Editorial 1 : Staunch the breach

Contet

India and Pakistan need to drop their hard line stances on the Indus Waters Treaty.

Introduction

In its fourth notice to Pakistan since January 2023, India has escalated its demand for the renegotiation of the 1960 Indus Waters Treaty (IWT), now calling off all meetings of the Permanent Indus Commission (PIC) until Pakistan agrees to sit at the table for talks.

What are the India’s demand?

• The logjam in the treaty process:  India’s demand last year followed a logjam in the entire process, once held up internationally as a model template for water-sharing agreements.
• India’s win in the treaty disputes: Even in the new millennium, the tenets of the treaty held firm, and India was able to win two major disputes by adhering to the processes laid out,
  •  The Baglihar Dam project in 2007
  • Another dispute over allegations that India was interfering with Pakistan’s Neelum project in 2013.
• Looking for a way ahead on other disputes:  The issue over how to proceed on dispute resolution for the Kishenganga and Ratle projects has snowballed since 2016.

The external players in the disputes

• Escalating of disputes to PCA: When Pakistan escalated the disputes — having a neutral expert look at them and demanding a Permanent Court of Arbitration (PCA).
• The role of the World Bank:  In a moment of weakness, that it may come to regret, the World Bank — it is a co-signatory and guarantor of the IWT — decided to allow two parallel processes of the dispute mechanism to run at the same time.
• No cooperation between India and Pakistan: To make matters worse, Pakistan turned its back on the neutral expert’s proceedings, while India has boycotted the PCA hearings at The Hague.

The political context of the Indus water treaty

• The Pakistan’s cold attitude: to India’s notices on renegotiating the treaty and the decision by the Modi government to stop all PIC meetings has put the future of the process in peril.
• Escalation in rhetoric’s: Unlike in past decades, when the IWT was considered off-limits for partisan politics, leaders on both sides are now not above using fiery rhetoric.
• India’s aggressive military stand:  Mr. Modi’s statement after the 2016 Uri attack, that “blood and water” cannot flow together, is perhaps the most egregious example.

The impact on bilateral relationship of India-Pakistan

It is no coincidence that the spiral mirrors the unravelling of the India-Pakistan bilateral relationship in the same period.

• Decline in pollical engagement: There is no political engagement or trade and the 2021 LoC ceasefire agreement is in danger after growing terror attacks and deaths of Indian Army personnel.
• Renegotiation can have a positive way forward: It may be possible to re-open the treaty talks, but concluding any agreement will be that much more difficult.

Way forward

All eyes are now on New Delhi’s response to Pakistan’s invitation for the SCO Heads of Government meeting on October 15-16. Such an opening could present an opportunity for talks on the way forward.

• De-politicize the IWT: Leaders should move past politics and view the treaty in terms of hydro-technical issues that may benefit both India and Pakistan equally.
• Re-establishing the dialogue: Both India and Pakistan must consider resuming diplomatic dialogue on the Indus Waters Treaty (IWT)
• Revision of the treaty: there is a need to update and address current challenges and opportunities that come by due to climate change and new energy requirements.
• Leveraging multilateral opportunities: meeting of the SCO Heads of Government allows India and Pakistan to discuss water-sharing issues within a neutral multilateral context.

Thus, such steps may help in reducing tensions across both nations. 

Conclusion

No doubt, new-age issues such as climate change and the need for renewable energy and hydropower options on the Indus necessitate a re-opening of the 64-year-old Treaty. How that is done, along with resolving current disputes, will decide whether the two countries can save the treaty, once referred to as the “one bright spot” in a “very depressing world picture” by U.S. President Dwight D. Eisenhower. Resolving disputes and adapting the Indus Waters Treaty to modern challenges is essential for maintaining regional stability and cooperation.

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Editorial 2 : Pivot to watch

Context

The impact of the reduction in the Unites State’s Fed rates on India and Global economies.

Introduction

The U.S. Federal Reserve on Wednesday cut interest rates for the first time in more than four years, lowering its benchmark interest rate by half a percentage point, in a policy pivot that is bound to have far reaching implications.

The rationale for the Fed Rate cuts

• The highest cut in a long time: Elaborating on the rationale for the cut after having raised the federal funds rate to its highest level in about two decades and held it there for more than a year,
• The support from labour market:  Fed Chairman Jerome Powell said, “… with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation.
• The trigger from inflations:  Moving sustainably down to 2%”. Policymakers of the Federal Open Market Committee (FOMC) also signalled by a 17 to 2 majority that they expect at least another quarter point reduction in 2024.
• The dual mandate of Fed: The Fed has been consistently striving towards:
  • The first is ensuring maximum employment
  • It seeks to keep inflation at 2% over the longer run,
• The impact of the pandemic on the prices and economy: had been raising rates since early 2022 when a COVID-19 pandemic-driven surge in prices had forced it to focus largely on taming inflation.

The Global economic impact of the Fed’s decision

• The continuous rate hikes: Given that the U.S. central bank’s unrelenting rate increases and subsequent decision to hold the rate at an elevated level had rippled through the global economy.
• The impact of the global currencies: It led to the dollar strengthening against most currencies of emerging market economies (EMEs), the latest pivot will bring relief.
• The Indian perspectives: As the Reserve Bank of India Governor Shaktikanta Das has noted, “a strong U.S. dollar increases debt service burdens and inflationary pressures for EMEs”. 

The impact of the Fed rate cuts on India

• A positive and supportive move: India’s Chief Economic Adviser V. Anantha Nageswaran welcomed the rate move.
• A key stress point:  that the Fed’s rate reduction would ‘on the margins have a limited impact’ given that investor interest in the country’s economy had already been fairly significant over the last several years.
• The IMF’s perspectives: The post by two IMF economists posits, “The onset of a Fed easing cycle may support… a broader revival of capital flows to emerging market and developing economies.”
• The impact on the Capital flows:  India too is very likely to see an increase in foreign portfolio investor inflows, especially into its debt markets.
• The impact on different economies: The relief though is certain to be far more palpable for other emerging and developing economies in Africa and Latin America.
  • These economies have high costs of servicing overseas borrowings had severely impaired those countries’ ability to invest in vital public infrastructure and services.

Way forward

With the reduction of interest rates by the US Federal Reserve, emerging economies have a clear route ahead.

• Redirecting capital inflows into infrastructure and productive industries can be done by the backing of policies that are focussed on restoring investor confidence.

• EMEs will need to control inflation to balance the foreign reserves in order to decrease currency volatility and manage risk.
• The Reserve Bank of India must address the dual tasks of balancing the domestic inflation and economic growth.
• Greater regional cooperation can assist smaller nations with significant debt burden.

Conclusion

And while Mr. Powell repeatedly emphasised that the world’s largest economy was overall “strong”, the uncertainties clouding the global economic outlook, including the volatile conflicts in Europe and West Asia mean that the Fed’s pivot also runs the risk of being read as a cautionary signal of troubled times ahead. Although the reduction of the Fed’s rate is welcomed as a short-term relief for some emerging economies, the continuing global uncertainties indicate that we may still have to deal with economic challenges for some time. Proactive steps can help deal with the trends safely.