable world order. They have mutually shared perceptions on the need to preserve national territorial integrity and combatting challenges of fundamentalism, ethnic separatism and cross-border terrorism. There is also a broad understanding between the two countries on global trade issues and the pressures emanating from the industrialised world on human rights and good governance. All this augurs well

for a more relaxed and cooperative relationship between India and China. It would, however, need to be clearly borne in mind for India's long-term projections that relations between the two Asian giants are bound to be marked by undercurrents of competition and contest, inherent in the logic of geo-political proximity and national rivalry. It also needs to be borne in mind that the border question has been shelved but not resolved. India has vital stakes in consolidating the process of normalisation with China but as long as the dynamics of military competition remains unchanged, a durable framework of Sino-Indian friendship would have to be underpinned by an overall balance of strength and a clearrecognition of their mutual power status and stakes in the region.

It is clear from the foregoing that India has an abiding stake in peace and stability in its neighbourhood for itslong-term security. India is going through a phase of rapid economic transformation and is poised to play a significant role in the global stage in the coming century. There is no gainsaying that India's projection on the world scene would depend in no small measure on its effective and constructive neighbourhood diplomacy. This would at the least call for evolving a framework of cooperative security in its neighbourhood. This would essentially mean striving to reduce tensions with China and Pakistan, its two powerful neighbours, without compromising on its core national strategic interests. This is so not only because they separately and together constitute a long-term threat to its security but also because stable peace in this region hinges on India's friendly ties with these two countries. India's recent agreement with China offers ground for finding a viable basis of confidence on which to build cooperative

relationships. India's offer of several confidence-building measures to Pakistan is also a step in the same direction. These include the agreement on prohibition of nuclear attack on population centres and economic targets; the agreement on "no first use" of nuclear weapons; and upgrading of communication links between DGMO of both sides. In some ways, the Simla Agreement itself provides for an effective mechanism for confidence-building between the two nations to build durable peace in the subcontinent. Sustained efforts to initiate new confidence-building measures and strengthen the existing mechanisms would remain imperative for building a credible framework of cooperative security in the region.

India would also need to take a lead in setting the tone for a framework of relations with its smaller neighbours.New Delhi is today committed to evolve a fresh perspective on its relations with its neighbours in a framework of positive asymmetry. There is no doubt that in the short run, anti-Indian rhetoric would continue to be manipulated at will by these countries, depending on their domestic compulsions, but in the long run, deft handling of the neighbours with flexibility and sensitivity is bound to lead to a more relaxed political environment. This itself would lend a great credibility to India's role as a regional influential.

Peace and development in the region is in the long term asine qua non for India's long-term security perspectives in South Asia which is facing staggering problems of poverty, illiteracy, malnutrition and under-development. The biggest challenge to regional peace and security emanates from its poverty and the under-utilisation of its vast resources to address the socio-economic needs of

its teeming millions. Pressures of endemic poverty and population explosion are becoming critical in the region.South Asia has sunk to the bottom rung in terms of the number of its people living below the line of poverty. SAARC provides an effective regional institutional arrangement for South Asia to optimise its regional resources and capabilities to promote the welfare of its peoples and a cooperative framework for the socio-economic development of the entire region. India as the largest South Asian power has a special responsibility togive a visible push to SAARC and invest in policies whichare informed by a larger and long-term vision of a cooperative and stable South Asia.

VI

An important challenge to India's security lies in the unfolding security environment in its adjacent neighbourhood which has a vital bearing on its geo-political interests. The volatile situation in Afghanistan is of major concern to India. Afghanistan seems set to witness a fierce and long drawn struggle among the main contenders for power which, if unresolved,will lead to grave destabilisation in the trouble-torn country. Although India does not share any borders with Afghanistan, it has fundamental geo-political stakes in the unfolding events there which can be detrimental to its own long-term security interests in the region. India, therefore, has a major stake in any outcome of theprotracted Afghanistan crisis. India rightly views any fundamentalist regime in Afghanistan as an insidious threat to its own secularism as well as a potentially destabilising factor in the region. An important dimension of Indian policy is the inevitable antagonism of such a regime to India which has traditionally enjoyed

close links with Afghanistan based on a shared perceptionof regional interests. The possible spillover of a Taliban style fundamentalist regime, in terms of impact of ideology, violence and narco-terrorism, into Kashmir makes for deep concern for India's internal security. India has, therefore, a stake in seeing the evolution of a broad based government in Afghanistan which takes care of the legitimate interests of all major groups to enableit to emerge as a stable and non- fundamentalist nation. It is in this context that India is keeping contacts withmajor groups within Afghanistan and supporting all broad regional initiatives from outside to solve the problem. Agrowing understanding with Iran and other likeminded countries is emerging as an important dimension of India's policy not only towards Afghanistan but also the politically sensitive Central Asia.

Of late, Central Asia has emerged as an area of major concern for India in view of India's long-term interest in this strategic area. This is because the situation in the region which continues to be fluid because of political instability and challenges of Islamic fundamentalism has wider implications for India's own vicinity. Central Asia has also emerged as a major strategic region in view of its vast untapped reserves ofoil, natural gas and other precious resources. This has made the region a focus of sharp interest and struggle among most major powers, notably the United States, Russia, China, Iran and Turkey, who want to exploit the tremendous economic potential of the area. Although Indiacan do little to influence the interplay of Great Power rivalry in the region, it has a stake in deepening and broadening its own interaction with the region. This would call for a more energised policy in building upon existing economic and cultural ties with the Central

Asian countries making for its reinforced presence in this vital area. India is already engaged in an exercise of exploring the avenues for extending support in the field of infrastructure and technology. India has to continue to take into account in its larger security perspectives the region's great strategic, economic and political importance in terms of its energy reserves, strategic location and emerging political dynamics that are attracting wide attention and will have major implications for this whole region.

India also has vital interests in the emerging political and strategic dynamics in the Indian Ocean region. This is so because of its vital need for uninterrupted energy supplies and maritime trade through its strategic waterways. India is vitally interested in keeping the major sea lanes of communication in the Indian Ocean freefor the movement of substantial portion of its trade, particularly in terms of access to vital oil supplies. Its objections to superpower presence in the Indian Oceanin the Cold War days was also a function of its concerns over escalation of tensions in its vital strategic vicinity. India's positive role in the newly formed Indian Ocean Rim Community also underlines its desire to evolve a cooperative framework of relations among the littoral countries of the Indian Ocean without undue interference of outside powers.

India's demand for oil supplies is slated to grow very steeply in the coming decades. Till such time that Central Asian vast reserves are fully exploited, the Persian Gulf which is currently accounting for 60 per cent of world's energy resources, would hold the key to global energy security. The potential of the South China Sea remains as yet largely untapped. West Asia and the

Persian Gulf in particular would thus continue to remain a region of great strategic concern for all major powers,including some of the erstwhile self-sufficient countrieslike Russia, China and Indonesia whose reserves are getting fast depleted. Given India's strategic location to the area, India's has abiding interests in long-term stability and peace in the area because any potential destabilisation or conflict would lead to insecurity in India's strategic neighbourhood.

VII

Given the external powers' continued quest for power and influence in the South Asian region, the need for diversification of strategic political options remains imperative for India as there is also evidence of new pressures in economic, security and nuclear fields. This calls for both restructuring the old ties and forging newrelationships. India's policy towards the United States, Russia and China would have to be thus increasingly informed by the changing needs of national security and economic development as also the logic of its own role inthe region.

Strategic and geo-political considerations had been critical for Indo-Soviet ties in the Cold War period. Butit was essentially the mutuality of interests that sustained those ties lending them a certain autonomous structure, irrespective of extraneous inputs. Mutual convergence between the two countries rested on the basicpremise of Soviet endorsement of India's pre-eminence in the region. The Soviet support was critical for India in coping with its problems with both Pakistan and China, singly and together. More important, it helped India to build a credible and self-sufficient defence structure at

a time when there was visible reluctance from the West todo so. In the post-Cold War world, India and Russia have been able to credibly rework their relationship despite the initial hitches in the transitional phase in a qualitatively altered framework. Although there has been some reduction in the volume of trade and economic interaction between the two countries, the question of repayment of loan and currency adjustment has been settled to mutual satisfaction. The new treaty of friendship and cooperation between the two countries is areaffirmation of the abiding mutuality of the interests between them. India and Russia would continue to have a convergence of interests in the developments in their proximate regions--Afghanistan and Central Asia--where both have vital geo-political interests in promoting peace and stability. There is also mutuality of interest on the need of averting internal destabilisation from ethnic conflict and trans-border terrorism in large multiplural societies. This has particular significance for India which faces a simmering problem in the sensitive state of Kashmir. India also has a continued stake in strengthened defence relations with Russia, given its large scale dependence for Russian modern military hardware—at reasonable prices--and advanced civilian technology in space and nuclear fields. India has been able to procure military equipment with provision for technology transfer, joint production and export to third countries. Recently, India and Russia have set up a joint working group to address the operative elements of a long-term military technological programme--the only such programme Russia has signed withany foreign country--which has been extended for another ten years beyond 2000. Russia has also offered to India the latest and advanced technology in all areas of the defence field.

At the same time, any talk of "strategic partnership" is still premature, given Russia's strategic alliance with China and its continued dependence on the West. There arealso difficulties in the supply of sensitive technology--underlined by the problems in the cyrogenic deal and differences over nuclear disarmament, particularly after Russia's signing of the Comprehensive Test Ban Treaty (CTBT) and India's own position on it. There is, of course, some satisfaction in India that Russia has now re-endorsed its stand on India's pre-eminence in South Asia and moved back from the projection of equidistance between India and Pakistan. Moscow has now reaffirmed itssupport for India's stand on Kashmir and its firm commitment not to supply arms to Pakistan. Indo-Russian relations, although qualitatively altered in the changed world context, would have continued relevance for India'slong-term strategic perspectives.

In the post-Cold War world, maintaining friendly and close relations with the United States, the only superpower today, which is capable of shaping the regional environment, would need to receive the highest priority in India's larger strategic calculations. Indo-US relations have remained generally lukewarm over the years essentially for the United States' non-recognition of India as a power of consequence in the region. There has been no effort by the US to develop an autonomous approach to South Asia except in relationship to its broader global objectives. Shared democratic values have failed to provide a firm basis for understanding between the two countries whose divergent security interests lay at the root of the indifferent state of relations. This has remained so notwithstanding India's need and desire for improved relations with the United States, albeit on its own terms and from its own long-term security

perspectives. The United States is seen in India as displaying singular insensitivity and disregard for India's vital security concerns in the region.

An important Indian objection to US policy in South Asia has been its commitment to the parity syndrome between India and Pakistan--including equating Indian and Pakistani nuclear policy--which India sees as not only immeasurably intensifying its security problems but also eroding India's pre-eminence in the natural balance of power in South Asia. Notwithstanding an improved phase ofrelationship in recent years, the United States' continued reluctance to deliver sensitive technology to India only serves to underline its disregard for India's sensitivities to the qualitative alteration of the military balance of the region over the years.

There are today greater opportunities for developing understanding between the two countries on promoting peace and stability in both South Asia as also the neighbouring strategic regions of the Persian Gulf and the Indian Ocean. Although differences persist over a range of issues--nuclear proliferation, Kashmir, trade related issues and restructuring of the Security Council--all of which have a vital bearing on India's larger security concerns there are some positive indications of Indo-US relations acquiring greater depth with evidence of more intense economic interaction and the evolution of a strategic dialogue between the two countries. The United States which has emerged as India'ssingle largest trading partner and investor, has an abiding interest in India's vast economy and burgeoning markets. India, of course, would need the US capital, technology and markets which remain crucial to India's future economic development. India has welcomed the

recent US declaration--although belated--formally designating the Pakistan-sponsored organisation Harkat-ul-Ansar, operating in Kashmir, as a terrorist outfit. There is also some satisfaction with the US' full-heartedendorsement of the current Indo-Pak dialogue and its reaffirmation that it has no desire to intervene in Indo-Pak problems. All these would underline a growing US desire to build an independent relationship with India, notwithstanding Pakistan's continued relevance to its broader regional objectives. At the same time, a qualitative improvement in Indo-US relations would, in the long run, continue to remain contingent on the UnitedStates' recognition of India's regional pre-eminence in the building up of an independent policy towards India.

Given the inevitability of India's search for its own place in the global community, in view of its large size and power potential, and the growing complexity of its security challenges, India's nuclear policy would continue to have primacy in its national security agenda in the new world order. While nuclear disarmament must needs be India's long-term security goal, its nuclear policy has to take into account the given realities of the nuclear weapons having come to stay as an important bargaining leverage in international relations. There is a growing recognition in India that given the current international realities and the situation of nuclear asymmetry in the region, mere retention of the nuclear option may not hold unconditionally in the altered scenario. India would have to give more sustained and serious thought to the timing of the exercise or non-exercise of its option in the days ahead. Developing a full-fledged nuclear weapon capability while continuing to press for total elimination of nuclear weapons will, of course, be the foremost challenge for India's future

security perspectives. Three or four factors deserve attention in this regard. First, time remains of the essence for India as domestic costs grow and international pressures mount on India to abandon its nuclear option and missile programme at a time when the nuclear powers are engaged in updating and refining theircapabilities. Second, India has to reckon with the prospects of undeniable pressures from the US, China and Russia, should it operationalise its nuclear option. It may also find itself under increased Chinese nuclear threat in view of its unquestioned nuclear might today. Third, exercise of the nuclear option would bring to the fore the classic dilemma of development versus defence ata time when India's developmental goals require the greatest attention for sustaining its economic growth. Fourth, the goals of national security, short-term, as well as India's own aspirations, in the long-term, to play a global role of some significance, remain compelling for India's strategic perspectives. Last, can India afford to remain locked in continued confrontation with the nuclear powers--in the post-CTBT phase--and pay the inevitably high costs--economic, technological and political--without having actually exercised its nuclear option? It is clear that the whole range of possibilities--retaining the present ambiguity, opting for recessed nuclear deterrence and operationalising its nuclear option--would hold the centre-stage of the national security agenda demanding a well coordinated andwell thought out nuclear strategy that would sustain India's long-term security projections.

It is clear from the foregoing that India has to resolutely address itself to the emerging set of challenges and opportunites in the changed world order ina coordinated and comprehensive framework of paramount

importance would be its ability to project its (long-termstrategic perspectives and interests in responding to theinterplay of domestic imperatives, regional balance of forces and global dynamics in the coming decades. The overarching reality of India as a large independent nation which is destined to play an important role on theglobal stage would undoubtedly prevail over the present difficulties and obstacles. The need for India to come togrips with the complexities of the rapidly changing configuration of forces at the domestic, regional and global levels, however, remains self-evident. India's long-term strategic perspectives would have to show greater dynamism and flexibility in responding to the increasingly complex demands of national security, regional aspirations and global commitments. This would at the least call for clearly defining India's security interests and evolving a coherent and multi-layered framework of its security policy and perspectives. In thefinal analysis, India's own strengths and capabilities--political, economic and military--would alone add substance to India's future projections as a power of some consequence in the emerging global order.

Why the Indian Economy is in a Mess?Dr M N Buch, Dean, Centre for Governance and Political Studies, VIF

Up to the election of 2004, it was ‘India Shining’ all the way. Glasnost and Perestroika had removed the Soviet Union as a serious player on the world stage and the new Russia had not yet taken root. Rajiv Gandhi had come to power riding a wave of sympathy when Indira Gandhi was assassinated and India embarked on what was to become an era of economic liberalisation. Nevertheless, it was actually Narasimha Rao, as Prime Minister, who really brought about the partial

liberalisation of the Indian economy. Manmohan Singh was the Finance Minister and is said to be the author of the new economic regime, but the fact is that he was the hack who carried out Narasimha Rao’s directives and implemented his policies. My own view is that Manmohan Singh is neither creative nor inventive in his economic thought and has, in turn, adopted that theory which was contemporaneously fashionable. He has been a Nehruvian socialist, a South-South protagonist in the North-South dialogue, a centrist-liberal, a market oriented capitalist, a neo-liberal, a disinvestment back-tracker underLeft Front pressure and a populist do gooder because Sonia Gandhi’s National Advisory Council dictates it. Is it any wonder that we have no economic policy at all, only populist adventurism and economic ad hocism?

Today we are in a mess. The rupee has been fluctuating violently at historically low levels almost day by day, inflation is out of control, industrial growth has fallen and industrialists are in despair, the markets are in a free dive and investment is declining, global confidence is shaken and our foreign exchange reserves are under pressure as foreign funds are flowing out of India and all that government and ruling party spokespersons can say is, “The fundamentals of our economy are sound.” Well, surprise of surprises, the fundamentals of our economy are not sound, in fact, they are ailing seriously, if not terminally. Our failure to recognise this makes an ostrich with its head buried in the sand almost an avid seeker of knowledge when we compare this with our refusal to see the reality. There is something very flawed about our economy. It is this blindness which is preventing us from taking those painful measures, those hard decisions, which can set us back on the road to recovery.

At a later stage in this paper, I shall attempt, perhaps somewhat ignorantly, to look at the theoretical underpinnings or lack thereof of the economy and our policies. At this stage, let us look at the so called fundamentals of our economy. The primary sector, mainly agriculture, but also mining for essential raw materials, has been ourmainstay and it is this sector, which is most labour intensive, which has provided the bulk of employment. Being rural based, this sector has contributed to the basic equilibrium in our settlement pattern,

from village to metropolitan city. This is our strength, because neither do we have one or more primate city which dominates the whole country, nor is the rural to urban migration alarming. Some improvement has been initiated over the years in the agricultural sector and as against the earlier Green Revolution states such as unified Punjab, which included Haryana, now one finds significant agricultural growth in states such as Gujarat and Madhya Pradesh, but overall the picture is very patchy indeed. The first three Five Year Plans did put emphasis on agriculture and irrigation, but the effort has not been sustained and we are unable to break free of our almost total dependence on the monsoon. There is, therefore, a major flaw even in the fundamentals of agriculture, the largest sector in terms of employment, though not in the share of GDP.

Our approach to agriculture has not been either holistic or consistent. Agriculture has major components --- the farmer, the land and its tenure, soil productivity, the cropping pattern, water availability, amplitude of quality power supply, agriculture research aimed at applying technology, technique, seed, fertilisers and sound agricultural practices in order to maximise productivity, the support services of roads, developed markets, financial support through easy credit, value addition through processing and government backing to ensure that the farmer to consumer relationship is healthy and mutually beneficial. We also need to promote land related activities such as animal husbandry, fishing, poultry keeping, horticulture, fodder development and silviculture which meets the village requirements of fodder, fuel and secondary timber. But before we do any of these, we need a national land use policy which identifies and allocates land according to the use to which it is best suited, of which agriculture would be the most predominant. From this would flow land management at meso, mili and micro level, an art at which the Japanese seem to excel. Unfortunately, India has no national land use policy at all. So much for our fundamentals!

It is not as if we are unaware of the above issues. We are and from time to time we have even addressed some or all of them. But never wholly, holistically, harmoniously, or consistently and with persistence. Apparently we either tire very quickly or else are soon

bored by consistency and want to move on to something new. Let me givetwo or three examples. We launched land reforms to give land to the tiller. Madhya Pradesh embraced this enthusiastically and enacted the Abolition of Proprietary Rights Act, 1950. We abolished Malguzari which was not quite zamindari and the Malguzar had only limited authority. He, however, was charged with the responsibility to manage the village commons, including the village forests. This function ceased in 1951 and from that year till 1961, when we brought the old “chhote jhad ke jungle” and “bade jhad ke jungle” within the ambit of protected forest under the Indian Forest Act, Madhya Pradesh lost fourmillion hectares of village forests to indiscriminate felling, of which 2.8 million hectares were encroached upon. That is when village nistar rights were gravely affected, biotic pressure on reserve forests increased and villagers and forest officials entered into conflict. Yet another sound fundamental, Mr. Politician?

In the early fifties of the twentieth century. we launched S.K. Dey’s Community Development Programme. The whole country was divided into Community Development (CD) Blocks, each headed by a Tehsildar rank Block Development Officer, but forming with his team a separate cadre of development officers. We thus separated the Revenue, or regulatory and the development administration, from which eventually flowed Panchayat Raj. In a C.D. Block, all planning and implementation was participative and whereas the villagers prescribed their priorities, work was undertaken on the basis of fifty per cent contribution by thepeople in cash, materials or voluntary labour. Because the people had a stake in the work, they saw to it that it was done honestly and the roads, wells, minor irrigation works, schools and panchayat bhawans built sixty years ago are still intact. The Block was a complete unit,with a Primary Health Centre and extension officers in education, social welfare, agriculture, animal husbandry, cooperation, etc. In 1963, however, we abolished the C.D.B., gave up participative development and replaced it by hundred per cent government grants works. The fundamentals still OK?

A third example is of the watershed development and management programme. The whole country is divided into mili (about 5000 hectarescovering about ten villages) and micro (about 500 hectares covering a

village) watersheds. For each mili or micro watershed, a Project Implementation Agency was identified, whose job was to prepare a detailed management plan, do a participative rural appraisal with the villagers, form a watershed development committee and then oversee thework. With ridge to valley vegetation treatment of hill features, undertaking soil conservation works and suitably treating all waterways and creating water bodies, the programme has succeeded in converting sizeable tracts of drought prone areas into productive areas, reduced seasonal distress migration and substantially raised the water table and improved the availability of fuel and fodder. Employment is locally generated, first as wage labour on the works proper and then in the improved agriculture of the village. Because everyone benefits, there was very little corruption in the programme.

But can our “The fundamentals are sound” brigade leave well alone? Along comes the National Advisory Council (NAC), headed by Sonia Gandhi and with woolly headed do gooders, long on intention but very short indeed on practical commonsense, as members. They persuaded government to launch the National Rural Employment Guarantee Programme, supported by the MNREG Act, the purpose of which is to givea hundred days’ employment per capita per year. This is an employment programme, muster based, whose prime objective is not asset creation. NAC may think it was pioneering something, but all such programmes cantrace their origin to the scarcity relief programme of British days. In his famine relief programme, Maharaja Sardul Singh of Bikaner at least built the Lal Bagh Palace. All we are building through NREGS is a massive web of corruption which has engulfed the entire Panchayat Raj system. The vast sums of money spent on a programme which, becauseit is muster based, has corruption built into its genes, have completely skewed our economy without creating any worthwhile assets which will give us long term returns. How can such a programme be partof our sound fundamentals?

An important component of the primary sector is mining for minerals which are the raw material for industry. This activity is extractive and impacts the environment, hence is the target of activists, some environmental, some social, some just plain cussed and, therefore, antiestablishment. Such activism has seriously affected mining for

coal, iron ore, bauxite aggregate and sand, to mention just a few items. Thermal power plants are denied coal, thus inhibiting new plants. Steel plants are denied iron ore. Sand mines are closed. Apartfrom adversely affecting industry, this has led to huge job losses, estimated at over 50,000 in Bellary and over 20,000 in Hoshangabad. Noone advocates exploitative mining which destroys whole ecological systems, or the corrupt practices that have burdened these industries in recent years. But one has to evolve a balance between exploitation,curbing corruption, and using the resultant ore for job creation and generating wealth and minimising the adverse environmental impact and rehabilitating the mined areas.

The German State of Rheinland Westphalia worked out about 70 years agoa policy whereby before mining began, the company had to submit a detailed plan of the mining operations, site for dumping overburden, restoring the site through backfill and layering with fresh soil, carrying out a vegetation plan and generally ensuring a return of the site to its old biodiversity. The policy has paid rich dividends, especially because it is vigorously enforced. That is the direction inwhich we must move, that is, extract, but responsibly and restore the land to its former state thereafter. We have a huge potential for employment and wealth generation in this segment of the primary sectorand we must use this wisely.

The backbone of a modern industrial state is the secondary or manufacturing, sector. At the time of independence, this was still rudimentary, though the Second World War had given a fillip to manufacture because many of the industrial goods which were imported could not be brought in and the British war effort needed the contribution of Indian industry. However, the main push to industry was given after independence when India deliberately embarked on a voyage of developing capital goods industries and of infrastructural development. From the First Five Year Plan onwards, the State took thelead in capital investment in power, irrigation, metallurgy, defence industry and other sectors of the economy, which were generically clubbed together as the high ground of the economy. Various power projects, steel plants, aluminium, copper, etc., smelters all came up in the public sector. At that stage, only the State had the capacity

to mobilise capital in sufficient quantity and at a scale necessary for investment in infrastructure and the capital goods industries. If this formed the core of Nehruvian socialism, which is now being condemned by modern economists and the neo-liberalists, it was nevertheless the only course open to India for rapid development at a time when India had few real industrialists and the average businessman would rather trade than manufacture. Japan went through a similar phase after the Meiji Restoration, but wisely that country kept open the doors of private enterprise and as the great Japanese business houses, the Ziabatsu, were able to undertake a larger role, the State stepped back from directly running the economy and allowed the private sector to take over. The State first led, then it worked in tandem and finally it allowed management to go into the hands of business houses whose primary objective was to maximise profit. The Japanese being a patriotic people, the State was able to retain a major role as facilitator and regulator and industry itself imposed self-discipline in which the interests of the nation were always kept paramount.

In sharp contrast, in India, as our planned economy increased the tentacles of the State, those in charge of governance began to taste economic power and not merely government power. Patronage soon skewed any sensible personnel policy in the public sector, nepotism led to unsuitable appointments to critical posts, the temptation of making money soon overcame the interests of the enterprise and the whole system began to fall apart because of inefficient management, overstaffing, delay in decision making and outright corruption. Huge amounts of money were frittered away in loss making activities and cumulatively this has certainly affected our economy adversely.

Rajiv Gandhi, followed by Narasimha Rao, did bring about a change of attitude in terms of opening up the economy to private enterprise. This did bring a large number of new start ups and sunrise industries and brought about rapid industrial growth in many sectors. Unfortunately, the government continued to vacillate because many of the sectors related to industry, mainly dealing with infrastructure, continued to be inefficiently run by government. Power has been one ofbiggest bottlenecks and this is one sector which government did not

deregulate for a long time. Even today, private participation in powergeneration and distribution is hedged in by many constraints. These include a reluctance on the part of government to loosen its hold overwhat government considers a strategically important sector but which in fact is only a public utility. The constraints are in licensing of new power stations, environmental clearance on their location, making available land, reserving coal for the use of the power stations and evolving environmental norms which, while protecting the environment, do not completely negate the project itself. Much of the problem of the episode now popularly referred to as ‘Coalgate’ arose out of the fact that government has not holistically looked at the power sector. There is demand for power and it can be met by private investment, provided a reasonable return can be ensured. If on the one hand, government decides to allow private players to function whilst at the same time government insists on subsidising whole sections of users, which denies the generation company a fair return on its investment, how can we expect private participation?

Because all major minerals are a monopoly of the State and coal is a major mineral, unless government allocates coal to a power plant, how can it produce power? The Environment Ministry does not clear coal mining projects, in the allocation of coal blocks there are allegations of corruption and wrongdoing, the mining of coal never takes place and yet we expect the power plants to generate electricity. This scenario is so reminiscent of a lunatic asylum. If power is to be generated and a power plant is to be built, then it is the job of the ministries concerned to sit together, hammer out norms of environmental clearance and then ensure that the power plant gets all the necessary clearances automatically. The Coal Ministry and the Environment Ministry have to sit together and work out the areas from which coal will be mined and made available to the power plants. My own view is that even if coal is given free it would be worthwhile because that coal will be converted to electrical energy, the users ofwhich would pay the State electricity duty and the use of that power for industrial production will create jobs and generate income. Instead of being apologetic, though one can understand that because inthe allocation of coal mines government’s policy has been inconsistent, the Prime Minister should have stood up in Parliament

and said that he has approved the allocation of coal, he stood by his decision and that anyone who did not like it could campaign for the defeat of the ruling party at the next election. Mere police agencies such as CBI or even the Supreme Court cannot sit in judgement over theexecutive decisions of the Prime Minister which he is constitutionallycompetent to take. It is the absolute lack of guts of government to stand by its decisions which is responsible for its woes.

Be that as it may, unlike China, India post liberalisation preferred the easy path of the tertiary sector for its own economy growth. In the tertiary sector, we emphasised IT and ICT as the core areas. The world was seeking the information highway and India provided it, whichled to a massive upsurge in employment in the IT sector. Does information technology directly produce tangible goods? Obviously not because information technology is merely an enabler to access information, analyse data and suggest a course of action. By itself Information Technology produces nothing, though by using this technology manufacturing industry can extend its horizon and massivelyupgrade its own efficiency and profitability. China produces, we give ideas. India has the capacity for marrying both but our industrialistsand businessmen prefer the easy path and our government enthusiastically falls in line. We are proud of our IT industry and wealso claim to have the fastest growing mobile telephony sector in the world. But do we manufacture even one brand of mobile telephone? Do weproduce any computers? We assemble some but that is only screw driver technology. All the hardware is designed and manufactured in the United States, Japan, Taiwan, Korea and China. Lenovo has become a bigname both in IT and ICT and the market is flooded with Lenovo computers and Lenovo mobile telephones. Our over dependence on the tertiary sector for economic growth is also the source of our greatestweakness because this is a vulnerable sector which is very quickly affected by what happens elsewhere in the world and by itself generates neither manufacturing competence nor manufacturing capacity.

Yet government used growth in the sector to showcase its claim that India is amongst the fastest growing economies in the world, part of the global market and yet protected against global economic vicissitudes because of the fundamental strength of our economy. The

hollowness of the claim has been suddenly exposed as inflation threatens to get out of hand, the rupee is devaluing from day-to-day and investor confidence in India is ebbing away. If our fundamentals are sound, why is this happening? Before we look at the unholy mess inwhich we find ourselves today, let us try and understand the theoretical underpinnings of our economy. Do we believe in the laissezfaire of Adam Smith? Do we believe in capitalist free enterprise? Do we practise mercantilism which, in any case in the present day and ageof open seas, does not lend itself to monopolising trade through a Navigation Act? Are we players in the monetarism advocated by Milton Friedman, who advocated that it is possible to control the economy by controlling money supply? Are we Keynesian in our belief that the State has a major role to kick start a flagging economy and to generate employment through public spending on works which create assets? Are we Marxian in outlook or Fabian socialist? Are we neo-liberals? What exactly are our economic moorings and to which brand ofmacroeconomics do we owe allegiance? Do we really believe that India is part of the global economy and is almost wholly controlled by global trends? Is that why a minor policy change by the Federal Reserve in the United States can make or break the Rupee? This last point is emphasised because the various apologists for government, ministers, economists and planners all claim helplessness because theysay that it is global trends which are affecting the Indian economy and these forces are beyond our control. When Y.V. Reddy was Governor of the Reserve Bank and the entire banking system in the Western worldand in South East Asia was collapsing, his conservative policies enabled our banks to be relatively immunised from the crisis. At that time, we claimed that we had the innate strength to resist the global trend. Today what has happened to that strength that a mere whiff of arumour somewhere else causes the rupee to go into freefall?

Much has been written on what is causing our woes, but some points need to be made again, because failure of government to recognise thatour policies are flawed has resulted in exacerbating the situation. Let us begin with inflation. There are many factors behind inflation, but excessive money supply is certainly not one of them. If money supply were excessive, would government be prepared to spend anything between Rupees 1.25 lakh crores and 3.0 lakh crores in subsidising

grain for the poor under the Food Security Programme? And yet government adopts monetarism as one of the means of checking inflation. Money supply is attempted to be restricted by a high bank rate, which pushes up the cost of money by way of credit. In a countrywhere there is a very strong parallel economy and where in any case the Reserve Bank is totally clueless about how much money is actually circulating, pushing up the bank rate does not push down consumption. What it does is to make the cost of legitimate capital needed for investment in business and industry unaffordable and thus render the product of such industry costly and uncompetitive in the global market. The way to counter this is not to make the rupee worthless. The way forward is to make money affordable so that the input costs reduce and the product can be produced at a competitive price. The high interest rate has some effects. The cost of capital is increased.Even at a high interest rate, industry could invest, provided there isan optimistic climate in which the possibility of reasonable returns cannot be ruled out. However, when this is accompanied by a fast devaluing rupee, the economic climate is vitiated and industry is holding back investment. This causes growth to stagnate, new start upsto be postponed or even abandoned, investment in upgradation and modernisation kept pending and, generally speaking growth suffers. This is the direct result of the monetarist policy followed by our government. This is also inhibiting industry from investing self ownedcapital in expansion, new start ups or modernisation. All this in a situation in which the banks are flush with funds but are not going for aggressive lending because the state of the market does not encourage this.

Another area in which we are on the wrong track is in our capacity to take sound decisions. The world can live with a harsh tax regime, provided it is practicable and consistent. In India, however, the tax regime is totally inconsistent, as has been proved in the Vodafone case. Our tax policies are not economics driven but are completely political in character. Somebody suggests to tax the rich and so everyone runs in that direction. Then someone else says that we must give concessions to encourage industry and that becomes the flavour ofthe day. Someone makes some complaint about wrongdoing because a certain order has been issued in a tax matter and everyone runs around

like a chicken with its head cut off. Why can we not have a long term tax policy aimed at sending a message to investors about what they canexpect in this country in terms of taxation and the policy of government regarding fair repatriation of profit?

I had said in the beginning of this paper that we take a holistic viewof almost nothing. Many smaller activities are involved in any activity and one component can cause all components to fail. Industry has certain requirements, the first one of which is land on which industry can locate. Some States are able to handle the matter better than others, Gujarat being one of them. Industry is welcome to locate in Kutch where land is plentiful and does not have a gainful alternative. Water is a problem here, which the government has solved by bringing in Narmada water. A number of industries, therefore, have located in Kutch. The Gujarat Government had made it clear that it will not use coercion to acquire fertile land for industry, though it has no objection to private purchase. There is no ambiguity and, therefore, the industry has no inhibition in locating in Gujarat. We should certainly keep the interests of cultivators in mind, but we cannot adopt a policy whereby land is simply not made available for undertaking public works or for location of economic activity which provides large scale gainful employment. Therefore, land promises to be a big obstacle in any future development project.

There are many countries which have struck a balance between environmental considerations and development needs. There are very strong environmental regulations, but they stop short of bringing all economic activities to a halt. What these regulations do is to force industry to realise its key role in protecting the environment and to make it accept responsibility to discharge this role both in the setting up of the industry and in running it. There is regular environmental audit and violation of environmental laws invites and infact gets severe punishment. However, industry is encouraged to establish new plants, but with responsibility. In India our approach is the reverse. There is a shortage of wood and, therefore, governmenthas put a ban on use of wooden furniture in government offices. My approach would be to insist on the greater use of wood, with a specific mandate being given to the Forest Department to go in for

aggressive afforestation and to create an environment in which the people and the private sector become partners in afforestation. Without sand, buildings cannot be constructed. Unless I find a sand substitute, I would not stop the use of sand but would regulate miningso that environmental damage is either avoided or minimised. In any case a ‘can do’ mindset would have to replace a ‘do not do’ mindset because ultimately Ludditism is not only an enemy of growth but is an ally of negative primitivism.

The obvious lack of policy direction is compounded by hair brained schemes to go on spending nonexistent money on so-called welfare programmes. Lord Keynes was a product of the Depression. He developed a theory that in times of depression or economic recession it is the duty of the State to kick-start the economy by judicious public spending on works which create permanent assets. If necessary the State would be justified, under controlled conditions, to print currency notes to fund such works, a process which goes by the name ofdeficit financing, which also covers revenue deficits in the budget. Franklin Delano Roosevelt, President of the United States, used the New Deal to fund public spending to overcome the effects of the Great Depression. The magnificent works in the Tennessee Valley, which harnessed the Tennessee River and its tributaries, generated hydel power and made available water for irrigation, is one of the finest monuments to well designed public spending to counter economic recession. In a way President Eisenhower’s post war programme of building 40,000 miles of interstate highways in the United States not only put money into the economy by way of public spending, but it created the infrastructure which today supports trade, commerce and industry in the whole of the United States. These are all Keynesian measures and are perfectly justified. This was the path we followed inour earlier plan period. There was a budget deficit on revenue account, but so what? It generated jobs, created assets and if there was a slight inflationary pressure, it was countered by greater productivity. That is still legitimate in India.

What is not legitimate is throwing money down the drain, which the National Rural Employment Guarantee Scheme as enshrined under the Mahatma Gandhi National Rural Employment Guarantee Act and the so-

called Food Security Bill are doing and will do. The real addition to money supply in the parallel economy is from the corruption generally found in India and corruption in NREGS specifically. To this will be added the colossal amount to be spent on subsidising food grain, whichcan have only one result --- a virtual collapse of the economy. Money,which should go into infrastructure, agriculture, business, industrialgrowth, promotion of foreign trade, will be denied to all these sectors and will be thrown down the drain. The way to feed people is to generate jobs which give them the money to buy food. Giving subsidised foodgrain but denying money to the sectors which generate employment is the single most foolish decision that government has ever taken in India since independence. It is so perfect a method of ruining the economy that it should be archived as a permanent record of how foolish governments can be. In any case, India now needs economic administrators with a sound practical knowledge of Indian realities. What it does not need is foreign trained economic advisors,who are clueless about India and what it emphatically does not need isthe National Advisory Council.

To sum up, we need to abandon every scheme which squanders money for possible electoral gain. We need very clear decisions on directions ofgrowth, with ruthless planning on providing both the environment and the financial and natural resources thereof. We need gainful employment generation which creates long term assets, thus providing the equality of opportunity to all enshrined in the Preamble to the Constitution. We need massive State support for health, education, skill development and infrastructure building. We need policies which carefully balance environmental concerns and protection on the one hand and growth of employment on the other. We need a government whichdecides and stands by its decisions. We need a grievance redressal mechanism which refuses to allow irresponsible activism to trivialise the process and bring development to a halt. We need to promote equity, not through doles but by encouraging activities from the village level projects which create assets all the way up to major industries, which genuinely give people equality of opportunity. What is more, we need a government, not the present spavined, paralysed, dithering apology of a government that we have today. All this in a democratic set up because as has been proved over and over again, a

self critical (not self destructive) democracy, in the long run, will always be better than totalitarianism. This is where we must say, “Yes, we can do, we shall do.”

Managing Land - A Holistic View


List 2 of the Seventh Schedule of the Constitution, which givesthe exclusive jurisdiction of the States, in Entry 18 reads, “

Land, that is to say, rights in or over land, land tenuresincluding the relation of landlord and tenant and the collection

of rent; transfer and alienation of agricultural land; landimprovement and agricultural loans; colonization”. However, Entry42 of List 3, the Concurrent List, gives concurrent jurisdiction

to Parliament and the State Legislatures in the matter ofacquisition and requisitioning of property. At the same time

under Entry 20 of List 3 puts economic and social planning in therealm of both the Centre and the States. To the extent that the

use of land affects the economy the Centre does have a say in theplanning of land use.

Land is the resource on which cities are built, industries areestablished, roads and railway tracks constructed, agriculture is

done, forests are conserved and expanded and mining andextraction operations effected. This is the common resource forpractically every human activity. The National Commission on

Urbanisation devoted a whole chapter to land as a resource. Thisis what the Commission has to say about land.

http://www.vifindia.org/print/1246

I quote in extenso because this is about the best coverage of thesubject. Purely as on aside, as Vice Chairman of the Commission I

wrote the chapter on “Land as a Resource” and, therefore, atworst I am only quoting myself.

“Land is the medium on which the entire superstructure of a humansettlement is created. On land man builds his houses, constructs

his factories, shops, schools and hospitals. From land heextracts metals and minerals and on it he grows his grain, fruitand flowers. The relationship between man and land, therefore, is

organic and symbiotic. Where land is managed with foresight,sympathy and understanding, an environment is built up in whichthe whole ecological system tends towards equilibrium. Where,however, land is mismanaged and exploited rather than used, theresult is blight. By and large, the way man has managed land,especially in India, there has been environmental degradation,

and nowhere more so than in our cities”.

The Commission further states:-

“The management of this critical resource is qualitativelydifferent in the urban and the rural context. Rural land is a

factor of production, the major input for the main rural economicactivity, agriculture. Urban land, on the other hand, by andlarge, is the base on which things are built. Rural land ispredominantly under a repetitive cycle of sowing, tending andharvesting, whereas urban land is converted or diverted to abuilt environment on a one-time permanent basis. Because it isconstantly reused, rural land is generally better managed thanurban land which is often utilised for an expedient profit,

without thought of long-term consequences. This is perhaps whyour exercises in land planning tend to be restricted to urbanareas in the form of master plans, there being an underlying

assumption that rural land will be properly managed in any case.

In large measure, it is our attempt to plan land use, divorced ofa wider understanding of human behaviour under the stress of citydynamics, which has contributed to the present urban chaos. While

land use planning alone cannot sort out the urban mess, themanagement of land can certainly be improved so that land is

viewed in its correct perspective, as a resource, and its useplanned with optimisation under changing circumstances as theobjective. To illustrate the point: a farmer decides whether to

plough his land or leave it fallow, whether to use it for rabi orkharif cultivation and the crops to be sown on it, depending onweather and market conditions and the availability of seed. Hissystem of land use is thus flexible. The urban planner, however,

tends to assign one particular use to land, into which thebureaucrat locks it, regardless of changing conditions.

Paradoxically, the use, ownership and transfer of land are welldocumented in village India, where land is fairly well managed,because the man-land symbiosis is still largely undisturbed. Theland records system ensures an annual review and revision of theland-use situation and the data base is thus kept up-to-date, andjust where planning is a matter of vital importance, there arevirtually no land records. There are city surveys, but they are

outdated, inadequately informed and quite worthless as a planningtool. For example, this Commission tried to ascertain how much

land under actual cultivation has been acquired for or privatelyconverted to urban, non-agricultural use in the last 20 years. Norecords are available. Neither the Ministry or Urban Development,

nor the National Remote Sensing Agency could give thisinformation. City by city, it is possible to longitudinallycompare the physical spread, but it is not possible to obtain

data about how much of this has occurred by conversion ofagricultural land, or the quality of the land thus converted. Inother words, a broad analysis of the cost of city spread in termsof diverting land from cyclical use to a built environment is notpossible because there is no record of the potential of the landthus converted and its productivity and value under agriculturaluse. Even in the context of intra-city planning, the lack of suchdata effectively blocks any attempt to assign uses so that landbest suited to growing things is retained under vegetation,whilst marginal land is built upon. In city after city, with

Delhi as a good example, barren land is converted into gardens atimmense cost, whilst fertile land is smothered under concrete and

asphalt”.

Having examined the issue of land in great detail the Commissionrecommended that in addition to the Survey of India, which may be

taken as the mother institution, there should also be aSettlements Survey of India, which would scientifically surveyland and classify and suggest the most appropriate uses fordifferent types of land. A separate Directorate of Urban Land

Records within the overall umbrella of the office of theCommissioner for Land Records, Survey and Settlement should beset up in every State. On the basis of the data generated an

overall land use policy should be framed whereby land is allottedthat use for which it is most appropriate. That is simply notdone in India so far. In fact land use allocation follows sucheconomic policies as the one for development of backward areas

through industry. One has just to fly over Hyderabad to see whatthis has done to a city which at one time was known for the

beauty of its rocky landscape and the water bodies like HusseinSagar and Himayat Sagar. Whether one flies from the north or fromthe south one witnesses a huge urban sprawl which has destroyedsuch beautiful rocky locations as Banjara Hills, Jubilee Hills,Somajiguda, etc. All the agricultural land around Hyderabad hasbeen eaten up. This is because Medak District which adjoins

Hyderabad was declared to be backward. Cyberabad,Ramachandrapuram and Pattancheru are the results, with Hyderabadcity itself expanding into the so-called backward areas. Had anintervening space of about 100 kilometres been left betweenHyderabad and the backward areas Hyderabad would not have

expanded so much and independent, thriving townships would havecome up in the designated backward areas for the benefit of the

residents of the district. Similar is the case with Dharampuri inTamil Nadu, with the result that the border town of Hosur has nowgrown into Bangalore and the outreach of Bangalore has expanded

because of the concessions made available on the outskirts of thecity. Indore, with Dewas to the north and Pithampur in DharDistrict to the south is a similar example of urban sprawl

promoted by faulty industrialisation policies and, therefore,land use policies.

The problem of land management has to be disaggregated atdifferent levels. The first is the national level. India is one

of the very fortunately placed countries in the world in whichsixty percent of the land is arable, thirty percent is underforests, grazing or other public use and only ten percent is

uncultivable waste land. In China, by contrast, only ten percentof the land is arable, sixty percent is uncultivable waste land

and the balance thirty percent is divided between grazing,forests and human settlements. In China expansion can take placeinto land which does not have an alternate use. In India it has

to be planned so that it is forced to divert to land which cannotbe cultivated or put to other useful purposes. For this reason atmacro level we need a strong, scientifically formulated land usepolicy which divides land along lines of permissible activity and

then assigns land use accordingly.

There is also a meso level dimension which would roughlyapproximate to the State. Every State provides for restriction ondiversion of land from agricultural to nonagricultural use. At

the same time it is well known that around cities such diversiontakes place, sometimes legally after seeking permission and veryoften illegally by surreptitious land use change and subsequentregularisation through political pressure, bribery or both.Unauthorised colonies in Delhi are a direct result of such

unauthorised, unplanned diversion of land from agricultural tononagricultural use. If the State fine- tunes the general

national level policy of allocating land for appropriate use thenillegal diversion could also be checked. How does the State fine-tune land use policy? In Gujarat the two areas most unsuited toagriculture are the Greater and Lesser Rann of Kutch, both ofwhich are deserts whose sands are encrusted with salt as seawater which inundates them during the wet season recedes and

leaves the land barren. The other large area which, in a way, isa continuation of the Rann, is the Khar Patti of the Bhal betweenBagodara and Limbdi. This area is totally unfit for cultivation

or growth of trees. It is a well known fact that the mostfertile, well watered part of Gujarat is south Gujarat, that is,

the districts of Baruch, Valsad, Navsari and Surat. CentralGujarat, Ahmedabad, Kheda, Mehsana and Baroda districts, is also

fertile. It is these districts where the maximumindustrialisation and urbanisation is taking place, thus eating

into thousands of acres of good, cultivable soil. A sensibleindustrial policy for Gujarat would be to locate industry in theKhar Patti or in Kutch. One is greatly encouraged to find thatthe present government of Gujarat is following a deliberate

policy of encouraging industry in Kutch, this being one of thefew examples of a state government adopting a sensible location

policy. We need to create a climate in which within the frameworkof the National Land Use Policy state governments do detailedplanning so that at meso-level we have an appropriate location

and land use policy.

Land use planning is equally important at the micro level, whichcould be the region, city or village. Very often sound land use

planning at ground level becomes a victim to the greed ofproperty owners and developers and the cupidity of our

politicians and officials. This is particularly true of land onthe periphery of our large towns. Whereas Delhi has now expandedexponentially, just thirty-five years ago the 1650 unathorisedcolonies, with a population of over twenty lakhs, were a direct

result of our not being able to plan land use and land managementas an integral part of the Master Plan of Delhi. A recent examplefrom Bhopal would further illustrate this point. About twenty-five kilometers from the centre of Bhopal is located village

Bhauri, approachable both from the Sehore road which goes west ofBhopal and the Narsingarh road, which goes north. With no thoughtto consequences government decided to locate the Indian Instituteof Science Education and Research (IISER), the School of Planning

and Architecture (SPA) and the National Institute of FashionTechnology (NIFT) in Bhauri. In addition, a major police trainingestablishment with all India coverage is also being located inthis village. Naturally land values have appreciated in Bhauri

and surrounding villages and real estate developers have steppedin. It is estimated that within the next few years a new townshipwith a population of over two lakh will be established, with no

thought to any centralised planning. Individual layouts have beencleared but area-wise infrastructure is not even envisaged. Thisnew development lies outside the command of the water supply,sewage and drainage systems of Bhopal. Two lakh people will beleft dependent on ground water, already in short supply. The

sewage, after perfunctory primary treatment in septic tanks, willbe discharged into a nala which drains into the upper reaches ofBhopal’s Upper Lake. All the efforts to protect the Lake from

pollution will be set at naught.

I have given these two examples to emphasise the need for aproper land use policy which covers the region, the settlementswithin the region and the direction in which the region should

grow. In other words, within the broad framework of the nationalland use policy and the state level policy, we need to do

detailed planning of regional infrastructure which would allowthe settlements located within that region to develop in tandemand without creating the imbalances which can create isolatedplanned pockets within a blighted region. It is this sort of

planning which can then lead to the detailed development plan ofa town and fine-tuned zonal planning within the development plan.

India is paying a very heavy price for neither having a properrecord of how its land space is being used, nor a broad nationalpolicy of how land should be used. Some of the consequences needto be mentioned for a proper understanding of the problem. It isself-evident that in rain fed areas where the health of rivers is

directly dependent upon the health of the forests within thecatchment because there is no snow to feed the rivers, anynational level policy must give very high priority to the

conservation and enlargement of the forests in the catchment ofall our peninsular rivers. The forests of the upper and middle

reaches of the Narmada River are under stress but are still in areasonably healthy state of conservation. The Narmada is anentirely rain fed river. The gauging stations at Mandla,

Hoshangabad and Mortakka show that the dry season flow of theNarmada is between twelve to fourteen percent of the wet seasonflow. Contrast this with the Bhagirathi (Ganga) at Uttar Kashi

and Tehri. Here the dry season flow is six percent of peak seasonflow, despite the fact that the Ganga emerges from a glacier andis snow fed. There is such mass deforestation in the hills of

Tehri and Uttar Kashi that the behaviour of even a snow fed riveris less satisfactory than that of a pure rain fed river whoseforests are still reasonably healthy. Ultimately it is the

forests which are the source of water and it is they whichregulate the health of ground water in the plains and also

prevent upland erosion. Forests, therefore, must get the highestpriority in any national land use planning.

India wants to retain a sustained growth rate of between eightand eight and a half percent per annum. Our mindset is such thatthe secondary and tertiary sectors are the ones which we haveplanned to engineer growth. In the process the primary sector,

agriculture, is neglected, or else it is presumed that the growthpotential of this sector is very little. Agriculture is not onlya function of sowing seed and then harvesting the mature crop.

Linked with agriculture is irrigation and, consequently,availability of power. Irrigation itself demands storage for flowirrigation and exploitation of ground water for lift irrigation.We have no national policy in this behalf. So far as ground water

is concerned we have not been able to have a policy whichcorrelates discharge through lift and recharge of the source ofground water. This has caused a disastrous drop in the watertable in areas such as the Punjab and Haryana, where naturalaquifers exist and the Malwa region of Madhya Pradesh, wherethere are very few aquifers and it is only pockets of fossil

water which are tapped. As a part of the national land policy wemust, therefore, also have a policy relating to water withdrawaland recharge. The State of California in the United States of

America does have such a policy. A series of percolation tanks inthe hills cause ground water recharge in the central part of the

State. Government carefully monitors recharge and regulatesdrawing of water by volumetric metering and fixing of the water

rate, plus a ceiling on the quantum that a user can draw.

Closely connected with land use policy is the correlationship ofdevelopment activity and conversion of land to that particularuse. For example, if a road is to be built land will have to be

acquired. If industry is to be established it can be done only bylocating it on land. If a new Indian Institute of Technology is

to be founded it will need five hundred acres of land. If thermalpower is to be generated coal will have to be mined and assigned

to the power station and this converts the present land use,

largely under forests, to mining which, through excavation,changes the landscape. The national land use policy must take

this factor into account so that it accommodates both the thermalpower station and the mines that feed it. Here what is needed is

a sound policy for restoration of mined areas to a state ofnature, a policy followed with great success in the German State

of Rhenish—Westphalia, but is not even conceived even as aprinciple in India. If land is the medium on which human activitytakes place, then the national land use policy will have to takeinto account all such activities. How to optimise land use, howto come up with a rational policy of diversion of land use, how

to acquire land for purposes which are critical to thedevelopment process would all emanate from a national land use

policy. Today for want of such a policy ministries such as RuralDevelopment and Forests and Environment pull in one direction,ministries such as Agriculture and Industry pull in another andactivists who are trying to establish their own credibility pull

in every direction imaginable, leading to complete chaos.Economic planning is not a function of individual ministries

taking decisions, almost always contradictory of each other, butis rather a holistic exercise in which the national land usepolicy plays a vital role in determining land use and thenassigning to land the function which will promote overalleconomic development without compromising on issues of

environmental protection.

Is there any hope that we shall get a national land use policy?In fact the answer is a string of question marks because at

present there is no evidence that a holistic land use policy iseven thought of by our politicians, officials and planners. As is

our wont it is ad hocism which governs and will continue togovern every issue relating to land use.

Foreign Direct Investment and Economic Growth



Paul Theroux in his book, ‘Riding The Iron Rooster’ has made some fascinating comments on China which can help us in trying to understand why China is today an economic power-house and India is still struggling. This book was written in 1988 and describes a seriesof train journeys that Theroux undertook across China in trains which were obviously not the new Bullet Trains that China has now introduced.

Starting from Victoria Station in London Theroux travels across Europe, Russia, and Mongolia and then enters China through Inner Mongolia, making landfall at Datong. After the emptiness of Mongolia Theroux finds Datong and the China it represents to be shabby, busy, disorderly, very crowded and thoroughly polluted by smog which was a combination of desert dust, fog and industrial smoke. The shops were full of goods; there was an air of prosperity, but coal as the source of energy and manufacture, especially of steam locomotives, created a lasting impression. The industrial process was not automated, but everyone was busy working. The guiding philosophy was the three great goals of the workers. To quote Theroux these goals were, “timing of production, so that no work was wasted; keeping the right mental attitude; and increasing productivity”.

I have begun this paper by referring at some length to the very first impression that Paul Theroux had when he entered China from Mongolia. It was one of a country which has industries, whose people had a mindset of production and whose government obviously had a commitment to manufacturing. After the revolution Mao Tse Tung deliberately fostered an economic policy which strove to build a huge manufacturingsector in the country so that China could become an industrialised nation. Remember the slogan that China would overtake America in steelproduction? The huge number of backyard furnaces that came up and produced very low quality pig iron was a part of this effort to industrialise. Not much pig iron was produced this way, but the peoplewere weaned away from a rural psyche to one in which manufacturing became central to the economy. It must be remembered that in China only ten percent of the total land area is cultivable and more than

sixty percent of the land consists of uncultivable wasteland. Geology,geography, topography, hydrology and soil morphology encouraged, in fact mandated, that China could not continue to prosper on the basis of agriculture alone. The industrial revolution in China was then an inevitable consequence of the land configuration, though to give Mao credit he hastened the transition from a basically subsistence rural economy to a very powerful industrial economy.

Industrialisation carries with it a number of prerequisites, sequential growth of support infrastructure, capital requirement and capital formation and research and development which would lead to invention, innovation and improvement. Industry cannot survive withoutpower and the development of the power sector becomes a sine quo non for industrialisation. The development of communications so that goods, people and services can be transported over long distances is absolutely essential for industrial growth. Because a country startingfrom a low level of economic capability does need assistance for capital formation and for development of technology, China had to findpartners. Therefore, despite the fact that China is a Communist country whose ideal is socialism and State ownership of the means of production, China opted for an open door policy in which foreign investment was welcomed and the off-shoring of foreign industry and its location in China was encouraged. China provided the land space and labour and many of the world industries established a base in China. A great deal of Chinese industrial grown has taken place because of this open door policy. The Chinese Government at no stage felt that it could not keep the multinational corporations under control and, therefore, the Chinese had no hesitation in letting in foreign capital. Despite the handicap of having a one-party rule and ajudicial system which is certainly not Anglo Saxon, China has been able to reassure the foreign investor that his investment would be safe.

Let us contrast this with India. We have always been suspicious of foreigners coming and investing in India because after all the East India Company and its Dutch, French, Portuguese and Danish counterparts initially came to India for trade. Because of a succession of wars in Europe in which Britain emerged as the dominant

naval power and also a great military power on land, the French, Portuguese and other European interventions in India were virtually liquidated and Britain emerged as the supreme European power. Startingfrom trading posts such as Bombay, Surat and Calcutta the British trader gradually grew into being an arbiter in matters of local, native administration and the East India Company expanded into an imperial power. These memories are fresh in the Indian mind and, therefore, the Indian people and the Indian politicians have always had a deep- rooted suspicion and antipathy towards the successors to the East India Company, the multinational corporations. That is why there is strong political opposition to allowing foreigners to come and take over our companies, our manufacturing units and our trade outlets. Surprisingly China, which calls itself a Peoples Republic andhas the single party rule of the Communist Party of China, is today most openly capitalist and gives the warmest possible welcome to foreign investors. India, on the other hand, is a multi-party democracy in which the word “socialist” used in the Preamble to the Constitution is more a comforting slogan than a political commitment, but we are still hostile to the idea of foreigners participating in our economy because we still feel that Surat may become the base of a foreign empire. That does explain why there is such strong political revulsion whenever the question of opening up of our market to foreigners comes up for discussion.

Trade created an empire in India and, subsequently, this empire systematically destroyed such manufacturing capabilities that India had so that the factory-made goods of Britain may be sold in the Indian market and India may then be reduced to the position of a supplier of primary products to Britain. Despite this history the Government of India has decided to open up two sectors of the Indian economy to Foreign Direct Investment. These are retail trade and the civil aviation sector, the latter named being in absolute shambles because of mismanagement. Foreign Direct Investment in the retail sector is strongly opposed by the Left, BJP, Trinamool Congress and several such parties, some of which are a part of the present Congressled coalition. The argument advanced by government is that foreigners taking over the aviation industry will pump necessary working capital into the system and this part of the economy would revive. Similarly,

Foreign Direct Investment in retail trade would cut out middlemen, create the infrastructure which would enable the supply chain to reachfrom the farmer right up to the customer in the retail store and wouldbring direct benefit to the cultivators while ensuing good quality of the produce and a reasonable price for the urban consumers. It is argued that the present system of agricultural production and marketing is such that there is considerable wastage of agricultural produce by inappropriate storage, spoilage and even destruction through putrefaction in the process of transporting the produce from field to market. The foreign investment retail chains would reach out directly to the producer, create adequate storage, including cold storage facilities and build an efficient transport system which wouldquickly bring goods to the retail stores. This would put more money inthe hands of farmers, prevent wastage and enable the consumer to buy agricultural products at an affordable price. The fact that it would throw a very large number of small vendors, road side hawker and itinerant sellers who carry fruits and vegetables on hand carts right up to the doorstep out of a job does not seem to bother our American Business School, World Bank trained or oriented economists and policy makers.

We seem to be quite willing to allow foreign investors to invest capital, including working capital, in airline companies, most of which are utterly mismanaged. Why do we not encourage foreign investors like British Aerospace, Boeing, Dassault, etc., to invest inproducing aircraft in India? Why do we not try and have foreign companies invest in building factories for producing the refrigerationequipment which keeps cold storage plants functional? In other words, why do we not encourage foreign companies to invest in the secondary sector in a big way in India? We have had a fair amount of success in the Build, Operate and Transfer model (BOT model) of road constructionand certainly on highways such as that which connects Bhopal to Indorethe BOT model has enabled a first rate road to be built. If a sufficiency of off-shoring of manufacturing facilities is done in India we would certainly be able to create more gainful employment, India would be able to evolve an industrial culture instead of the present satisfaction with trading and as our manufacturing capacity increases, we would become a major industrial power, economic power

and military power. Obviously we need to take a fresh look at our policy relating to Foreign Direct Investment in India. Given the choice I would cut down all FDI in retail trade, the service sector such as running an airline and in real estate. I would have an open door policy towards investment in the secondary sector, including the setting up of hundred percent foreign owned manufacturing facilities in India. I would certainly give meaningful incentives for investment in physical infrastructure. My only restriction would be that employment generated by these activities would go to the citizens of this country so that their earning and welfare are enhanced.

The great advantage of having a powerful industrial economy is that itforces the manufacturing companies to invest in more research and development because if they do not improve, innovate and invent, theirproducts will become unsaleable in the market. Therefore, industrial growth will bring about simultaneous growth in scientific research forthe purpose of innovation and invention. This, in turn, will strengthen our institutions of technology and management because as industry grows, as the need for research grows, the market for these disciplines will expand, the research and development establishment will become stronger and the Institutes of Technology and Management will be forced to redesign teaching methodologies to keep up with the new demand.

My final words would be that government must realise that so far as the foreign direct investor is concerned, he would prefer an activity in which his own capital investment is miniscule, there is a quick turnover of commodities and, therefore, profits are earned almost simultaneously with trading. The gestation period in envisaging, constructing, commissioning of an industrial establishment and then going into commercial production is quite long and profit would have to be deferred to an appropriate date in the future. That is why in India trade is more attractive than manufacture. This would be true ofthe foreign direct investor also. We need to break this mindset, to make the industrialist realise that waiting for profit is not such a bad idea after all because the production capacity created will yield results year after year after year and that a well managed industrial enterprise will always be more profitable than just trade, whilst

being less risky because it is unlikely to be affected by daily marketfluctuations which retail trade has to face. Therefore, let economic reforms be targeted at opening up our economy to productive investmentbut not indiscriminately to trade. America and the developed world want exactly the opposite to happen and this we must resist.

Nehruvian Rate of Growth


Dr. V. Anantha Nageswaran, Visiting Fellow, VIF

India unveiled its new pan-India Consumer Price Index (CPI) in February 2012. With the release of the index figures for January, it is possible to compute annual inflation rates based on the new all-India CPI. The headline inflation rate based on this new measure stoodat 7.7% but the core inflation rate, excluding food and fuel, was in double digits (10.3%). Food has a weight of around 50% in the index, fuel around 10% and services about 26%. The Reserve Bank of India (RBI) is unlikely to set monetary policy based on this new inflation measure in the near future, given that the data series is yet to be tested for consistency, etc. Nonetheless, the inflation rate is high enough to warrant tempering of rate cut expectations.

The RBI governor, in a recent speech, said that global central bankersincreasingly face the trilemma of managing financial stability, price stability and fiscal sustainability. He should know. His attempts to bring the rate of inflation down in India have been enormously complicated by fiscal deficits and government borrowings. Further, in an interview to The Wall Street Journal, he pegged India’s potential growth rate at 7% only. Perhaps, he was aware of the numbers in the economic advisory council (EAC) report submitted to the Prime Ministerin February. The gross domestic fixed capital formation in India is expected to have slipped below 30%. The private sector has pulled backfrom investing in the country. EAC still goes ahead and predicts a bounce-back in the gross domestic product (GDP) growth to 7.6% in 2012-13 from an expected growth outcome of 7.1% in 2011-12 (the government estimate is 6.9%). In fact, if EAC assumptions on growth

and the dollar-rupee exchange rate hold good, then 2012-13 should witness India’s nominal GDP cross the $2 trillion mark.

That is ambitious and mostly unrealistic. It is predicated on the United Progressive Alliance (UPA) government climbing the tall fiscal hurdle EAC has set for it. That requires demonstrating incontestably that government finances are indeed on the path of fiscal consolidation (Page 14 of the EAC report). It is a tall order for a government that is still captive to populist instincts. The 3Fs—food, fuel and fertilizer subsidies—are devouring the country’s fiscal and economic future. EAC correctly notes that the half-hearted attempt at decontrolling the price of petrol while leaving diesel fuel pricing regime intact has introduced additional distortions. The partial reform in the fertilizer subsidy regime remains a non-starter unless urea prices are either decontrolled or raised substantially.

Indeed, analysts are unsure as to what outcome should they wish for the Congress party in the elections to five state assemblies for the government at the Centre to pursue fiscal consolidation. In fact, it is possible to argue that a good outcome for the Congress is bad for India’s medium-term fiscal path as a good outcome emboldens the chances of Rahul Gandhi making a bid to be the prime minister of Indiain the national elections in 2014. His fiscal instincts seem populist rather than prudent. If the Congress fares badly, it might shelve any attempt at fiscal consolidation out of fear of alienating voters further ahead of the 2014 elections. Hence, whichever way one slices the argument, India’s fiscal direction is far from being set on the path to improvement.

Writing about Bundelkhand in Uttar Pradesh (UP), Shekhar Gupta of The Indian Express notes that the place has everything except water and that its water scarcity had everything to do with the UPA government’senvironmental activism: “And the one scheme that could have changed its face, the interlinking of Ken and Betwa, two rivers in the same Yamuna basin, became a casualty of the UPA’s early phase of environmental activism, in spite of the fact that the three riparian states, UP, Madhya Pradesh and Rajasthan had already signed an agreement on it.”

With the price of crude oil now rising globally and with fiscal consolidation not a done deal, India’s growth-inflation trade-off is not about to become favourable any time soon. India may have to live with a growth rate of 7% or below for quite some time to come. The Business Standard gets it right: there are solid reasons for us to lower growth expectations not only for 2012-13, but also for the next few years, at least.

Ironically, many commentators thoughtlessly refer to India’s 3.5% realgrowth rate in the first three decades after independence as the “Hindu rate of growth”. That is absurd. The policies fashioned by an avowedly atheistic Prime Minister who was as uninformed on Hinduism ashe was on economics laid the foundation for India experiencing mediocre growth for a long period after independence. It was the Nehruvian rate of growth. Now, the Congress party is once again overseeing the derailment of the growth ambitions of a resurgent Indiain the new millennium. Mission accomplished.

A Perspective on Subsidies in Our Economy



One of the favourite whipping boys of economists with a free market bias, neo-liberals, businessmen and ultra conservative right wing politicians is the question of subsidies. The whole economic scenario in India is said to be vitiated by subsidies given by the government, which is causing the budget to be skewed and keeping the fiscal deficit at a high level. According to them if subsidies are abolished the economy will suddenly revive and India will prosper.

One begins with an assumption that even the so-called neo-liberals will concede that the Government of India and its policies will conform to the Constitution. The Preamble mandates social, economic and political justice and Article 38 directs the State to secure a social order for the promotion of welfare of the people. Article 39 directs the State to ensure that the material resources of the

community are distributed as best to subserve the common good and thatthe operation of the economic system does not result in the concentration of wealth and means of production to the common detriment. A social order aimed at promoting the welfare of people contains within itself the principle of equity as the guiding star forour economic policies. If production of wealth is one of the major objectives of society in India, the promotion of equity is one of the principal duties of government. It is in this context that the subsidyregime has to be viewed. The word subsidy is defined in the Chambers 21st Century Dictionary as “a sum of money given, e.g., by a government to an industry, to help with running costs or to keep product prices low”. It also means help or assistance, especially to those who need such assistance in order to remain afloat. By itself the word subsidy is neutral, that is, it is not really intrinsically either good or bad. Quite often subsidy is paid for activities or to persons who need assistance and could not have survived without such help. The entire social security regime in the United States and much of Western Europe is based on the principle that the State must provide for those who are unemployed, indigent, unable to afford basichealth care and are in need of social support. Such a system is obviously predicated on taxing the more prosperous citizens and using this money to support those in need.

One can safely state that there is no country in the world which does not have one form of subsidy or the other for a selected group of people. Corruption which is tolerated or, because of the policy of therulers, is encouraged is itself a form of subsidising the rich and influential by looting the common man. A governmental system which facilitates corruption by its officials at the cost of citizens is a form of subsidising a group of persons in power. The entire sordid horse-trading in our Legislatures in order to obtain and retain power is a form of subsidy to the corrupt. Assistance by the United States to Israel above and beyond that country’s minimum security needs is a subsidy to Israel indirectly at the cost of its Arab neighbours. Almost every single proxy war is fought on the basis of subsidies, including the low intensity conflict indulged in by Pakistan against India through surrogates. Arms for the Pakistan Army given by the United States and partially passed on to the Taliban also form part of

the subsidy regime. How are these subsidies better than a subsidy given by the Indian Government on diesel and LPG which would benefit the farmer, the worker and the lower and middle income group people ofIndia?

Let us come to the Indian context. Regardless of the jugglery of figures by the Planning Commission and the claim by government that India has been successfully able to make a substantial dent in poverty. India still remains a country with huge numbers of people whoare so poor as to be unable to sustain themselves. One estimate is that anything between forty percent and fifty percent of children are under nourished. Malnutrition is not a function of lack of knowledge of what constitutes a healthy diet. Malnutrition is a direct consequence of the parents not being able to afford to feed the child and, therefore, the child is perpetually hungry and physically underdeveloped, prone to disease and cumulatively liable to have serious intellectual deficiency. One cannot expect the brain of a child who is physically underdeveloped to reach a level of growth of the brain of a well-nourished child. Malnutrition, therefore, seriously affects both the physical and mental health of an entire nation. Which State, whose avowed objective is the welfare of the people, can afford to leave such vast masses of its citizens to their own device without intervening strongly for their economic upliftment?Which State can afford to allow its children to starve or the people to die of hunger? Certainly not the democratic India in which we live.Ideally the State must create gainful employment for the masses so that everyone is able to make a reasonable living and feed his children. However, till that happy day arrives does not the State havea duty to make available the wherewithal to the poor to be able to survive? This would be by way of a subsidy, call it what you will.

We are not ignorant of affluence, which is why so many of our businessmen figure in every international list of billionaires. Our Parliament and, following suit, our Legislatures have voted themselvessubstantial increases in emoluments at frequent intervals. Today the position is that a Member of Parliament has the following emoluments and perquisites: -

Salary : Rs. 50,000 per month (increased from Rs. 16,000)

Daily allowance for every sitting of Parliament or of a parliamentary committee, subject to an additional three days allowance before and three days after a parliamentary session and two days before and afterall the meetings of a committee – Rs. 2,000 per day. (Increased from Rs. 1,000 per day)

Constituency Allowance: Rs. 45,000 per month

Office Expenses: Rs. 45,000 per month

Travel facilities:

a) To attend a session of Parliament, meeting of a committee or any other duty as a member: First class A.C. for self plus one first classand one second class AC fare for rail travel, or one and one-fourth air fare if the travel is by air and Rs. 16 per kilometre if the travel is by road.

b) Additional air travel facilities: Every M.P is entitled to 34 single air journeys in a year anywhere in India, together with a spouse and unlimited number of companions and relatives. If there is an unspent balance of air travel it can be carried over to the next year.

c) For rail travel a MP is allowed unlimited first class air-conditioned travel for himself/herself and his/her spouse, plus one companion who will be accommodated in A.C two-tier.

Accommodation: A Member of Parliament is entitled to official accommodation in Delhi and to annual supply of forty lakh litres of water and fifty thousand units of electric power free of cost. The water and power allowances can be carried over to the next year. In addition, the MP is entitled to purchase of furniture worth Rs. 60,000plus Rs. 15,000 worth of non-durable furnishing items. In addition, every three months the cost of washing of sofa covers and curtains will be borne by the State.

Telephone facilities: A Member of Parliament is entitled to three telephones to be installed. He is entitled to a mobile telephone also,

and 1,50,000 local calls per year and broadband internet charges of Rs. 1,500 per month

Medical facilities: On payment of Rs. 500 per month a Member of Parliament is entitled to complete CGHS coverage.

Ex-Members: Every Ex-Member of Parliament is entitled to a pension of Rs. 20,000 per month and an additional Rs. 1,500 per month for every year in excess of five years of membership. His or her spouse would beentitled to fifty percent of the pension as family pension. Rail travel facilities for an Ex-Member of Parliament would be unlimited first class A.C. travel if he goes alone and two second A.C. travel facilities if he or she goes with a companion.

The above emoluments and perquisites of the MPs have been given in detail to show that our Members of Parliament are in the top income-earning bracket in India, at least in the public sector. With no disrespect to our legislators it is clear that they are well above thepoverty level income recently prescribed by the Planning Commission asRs. 28 per day in an urban area and Rs. 22 per day in a rural area. Isthis not a form of subsidy?

Let us take another form of subsidies. In a completely free market economy (one does not refer here to the virtual economic piracy of thebad old days of American capitalism as practiced by Henry Ford, Vanderbilt or Rockefeller) industry has to fend for itself in the matter of land, infrastructure, capital, labour, cost of production and marketing. The State will not acquire land and make it available at concessional rates to industry. All our industry is located on landgiven free or very cheap by government through either allotment of government land whose opportunity cost is thus foregone, or by acquiring it at low rates from farmers. The entire cost of infrastructure has so far been borne by the State and will continue tobe borne by it. Power, water, communication connectivity and transportfacilities have been provided by the State either free of cost or at highly concessional rates, government gives tax breaks and, where the industry is really influential, then government frames policies which create semi-monopolistic conditions in the industry. When industry turns sick government bails it out. Many industries are defaulters in

the matter of taxes and user charges. Kingfisher Airlines is one such an industry. Very often the power connection of an industry is not discontinued because of default of payment of electricity dues, the argument being that if industry closes workers will become unemployed.In other words, the amount due, by not being recovered, is a form of subsidy to that industry. One does not hear the neo-liberal crying outin horror at such subsidies.

The argument given for concessions to industries are that it is only when industries are set up that there will be job creation and, therefore, any incentive offered to industry is in fact a welfare measure because people thereby gain employment. The Indian businessmanbeing such a philanthropist, one supposes that he draws no benefit from the largesse given by government! The exact opposite is in fact the truth. In many of the so-called backward areas industrial schemes,where large industrial estates were created, most of the industries have closed. The industrialists took full advantage of the land, the tax breaks, the subsidised loans and other facilities given by government, set up some token industries and when the period of concessions was completed, transferred the assets to their main units located in more traditional areas where there is an advantage of cluster. Malanpur in Bhind District, adjacent to Gwalior and virtuallyits suburb, was an industrial area developed under the backward areas scheme. Today most of the industries have moved away, the landscape isone of stripped factories which look like the wreckage of a war zone and the industrialists, after enjoying subsidies, have moved elsewhere. Why is there no neo-liberal outcry against this? The whole policy of industrial location through subsidies has just not worked. In fact the Gujarat policy is better, where land and infrastructure are available in such inhospitable regions as Kutch and industry is invited to establish there. Now industrialists make an economic decision. The cost of establishing in Surat District is prohibitively high, whereas in Kutch it is relatively low. Because infrastructure isavailable in Kutch the industrialists prefer to locate there. An industrialist is given no subsidy, but he does find that it makes economic sense to locate in Kutch rather than in Baroda. In a way thisis a subsidy which does not ignore market forces.

Let us see the areas in which the poorer half of India is subsidised and that, too, very inefficiently. The largest, of course, is the National Rural Employment Guarantee Scheme. It is a subsidy in that even where it is honestly administered, which is almost nowhere, in terms of output the scheme is not very productive because it has not been designed as an assets creation programme but as only a programme for providing employment for a hundred days per year. Nevertheless, with all the corruption and inefficiency which plague this scheme, it has brought a little more money to the very poor in rural areas. One positive effect is that it has created some hope in rural Bihar so that migration of cheap labour to rich agricultural areas such as the Punjab is substantially reduced. This has forced the Punjabi farmer topay attractive wages to the Bihari labour to persuade it to work in the Punjab. This is a form of subsidy which does promote welfare. Tiedto this would be the entire subsidy regime for agriculture, whether itis by way of subsidised seed and fertilizer subsidised water rate for irrigation, subsidised power and more money being pumped into rural infrastructure so that there is both employment creation and general upgradation of the economic and social infrastructure of rural areas. Here what we need is not less of subsidies but rather a complete redesigning of the administrative system so that the schemes of subsidy are honestly and efficiently administered.

We have a subsidy on petroleum products. Petrol and aviation fuel are used by affluent people and by the airlines for operation of their aircraft. This is fuel for the rich and can be taxed. LPG is used for cooking purpose across a wide spectrum of society, including the lowerincome groups and a substantial number of people of the economically weaker sections. It is said that on every cylinder of gas the oil companies take a substantial loss and have to be subsidied by government. Similarly, it is said that heavy losses are being incurredon account of diesel. Diesel is the fuel for all our goods transport vehicles, the locomotives of the Indian Railways on non-electrified sections and it powers tractors and pump sets used in the agriculture sector. Every paisa of additional cost added to diesel would push up the cost of transport and, therefore, the price of goods that the average citizen uses. It also pushes up the cost of agriculture because cost of running of tractors and of non-electrified pump sets

increases. This pushes up the price of food grains and contributes to inflation. If LPG become more costly and people turn to alternative fuels, God help our trees because they would be cut down in increasingnumbers even in urban areas. A subsidy on fuel, therefore, if fully justified.

Why are fuel costs high? Partially it is the cost of crude oil but more importantly it is the taxes such as import duty, excise duties, various types of sales tax and value added tax is what keep the price of petroleum products high. The revenue earned from petroleum productsis what is passed on by government as subsidy to the oil firms. Government wants to keep earning that revenue, but it wants to transfer the burden of subsidies to the consumers, many of whom would have a major economic slide back and reduction in life style if the subsidy were withdrawn. Why is government not prepared to forego that revenue so that fuel prices may remain affordable? Should the neo-liberals not answer this question?

Let us take education and health care. Under Article 47 the State is directed to raise the level of nutrition and the standard of living ofits people and to make health care amongst its primary duties. In Britain the National Health Service gives health coverage to everyone living in the British Isles. In India most State Governments are allowing the health facilities in the public domain to run down so that the private health care facilities can prosper. Is this not a clear violation of the primary duty of the State? Similarly, in education it is the duty of the State to provide free and compulsory school education. Government seems to be willing to invest thousands of crores of rupees in setting up eight new Indian Institutes of Technology and seven new Indian Institutes of Management. School education, however, is woefully neglected. Here the public-private partnership mode is advocated by our dear Planning Commission, even though in the America which is beloved of the Planning Commission, school education is firmly in the public domain. At the lowest end of the spectrum of education neglect of school education has resulted in our having one of the worst run school systems in the world. At the top of this spectrum the Indian Institutes of Management charge an unrealistically high fee, which students can afford only by taking a

hefty loan, the nightmare of whose repayment looms large before them. Therefore, instead of acquiring knowledge the students only try and acquire a higher employability profile so that they can be immediatelyemployed on high remuneration. Genuine education, research and development go by the board. Neglect at one end and high fees at the other have given us exactly the same result, a complete lack of genuine education. Is this what the free market economy is designed todo?

Subsidies come with a price. One has to find funds for subsidies and agovernment which will not progressively tax the affluent naturally resorts to deficit financing. If, for example, Mukesh Ambani had to pay an expenditure tax of Rs. 650 crores on the Rs. 650 crores he spent on constructing his new house in Bombay, or the Swaminarayan sect had to pay Rs. 1,500 crores tax on the Rs. 1,500 crores spent on the Akshardham temple at Delhi, government would have the funds for genuine subsidies. The alternative would be for potential big spendersto demonstrably prove that they are diverting luxury spending to physical or social infrastructure development, thus relieving pressureon the budget. In any case deficit financing for a defined purpose is not really evil, as any Keynesian economist will vouch, provided it creates assets which begin to contribute to economic development.

The administration of subsidies is our biggest weakness. First and foremost subsidies cannot be a means of populism and both the need forsubsidy and its quantum and time span must be carefully thought out. The administration of each subsidy has to be made over to a dedicated officer or organisation, whose area of responsibility and accountability must be defined. Within the organisation there must be interlocking accountability, with the sins of the subordinate being visited on the superior. Punishment must be swift and sure and there has to be ruthlessness in awarding it. Equally important is reward forgood work. The supervisory, monitoring and evaluation has to be tight knit and the subsidiary regime must be free of politics, completely open and amenable to public viewing and review. I refuse to believe that we cannot run a system efficiently and honestly because I personally have run systems accordingly. I know government has many officers better than I --- all they need is a sense of direction, a

motivation to succeed and freedom to operate without interference, badgering or worse.

In the ultimate analysis the key word is equity. If equity is to be ensured in a country with massive income differentials, then effectiveuse of subsidies has to be one of our major weapons. Let us not shy away from it.

India’s Stalled Reforms


Chietigij Bajpaee, Visiting Fellow, VIF

Conventional wisdom would dictate that the weakening of hard-line communist parties in recent state elections should have been a boon for the country’s reform agenda. But these polls have also reaffirmed the importance of regional parties, which retain the ability to hijackthe policy agenda at the national level. These political considerations have translated into policy lethargy and complacency inthe UPA government, which is manifested in the case of several recent high-profile corruption scandals and prolonged inflationary pressures.

Rather than indicating a “few bad apples” in the system, in the case of corruption woes or pressures from short-term exogenous factors in the case of inflation, these developments are instead indicative of the inability or unwillingness of the government to accelerate the much-needed second generation of reforms in India’s economic liberalisation.

The momentum of the economic liberalisation process that began during the government of Prime Minister Narasimha Rao in 1991 with the dismantlement of the infamous Licence Raj, which lowered trade barriers and liberalised the foreign investment appears to have slowedunder the current Congress-led UPA government that came to power in 2004.

Several crucial bills on issues ranging from mining policy, to foreigndirect investm

ent (FDI) in front-end retail, land acquisition and corporate governance remain stalled in parliament. Moreover, a false sense of security appears to have crept into the Congress since its re-electionto a second consecutive term on a strengthened mandate. This complacency has been fueled in part by the more than one trillion rupees (US$22 billion) collected from the auction of spectrum for 3G telecom services in 2010, which has reduced the urgency to curtail thefiscal deficit despite the government demonstrating little restraint to spend on a growing number of social welfare programmes. Despite thepresence of a prolific private sector, high savings rate and large andgrowing domestic market, economic exuberance is not sustainable in theabsence of several fundamental reforms. These include the fact that the country still remains a largely agrarian economy held hostage to annual rainfall in the absence of much-needed investment in irrigationinfrastructure.

Some 70 per cent of the workforce continues to be employed in the agricultural sector, which is not sustainable if India seeks to becomea major industrialised power. The government has set a target to increase the share of the manufacturing sector from 16-17 per cent of gross domestic product (GDP) at present to 25-26 per cent by 2020. Restrictive labour laws also remain a barrier to unleashing India’s full productive capacity. This has been illustrated by the relative decline of India’s much-hailed business process outsourcing (BPO) sector amid rising labour costs, high attrition rates and skills shortages.

The number of call centres in India has halved over the past three years amid the rise of competitors, such as the Philippines, China, Sri Lanka, Vietnam and Eastern European countries. This is also a reflection of the Indian BPO sector moving up the value-chain into knowledge-process outsourcing industries, such as software development, medical record services and accountancy.

Another stalled reform is the disinvestment process, which remains slow-moving and appears to be driven more by short-term concerns over filling the government’s coffers than a genuine recognition of the need to reduce the role of the state in economic affairs. Of the

government’s 213 state-owned companies (public-sector utilities), the government has pledged to divest interests in some 45 loss-making PSUsin 2011-2. The government has also failed to demonstrate any urgency to relax FDI limits in several sectors such as the $450 billion retailmarket, where foreign investment is barred in multi-brand retail. Similarly, the Insurance Laws (Amendment) Bill 2008 that proposes to raise FDI limits in the sector from 26 to 49 per cent has been stalledin parliament since 2008.

The amendment bill to the outdated 1894 Land Acquisition Act and the Resettlement and Rehabilitation Bill were passed by the Lok Sabha (lower house of parliament) in 2009 but lapsed without approval from the Rajya Sabha (upper house) while the Draft Mines and Minerals (Development and Regulation) Bill has also undergone several revisions.

In their absence, the country’s mining policy remains opaque, as demonstrated by the fact that it has taken six years for South Korean company POSCO to obtain clearance for a $12 billion steel plant in Orissa state, which is the single-largest foreign investment project in the country. India produces as many as 84 minerals, but is unable reach its full potential due to bureaucratic, political and regulatorygridlock.

The main problem plaguing India’s mining and infrastructure sectors isthe issue of land acquisition, given the political sensitivity associated with the conversion of agricultural land for industrial use. Recent violent protests by farmers in the Greater Noida region and Uttar Pradesh state over compensation for the construction of a highway project serve to highlight the difficulties associated with land acquisition for high-profile infrastructure projects.

Amid these problems a government committee has been established to assess the pricing and allocation of national resources, such as hydrocarbons, minerals and radio spectrum, including calls to place their management under independent agencies to deter corruption and accelerate the pace of reform.

While the government continues to pledge rhetorical support for economic liberalisation, actual progress remains slow, patchy and sometimes even counter-productive. No progress is likely on implementing much-needed structural reforms in the short term. Drivingthe slow pace of reform in India is the consensual nature of its politics and well-ingrained socialist ideologies that still dominate political discourse.

The government appears to have become complacent under pressure from appeasing coalition partners, the presence of a weak and fractured opposition and the ruling Congress party trying to live up to its pro-poor image. India is likely to continue to be held back by a slow-moving “Indian rate of policymaking” until the next economic crisis forces to it to accelerate the next generation of reforms.

Economic Survey 2013-14 highlightsNew Delhi: Finance Minister Arun Jaitley today tabled the Economic Survey for 2013-14, a day ahead of the Union Budget. TheEconomic Survey reviews the developments in the Indian economy over the previous 12 months, summarizes the performance on major development programmes, and highlights the prospects of the economy in the short to medium term.

Here are the highlights:

Chapter 1: State of the Economy and Prospects

Economy to grow in the range of 5.4 - 5.9 per cent in 2014-15 overcoming sub-5 percent growth.

Growth slowdown was broad based, affecting in particular the industry sector.

Aided by favourable monsoons, agricultural and allied sector registered a growth of 4.7 per cent in 2013-14.

Industry and Service sectors also witnessed slowdown.

Chapter 2: Issues and Priorities

Reforms needed for long term-growth prospects on 3 fronts- low and stable inflation regime, tax and expenditure reform and regulatory framework.

Survey suggests removal of restriction on farmers to buy, sell and store their produce to customers across the country and the world.

Rationalisation of subsidies on inputs such as fertilizer and food is essential.

Government needs to eventually move towards income support for farmers and poor households.

Chapter 3: Public Finance

The fiscal policy for 2013-14 was calibrated with two-fold objectives; first, to aid growth revival; and second, to reach the FD level targeted for 2013-14.

The Budget for 2013-14 followed the policy of revenue augmentation and expenditure rationalization to contain government spending within sustainable limits.

The fiscal outcome of the central government in 2013-14 was achieved despite the macroeconomic challenges of growth slowdown,elevated levels of global crude oil prices, and slow growth of investment.

Chapter 4: Prices and Monetary Management

High inflation, particularly food inflation, was the result of structural as well as seasonal factors.

IMF projects most global commodity prices are expected to remain flat during 2014-15.

The RBI with a view to restoring stability to the foreign exchange market, hiked short term interest rate in July and compressed domestic money market liquidity.

Chapter 5: Financial Intermediation

RBI has indentified five sectors -- infrastructure, iron and steel, textiles, aviation and mining as the stressed sectors.

Public sector banks (PSBs) have high exposures to the 'industry' sector in general and to such 'stressed' sectors in particular.

The New Pension System (NPS), now National Pension System, introduced for the new recruits who join government service on orafter January 2004, represents a major reform of Indian pension arrangements.

The next wave of infrastructure financing will require a capable bond market.

Chapter 6: Balance of Payments

The India's balance-of-payments position improved dramatically in2013-14 with current account deficit at US $ 32.4 billion as against US$ 88.2 billion in 2012-13.

India's foreign exchange reserves increased from US$ 292.0 billion at end March 2013 to US$ 304.2 billion at end march 2014.

India's external debt has remained within manageable limits due to the external debt management policy with prudential restrictions on debt varieties of capital inflows.

Chapter 7: International Trade

World trade

World trade volume which decelerated to 2.8 per cent in 2012 has shown signs of recovery in 2013, albeit slow with a 3.0 per cent growth.

The sharp fall in imports and moderate export growth in 2013-14 resulted in a sharp fall in India's trade deficit by 27.8 per cent.

In April-May 2014, trade deficit declined by 42.4 per cent.

Chapter 8: Agriculture and Food Management

Record food grains and oilseeds production of 264.4 million tonnes (mt) and 32.4 mt is estimated in 2013-14.

Horticulture production estimated at 265 mt in 2012-13 has exceeded the production of foodgrains and oilseeds for the first time.

Due to higher procurement, stocks of foodgrains in the Central Pool have increased to 69.84 million tonnes as on June 1, 2014.

The net availability of foodgrains increased to 229.1 million tonnes and that of edible oils to 12.7 kg per year in 2013.

Chapter 9: Industrial Performance

The latest gross domestic product (GDP) estimates show that industry grew by just 1.0 per cent in 2012-13 and slowed further in 2013-14, posting a modest increase of 0.4 per cent.

Chapter 10: Services Sector

India ranked 12th in terms of services GDP in 2012 among the world's top 15 countries in terms of GDP (at current prices).

India has the second fastest growing services sector with its CAGR at 9.0 per cent, just below China's 10.9 per cent, during 2001 to 2012.

In 2013-14, FDI inflows to the services sector (top five sectors including construction) declined sharply by 37.6 per cent to US$ 6.4 billion compared to an overall growth in FDI inflows at 6.1

per cent resulting in the share of the top five services in totalFDI falling to nearly one-sixth.

Chapter 11: Energy, Infrastructure and Communications

Major sector-wise performance of core industries and infrastructure services during 2013-14 shows a mixed trend. Whilethe growth in production of power and fertilizers was comparatively higher than in 2012-13, coal, steel, cement, and refinery production posted comparatively lower growth. Crude oil and natural gas production declined during 2013-14.

The performance of the coal sector in the first two years of the Twelfth Plan has been subdued with domestic production at 556 MT in 2012-13 and 566 MT in 2013-14.

A total length of 21,787 km of national highways has been completed till March 2014 under various phases of the NHDP. In spite of several constraints due to the economic downturn, the NHAI constructed 2844 km length in 2012-13, its highest ever annual achievement. During 2013-14 a total of 1901 km of road construction was completed.

From the infrastructure development perspective, while important issues like delays in regulatory approvals, problems in land acquisition & rehabilitation, environmental clearances, etc. needimmediate attention, time overruns in the implementation of projects continue to be one of the main reasons for underachievement in many of the infrastructure sectors.

Chapter 12: Sustainable Development & Climate Change

Human- induced Greenhouse gas (GHG) emissions are growing and arechiefly responsible for climate change.

The world is not on track for limiting increase in global averagetemperature to below 2C, above pre-industrial levels. GHG emissions grew on average 2.2 per cent per year between 2000 and 2010, compared to 1.3 per cent per year between 1970 and 2000.

There is immense pressure on governments to act through two new agreements on climate change and sustainable development, both ofwhich will be global frameworks for action to be finalized next year.

The cumulative costs of India's low carbon strategies have been estimated at around USD 834 billion at 2011 prices, between 2010 and 2030.

Chapter 13: Human Development

India's Human Development Rank and performance

According to HDR 2013, India has slipped down in HDI with its overall global ranking at 136 (out of the 186 countries) as against 134 (out of 187 countries) as per HDR 2012. It is still in the medium human development category.

The poverty ratio (based on the MPCE of 816 for rural areas and 1000 for urban areas in 2011-12 at all India level), has declinedfrom 37.2 per cent in 2004-05 to 21.9 per cent in 2011-12.

In absolute terms, the number of poor declined from 407.1 millionin 2004-05 to 269.3 million in 2011-12 with an average annual decline of 2.2 percentage points during 2004-05 to 2011-12.

During 2004-05 to 2011-12, employment growth [CAGR] was only 0.5 per cent, compared to 2.8 per cent during 1999-2000 to 2004-05 asper usual status.

Agriculture sector: Challenges & Reforms Required

The Economic Survey 2013-14 released in New Delhi today has highlighted several challenges and reforms required in the agriculture sector. The Economic Survey states that as a concomitant of growth, the share of agriculture and allied sectorin gross domestic product (GDP) declined to 15.2% during the Eleventh Plan and further to 13.9% in 2013-14 (provisional estimates—PE). While it still accounts for about 54.6% of total employment (Census 2011), there has been a decline in the absolute number of cultivators, which is unprecedented, from 127.3 million (Census 2001) to 118.7 million (Census 2011).

According to the Economic Survey, growth rates of productivity inagriculture sector are far below global standards; productivity levels of rice and wheat have declined after the green revolutionof the 1980s. Another issue is soil degradation due to declining fertilizer-use efficiency.

Also, the food subsidy has increased substantially in the past few years. Food subsidy was Rs. 92,000 crore in 2013-14. With 60 per cent of the total foodgrains and oilseeds produced being grown in the kharif season, and with just about 35 per cent of arable area being irrigated, Indian agriculture is still dependent on rainfall. The second long-range forcast for the current year by the IMD for monsoon season indicates that the monsoon rainfall is likely to be 93 per cent of the LPA (model

error ± 4 per cent), with 71 per cent probability of subnormal/deficit rainfall and 70 per cent occurrence of EL Nino.The government has put in place contingency measures in about 500districts. Currently, India is in an anomalous situation of beinglargely self-sufficient with large stocks of foodgrains on the one hand and registering high food inflation. On domestic and international marketing, the plethora of government interventionsthat were used to build a marketing set up have actually served as barriers to trade. Removing market distortions will create greater competition in markets, promote efficiency and growth andfacilitate the creation of a national agricultural market.

For establishing a national common market, the Economic Survey has recommended the following reforms:

I. Examine the APMC Act, EC Act, Land Tenancy Act, and any such legally created structures whose provisions are restrictive and create barriers to free trade.

II. Rigorously pursue alternate marketing initiatives, like direct marketing and contract farming.

III. Examine inclusion of agriculture related taxes under the General Goods and Services Tax (GST)

IV. Establish stable trade policy based on tariff interventions instead of non-tariff trade barriers.

V. Develop and initiate competition in the agro-processing sector. Incentivize the private sector to scale up investments.

VI. In this scenario of bumper production and stocks, a paradigm shift in the role of the government in all aspects of food grain production and distribution is necessary.

India’s Trade

Trade deficit improves, falls sharply by 27.8 percent

Turnaround in exports, grows by 4.1 percent over minus 1.8 percent in 2012-13

Imports fell by 8.3 percent after steep slowdown during previous year

TRADE DEFICIT

In the Financial year 2013-14 there were encouraging signs on theforeign trade front as India’s trade deficit recorded a sharp fall. The export-import deficit bridged in by 27.8%, from US$190.3 billion during 2012-13 to $137.5 billion. In Financial Year (FY) 2014-15 first quarter trade deficit declined by another42.4%.

The sharp fall in trade deficit was largely due to a fall in imports of gold and capital goods as non-Oil import deficit fell sharply to $35 billion from $87.2 billion during the previous FY.However, there was not much change in the POL (Petroleum, Oil andLubricants) deficit which was hovering at around $100 billion in the last two years and constituted 36.7% of total imports during 2013-14.

EXPORTS

In 2013-14 India’s exports stood at $312.6 billion as against thetargeted $325 billion. This represented a turnaround of 4.1% growth rate from the previous year’s negative growth of 1.8%. In the first quarter of current FY, export growth was slightly better at 5.3% in April, 2014 and for the first time in six months exports growth logged double digit growth at 12.4% in May,2014. As regards sectoral performance, many sectors which recorded negative growth rate in 2012-13, have moved to the positive zone, barring gems and jewellery and electronic goods. Many labour-intensive export sectors like textiles, leather, handicrafts and carpets have performed relatively better. While textiles exports grew by 14.6 percent, the exports in leather andleather manufacturers sector recorded a 16.7 percent jump, with

the European Union and USA being the major markets. The share of India’s textile exports to China also rose from around 2 percent in 2010-11 to 5 percent in 2012-13 and further to 7 percent in 2013-14.

The Services sector including travel, transportation and insurance improved slightly in 2013-14 with a 4 percent growth rate, compared to 2.4 percent during the previous year.

IMPORTS

The sharp decline in trade deficit is largely attributable to a fall in imports. Imports dropped by 8.3%, after steep slowdown during the previous FY 2012-13. Import growth had decelerated sharply from 32.3 percent in 2011-12 to 0.3 percent in 2012-13 and clocking a negative (-) 8.3 percent in 2013-14. The trend continued during April-May, 2014 as imports fell by 13.2%. On theback of several measures taken by the government, the value of gold and silver imports fell by 40.1 percent to $33.4 billion in 2013-14, with the import of yellow metal declining from 1,037 tonnes in 2012-13 to 664 tonnes.

OUTLOOK

The pick-up in India’s exports in April-May 2014, after five months of low/negative growth, though a positive sign, is partly due to the low base. The quarterly and monthly export and import growth performance of the world and major trading countries is also not very encouraging. Thus world trade and India’s exports are still fragile, the recent good performance notwithstanding. There is also the downside risk of external shocks like the latest increase in oil prices owing to the Iraq crisis.

Developing countries must get judicious Carbon and Development Space in new climate deals

Human- induced Greenhouse gas emissions are chiefly responsible for climate change

The Economic Survey presented in Parliament says that the global climate community faces a deadline for reaching an agreement in 2015, bringing in more than 190 countries to pledge emission cutsfor the post 2020 period. It is important that future agreements should take into account developing countries concerns and requirements fully. The issue of how developed and developing countries will be treated in these global pacts is the most crucial aspect.

New climate deals must ensure that developing countries are granted the required “carbon space and development space”. Governments are currently working on two new agreements on climate change and sustainable development, both of which will benew global frameworks for action to be finalized next year. Following the Rio+20 mandate, the global community is working to develop a set of Sustainable Development Goals (SDGs), possibly to be integrated with Millennium Development Goals (MDGs), when they end in 2015.

The survey notes that Human- induced Greenhouse gas (GHG) emissions are growing and are chiefly responsible for climate change. The world is not on track for limiting increase in globalaverage temperature to below 2◦C, above pre-industrial levels. GHG emissions grew on average 2.2 per cent per year between 2000 and 2010, compared to 1.3 per cent per year between 1970 and 2000.

As far as India is concerned, India’s per capita carbon emissionsincreased from 0.8 metric tons to 1.7 metric tons in 2010, well below the world average of 4.9 metric tons in 2010. India has already committed that its per capita emissions will not exceed those of the developed countries under any circumstances. India is making progress in implementing national plans on climate change. It has reduced its CO2 emissions per unit GDP by 20 per cent between 1990 and 2011. There has been considerable progress in achieving targets under National Action Plan on Climate Change. State Action Plans on Climate Change for 9 states have been endorsed. The cumulative costs of India’s low carbon strategies have been estimated at around USD 834 billion at 2011

prices, between 2010 and 2030. Even though India has accommodatedthe sustainability concerns in the development path, it is constrained in its effort, as the magnitude of resources requiredis very large. Raising new and additional resources for SDGs and the non-capitalization of the Green Climate Fund is a matter of serious concern and may threaten the credibility of the global negotiation process.

The global negotiations provide an excellent opportunity to ensure a fair burden sharing, cooperation between the rich and poor nations. At the heart of this challenge now lies a fair division of global rights and responsibilities. The survey calls for decisive action to achieve the goals of sustainable development and it underlines that the climate deals must ensure that developing countries be given their fair share of carbon anddevelopment space.

Highlights International Trade

Sharp fall in trade deficit, closes in by 27.8% to $ 137.5 billion. In FY 2014-15 first quarter trade deficit declined by another 42.4%.

Exports grew by 4.1% over negative growth of 1.8% in 2012-13.

Exports log double digit growth in May, 2014 after a gap of 6 months.

Imports drop by 8.3%, after steep slowdown during the previous FY2012-13. Trend continues in April-May, 2014 as imports fell by 13.2%.

Following government intervention, gold and silver imports fell by 40.1 percent to $33.4 billion in 2013-14.

Highlights –Industrial Performance

Industry grew by just 1.0 per cent in 2012-13 and slowed further in 2013-14, posting a modest increase of 0.4 per cent.

During 2013-14, FDI inflow (including equity inflows, reinvested earnings and other capital) was US$ 36.4 billion. Net FDI inflowshad been $ 21.6 billion during 2013-14. Overall gross bank creditflow to industry has increased by 14.9 per cent in 2013-14, lowerin comparison with 20.9 per cent growth achieved in 2011-12 and 17.8 per cent growth in 2012-13.

In order to boost manufacturing sector, the government has already announced setting up of sixteen national investment and manufacturing zones (NIMZs). Of these, eight are along the Delhi Mumbai Industrial Corridor (DMIC).

The policy focus now needs to target key growth drivers in the short term. One of the crucial drivers can be revival of the private corporate sector investment. Push ahead with critical reforms and removal of infrastructure bottlenecks.

The near term industrial outlook is conditional on continued improvements in the policy environment and quick return to peak investment rate. With the improvement in overall macroeconomic environment, industry is expected to revive and growth can accelerate gradually over the next two years.

Agricultural Exports Increase by 5.1% in 2013-14, Marine Exports up by 45% Credit flow to agricultural sector exceeds target

Agricultural exports (including marine) grew by 5.1% in 2013-14 over 2012-13 to US$ 37,292 million according to the Economic Survey 2013-14 released in New Delhi today. Exports of marine products alone increased by 44.8% over the same period.

Since the opening up of exports of rice in 2011, there has been asurge in its share in total exports from US$ 2575 million, in 2010-11 to US$ 7742 million in 2013-14. Exports of total dairy,

poultry, meat, and marine products have doubled their share in agricultural exports between 2008-09 and 2013-14.

A stable and long-term trade policy with respect to export of agricultural products is essential for increasing productivity. Significantly, some policy changes were made in recent years: exports of rice and wheat were permitted since 2011; and since February 2013 processed and/or value added agricultural products were exempted from export restrictions even if their base produceis subject to an export ban. These will benefit farmers, incentivize the development of the agro-processing sector, and enhance farm productivity.

During the last five years ending 2012-13, the food processing sector has been growing faster than the agriculture sector at an average annual growth rate of around 8.4%. With the decline in farm employment, additional employment opportunities have to be created in agro based industries.

Agricultural credit flow achievement was Rs 7,30,765 crore as against the target of Rs 7,00,000 crore in 2013-14. To facilitateclearance of arrears of previous sugar seasons and timely settlement of cane price for the current sugar season to sugarcane farmers, interest free bank loans of Rs 6600 crore was envisaged as additional working capital to sugar mills. An incentive of Rs 3300 per ton for raw sugar production targeted for the export market was also given to sugar mills.

Due to higher procurement, stocks of foodgrains in Central Pool stood at 69.84 mt as on June 1, 2014. Currently, India is in an anomalous situation of having large stocks of foodgrains with high food inflation.

Public expenditure (comprising public investments and input subsidies) has been ceding its share in total Gross Capital Formation of the agricultural sector to the private sector and was 14.7% in 2012-13. As a percentage of agricultural GDP also private investment has been rising and was 18.1% in 2012-13.

Moderate Deployment of Credit to Industries in 2013-14

Deployment of credit to industries moderated in 2013-14, even as credit to agriculture and allied activities, services, and personal loans picked up. Gross bank credit deployment to medium and large industries has been comparatively lower in 2013-14. Thecredit flow to micro and small enterprises has, however, shown robust growth. Deceleration in credit growth has been observed inthe mining, infrastructure, cement, coal, metals, and gems and jewellery sectors while in sectors such as food processing, construction, leather, rubber, glass, and paper, a pick-up has been witnessed.

Overall credit flow to industry increased by 14.9 per cent in 2013-14, lower in comparison with the 20.9 per cent growth achieved in 2011-12 and 17.8 per cent in 2012-13. Credit flow to mining remained near stagnant at 0.05 per cent during 2013-14. Inkeeping with the performance of the power sector during 2013-14, credit flow to the sector rose by 24.9 per cent over the previousyear. Looking at the individual sector-level credit absorption, petroleum, chemicals and chemical products, basic metals, transport, and all engineering sectors showed lower growth in gross bank credit flow during 2013-14, as compared to the previous year mainly owing to the slowdown in these sectors.

Industrial Upturn Depends on Improved Policy Environment and Higher Investment Rates The near-term industrial upturn is conditional on continued improvements in the policy environment and a quick return to peakinvestment rates. The HSBC India Manufacturing Purchasing Managers’ Index (PM) increased marginally from 51.3 in April to 51.4 in May, 2014. It indicates some improvement in manufacturingactivities and domestic and exports orders. Lead indicators for the first two months of the current financial year for power generation and production of cement, steel, fertilizers, and coalshow improvement. Railways freight earnings and exports have alsopicked up, raising hopes of increased industrial activity in the coming months. The index of eight core infrastructural supportingindustries registered a growth of 4.2 per cent in April 2014 as

compared to 3.7 per cent growth recorded in April, 2013. Further IIP-based overall industrial growth was 3.4 per cent in April 2014 as compared to the 1.5 per cent growth recorded in April, 2013. With the improvement in overall macroeconomic environment, industry is expected to revive and growth can accelerate gradually over the next two years.

Milk production touches a record high of 132.43 mt in 2012-13 India recorded a peak production of milk at 132.43 mt in the year2012-13 according to the Economic Survey for 2013-14, released inNew Delhi today. India ranks first in global milk production and accounts for 17 per cent of world production. Milk production hasbecome an important secondary source of income for 70 million rural households engaged in dairying and for 70 per cent of the workforce that comprises women. The average year-on-year growth rate of milk at 4.04 per cent vis-à-vis the world average of 2.2 per cent shows sustained growth in availability of milk and milk products for the growing population.

Globally India is the second largest producer of fruits and vegetables; the largest producer of mango, banana, coconut, cashew, papaya, and pomegranate; and the largest producer and exporter of spices. Horticulture production, estimated at 265 million tones, exceeded the production of foodgrains and oilseedsin 2012-13, owing to an 8.6% increase in productivity of horticulture crops between 2008-09 and 2012-13. India ranks firstin the productivity of grapes, banana, cassava, and papaya.

A comprehensive new scheme National Programme on Bovine Breeding and Dairy Development was launched with the objective of enhancing milk production and productivity in a sustainable manner. The National Dairy Plan Phase-I, launched in March 2012 with the objectives of improving productivity of milch animals, strengthening and expanding village-level infrastructure for milkprocurement, and providing producers greater access to the marketin the dairy sector continues. The number of milch animals

increased from 62 million in 2000 to 83.15 million in 2012, thus adding to the improved milch herd of the country.

India ranks second in world fish production, contributing about 5.4% of global fish production. It is also a major producer of fish through aquaculture. Total fish production during 2013-14 isestimated at 9.45 mt with 6.10 mt coming from the inland sector and 3.35 mt from the marine sector. The sector contributes about 1 per cent to overall GDP and represents 4.6% of agricultural GDP.

Stepping up Business Environment Over the next few years, the government, both at the centre and in states, has to consider ways of improving the business environment for small businesses. While the long-term solution isa wholesale revamping of the laws and regulations governing business, a number of steps can be aken in the short term, and a number of policy experiments could be initiated for the long term.

Steps in the Short Run:

1. Create a website with all the rules and regulations applicable to businesses across states and the centre.

2. Review the existing regulatory landscape for outdated regulations which can safely be done away with.

3. Strengthen grievance redressal mechanisms against inspections.

4. Minimize human interaction and shift reporting and data submission to an online-only mode wherever possible.

5. Shift important decision making from the inspector to higher-level officers.

6. Create a system for self-certification and third-party certification.

7. Allow firms a time period to remedy faults and lack of compliance rather than penalize them immediately.

8. The government could institute a ‘use it or lose it’ policy to free up locked land, which can be used for industrial estates,common facilities, incubators, etc.

9. The Apprenticeship Act should be amended.

Mid-term Steps:

1. Get states to share best practices on business regulations and see what can form the basis for tried and tested regulatory change.

2. Based on these inputs, create a state-approved model regulatory structure that is available for businesses opening up in NIMZs.

Long-term Steps:

1. Indian legislation governing business needs to be thoroughly revamped. A committee could be constituted with the mandate to propose a more streamlined and modernset of laws, especially in the areas of taxation, labour,environment, and safety. Preliminary work can be started here, but in controversial areas, the focus has to be on building consensus for the time being.

Record Production of Foodgrains & Oilseeds in 2013-14 Groundnut Records Highest Rate of Increase in Productivity

The agriculture sector will see a record production of foodgrainsand oilseeds in the year 2013-14, according to the Economic Survey for 2013-14, released in New Delhi today. As per the third

Advance Estimates, the production of foodgrains is likely to touch a record output of 264.4 million tones (mt) in 2013-14 showing an increase of 2.88% over the previous year. Similarly, oilseeds are likely to have a record output of 32.4 mt showing anincrease of 4.85% over the previous year. The production of rice is expected to be 106.3 mt and of wheat 95.8 mt. Cotton will touch a production of 36.5 mt in 2013-14. Overall, the agricultural sector is expected to grow at the rate of 4.7% in the year 2013-14. The agriculture sector grew at a rate of 4.1% during the Eleventh Five Year Plan (2007-08 to 2011-12).

The integrated scheme of oilseeds, pulses, oil palm and maize (ISOPOM) has resulted in record production of 19.6 mt of pulses (i.e., 7.10% increase over previous year), oilseeds production ata record of 32.4 mt (4.85% increase over previous year) and maizegave a record production of 24.2 mt (increase of 8.52% over previous year). The Technology Mission on Oilseeds and Oil Palm (TMO&OP) has been introduced in the Twelfth Plan to realize substantial increase in domestic production of edible oilseeds/oil, which is 50% short of the domestic demand. The emphasis of TMO&OP will be on ‘focused’ and ‘integrated’ interventions.

In 2013-14, the higher production in case of most of the major crops has been achieved by expanding area rather than yield/productivity. However, Groundnut with productivity of 1723 kg/ha has shown the largest jump in yield i.e., 73.17% over the previous year. Tur productivity at 857 kg/ha increased by 10.44% while yield of cotton (529 kg/ha) also showed an increase of 8.85%. Gram productivity (974 kg/ha) showed the largest productivity decline i.e., 5.98% in 2013-14.

The net availability of foodgrains increased to 229.1 million tones i.e., an increase of 15% over last year and that of edible oils increased to 12.7 kg per year in 2013. The per capita net availability of foodgrains also rose to 186.4 kg per year in 2013from 162.1 kg per year in 2009.

Expansion in area and increases in the Minimum Support Prices of select agricultural crops, have resulted in higher foodgrains production. As per the 3rd AE, the acreage under foodgrains

increased to 126.2 million ha and to 28.2 million ha under oilseeds.

16 National Investment and Manufacturing Zones(NIMZS) to Boost Manufacturing Sector In order to boost manufacturing sector, the government has already announced setting up of sixteen national investment and manufacturing zones (NIMZs). The National Manufacturing Policy (NMP) has the objective of enhancing the share of manufacturing in GDP to 25 per cent and creating 100 million jobs over a decade. The NMP provides for promotion of clusters and aggregation, especially through the creation of national investment and manufacturing zones (NIMZ). Till 2013-14, 16 NIMZsare being set up. Of these, eight are along the Delhi Mumbai Industrial Corridor (DMIC). Besides, eight other NIMZs have been given in-principle approval: (i) Nagpur in Maharashtra, (ii) Chittoor in Andhra Pradesh, (iii) Medak in Andhra Pradesh (now Telengana), (iv) Prakasam in Andhra Pradesh (v) Tumkur in Karnataka, (vi) Kolar in Karnataka, (vii) Bidar in Karnataka, and(viii) Gulbarga in Karnataka.

The DMIC project was launched in pursuance of a memorandum of understanding (MOU) signed between the Government of India and the Government of Japan in December, 2006. The project, spans thestates of Uttar Pradesh, Haryana, Rajasthan, Madhya Pradesh, Gujarat, and Maharashtra along the Western Dedicated Freight Corridor (DFC) of the Railways. The DMIC Development Corporation (DMICDC), incorporated in 2008, is the implementing agency for the project. The Master plans for all the nodes except the Dadri-Noida-Ghaziabad Investment Region in Uttar Pradesh have been completed and approved by the state governments. Land acquisitionfor the new industrial regions/ areas as well as for the early bird projects identified for development as model initiatives is in different stages of progress in different states. The DMIC Trust has taken investment decisions on nine projects and action to implement them has already been initiated by the DMICDC.

The Chennai-Bengaluru-Chitradurga industrial corridor (around 560km) will benefit the states of Karnataka, Andhra Pradesh, and Tamil Nadu. The Japan International Cooperation Agency (JICA) Study Team undertook the Preliminary Study for Comprehensive Integrated Master Plan for Chennai-Bengaluru Industrial Corridor (CBIC) and identified a total of 25 priority projects across various sectors aimed at removing infrastructural bottlenecks. Progress on these projects is being regularly monitored.

India and the United Kingdom have signed an MOU for the development of a new Bengaluru-Mumbai Economic corridor (BMEC). Afeasibility study has been undertaken and is scheduled to be completed during 2014. A joint steering group will be set up for the project after the feasibility study.

A concept note has been prepared by the Asian Development Bank (ADB) on an East Coast Economic Corridor linking Kolkata-Chennai-Tuticorin and it has been decided to initiate a feasibility studywith the help of the ADB. In view of the commitment made by the central government under the Andhra Pradesh Reorganisation Act, 2014, in the first phase of the study the ADB will focus on the Vizag-Chennai Section so that a final view on the Chennai-Vizag Industrial Corridor may be taken within the timeline prescribed in the Act and further action taken accordingly.

The government has, in January 2014, accorded ‘in principle’ approval for setting up of an Amritsar-Kolkata Industrial Corridor (AKIC) along a 150-200 km band on either side of the Easter Dedicated Freight Corridor(EDFC) in a phased manner. The proposed Corridor comprises seven states: Punjab, Haryana, Uttarakhand, Uttar Pradesh, Bihar, Jharkhand and West Bengal. Thegovernment has also approved ‘in principle’ formation of an Amritsar-Kolkata Industrial Corridor Development Corporation (AKICDC). It is proposed to set up the AKICDC during 2014-15 to kickstart work on the AKIC.

Agriculture Sector: Highlights

· Record food grains production of 264.4 mt in the year 2013-14

· Record production of oilseeds of 32.4 mt in the year 2013-14

· Record production of pulses of 19.6 mt in the year 2013-14

· Groundnut shows the largest increase in productivity i.e., 73.17% in the year 2013-14.

· India ranks first in the world in productivity of grapes, banana, cassava, peas, and papaya.

· Agriculture sector growth rate 4.7% in the year 2013-14

· Area under foodgrains increased by 4.47% to 126.2 million ha in the year 2013-14

· Area under oilseeds increased by 6.42% to 28.2 million ha in the year 2013-14.

· Stocks of foodgrains in the Central Pool stood at 69.84 million tonnes as on June 1, 2014

· Net availability of foodgrains increased by 15% to 229.1 million tonnes in 2013

· Per capita net availability of foodgrains increased to 186.4 kg per year in 2013

· Agriculture exports grow by 5.1% in the year 2013-14

· Exports of marine products show a growth rate of 45% inthe year 2013-14

· Milk production touches a record high of 132.43 mt in the year 2012-13

· Contribution of livestock sector to total GDP was 4.1% in the year 2012-13

· Year-on-year growth rate of milk production in India is4.04% vis-a-vis world average of 2.2%

· Credit to agriculture sector exceeds target of Rs. 7,00,000 crore in the year 2013-14

· Share of agriculture and allied sectors in GDP declinesto 13.9% in 2013-14

· Number of cultivators decline from 127.3 million in 2001 to 118.7 million in 2011

Industrial Growth to be Revived by Corporate Sector Investment, Pushing Ahead Critical Reforms and Removal of Infrastructure Bottlenecks Noting that the industrial growth has slowed down considerably inthe recent years, the Economic Survey highlights the need for revival of corporate sector investment, pushing ahead with critical reforms and removal of infrastructure bottlenecks . These key steps would revive industrial growth.

The main highlights of the Economic Survey relating to industrialperformance are as below:-

• The latest gross domestic product (GDP) estimates show that industry grew by just 1.0 per cent in 2012-13 and slowed further in 2013-14, posting a modest increase of 0.4 per cent. The key reasons for poor performance have been contraction in mining activities and deceleration in manufacturing output. Manufacturing and mining sector GDP declined by 0.7 per cent and 1.4 per cent respectively in 2013-14. The underlying cause of thepoor performance of these two sectors has been considerable deceleration in investment particularly by the private corporate sector during 2011-12 and 2012-13.

• Further, slowdown in construction activities has resulted incapacity underutilization in the steel and cement sectors. Steel and cement consumption rose by just 0.6 per cent and 3.0 per centrespectively in 2013-14. As per the use-based industrial classification of IIP, the index of capital goods declined by 6.0

per cent in 2012-13 and further by 3.6 per cent in 2013-14. Continuing slowdown has impacted the performance of the corporatesector. Sales growth of the corporate sector particularly in respect of listed manufacturing companies for the private sector,declined considerably from 25.3 per cent in Q1 of 2011-12 to 5.0 per cent in Q4 of 2013-14.

• As per the latest data available on gross capital formation by industry of use at constant (2004-05) prices, a sharp decline in the growth rates of the fixed investment of mining, manufacturing and private corporate sector has been estimated. The decline is far steeper in case of unregistered manufacturing pointing towards paucity of funds available to the informal sector businesses. During 2013-14, FDI inflow (including equity inflows, reinvested earnings and other capital) was US$ 36.4 billion. Net FDI inflows had been $ 21.6 billion during 2013-14. Overall gross bank credit flow to industry has increased by 14.9 per cent in 2013-14, lower in comparison with 20.9 per cent growth achieved in 2011-12 and 17.8 per cent growth in 2012-13. Credit flow to mining remained near stagnant as it increased by mere 0.05 per cent during 2013-14.

• In order to boost manufacturing sector, the government has already announced setting up of sixteen national investment and manufacturing zones (NIMZs). Of these, eight are along the Delhi Mumbai Industrial Corridor (DMIC). Besides, eight other NIMZs have been given in-principle approval, viz (i) Nagpur in Maharashtra, (ii) Chittoor in Andhra Pradesh, (iii) Medak in Andhra Pradesh (now Telengana), (iv) Prakasam in Andhra Pradesh; (v) Tumkur in Karnataka; (vi) Kolar in Karnataka; (vii) Bidar in Karnataka; and (viii) Gulbarga in Karnataka. The government has also been monitoring progress of Delhi-Mumbai Industrial Corridor(DMIC), Chennai Bangalore Industrial Corridor (CBIC), Bengaluru-Mumbai Economic Corridor (BMEC), East Coast Economic Corridor (ECEC) including Vizag-Chennai Industrial Corridor (VCIC) and Amritsar-Kolkata Industrial Corridor (AKIC).

• In view of the ongoing industrial slowdown, the policy focusnow needs to target key growth drivers in the short term. One of the crucial drivers can be revival of the private corporate

sector investment. The current industrial sector downturn presents an opportunity to push ahead with critical reforms and removal of infrastructure bottlenecks. Industrial policy needs tofocus on labour-intensive and resource-based manufacturing in informal sector to rejuvenate small businesses. In the medium term, challenge for the Indian manufacturing is to move from lower tech to higher tech sectors, from lower value-added to higher value added sectors and from lower productivity to higher productivity sectors.

• The near term industrial outlook is conditional on continuedimprovements in the policy environment and quick return to peak investment rate. With the improvement in overall macroeconomic environment, industry is expected to revive and growth can accelerate gradually over the next two years.

Liberalising Agriculture State APMC laws are a major hurdle to modernization of the food economy. They have artificially created cartels of buyers who possess market power. APMCs remain a non-level playing field. In addition, some state governments have introduced barriers to trade within the country through taxation and technical requirements. The Essential Commodities Act 1955, an enabling Actwhich gives powers of intervention to state governments is incompatible with an integrated competitive national market for food.

Parliament has the power to legislate a national market under theConstitution, which gives it the ability to legislate the freedomto buy and sell, for farmers and traders, across state lines. This law can override state APMC laws and restrictions that have been placed on the farmer’s right to sell food within and outsidethe state. Under such a law, APMCs would become one among many trading venues in a competitive market. Further, under the Constitution, Parliament can legislate the creation of a Commission that monitors the country for anti-competitive practices.

Alongside the removal of conventional interventions in the food economy, there is a need to place a priority upon the three national-level public goods in the field of food: production of knowledge, financial regulation of futures trading, and information interventions that address the market failure in warehousing.

India Has Second Fastest Growing Service Sector · India ranked 12th in terms of services GDP among the world’s top 15 countries.

· India has the second fastest growing services sector with its CAGR at 9.0 per cent, just below China.

· The growth rate of the combined category of trade, hotels, restaurants, transport, storage, and communications decelerated to 3.0 per cent.

· Financing, insurance, real estate, and business services grew robustly at 12.9 per cent.

· Services constitute a 57 per cent share in GDP at factor cost in 2013-14.

· India’s share in world inbound tourist arrivals increased to 0.63 per cent in 2013.

· The size of domestic tourism has also crossed an estimated 1.1 billion annual travel visits.

· The IT–Business Process Management (BPM) sector grew byan estimated 10.3 per cent, reaching US$ 105 billion in 2013-14.

· Services like software and telecom were big ticket items that gave India a brand image in services.

Human Development to be Taken into Account in Formulating and Implementing Social Sector Programmes: Economic Survey 2013-14 The Economic Survey 2013-14 presented by the Finance Minister Shri Arun Jaitely as precursor to the General Budget in the Lok Sabha today shows some interesting results of inter-state comparisons of socio-economic development of select states based on available indicators from various sources and furnish some clear policy pointers. While some states have done very well in terms of growth indicators, they are poor performers in terms of other human development indicators. The Economic survey states the Human Development dimension needs to be taken into account informulating and implementing social sector programmes and arriving at criteria for devolution of funds to states.

Population

Kerela is the best performing state in terms of the two indicators- Decadal growth of population (4.9 per cent) and sex ratio (1084) and is well ahead of other states. Andhra Pradesh isa distant second in terms of population growth and third in termsof sex ratio with Tamil Nadu in second place in terms of sex ratio. Bihar has the highest decadal growth of population (25.4) and Haryana the lowest sex ratio (879).

Growth

Bihar is the best performing state in terms of growth rate of both gross state domestic product (GSDP) 2012-13 (15.1 per cent and average GSDP 2005-06 to 2012-13 (9.9 per cent) and also per capita income growth 2012-13 (13.9 per cent). Madhya Pradesh, Gujarat and Kerela are other states that have performed well in all these indicators and well above the all India average. However, in terms of absolute values of GSDP and per capita income, Maharashtra and Haryana respectively are at the top. While Tamil Nadu has the lowest growth in GSDP 2012-13 and Assam the lowest average GSDP growth Rajasthan has the lowest per capita income growth in 2012-13.

Poverty

Poverty estimates indicate that Bihar which had the second highest poverty headcount ratio (HCR) in 2004-05 moved to first place in 2011-12 with the HCR at 33.7 per cent relegating Odisha to second place. Kerala had the lowest poverty (7.1 per cent) followed by Himachal Pradesh (8.1 per cent) and Punjab (8.3 per cent).

Health

Infant Mortality rate (IMR) in 2012 was the lowest in Kerala (12)and the highest in Madhya Pradesh (56) followed by Assam (55), Odisha, and Uttar Pradesh (53 each) against a national IMR of 42.Birth rate was also lowest in Kerala (14.9) and highest in Bihar (27.7) against a national average of 21.6. Death rate was lowest in Maharashtra and West Bengal (6.3) and highest in Odisha (8.5) against a national average of 7.0.

Social sector programmes

Progress in terms of 24x7 primary and other health centre facilities under the National Rural Health Mission (NRHM) is highest in Karnataka (2328) followed by Tamil Nadu and Rajasthan,and lowest in Himachal Pradesh (156) and Haryana (398).

Massive Investment Needed in Social Infrastructure, Skill Development and Empowerment of Women: Arun Jaitely

The Economic Survey 2013-14 presented by the Finance Minister Shri Arun Jaitely as precursor to the General Budget presents an analysis of India’s Human Development basic parameters and gives a new impetus to growth along with targeted policies aimed at both Financial and Social inclusion. It has listed that India’s performance continues to be below global average in most of the HDI indicators like life expectancy at birth, mean years of schooling, expected years of schooling and even per capita income.The Economic Survey says, massive efforts are needed in the form of investment in social infrastructure, skill development and empowerment of women.

Among the Outlook and Challenges for the social sector outlined in the Economic Survey are as follows:-

The outlook for India on the human development front could be positive given the large demographic dividend waiting to be tapped. This demographic dividend will benefit India if its population is healthy, educated and adequately skilled. Unleashing the time-bound potential of demographic dividend is the biggest challenge for India. This calls for massive investment in social infrastructure, skill development and empowerment of women.

One of the challenges is to deal with multiple and sometimes overlapping programmes. A mere mark up each year in the Budget for existing programmes or starting some new programmes will not suffice. What is needed is a ‘zero budgeting’ approach with a revamp, reorganization and convergence of social-sector schemes with a minimum size prescribed for the schemes.

The outlays for the different schemes have not often translated fully into outcomes owing to the poor delivery mechanism. Leveraging modern technology for efficient delivery of programmes, removing the multiple layers of governance, simplifying procedures, and greater participatory role by the beneficiaries can help in creating a better delivery mechanism. There is a need for greater degree of accessibility to information for the public, especially about the role, rights, and entitlements of the Panchayati Raj Institutions (PRIs). Focused attention on raising the awareness levels and capacity-building activities at gram sabha level and devolution of powers in real terms, i.e. funds, function, and functionaries to the PRIs will lead to better and more effective planning, execution, monitoring and social audit of panchayat centric programmes.

Poverty ratio declines to 21.9 per cent

Expenditure on Education increases to 3.3 per cent of GDP

United Nation’s Human Development Report signifies existing gaps in Health and Education indicators in India need to be bridged faster

The Economic Survey 2013-14 presented by the Finance Minister Shri Arun Jaitely has asked policy makers to design and execute development strategies targeting the young population that was approximately 58 per cent in 2001 and will increase to more than 64 per cent in 2021. The Government has to take timely action to make people healthy, educated and adequately skilled.

Social-sector expenditure Expenditure on social services by the general government (centre and states) as a proportion of total expenditure increased almost continuously from 23.8 per cent in 2008-09 to 25.2 per cent in 2013-14 (Budget Estimates). As a percentage of the Gross Domestic Product (GDP), expenditure on social services increased from 6.8 per cent in 2008-09 to 7.2 percent in 2013-14 (BE).

As a percentage of GDP, expenditure on education has gone up from2.9 per cent in 2008-09 to 3.3 per cent in 2013-14 (BE). There isneed not only to increase it further, but also address quality issues. Expenditure on health is just 1.4 per cent of GDP. Though, in 2013-14, there was an increase in outlay by 7.44 per cent over the previous year still a lot more needs to be done to provide quality and affordable healthcare for the large Indian population.

Poverty

The poverty ratio (based on the Monthly Per Capita Expenditure (MPCE) of Rs.816 for rural areas and Rs. 1000 for urban areas in 2011-12 at all India level), has declined from 37.2 per cent in 2004-05 to 21.9 per cent in 2011-12. In absolute terms, the number of poor declined from 407.1 million (40.71 crores) in 2004-05 to 269.3 million (26.93 crores) in 2011-12 with an average annual decline of 2.2 percentage points during 2004-05 to2011-12.

India’s Human Development Rank and performance

According to the United Nations Human Development Report (HDR) 2013, India has slipped down in HDI with its overall global ranking at 136 (out of the 186 countries) as against 134 (out of 187 countries) as per HDR 2012. It is still in the medium human development category with countries including China, Egypt, Indonesia, South Africa and Vietnam. India’s HDI of 0.554 in 2012has slipped down a notch from 0.551 in 2011.

The existing gap in health and education indicators in India as compared to developed countries and also many of the developing countries highlights the need for much faster and wider spread ofbasic health and education. Life expectancy at birth was 65.8 year compared to 81.3 year in Norway, 73.7 year in China and 75.1year in Sri Lanka as per HDR 2013. The Indian performance in meanyears of schooling (4.4 years) is even below that of Bangladesh and Pakistan which have lower per capita incomes. However, in terms of average annual HDI growth rate for 2000-12, India is well ahead of many countries with high and very high human development.

Inequality

Not only is inequality lower in India than many other countries, it has also decreased as reflected in a 9.2 per cent fall in its Gini coefficient from 36.8 during 2010-11 to 33.4 during 2011-12.As per the quintile income ratio, the inequality between the top and bottom quintiles in India was lower than in a large number ofcountries both developed and developing. The HDR measures inequality in terms of two indicators. The Gini Coefficient measures the deviation of distribution of income or consumption from a perfectly equally distribution among individuals within a country. The quintile income ratio is a ratio of the average income of the richest 20 per cent of the population to that of the poorest 20 per cent.

Employment

During 2004-05 to 2011-12, employment growth (Compound Annual Growth Rate[CAGR]) was only 0.5 per cent, compared to 2.8 per cent during 1999-2000 to 2004-05 as per usual status. Based on current daily status (CDS), CAGR was 1.2 per cent and 2.6 per

cent respectively for the same periods. However, unemployment rate in India continued to hover around 2 per cent under usual status (principal+subsidary) and fell under CDS steeply from 8.2 per cent in 2004-05 to 5.6 per cent in 2011-12.

Inter-state comparison

The inter-state comparisons of some major states which show varied performance furnish clear policy pointers like the need for greater focus on human development dimension while formulating and implementing social-sector programmes and in devolution of funds to states.

Inclusion of women

The Economic Survey says that empowerment of women is needed to reap the benefits of the time bound demographic dividend. Greaterinclusion of women involves not just a step up in the gender budget which has gone up from 2.79 per cent in 2005-06 to 5.83 per cent of the GBS in 2013-14, but also a greater share of womenin the decision-making process.

Planning with Affirmative Action for Inclusion of Womenand Children in Growth and Development Process Focused The Economic Survey 2013-14 presented by the Finance Minister Shri Arun Jaitely as precursor to the General Budget in the Lok Sabha today talks of inclusive development that incorporates social and financial inclusion and implementing social sector programmes like poverty alleviation and employment generation, social protection, rural infrastructure and development, urban infrastructure, education and skill development, heath, women andchild development and welfare and development of weaker sections.On women and child development, The Economic Survey states that women and children constitute about 70 per cent of the populationof the country and are vulnerable and lag behind in terms of manyeconomic and social parameters. There is a need for focused planning with affirmative action for inclusion of women and

children in growth and development process with greater share in the decision making process. The new policies that are needed to address violence against women and children including a new National Policy for Children NPC 2013 for the realization of the rights of all children have been adopted. A special law, the Protection of Children from Sexual Offences (POCSO) Act 2012 and the Sexual Harassment of Women at Workplace (Prevention Prohibition and Redressal Act 2013 have been enacted for greater inclusion of women and greater share of women in the decision making process.

Regulators Adopt Non-Legislative Aspects of FSLRC Report The Financial Sector Legislative Reforms Commission (FSLRC) in its Report submitted on 24 March 2011 has given wide-ranging recommendations, both legislative and non-legislative aspects, onthe institutional, legal, and regulatory framework, and operational changes in the Indian financial sector. The Economic Survey mentions that in October 2013 regulators decided to adopt the non-legislative aspects of FSLRC recommendations. These are broadly in the nature of governance enhancing principles for enhanced consumer protection, greater transparency in the functioning of financial sector regulators in terms of their reporting system, greater clarity on their interface with the regulated entities and greater transparency in the regulation making process by means of mandatory public consultations, incorporation of cost benefit analysis etc. Most households are as yet cutoff from large parts of the financial system. The survey says next wave of infrastructure financing will require a capable bond market.

Biometric Identification to Improve Subsidy Schemes Programmes such as food subsidy have huge overhead costs. In other cases, such as the fertilizer subsidy, the expenditures generate a distorted resource allocation that hampers

productivity. Besides, not all the money put into subsidy schemesreaches the poor.

Therefore, it is increasingly feasible to identify households below the poverty line and give them cash. The new technologies of biometric identification, and payments through mobile phones, have created a range of new possibilities for the design of programmes. These would lead to a reduction in poverty at a lowercost when compared with the present subsidy programmes.

Subsidy programmes are particularly problematic when they hamper changes in prices and the consequent shifts in resource allocation which must take place. When the price of diesel rises,in the medium term, the economy shifts away from diesel. But thisadaption is blocked if the price of diesel is not actually raised. When the purchase price for cereals is raised, cereal production becomes more attractive, even though consumers might want more non-cereals.

67.11 lakh members enrolled under the National Pension System with a corpus of Rs 51.14 crore.

The passage of PFRDA Act has been a major milestone of the year 2013-14. The Act vests PFRDA with statutory status to allow it toperform its developmental role effectively and to extend the social security cover to hitherto uncovered working population through the National Pension System(NPS). Introduced for the new recruits who join government service on or after January 2004, the NPS represents a major reform of Indian pension arrangements,and lays the foundation for a sustainable solution to ageing in India by shifting to an individual account, defined-contribution system. The Economic survey says till 7 May 2014 a total of 67.11lakh members have been enrolled under the NPS with a corpus of Rs51,147 crore. The growth rate of members and assets is likely to considerably accelerate from this foundation. From 1st May 2009, the NPS was opened up for all citizens in India to join on a voluntary basis.

The Swavalamban Scheme for workers in the unorganized sector launched in 2010, has now been extended to five years for the beneficiaries enrolled in 2010-11, 2011-12, and 2012-13 and thus the benefits of co-contribution under the Scheme would be available till 2016-17.

GST to be a Major Milestone for Indirect Tax Reform DTC required as a Clean Modern Replacement for existing it laws

In a non-market economy, in addition to laws, taxes and subsidiesare used for encouraging or discouraging activities that the central planner considers good for the economy. India’s complex tax system suffers from problems in both structures and administration. Uneven and high tax rates and uneven tax treatment of similar economic activities have induced distortionsin the behavior of firms and households. Tax reform in India can improve the ease of doing business and promote efficiency and productivity growth.

There is consensus that the GST will be a major milestone for indirect tax reform in India. Replacing all existing indirect taxes by the GST will create a national market, eliminate cascading taxes, and align taxation of imports and exports correctly. This will improve the competitiveness of production and export from India. The implementation of a Central GST (CenGST) could be the first step towards the GST. Once the CenGSTis implemented, and the information technology system for CenGST has worked, estimation risk will be lower and it will be easier for the centre and states to move to the GST.

Just as the GST is a transformation of indirect taxes, the DTC isrequired as a clean modern replacement for the existing income tax law. As with the GST, the key objective must be a simplification with a clean conceptual core, and the removal of alarge number of special cesses and exemptions that favour specialinterest groups. The tax system must move away from industrial policy, with incentives for one activity or another, towards a simple framework.

As with the GST, the DTC will yield gains by removing distortionsof individual and corporate decision making, reducing compliance cost and litigation, and improving tax collections.

Fresh Thinking on a Responsible Fiscal Policy FrameworkRequired Fresh thinking is required on a responsible fiscal policy framework. The fiscal situation of the central government is worse than it appears, given the acceleration of inflation from 2006 to 2014. These inflation shocks effectively reduced the value of outstanding debt. This has harmed the interests of households but has reduced the debt burden of the government. These inflation shocks are unlikely to recur in the future.

This warrants a fresh thinking on a responsible fiscal policy framework. This should feed into a new FRBM Act. The modified Actneeds to take into account business cycles and to have penalties that are strong enough so that it cannot be ignored.

Low and Stable Inflation, Tax and Expenditure Reform and a Well-Functioning Market Economy a Must to Improve Long-Term Growth Prospects

Investments can be revived by improving long term-growth prospects. For this, reforms are needed on three fronts: creatinga framework for sustained low and stable inflation, setting public finances on a sustainable path by tax and expenditure reform, and creating the legal and regulatory framework for a well-functioning market economy.

First, the government must ensure a low and stable inflation ratethrough fiscal consolidation, establishing a monetary policy framework, and creating a competitive national market for food. Initiation of reforms on these fronts will reduce inflation uncertainty and restore a stable business environment. Further

lower inflationary expectations would increase domestic householdfinancial saving and make resources available for investment.

Second, public finances need to be put on a sustainable path. India needs sharp fiscal correction, a new Fiscal Responsibility and Budget Management (FRBM) Act with teeth, better accounting practices, greater transparency and improved budgetary management. Improvements on both tax and expenditure are needed to obtain high quality fiscal adjustment. The tax regime must be simple, predictable and stable. This requires a single-rate goodsand services tax (GST), fewer exemptions in direct taxes, and a transformation of tax administration. Government expenditure reform involves three elements: shifting subsidy programmes away from price subsidies to income support, a change in the focus of government spending towards provision of public goods, and a focus on outcomes through an improvement in systems of accountability. A focus on health and education outcomes, rather than inputs and expenditure must be a priority. Improvements in credit ratings, lower inflation, lower cost of capital, and greater business confidence that would ensue will yield short-term benefits in response to long-term initiatives.

Third, the government faces the task of putting in place the legal foundations of a well-functioning market economy for India.This must be a carefully executed project as it involves legislative, regulatory, and administrative changes. It involves both removing existing restrictions where there is no market failure and building state capacity to allow businesses to operate in a stable environment. This will help improve the ease of doing business. While product markets have seen reform in India, there is a pressing need to reform factor markets such as those for land, labour and capital. Reforming the financial sector would involve reducing financial repression through which the state usurps a large share of household financial savings, financial sector regulatory reform and changing the laws and regulations governing the flow of foreign capital into India.

Reforming the food market is a huge challenge. Restrictions on farmers to buy, sell and store their produce to customers across the country and the world imposed by Indian laws enacted in the

1950s and 60s have not been removed, even though restrictions on industry were removed long ago. Restoring economic freedom of farmers and allowing them to be part of a competitive national market is essential for controlling food inflation. There is a huge opportunity today for Indian agriculture to be transformed through creation of markets as well as state intervention in public goods such as rural infrastructure and training as well assetting up modern regulatory frameworks for warehousing and commodity futures. Rationalisation of subsidies on inputs such asfertilizer and food is essential. Government needs to eventually move towards income support for farmers and poor households, so that market forces are able to respond to changes in consumption and technology.

Need to Promote Structural Changes in Manufacturing in the Medium Term Indian industry has immense potential for further strengthening the agro-processing, textiles and garments, and leather and footwear sectors with good prospects for sustained employment generation. But the medium-term challenge for Indian manufacturing is to move from lower to higher-tech sectors, from lower to higher value added sectors, and from lower to higher productivity sectors. Medium-tech industries are primarily capital intensive and resource processing and high-tech industries are mainly capital and technology intensive. In order to push the share of manufacturing in overall GDP to the projected 25 per cent, Indian manufacturing need to capture the global market in sectors showing a rising trend in demand. These sectors are largely high technology and capital intensive. Such high-tech industries may perform a less important role in sustaining employment but are critical for capital accumulation and skills development and for improving the knowledge base. To gain a firm footing in these sectors, the policy thrust should beon pushing up the level of public and private expenditure on technology upgradation, research and development, innovation, andskill development.

Urgent Initiatives in Infrastructure, Iron and Steel, Textiles, Aviation, and Mining The RBI in its Financial Stability Report, December, 2013 has indentified five sectors – infrastructure, iron and steel, textiles, aviation, and mining – as the stressed sectors. PSBs have high exposures to the “industry” sector in general and to such “stressed” sectors in particular. The survey mentions that the increase in NPAs of banks is mainly accounted for by switchover to system-based identification of NPAs by PSBs, slowdown of economic growth, and aggressive lending by banks in the past, especially during good times. Asset quality in the banking system has deteriorated in the post-crisis years and among banks groups, PSBs had the highest level of stress in termsof NPAs and restructured advances. Some recent initiatives takenby the government to address the rising NPAs include:

· Appointment of nodal officers in banks for recovery attheir head offices/zonal offices/for each Debts Recovery Tribunal(DRT).

· Thrust on recovery of loss assets by banks and designating asset reconstruction companies (ARC) resolution agents of banks.

· Directing the state-level bankers’ committees to be proactive in resolving issues with the state governments.

· Sanction of fresh loans on the basis of information sharing amongst banks.

· Conducting sector/activity-wise analysis of NPAs.

· Close watch on NPAs by picking up early warning signalsand ensuring timely corrective steps by banks including early detection of sign of distress, amendments in recovery laws and strengthening of credit appraisal and post credit monitoring.

Performance of Core Industries and Infrastructure Services shows a Mixed Trend in 2013-14;

Survey Calls for enhanced Infrastructure Investment, Improving Productivity and Removing Procedural Bottlenecks

Major sector-wise performance of core industries and infrastructure services during 2013-14 shows a mixed trend. Whilethe growth in production of power and fertilizers was comparatively higher than in 2012-13, coal, steel, cement, and refinery production posted comparatively lower growth. The Economic Survey 2013-14 tabled in the Parliament today by the Finance Minister Shri Arun Jaitley mentions that crude oil and natural gas production declined during 2013-14. Among infrastructure services, growth in freight traffic by railways and cargo handled by major ports and the civil aviation sector (except import cargo) has been comparatively higher during 2013-14. In the road sector the National Highways Authority of India (NHAI) posted negative growth of 33 per cent during 2013-14 as compared to the 26.5 per cent growth during 2012-13, says the Survey.

Concerning energy production, the Survey mentions that even though the domestic production of energy is projected to increase, import dependence will continue to be high, particularly for crude oil where nearly 78 per cent of the demandwill have to be met from imports by the end of the twelfth Plan.

As per the Survey, the growth in power generation during 2013-14 (April-March) was 6.0 per cent, as compared to 4.0 per cent during April 2012 to March 2013. The capacity-addition target forthe Twelfth Plan period is estimated at 88,537 MW. Against this target, 38,583 MW capacity has been added till April 2014, which constitutes 43.6 per cent of the target envisaged in the Twelfth Plan. The individual targets achieved by the centre, states, and private sectors during this period are 30.5 per cent, 47. 2 per cent, and 49.7 per cent respectively, says the Survey.

Regarding the performance of the coal sector in the first two years of the Twelfth Plan, the Survey states that it has been subdued with domestic production at 556 MT in 2012-13 and 566 MT

in 2013-14. Overall domestic demand for coal during these two years was in the range of 715-720 MT. Demand was mainly driven bythe power generation sector, whereas demand in the iron and steeland cement sectors had moderate growth rates. To fill the gap between domestic demand and supply, the country imported about 146 MT during 2012-13 and about 169 MT of coal during April-January 2013-14 (provisional), the Survey adds. The Survey notes that in India the overall long term demand for coal is closely linked to the performance of the main end-use sectors i.e., thermal power, iron and steel and cement. Sharp deceleration in the production of natural gas in the past two-three years has further increased the energy sector’s dependence on coal.

In the Road sector, the Survey states that a total length of 21,787 km of national highways has been completed till March 2014under various phases of the NHDP. In spite of several constraintsdue to the economic downturn, the NHAI constructed 2844 km lengthin 2012-13, its highest ever annual achievement. During 2013-14 atotal of 1901 km of road construction was completed, adds the Survey.

Regarding telecom sector, the Survey mentions that it has registered phenomenal growth during the past few years and has become the second largest telephone network in the world, next only to China. The Survey observes that a series of reform measures by the government, innovations in the wireless technology, and active participation by the private sector playedan important role in the growth of this sector. The Survey suggests that policy for better spectrum management through trading and sharing needs to be looked into so as to bring down the cost of spectrum.

Recognizing the need for streamlining environmental clearances ofinfrastructure projects, the Survey states “ There is need for better and more effective coordination amongst various central ministries/ institutions regarding integration of environmental concerns at the inception / planning stage of a project. The Survey further notes that rapid economic growth in recent years has put enormous pressure on existing infrastructure , particularly in transport, energy and communications. It observes

unless it is significantly improved, infrastructure will continueto be a bottleneck for growth and an obstacle to poverty reduction.

Giving details of financing infrastructure, the Survey states that the latest available data on gross deployment of bank creditto major infrastructure sectors shows that the rate of growth of bank credit moderated from an average of 44.8 per cent in 2011-12to 17.7 per cent in 2013-14. Power sector had an over 50 per centshare in total credit flow to infrastructure. Both in terms of share in total credit to infrastructure and rate of growth, the telecom sector witnessed consecutive decline in the last three years. The government has put in place a liberal FDI policy, under which FDI up to 100 per cent is permitted under the automatic route in most sectors/activities. As a result, total FDI inflows into major infrastructure sectors registered a growthof 22.8 per cent in 2013-14 as compared to the contraction of 60.9 per cent during 2012-13, the Survey adds.

From the infrastructure development perspective, the Survey states that while important issues like delays in regulatory approvals, problems in land acquisition & rehabilitation, environmental clearances, etc. need immediate attention, time overruns in the implementation of projects continue to be one of the main reasons for underachievement in many of the infrastructure sectors.

In order to accelerate coal production in the short term, the Survey suggests the need to focus on building critical feeder railways routes for coal for evacuation and movement of coal. Clearing pending environment and forest clearances and rehabilitation issues that have stalled coal production by private captive blocks and Coal India Limited (CIL) subsidiaries also need to be accorded top priority. The CIL encompasses the whole gamut of identification of coal reserves and detailed exploration followed by design and implementation and optimizing operations for coal extraction in its mines. The process of restructuring CIL needs to be pushed through swiftly to boost coal production, the Survey adds.

Long-term finance for infrastructure projects , the Survey says, one of the issues that need to be addressed in the context of thelimitation of banks to finance such projects. Infrastructure projects, given their long pay-back period, require long-term financing in order to be sustainable and cost effective. A robustand transparent issuance and trading process, uniform stamp duty across states and a well-devised credit enhancement mechanism aresome of the issues which need immediate attention for developmentof the fixed instrument market in India, the Survey adds.

Growth forecast for Next Fiscal to remain between 5.4 to 5.9 per cent. Improvements in Current Account and Fiscal deficits to spur higher growth in 2014-15

A record food grains production of over 264 million tonnes is estimated in 2013-14 indicating an increase of 20 million tonnes in last 5 years

Indian economy is likely to grow in the range of 5.4 to 5.9 per cent in 2014-15 overcoming the sub-5 per cent growth of Gross Domestic Product (GDP) witnessed over the last two years. The growth slowdown in the last two years was broad based, affecting in particular the industry sector. Inflation too declined during this period, but continued to be above the comfort zone, owing primarily to the elevated level of food inflation. The Economic Survey 2014-15, presented by the Finance Minister Shri Arun Jaitley in the Lok Sabha predicts that moderation in inflation would ease the monetary policy stance and revive the confidence of investors, and with the global economy expected to recover moderately, particularly on account of performance in some advanced economies, the economy can look forward to better growthprospects in 2014-15 and beyond.

The survey also points out at the downside risks to the economy arising from a poor monsoon, the external environment and the poor investment climate. After recovering in 2009-10 and 2010-11 from the crisis and growth slowdown of 2008-09, GDP growth slowed

to below 5 per cent for two consecutive years, i.e. 2012-13 and 2013-14.

The survey notes that external sector witnessed a remarkable turnaround after the first quarter of 2013-14 and the year ended with a Current Account Deficit of 1.7 per cent of GDP as against 4.7 per cent in 2012-13. Improvement is also observed on the fiscal front, with the fiscal deficit declining from 5.7 per centof GDP in 2011-12 to 4.9 per cent in 2012-13 and 4.5 per cent in 2013-14. Aided by a favourable monsoon, the agriculture and allied sectors achieved a growth of 4.7 per cent in 2013-14 compared to its long term average of around 3 per cent (between 1999-2000 and 2012-13). A record food grains production of 264.4 million tonnes is estimated in 2013-14, as per the third Advance Estimates, indicating an increase of more than 20 million tonnes over the average production during the previous five years. Horticulture production is estimated at 265 million tonnes in 2012-13 and for the first time has exceeded the production of food grains and oilseeds. The robustness of the agriculture and allied sector can be attributed to the steady increase in gross capital formation (GCF) in this sector. In industry, the contraction in mining and quarrying for the second year in a row in 2013-14 and the negligible growth in manufacturing over the past two years, indicate the severity of structural bottlenecks. A slowdown is also noticed in services, in particular the internal trade, transport, and storage sectors that are largely attributed to the loss of momentum in commodity-producing sectors, especially, the industry sector. Thus, the revival of the industrial sector, with its economy-wide linkages, is centralto the revival of aggregate economic activity.

Referring to the demographic dividend, the survey states that India with a large and young population has a great demographic advantage. The proportion of working-age population is likely to increase from approximately 58 per cent in 2001 to more than 64 per cent 2021. While this provides opportunities, it also poses challenges. Policy makers have to design and execute development strategies that target this large young population.

Demographic advantage is unlikely to last indefinitely. Thereforetimely action to make people healthy, educated and adequately skilled is of paramount importance.

The survey points out that the priority of the Government will bethe revival of business sentiments that could be at the heart of restarting the investment cycle. Aggregate demand (measured in terms of GDP at market prices) registered a growth of 5.0 per cent in 2013-14 vis-à-vis 4.7 per cent in 2012-13 primarily due to improvement in net exports. The decline in the rate of gross fixed capital formation in 2013-14 reflects subdued business sentiments.

The investment boom in India till 2007-08 was largely due to significant increase in investment by the private corporate sector. The steep reduction in the rate of private corporate investment, leading to slowdown in overall investment rate in theeconomy, in recent years, point towards the need for revival of business sentiments. The survey adds that developments like the dramatic improvement in the external economic situation with the current account deficit declining to manageable levels and reduction in the fiscal deficit in 2013-14, along with some moderation in inflation, augur well for macroeconomic stabilization and revival of business confidence and investment.

In the above context, apart from fiscal consolidation, maintaining a stable external balance and further control of inflation, priorities for growth revival include streamlining implementation procedures to restart the investment cycle; simplification of tax policy, repeal of archaic laws governing market access, expansion and entry/exit of firms and revamp of the dispute resolution mechanism for commercial disputes to lend greater predictability to policy; boost to physical infrastructure; and, reforms that enhance productivity in agriculture, etc. are crucial.

Targeted measures by the government and RBI have improved the external economic situation significantly, even as India remains exposed to risk on/off sentiments of investors and to policy

shifts in advanced economies. Regaining growth momentum requires restoration of domestic macroeconomic balance and enhancing efficiency. To this end, the emphasis of policy would have to remain on fiscal consolidation and removal of structural constraints. Though some measures have been initiated to this end, reversion to a growth rate of around 7-8 per cent can only occur beyond the ongoing and the next fiscal.

Next Wave of Financial Reforms to Strengthen Institutional Foundations for a Globalized India

In a fast changing world, financial policy has to catch up with the needs of future India that people are aspiring to build. The Economic Survey 2013-14 mentions that the next wave of reforms will be through strengthening the institutional foundation – bothlaws and organizations – improving and polishing the financial processes; and by taking well-designed policy decisions that willenhance clarity, consistency, and transparency for a globalized India.

Growth rate of aggregate bank deposits marginally moderated to 14.1 per cent in 2013-14 from 14.2 per cent in the previous year.The acceleration is mostly on account of large accretion to non-resident Indian (NRI) deposits. Growth in bank credit increased to 13.9 per cent in 2013-14, as compared to 14.1 per cent in 2012-13. The Reserve Bank of India (RBI) continued with the policy of monetary easing during the first quarter of 2013-14 to support growth in the face of moderation of wholesale price index(WPI) inflation and reduced the repo rate by 25 basis points(bps) to 7.25 per cent in May 2013. Following the exceptional measures taken by RBI in Q2 2013-14, both deposit and lending rates firmed up by September, 2013.

The Economic Survey says that the factors impeding the pace of smooth monetary policy transmission to the credit market include rigidities in repricing for fixed deposits, size of government borrowings, level of non-performing assets (NPAs), high inflationand the significant presence of informal finance.

The survey says that the Indian banking sector, which exhibited considerable resilience in the immediate aftermath of the global financial crisis, has been impacted by the global and domestic economic slowdown over the last two years.

Economic Survey asks the government to move towards a Low and Stable Inflation Regime through Fiscal Consolidation. Survey calls for Revamping Social Sector Schemes like MNREGA, NRHM, and SSA;

Favors Reforming the Food Market.

GDP at constant prices is expected to grow in the range of 5.4 – 5.9 per cent in 2014-15. There are downside risks to the economy arising from a poor monsoon, the external environment and the poor investment climate.GDP growth slowed to below 5 per cent fortwo consecutive years, i.e. 2012-13 and 2013-14. The combination of domestic structural constraints, inflationary pressures, particularly food inflation and uncertainty in the global economy, has affected growth and posed challenges for macroeconomic stability.The growth slowdown was broad based, affecting in particular the industrial sector.Aided by favourablemonsoons, the agricultural and allied sector grew at 4.7 per centin 2013-14.

In 2013-14 industry grew at 0.4 per cent. The key reasons for poor performance have been contraction in mining activities and deceleration in manufacturing output. Manufacturing and mining sector GDP declined by 0.7 per cent and 1.4 per cent respectivelyin 2013-14. The underlying cause of the poor performance of thesetwo sectors has been considerable deceleration in investment, particularly by the private corporate sectorduring 2011-12 and 2012-13. In infrastructure delays in regulatory approvals, problems in land acquisition & rehabilitation, environmental clearances and time overruns in the implementation of projects are matters of concern.

Consumer price inflation declined from 10.21 per cent during FY 2013-14 to about 9.49 per cent in 2013-14. However, food inflation remained stubbornly high during FY 2013-14. Contribution of the commodity sub-groups, ‘fruits and vegetables’, as well as ‘egg, meat and fish’ to the food inflation has been very high.

India’s balance-of-payments position improved in 2013-14 with current account deficit (CAD) at US $ 32.4 billion (1.7 per cent of GDP) as against US$ 88.2 billion (4.7 per cent of GDP) in 2012-13. India's exports at US$ 312.6 billion grew by a positive 4.1 per cent compared to the previous year’s negative growth of 1.8 percent. Import growth decelerated from 0.3 per cent in 2012-13 to a negative (-) 8.3 per cent in 2013-14, owing to fall in non-oil imports by 12.8 per cent primarily due to restrictions ongold imports. POL imports grew marginally by 0.7 per cent.Services grew at 6.8 per cent in 2013-14. The growth rate ofthe combined category of trade, hotels, and restaurants and transport, storage, and communications decelerated to 3.0 per cent while financing, insurance, real estate, and business services grew robustly at 12.9 per cent. Challenges to the external environment remain as the global environment remains uncertain.

In 2013-14, public finances faced serious challenges. With a shortfall in tax revenues and disinvestment receipts and higher than budgeted subsidies, interest and pension payments, fiscal consolidation was mainly achieved through a reduction in grants for creation of capital assets and capital expenditure. An important factors in the increase in the Centre’s fiscal deficit after 2008-09 has been the sharp increase in subsidies from 1.42 per cent of GDP in 2007-08 to 2.56 per cent of GDP in 2012-13. For 2013-14 (RE) the subsidy bill is 2.26 per cent of GDP.

In the financial sector, leverage by infrastructure firms and deteriorating asset quality of the banking sector emerged as a major concerns. Gross NPAs of banks increased from 2.36 per cent of total credit advanced in March 2011 to 4.40 per cent of total credit advanced in December 2013 with infrastructure, iron and steel, textiles, aviation and mining emerging as the stressed

sectors.Reforming the financial sector would involve reducing financial repression through which the state usurps a large shareof household financial savings, financial sector regulatory reform and changing the laws and regulations governing the flow of foreign capital into India. The passage of the PFRDA Act, the shift of commodity futures trading into the Ministry of Financeand the first steps towards adoption of improved consumer protection and better regulatory practices proposed by the Financial Sector Legislative Reforms Commission were the milestones in financial sector reform in 2013-14.

The Survey identifies the need to address long run problemsto improve the investment climate. It emphasizes the need for creating a framework for low and stable inflation, setting publicfinances on a sustainable path by tax and expenditure reform, andcreating the legal and institutionalframework for a well-functioning market economy.It calls for legislative and administrative reform for building state capacity to allow businesses to operate in a stable environment and improve the ease of doing business.

The Survey calls for putting public finances on the sustainable path through fiscal correction, a new Fiscal Responsibility and Budget Management (FRBM) Act with teeth, better accounting practices, greater transparency and improved budgetary management. It argues that improvements on both tax and expenditure are needed to obtain high quality fiscal adjustment.

It calls for a tax regime that is simple, predictable and stable consisting of a single-rate goods and services tax (GST), fewer exemptions in direct taxes, and a transformation of tax administration. Government expenditure reform should involve three elements: shifting subsidy programmes away from price subsidies to income support, a change in the focus of government spending towards provision of public goods, and a focus on outcomes through an improvement in systems of accountability. Forexample, a focus on health and education outcomes, rather than inputs and expenditure must be a priority.

The Survey recommends that the government needs to move towards alow and stable inflation regime through fiscal consolidation, establishing a monetary policy framework, and creating a competitive national market for food. Initiation of reforms on these fronts should reduce inflation uncertainty and restore a stable business environment. Further lower inflationary expectations should increase domestic household financial saving and make resources available for investment.

The Survey calls for reforming the food market. Restrictions on farmers to buy, sell and store their produce to customers across the country and the world imposed by Indian laws enacted in the 1950s and 60s have not been removed, even though restrictions on industry were removed long ago. Restoring economic freedom of farmers and allowing them to be part of a competitive national market is essential for controlling food inflation. There is a huge opportunity today for Indian agriculture to be transformed through creation of markets and well as state intervention in public goods such as rural infrastructure and training as well assetting up modern regulatory frameworks for warehousing and commodity futures. Rationalisation of subsidies on inputs such asfertilizer and food is essential. Government needs to eventually move towards income support for farmers and poor households, so that market forces are able to respond to changes in consumption and technology.

The Survey also discusses the need for revamping some of the social sector schemes such as MNREGA, NRHM, SSA, etc. It is felt that the outlays for the different schemes have not often translated fully into outcomes owing to the poor delivery mechanism. Leveraging modern technology for efficient delivery ofprogrammes, removing the multiple layers of governance, simplifying procedures, and greater participatory role by the beneficiaries can help in creating a better delivery mechanism. There is a need for greater degree of accessibility to information for the public, especially about the role, rights, and entitlements of the PRIs. Focused attention on raising the awareness levels and capacity-building activities at gram sabha level and devolution of powers in real terms, i.e. funds, function, and functionaries to the PRIs will lead to better and

more effective planning, execution, monitoring and social audit of panchayat centric programmes.

WPI Inflation Shows Sign of Receding fell to 5.98% during 2013-14 Food Inflation Remains High

Wholesale and Consumer Price Inflation expected to Decline

Economic Survey 2013-14 states that in comparison with previous years, inflation showed signs of receding with average wholesale price index (WPI) inflation falling to a three-year low of 5.98 per cent during 2013-14, compared to 7 and 9% over the previous two years. Consumer price inflation, though higher than the WPI, has also exhibited signs of moderation with CPI (new-series) inflation declining from 10.21 per cent during FY 2013-14 to about 9.49 per cent in 2013-14. Food inflation, however, remainedstubbornly high during FY 2013-14, reaching a peak of 11.95% in third quarter.

High inflation, particularly food inflation, was the result of structural as well as seasonal factors. Contribution of the commodity sub-groups, ‘fruits and vegetables’, as well as ‘egg, meat and fish’ to the food inflation has been very high.

Inflation in Non Food Manufactured Product (WPI core) has remained benign throughout the year, with average inflation moderated to four year low of 2.9 per cent in 2013-14, which indicates that underlying pressures of broad-based inflation havesomewhat eased.

IMF has projected that most global commodity prices are expected to remain flat during 2014-15, which augurs well for inflation inemerging market and developing countries including India. The WPIinflation is expected to moderate by the end of 2014. However, there are risks to the outlook for inflation from a possible sub-normal monsoon during 2014-15 as predicted by the IMD on account of El-Nino effect, possible step up in the pass-through of

international crude oil prices, and exchange rate volatility.

The course of gradual monetary easing that had started alongside some moderation of inflationary pressures at the beginning of thefinancial year 2013-14 was disrupted in May 2013, following indications of possible tapering of the US Fed’s quantitative easing programme. The RBI with a view to restoring stability to the foreign exchange market, hiked short term interest rate in July and compressed domestic money market liquidity.

Following the ebbing of volatility in the foreign exchange market, RBI initiated normalisation of the exceptional measures in a calibrated manner since its mid-quarter review (MQR) of September 20, 2013. The interest rate corridor was realigned to normal monetary policy operations with the MSF rate being reducedin three steps to 8.75 per cent between September 20, 2013 and October 29, 2013.

RBI in its Third Quarter Review of Monetary Policy on January 28,2014, hiked the repo rate by 25 bps to 8 per cent on account of upside risks to inflation, to anchor inflation expectations and to contain second round effects. The move was intended to set theeconomy securely on the disinflationary path.

Liquidity conditions remained tight during the first half (H1) of2013-14, mainly reflecting policy intent to stabilise the exchange market pressure. The elevated central government cash balances with RBI (particularly in Q2 and Q4 of 2013-14), quarterly advance tax outflows, and festival-induced increase in currency in circulation also contributed towards the tight liquidity phases in 2013-14. In order to prevent excessively worsening of liquidity conditions, which would have impacted financing conditions, RBI undertook measures to inject liquidity through OMO purchase auctions, overnight repo, MSF and variable rate term repos.

The passage of the PFRDA Act, the shift of commodity futures trading, FSLRC report were the three major milestones of the year 2013-14 · The passage of the PFRDA Act, the shift of commodity futures trading into the Ministry of Finance, and the presentation of the FSLRC report, were the three major milestonesof the year 2013-14.

· In the banking sector gross NPAs of banks registered a sharp increase. Overall NPAs of the banking sector increased from2.36 per cent of total credit advanced in March 2011 to 4.40 per cent of total credit advanced in December 2013.

· The RBI has indentified five sectors -- infrastructure,iron and steel, textiles, aviation and mining as the stressed sectors.

· The New Pension System (NPS), now National Pension System, represents a major reform of Indian pension arrangements,and lays the foundation for a sustainable solution to ageing in India by shifting to an individual account, defined-contribution system.

· Till 7 May 2014 a total of 67.11 lakh members have beenenrolled under the NPS with a corpus of ` Rs. 51,147 crore.

· The Swavalamban Scheme for workers in the unorganized sector launched in 2010, has now been extended to five years for the beneficiaries enrolled in 2010-11, 2011-12, and 2012-13 and thus the benefits of co-contribution under the Scheme would be available till 2016-17.

· The FSLRC in its Report submitted on 24 March 2011 has given wide-ranging recommendations, broadly in the nature of governance enhancing principles for enhanced consumer protection,greater transparency in the functioning of financial sector regulators in terms of their reporting system, greater clarity ontheir interface with the regulated entities and greater transparency in the regulation making process by means of

mandatory public consultations, incorporation of cost benefit analysis etc.

Fiscal deficit for 2013-14 contained at 4.5% of the GDP • Wholesale Price Index inflation falls to a three year low of5.98% during 2013-14

• Consumer Price Inflation also signs of moderation

• Both, Wholesale and Consumer Price Inflation, expected to godownward

• Fiscal consolidations remains imperative for the economy, says the Economic Survey

• Economy Survey recommends fiscal consolidation through higher tax-GDP ratio then merely reducing the expenditure to GDP ratio

• Proactive policy action helped government remain in fiscal consolidation mode in 2013-14

• Fiscal deficit for 2013-14 contained at 4.5% of the GDP

• Total outstanding liabilities of the central and state governments decline as a proportion of GDP.

Fiscal Outcome of Central Government in 2013-14 achieved; Fiscal Deficit Contained at 4.5% of the GDP Fiscal Consolidation Remains Imperative for the Economy, says theEconomic Survey

Proactive policy action helped government prevent the fiscal slide and remain in fiscal consolidation mode in 2013-14. According to the Economic Survey 2013-14 released here today, the

fiscal outcome of the central government in 2013-14 was in line with the targets set as per the Medium Term fiscal policy statements and was achieved despite the macroeconomic challenges of growth slowdown, elevated levels of global crude oil prices, and slow growth of investment. The fiscal deficit for2013-14 has been contained at Rs 508149 crore (provisional) whichis 4.5% of the GDP. The corresponding figure for 2012-13 was 4.9%. The primary deficit would be 1.2% of the GDP in 2013-14 while the revenue deficit is 3.2%.

The revenue receipts in 2013-14 would be Rs 1015279 crore, 8.9% of the GDP. The gross tax revenue in 2013-14 are provisionally estimated to be Rs 1133832 crore which is 10% of the GDP. The gross tax revenue has shown a decrease of 0.2% in terms of GDP over the previous year. The shortfall is mainly due to the poor performance of indirect taxes. The total indirect tax collection for 2013-14 has been Rs 496231 crore, while it was Rs 473792 crore in 2012-13. The decline in expected revenue from indirect taxes was mainly on account of general economic slowdown, reduction in duty rates (both customs and excise), lower volume of imports of dutiable goods, and various exemptions. The direct tax collection for 2013-14 has been Rs 633473 crore. The percentage of direct tax revenues as part of GDP is 5.6% while indirect tax revenues constitute 4.4% of the GDP.

The non-tax revenue during the year 2013-14 has gone up to Rs 199233 crore, showing a significant increase of about 45% compared to the previous year, chiefly on account of dividends and profits and interest receipts. Non-debt capital receipts which include recoveries of loans, disinvestment receipts and miscellaneous receipts decreased to Rs 36644 crore in RE 2013-14.The disinvestment programme has had limited success due to subdued market conditions and yielded Rs 27555 crore.

The total expenditure of the central government was Rs 1563485 crore which constituted 13.1% of the GDP. The major subsidies went up to Rs 247596 crore, 2.2% of the GDP. The interest payments were Rs 377502 crore, 3.3% of GDP.

With the shortfall in tax revenues and disinvestment receipts, and higher than budgeted subsidies, interest, and pension

payments, the fiscal consolidation was mainly achieved through a reduction in grants for creation of capital assets and capital expenditure.

To achieve the debt policy of maintaining stable, sustainable, prudent and market oriented active debt management, the government conducted buyback and switching of securities which resulted in reduction in market borrowings by Rs 15000 crore for 2013-14 to Rs 468902 crore. To broaden the investor base and develop a competitive market, the government introduced inflationindexed bonds. A positive change in the debt profile of the country has been the reduction of total outstanding liabilities of the central and state government, as a proportion of GDP whichnow stands at 49.4%. India's central government liabilities-GDP ratio declined from 63.5 per cent in 2002-03 to 49.8 per cent in 2013-14 (RE), because the high nominal GDP growth offset both thenew borrowing as well as the nominal interest payments, creditorshave demanded.

Economic Survey says that despite the global and domestic challenges, the economy achieved its targeted fiscal consolidation in 2013-14 but this was done by cutting expenditure(majorly plan /capital expenditure) which is unsustainable for aneconomy. It says that addressing the risk of food, fertilizer andpetroleum subsidies is critical. Another challenge lies in improving tax buoyancy, and overall shortfall in non-debt receipts could be contained with greater efforts at mobilisation and reforms. Fiscal consolidation remains imperative for the economy, both in the current context and the years to come with the emphasis on maintaining the quality of adjustment. It is better to achieve fiscal consolidation partly through a higher tax- GDP ratio than merely through reduction in the expenditure to GDP ratio, in view of the large unmet development needs.

Long-term Borrowings Account for 78.2 per cent of TotalExternal Debt The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that the

maturity profile of India’s external debt indicates dominance of long-term borrowings. The long-term external debt accounted for 78.2 per cent of total external debt at end-December 2013 vis-à-vis 76.1 per cent at end-March 2013. The long-term debt at end - December 2013 increased by US $ 25.1 billion (8.1 per cent) over the level at end-March 2013 while short-term debt declined by US $ 4.0 billion (4.1 per cent), reflecting a fall in the levels of imports.

Sustaining Improvement in BoP Position – A Challenge The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that sustaining the improvement in the BoP position in the medium termis a challenge. Given the uncertain global environment and the frequent bouts of flight of capital on aversion to all kinds of risks, there is need to put in place a mechanism for closely monitoring developments and assessing vulnerabilities so as to take measures to cope with the situation.

The Survey observed that the improvement in the BoP position during the latter half of 2013-14 was indeed swift and owed to exceptional measures like restrictions on non-essential imports and limited period incentives for certain varieties of capital flows and the impact of overall economic slowdown on imports. Sustaining the robust outcome in the medium term is a challenge as some of the restrictions need to be gradually withdrawn and there is a need to adjust not merely to the asset purchase taper by the US Fed but also to the eventual exit from the accommodative monetary policy stance by the advanced economies.

The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that as India had a large trade deficit in the first quarter, The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that as Indiahad a large trade deficit in the first quarter, negative market perceptions led to sharper outflows in the foreign institutional investors (FIIs) investment debt segment, leading to 13.0 per

cent depreciation of the rupee between May 2013 and August 2013. The government swiftly moved to correct the situation through restrictions on non-essential imports like gold, custom duty hikein gold and silver to a peak of 10 per cent, and measures to augment capital flows through quasi-sovereign bonds and liberalization of external commercial borrowings.

The RBI also put in place a special swap window for foreign currency non-resident deposit (banks) [(FCNR (B)] and banks’ overseas borrowings through which US$ 34 billion was mobilized. The one-off flows arrested the negative market sentiments on the rupee and, in tandem with improvements in the BoP position, led to a sharp correction in the exchange rate and a net accretion toreserves in 2013-14.

External Debt Remains within Manageable Limits The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that India’s external debt has remained within manageable limits due to the external debt management policy, with prudential restrictions on debt varieties of capital inflows given the largeinterest differential. India’s external debt stock at end of March 2013 stood at US $ 404.9 billion (Rs. 2,200,410 crore), recording an increase of US$ 44.1 billion (12.2 per cent) over the previous year’s level of US $ 360.8 billion (Rs. 1,844,167 crore). External debt both at end March 2013 and end March 2012 is higher than reported earlier in various publications owing to the inclusion of securitized borrowings of banks as reported by the RBI in its external debt statistics. Component-wise, long-term debt increased by 9.1 per cent to US $ 308.2 billion at end March, 2013 from US $ 282.6 billion at end March 2012, while short-term debt refers to such debt in terms of original maturityunless otherwise stated, increased by 23.7 per cent to US $ 96.7 billion from US $ 78.2 billion at end March 2012, reflecting elevated levels of imports.

India’s Foreign Exchange Reserves Increase The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that India’s foreign exchange reserves increased from US $ 292.0 billion at end March 2013 to US $ 304.2 billion at end march 2014. The Survey underlined that India continues to be one of thecountries that have sizeable foreign exchange reserves particularly considering that some of the other major reserve holders are nations with large current account surpluses. Intervention in the foreign exchange markets by the RBI so as to manage the exchange rate of the rupee and guard against volatility without targeting a specific rate is behind the accumulation of reserves generally. In the specific context of developments in 2013-14, the intervention was to provide a measure of comfort against the elevated levels of vulnerability indicators which are expressed as proportions of reserves.

India has the Second Fastest Growing Services Sector with Compound Annual Growth Rate at 9.0 Per Cent India has the second fastest growing services sector with its Compound Annual Growth Rate at 9.0 per cent, just below China’s 10.9 per cent, during 2001 to 2012. Also, India ranked 12th in terms of services Gross Domestic Product (GDP) in 2012 among the world’s top 15 countries in terms of GDP. While services share in World GDP was 65.9 per cent and in employment was only 44 per cent in 2012, in India, they were 56.9 per cent and 28.1 per cent respectively.

GDP

Services constitute a 57 per cent share in GDP at factor cost (atcurrent prices) in 2013-14, an increase of 6 percentage points over 2000-01. Despite deceleration, services GDP growth at 6.8 per cent was above the 4.7 per cent overall GDP in 2013-14. The growth rate of the combined category of trade, hotels, restaurants, transport, storage, and communications decelerated

to 3.0 per cent while financing, insurance, real estate, and business services grew robustly at 12.9 per cent.

FDI

In 2013-14, FDI inflows to the services sector (top five sectors including construction) declined sharply by 37.6 per cent to US$ 6.4 billion compared to an overall growth in FDI inflows at 6.1 per cent resulting in the share of the top five services in totalFDI falling to nearly one-sixth.

Exports

India’s increase in share in world services exports from 0.6 per cent in 1990 to 3.3 per cent in 2013 was faster than in merchandise exports. Exports of software services, accounting for46 per cent of India’s total services exports, decelerated to 5.4per cent in 2013-14, travel, accounting for a nearly 12 per cent share, witnessed negative growth of 0.4 per cent.

Annual Average Exchange Rate Goes UP The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that the annual average exchange rate of the rupee went up from Rs. 47.92 per US dollar in 2011-12 to Rs. 54.41 per US dollar in 2012-13 and further to Rs 60.50 per US dollar in 2013-14. The large depreciation of the rupee during the course of the year, notwithstanding sizeable accretion to reserves in 2013-14, could partly be attributed to frictional forces and partly to the role of expectations in the forex market. The rupee has stabilized recently, reflecting an overall sense of confidence in the forex market as in other markets.

India’s BoP Position Improves Dramatically in 2013-14 The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that India’s Balance of Payments (BoP) position improved dramatically

in 2013-14, particularly in the last three quarters. This owed inlarge part to measures taken by the Government and the Reserve Bank of India (RBI) and in some part, to the overall macroeconomic slowdown that fed into the external sector. Currentaccount deficit (CAD) declined sharply from a record high of US $88.2 billion (4.7 per cent of gross domestic product GDP) in 2012-13 to US $ 32.4 billion (1.7 per cent of GDP) in 2013-14. After staying at perilously unsustainable levels of well over 4.0per cent of GDP in 2011-12 and 2012-13, the improvement in BoP position is a welcome relief and there is need to sustain the position going forward, the Survey noted.

Economic Survey Underlines Significant Improvement in BoP Position • The India’s balance-of-payments position improved dramatically in 2013-14 with current account deficit (CAD) at US $ 32.4 billion (1.7% of GDP) as against US $ 88.2 billion (4.7% of GDP) in 2012-13.

• The annual average exchange rate of the Rupee went up from 47.92 per US dollar in 2011-12 to Rs. 54.41 per US dollar in 2012-13 and further to Rs. 60.50 per US dollar in 2013-14.

• India’s foreign exchange reserves increased from US $ 292.0 billion at end March 2013 to US $ 304.2 billion at end March, 2014.

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