Thursday, September 25, 2014

Modi's China gamble and Japan's secure friendship

When Modi ascended to power there were doubts about his diplomatic ability to gauge our neighbors who share boundaries with us and with other countries whose investment can tremendously help India. In the past few months his visit to Bhutan, Nepal, and Japan clearly demonstrated his diplomatic and business acumen of dealing with various East Asian countries. Modi's Japan tour is extraordinarily historic because no Indian Prime Minister has been able to extract such concrete investments in one single visit. 

Back in 1993 when former PM Narasimha Rao coined "Look East" policy term it was for Indian diplomacy to look east of India to countries such as China, Japan, ASEAN - (includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam). Subsequent governments irrespective of parties contributed to this policy. At the beginning of 2000, former PM Vajpayee dedicated a lot of his diplomatic strength to make America a long standing ally of India in addition to engaging East Asian countries. His achievement was to change the definition of Indo-US ties forever. However, political, diplomatic and security compulsions led to this direction. The current PM Mr. Modi is leading this policy again of Look East but purely for economic gains. This is the first time an Indian PM is trying so hard to get China and Japan together to invest in India in very specific sectors.

Even though his tours of Nepal and Bhutan were significant for India an enormous excitement was in store for his Japan tour. The tour resulted in Japan investing close to 35 billion dollars in very specific sectors like High Speed Railways to give financial, operational and technical support. Unlike the World Bank loan which can be siphoned off easily without achieving the objective for which the loan was taken Japan will not give away hard cash. It is going to invest over 5 years and will monitor how India performs on speedy clearances and expedition of processes to ease business in India. Japan will participate in helping "Clean Ganga", "Develop Smart cities" and "Metro projects in Ahmedabad", "set up Industrial parks in the two countries", "make Varanasi like Kyoto"

The key achievement was to sign up agreements specific to these projects to be implemented in a time bound manner. I hope that the agreement translates into a reality everyone would love to see.

Apart from the photo ops and speeches made by Modi it was clear that he needed to act on this investment in a transparent manner. He has decided to set up a special team to look into the way these funds are utilized and will have a member from Japan as well. This is good as we hope that the investment is sincerely utilized to realize the election promise and the dream of India getting the bullet train. The time of completion may be 10 years but it is important to get it started.

Besides Japan also decided to sell US-2 amphibian aircraft something India needs since it carries the strength of 21 firefighting helicopters. US2 will significantly enhance Indian Navy's capabilities. For more information on the abilities read here. It is no mean achievement that Japan lifted sanctions on India with respect to sell and transfer military equipment. After World War II this is the first time Japan has done so with India. One of the most important reasons why Modi was able to extract this from Japan is because Japanese PM Abe and Modi share a personal rapport and friendship of many years.

If Japan's tour was picture perfect, Chinese President Xi's visit to India was that of a big gamble. In my previous articles I had already articulated the reasons for India's defeat of 1961 war, the cause and solution of the disputes in the Ladakh and Arunachal region. Modi knew that just like Japan, Chinese investment in India and their expertise will be of great significance. He played this gamble in a near perfect manner until the intrusion in Ladakh region became the stumbling block.

Let's understand the role of China in the Asia Pacific Region in a larger context. There are 2 hard facts to consider:

1) The control of South China Sea for decades has been a bone of contention amongst several countries like Indonesia, Vietnam, Singapore, Malacca Straits, Cambodia, Thailand and many more. 

(image courtesy: Wikipedia)

China has for ages dominated the control of this sea. In order to balance this domination US allied with Japan and together they form the other end of the control. However, in recent times China has begun to get in touch with all these countries giving them economic and financial aid thereby getting their support. With the US beginning to lose its grip it began to ally with India and Japan to balance the control. In this context since 2011 Indian diplomats began steps to secure friendship with countries such as Bangladesh, Vietnam etc. The "Look East" policy that was active in 1993 under Narasimha Rao and then under Vajpayee till 2003 suddenly lost momentum and again in 2011 gained slow speed under Manmohan Singh. Modi is accelerating this policy with targeted investments so that there is a win-win situation. South China Sea is known for huge oil reserves and all countries want to control it. With China having territorial disputes with almost everyone in the region has always upped the ante. China's arch enemy is Japan and both cannot stand each other.

In this context, recently India signed agreements to provide loan and sophisticated boats to Vietnam against China's territorial aggressions in return for getting oil supply from the waters around Vietnam. The Chinese categorically warned of consequences if India extracts oil from Vietnam.

2) String of Pearl strategy by China:  When China began to rise in 2001 it began this policy of involving all of India's neighbors to form a string so that upon necessity it can prepare for attack on India. For this it began to develop friendships with Nepal flooding its market with goods and helping it in financial aid. It then began to deepen its friendship with Pakistan to develop Gwadar port to the west of Gujarat, controlling ports in Bangladesh and putting pressure on Bhutan to support China in every way. Besides all these ventures China also began developing Tibet such that within an hour through roads and high speed railways can reach Indian borders if a situation arises. The UPA Government was least interested in acting upon these steps. Only in the last few years of UPA II the former PM Manmohan Singh began to take steps to mend friendships with Bangladesh.

Modi wanted to change the situation to make China an economic partner and go beyond just boundary disputes. Keeping the boundary issues aside he wanted to involve China to invest with a strong economic agenda. When he was Gujarat CM he visited China several times and often in his speeches he talked about China as the real competitor to India. When Chinese President Xi came to India the rumor was that investment would be to the tune of 100 billion dollars - thrice the amount Japan agreed to invest. It was a huge gain if China had invested this amount. However, it reduced to 20 billion dollars, which is less than Japan's investment. What triggered this?

Like Modi, Xi is considered reform oriented Chinese President. An investment to the tune of 100 billion would have benefited China as well. It looks like there was a hidden twist to this whole story. The Chinese, exactly hours before the meeting of Modi and Xi, infiltrated into Chumar region of Ladakh. The number was 1000. This is the highest number of soldiers entering the territory post 1962 war. This whole incident shadowed the event Modi had organized.

On one side Modi achieved a lot when agreements were signed to make Pune and Ahmedabad export and manufacturing hubs, train Railway officials to increase the speed of Bangalore-Mysore-Chennai train, rejuvenating Railway stations, setting up a Railway university, giving enhanced access to Indian agricultural and pharma products in China, and opening up a new route to Manas Sarovar through Sikkim.

On the other side he had to talk tough to ask Xi to withdraw his troops. The tough negotiations by Modi finally led to the withdrawl of the troops. However, things did not stop here. Two days after this meeting troops again entered the territory. This time the number was just 50. Since this is a mystery that will hardly be revealed, this article explains 3 possible reasons as to why the Chinese intruded right at this moment - a) The People liberation Army (PLA) that is controlled by the Chinese Government is not under Xi's control b) Xi knew this intrusion and was done intentionally c) Xi wanted PLA to do its work and he wanted to do his. So, one wing aggressively pursuing border issues and the other economically winning deals with India. 

In my personal view the third reason is most probable since Chinese history is well know to all countries in South China Sea. China is probably the only country yet to have so many territorial disputes with everyone in its neighborhood. India has no options but to constantly monitor the situation and rise economically and strengthen its infrastructure in these regions.

Since Modi's ascent he seems to be planning to break the very trap China has set up. With India cozying up to Japan and the recent steps taken by his Government to engage Vietnam and Bangladesh to corner China this game of Chinese checkers is getting very interesting. China was quite naturally baffled and decided to intrude into Indian territory to increase the scale of provocation.

Such diplomatic games by China is hard to play with. With a single party and a single focused agenda Chinese government, economy and defense is way ahead of India by about 50 years, With changing political equations and central governments India lacks a consistent tough leadership. As long as Modi is going to rule India there will be tough moves by his government in every way possible.

At this point the country's economy is very important and the investments from China and Japan would play a critical role in realizing many projects which we do not have expertise in. Together this is the biggest investment India can dream of getting in to achieve its most complex goals.

Monday, September 8, 2014

Why Planning Commission needs a credible replacement?

I remember my school days when I used to study about Five-Year Plans in Civics class and it was so painful to understand and remember what the First, Second, Third Five Year Plan outlined and so on. At one point in 1999 when I saw the rise of cell phones a question did come to my mind. Just one year and one policy brought a meteoric rise of cell phones in India and how could a five year plan think of changes needed in 5 years from the point of planning? 

India's bureaucratic system is notorious for having multiple agencies doing the same task and in certain cases a single agency having no power. 

Recently, the PM decided to abolish this body and replace it with a brand new body with new powers. No one knows what shape it will take. Planning Commission is currently chaired by the PM and it has experts in Economics, Administration, Industry and Science. This article tries to understand why the existing Planning Commission has become so non-functional and obsolete and what the possible solutions are.

To understand this one has to know 3 facts. The first - Planning Commission is not a body recognized by the Indian Constitution. The second - it's authority has far exceeded its capability (This statement was made by Mr. Modi (Source) when he was the CM of Gujarat). The third is the existence of Finance Commission of India which is accountable to the Parliament and is appointed by the President to look into many of the affairs Planning Commission does and thereby duplicating responsibilities.

Let's elaborate these further. Planning Commission was constituted by India's first PM Nehru who was inspired by Soviets and thought a centralized planning body would help India grow much faster than anticipated. His idea which also translated into a Resolution had 5 major functions -a) Formulate 5 year plan providing framework for development b) How much money each scheme announced by the govt would get c) Appraising the scheme to see if resources are optimally utilized d) Monitoring the same e) act as a mediator between center and states.

The Planning Commission did some commendable jobs. Until the late 1960's Planning Commission had some great experts whose recommendation was taken seriously by Nehru and he established the IIT, IIM, DRDO, IISC and such other prestigious institutions that have helped the country tremendously. Many aspects of land reforms were also formulated and implemented by the Planning Commission. Planning Commission was responsible for recognizing and establishing steel plants (Bhilai, Rourkela, Durgapur), Hydroelectric power projects, state electricity boards and many more.

Since this was not a body accountable to the Parliament and has no constitutional authority each of the successive governments used it to push their agenda and made Planning Commission a transfer agent of centre's money to the states. This was an absolute deviation from the vision it was set up with. As each state became more complex to manage it was in the late 60's that the amount of money to be given to any state became dependent on tax the state generated, its population and many such parameters(Gadgil Formula as it is called). 

When the economy opened up in 1991 private sector began to control many of the resources which the government controlled till then. As an example amount of money needed to make roads, airports or ports. These began to be built in partnership with private companies and no state or government could get into the business of allocating resources. This began to make its role of resource allocation meaningless. Instead of planning with a vision they became a body of monitoring central schemes and transferring money to states in the name of the schemes. So, post 1970's functions a), b),d) became the only function of the Planning Commission.

Truly, formulating a 5 year plan has become obsolete now since every year new technology and scientific innovation forces existing mechanisms to be re-evaluated. So, the Planning Commission is out of touch with this reality. If one remembers this commission was widely criticized for coming up with the definition of poverty which was anyone close to spending Rs.32 per day or below. 

Let's explore now the 3rd fact before getting to the second one. The Finance Commission of India was set up under Article 280 of the Constitution (Source). Its functions, roles and responsibilities are all explained on the website. This body contains 5 experts nominated by the President of India and has done a fair job in coming up with numbers as to which states must get what money and it has a wide variety of parameters based on which it comes up with a formula. It also changes these parameters as and when required. This money typically is the transfer of total taxes collected on various items or services collected by the Center to various states on various formulae (Source). Unlike Planning Commission which uses its own discretion about how much money needs to go to one state, the Finance Commission applies formula and rationale behind its math. The Government of the day has to submit a report about "action taken" and both the Government and Finance Commission are accountable to the Parliament. The Finance Commission also meets with the concerned officials of every state and has the powers of a civil court in the event of discharging such duties. 

Now, coming back to the second fact - The Planning Commission's authority far exceeds its capability. This is very true because Planning Commission is an extra constitutional authority. It has no powers to transfer money to the states and is often accused of using adhoc mechanisms to estimate several parameters and make it binding on the states to accept it. Over the past 10 years according to this article, Planning Commission began to appraise all PPP projects in infrastructure something which the respective departments in the Government must do. Planning Commission got into a direct conflict between several departments.

Clearly, the function of formulating plans with a vision was sidetracked and Planning Commission became a body of monitoring schemes and transferring money to states. 

What can be done in this scenario?

a) Finance Commission is appointed every 5 years. Instead, it should be 2 or 3 years and must be made permanent.
b) It should now become the de-facto body of transferring funds to states since it has the required expertise. Currently, it does non-planned expenditure only. The difference between the two must be removed and all money transfers must now take place only through Finance Commission.
c) Make the recommendations of the Finance Commission binding on the Union Government. So, far almost all Central Government's have accepted Finance Commission recommendations. However, the Commission must be given powers to identify if the Govt has indeed acted on the report it produced in the Parliament.
d) Make Planning Commission strictly a body that can formulate plans with a vision and have experts in it who have enough experience to plan with a big picture.
e) Have planning commission officials in every state who can share their expertise with the respective state since each state has its own geography, resource constraints and demographics. One suggestion applied in Kashmir may not work in TamilNadu and one formula applied in Kerala may not work in West Bengal.
f) There should be one wing of academicians who study the similar problems that exist in other parts of the world and solutions applied to the same. These academicians must submit a report of their own assessment. 
g) A reward mechanism must be set in place where such students/academcians who suggest out of the box and practical solutions be given recognition.

Only time will say when the new body will be formed and whether it will be made effective enough to cause a difference in the broad policy framework. Planning is essential, but planning that includes policies that are feasible to implement is the only way of measuring success of such a body.

While Mr. Modi is in the right direction he needs to take it to the right conclusion. If this does not happen then the new body will be like the old wine in a new bottle.