PM IAS JAN 18 EDITORIAL

Editorial 1: The illogical rejection of the idea of South Asia

Context:

• A recent World Bank study on air pollution concludes that about two million people die prematurely in South Asia each year as particulate measure concentrations put nine South Asian cities among the world’s top 10 worst affected by air pollution. The ill effects of this pollution, regardless of where it originates from, are clouding even the region’s once-pristine tourist destinations.

Air pollution in the region:

• One surprising study in Bhutan found that the average PM 2.5 concentration from 2018-2020 was three times World Health Organization-prescribed limits. Last week, the Maldives Meteorological Service warned that visibility had been reduced by 60% due to smog it has blamed on “winds from the Himalayan foothills”.
• Not only that, it is clear from success stories in other parts of the world, including countries of the Association of Southeast Asian Nations, European alpine nations and China, that the solution to the problems of air pollution lies in a “whole of region” approach, and is not one that any one country in the “air sheds” can resolve on its own.
• The report ends by asking India, Pakistan, Bangladesh and all other South Asian countries to begin talks between scientists, officials and eventually ministers and leaders to create a mechanism for the cooperative management of the six air sheds the region is made up of.
• That such a conversation does not exist or is even being contemplated is one more example of the rejection of the idea of South Asia that continues to bedevil a region refusing to see itself as one geographical unit.
• This is particularly illogical when you consider that all South Asian Association for Regional Cooperation (SAARC) nations are members of the Group of 77 Developing countries, which under the chairpersonship of Pakistan last year, negotiated a breakthrough at the UNFCCC COP27 Climate Change summit at Sharm el-Sheikh (2022), but are unable to convene a climate change conference for themselves.

Multiple crises in the region:

• The climate crisis is only one of the immediate challenges of the times where South Asia has failed to build a platform. In fact, while India and Pakistan, the chief opponents of an integrated South Asia, continue to point to past disputes as the reason to hold up South Asian summits such as SAARC, block trade, connectivity and other avenues for cooperation, the undeniable truth is that every immediate geopolitical challenge is pushing the region to work more closely together:

1. The climate change crisis that saw Pakistan being engulfed in floods
2. Russia- Ukraine war that sent costs of procuring energy
3. Inflation- prices of grain, fertilisers all soaring
4. Persistent global economic recession
5. More variants of the COVID-19 virus
6. Terrorism, especially arising from the Taliban takeover of Afghanistan.

• The failure to build a regional defence to the issues arising from Russia’s invasion of Ukraine and from North Atlantic Treaty Organization (NATO) sanctions, trade ban and weapons stockpiling, means that South Asia has missed the chance to position itself as an energy “cartel” commanding a better price for the region.
• Apart from crude dependencies, Bangladesh, Pakistan and India buy more than 50% of their liquefied natural gas through the spot market — an indicator of how vulnerable they are to global energy trends.

Regional fissures

• Pakistan has refused talks with India to its own detriment, and now stands to miss out on being part of the South Asia energy grid that is already powering dreams of regional connectivity between Bangladesh, Bhutan, India and Nepal (BBIN grouping), and possibly Sri Lanka.
• Phrases such as “Vasudhaiva Kutumbakam” and “diplomacy and dialogue” as being the only ways to resolve the conflict sound hollow when compared to India and Pakistan’s act of holding up the SAARC Summit from meeting for nearly a decade.
• Furthermore, if New Delhi can virtually hold a special meeting for the “Global South”, with the impact of the Ukraine war on the agenda, there is no reason why it cannot convene or participate in a regional dialogue to discuss the issue, or even to include the regional agenda in its G-20 narrative.
• Similar opportunities for regional cooperation in health security are being missed, although India has worked bilaterally with most of its neighbours to provide vaccines and COVID-19 medicines. Another move may be to unilaterally extend copyright (IPR) waivers on medical products within South Asia of the sort India has proposed, unsuccessfully thus far, at the World Trade Organisation (WTO).

Terrorism:

• When it comes to terrorism, the contradictions between what can be discussed at broader multilaterals, but not in the region, are manifold: India and Pakistan talk about terrorism at the United Nations and the Shanghai Cooperation Organisation (SCO), but will not discuss the issue bilaterally or within South Asia.
• In 2022, New Delhi and Islamabad exchanged teams as part of the SCO Regional Anti-Terrorist Structure (RATS), and India was part of the Financial Action Task Force (FATF) grouping that let Pakistan off its terror financing “greylist”, but the two sides are still not able to find a way for talks on the subject between them.
• Pakistan has made Kashmir its “sticking point” for any engagement with India, including opening trade with India, but allows transit for Indian wheat to Afghanistan. India will not hold talks with Pakistan due to its support for terrorists, but now has a dialogue open with UN designated terrorists themselves — Taliban leaders including Sirajuddin Haqqani, held responsible for the attacks on Indian missions where an Indian diplomat and several security personnel died.
• In the process of such rank lack of logical behaviour, any chance of coordinating or cooperating against the developing chaos in Afghanistan, and countering extra-regional terror threats are also lost for South Asia, the one region affected the most.

Way forward: Comfort in regionalisation

• Given the deepening polarisation in the world, climate chaos, and the growing scarcity of resources, it is clear to see that the underpinnings of globalisation over the past century are about to be upended, and nearly every other nation is finding its moorings in regionalisation and forums closer home.
• Regional trade now makes up for more than half of global trading, and agreements such as United States-Mexico-Canada Agreement (USMCA), Southern Common Market (MERCOSUR for its Spanish initials), European Union (EU), Eurasian Economic Union, Cooperation Council for the Arab States of the Gulf, African Continental Free Trade Area (AfCFTA) and Regional Comprehensive Economic Partnership (RCEP) are further boosting this trend.
• However, South Asia is the outlier to this most logical principle. South Asia is the world’s least integrated (in terms of economy as well as connectivity) region. It has a huge potential waiting to be tapped.
• Some options still exist for South Asian cooperation. Just as Prime Minister Narendra Modi has delinked himself from the Non Aligned Meet (NAM) Summit since 2014, but with the Government seen asserting its belief in non-Alignment, it should be possible to delink Mr. Modi’s presence from the SAARC summit, due to be held next in Pakistan, and instead have the President or the Vice-President to represent India. A quid pro quo could even see Pakistan send a replacement for its Prime Minister to the SCO Heads of State summit due to be held in India in June.

Conclusion:

In any case, it is necessary for the future to delink South Asian cooperation from the summit itself, and allow other parts of the agenda ( health, energy, women’s rights, security and terrorism) to be held even if a leadership event is not. To reject this idea would mean a missed opportunity, with repercussions more dire than those that come from the poisoned air the region breathes today.

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Editorial 2: Balance fiscal consolidation with growth

Context:

• As the number of COVID-19 cases subsided, 2022-23 was expected to be a normal year. However, this hope was shattered by Russia’s invasion of Ukraine. The supply of critical imports was disrupted and, as a consequence, the prices of such imports increased sharply, derailing many economies. Growth slowed down, and India was affected too.

The outlook for 2023:

• While India’s performance was relatively better than many other countries, the return to normalcy has been delayed. Even at the currently projected growth rate, India’s GDP at the end of the present fiscal year will only be 8.57% higher than its level in 2019-20, giving an average of 2.86% for three years.
• India needs to move on to a high growth path beginning 2023-24. In this context, what should be the focus of the upcoming Budget to achieve steady, high growth with reasonable price stability?

Growth performance:

• In 2022-23, real Gross Value Added (GVA) is estimated to grow by 6.7%. Its sectoral decomposition indicates that every output sector has turned positive as compared to the corresponding magnitudes in the pre-COVID-19 year of 2019-20. In other words, the 2023-24 Budget would pertain to the first normalised economy after the pandemic shock.
• The expectation is that nominal GDP in 2023-24 may be close to ₹300 lakh crore. This is based on applying a nominal growth of about 11-11.5%, which implies the assumption of a real growth in the range of 6-6.5% and a deflator-based inflation in the range of 4.5-5%. It may be noted that real growth in the second half of 2022-23 is only 5.5% as per the advance estimates.

Fiscal Deficit (FD):

• The policy response to the COVID-19 shock, which affected 2020-21, was a sharp increase in the Centre’s fiscal deficit to 9.2% of the GDP. This was more than three times the original Fiscal Responsibility and Budget Management Act (FRBMA) norm of 3%.
• In the two succeeding years, FD could be reduced to 6.7% and 6.4%, respectively. With 2023-24 being the first genuine post COVID-19 normal year, it would be best to spell out a convincing path towards the prescribed FD ratio of 3%.
• There is, however, a need to recognise the challenges to India’s growth prospects in view of the global economic slowdown. Multilateral institutions have projected global growth prospects and India’s growth prospects for 2023-24:

1. Organization for Economic Co-operation and Development (OECD) has projected a growth rate of 2.2% for the global economy in 2023 and 5.7% for India in 2023-24.
2. International Monetary Fund (IMF) has projected global growth at 2.7% and India’s growth at 6.1%.

The economist C Rangarajan recently opined that India may be able to achieve a growth in the range of 6-6.5% in 2023-24, provided significant policy support is given to growth.

Saving-investment balance:

• The need for correction in the government’s FD primarily arises because of the relative profile of savings and investment as a proportion of GDP. Financial savings along with net inflow of foreign capital provide the extent of surplus available for the potential net deficit sectors in the economy, which consists of the public sector (government and non-government) and the private sector.

Financial savings in the household sector had averaged 7.9% of GDP from 2017-18 to 2019-20 before it increased inordinately to 11.6% in 2020-21 due to an upsurge in the precautionary motive in the COVID-19 year.

• If we target a reduction of 0.7% point in fiscal deficit in 2023-24 as compared to 2022-23, the resultant FD of 5.7% of GDP would imply availability of investible resources of 1.1% of GDP for both the private corporate sector and the non-government public sector.
• This can be financed by a household sector financial saving of about 8% of GDP and net inflow of foreign capital of 2.3% of the GDP assuming that States are allowed a FD of 3.5% of the GDP in 2023-24.
• This balancing would not put any additional pressure on interest rates and would be ideal for sustaining a robust medium-term growth with price stability. Bringing down FD and charting out a glide path are essential for maintaining price stability. The pressure on the Reserve Bank of India (RBI) to expand reserve money will come down.

Conclusion:

Fiscal support to growth would call for continuing emphasis on capital expenditure. A careful calibration would be required for limiting revenue expenditure growth in order to retain space for capital expenditure to grow adequately with a view to supporting growth.