Containing the 3Cs- China, Covid and Congress

The Modi government has its near-term challenges well defined – containing China, Covid and Congress in the order they are presented.

The Congress bogey

Of these, the last seems the most doable. The Congress lingers primarily because Indians are habituated to hedge their bets and have a back-up plan. Never put all your eggs in one basket is an adage that resonates with us. 

Congress is the political equivalent of gold – good only in times of trouble as a default option. The BJP is clearly a publicly held stock with its ups and downs.  The rise in share value was spectacular. But self-goals in 2017, enhanced muscularity in 2019 and now the missing supportive environment have forced growth, ergo enhanced wealth and incomes, to a halt. As in the stock exchange, this is when faint-hearted investors sell – and often live to rue the day. 

State elections in Bihar and in four other states next year will tell us decisively how citizens feel about the performance of the BJP stock. But there are no early expectations of a BJP rout. So, it is an advantage BJP for now.

The Covid aftermath

On Covid we are not losing control despite an increase in the daily numbers of infected cases and fatalities. The more relevant metric is the time in which fatalities double. In mid-April, it was one week. By end of May, it exceeded ten days – the lengthening continues, indicating an improving trend. 

On a population-weighted basis, using fatalities as a metric, India remains the least affected big country except those in East Asia (China, Japan, South Korea, Indonesia) and Africa (Nigeria, Tanzania, DRC and Kenya) which have fared much better, giving rise to the speculation that the virus was engineered.  

State governments in the driver’s seat

Containing the damage is now in the hands of state governments which have to (1) ensure that the state does not descend into “police raj” with heavy-handed state controls (2) reallocate the bureaucracy, bringing in the best to manage the vital task of ramping up social protection delivery systems – pensions, cash support, timely subsidy payments, loans for the needy and food and medical services for the indigent. Chief Ministers should encourage the bureaucracy to hack through rules and regulations designed for a more languid pace and strive for immediate tangible results in public interest. 

Union government’s wizardry needed in mobilising resources and targeted reallocation

The tough task before the Union government is to manage its meagre resources wisely. This year’s negative economic growth will be driven by poor prospects in urban and industrial activity and reduced prospects for exports. Agriculture is slated to fare well with around 4% growth.  In the HAAT businesses (Hotels, Aviation, Automobiles and Travel) job losses are already piling up. 

A publicly-funded employment support package of free cash and loans for employees, who lost jobs or income, with easy repayment terms, starting a year from now, can mitigate the temporary enforced hardship for around 10% of needy households and retain demand in the economy.

The resources can be found by curtailing the freebies agriculture enjoys. Doing away with the subsidy for fertilizer (Rs 713 billion) is a prime candidate half a century after the green revolution. 

Substituting the loosely targeted allocation of cereals (wheat and rice) with direct cash benefits to only those demonstrably below the $1.9 per person per day “poverty line” can save another Rs 500 billion by stripping out the undeserving freeloaders – possibly one half of the 800 million persons or 160 million households (HH)  covered under the Food Security Act)-  who are not “poor” and who already enjoy multiple subsidies – on cooking gas, electricity, water supply, rail fare, city bus fares, metro fares et all. 

This is not to say that the “un-poor” do not need any support. For starters, at least 24 million such households (10% of total) who were just above the poverty line in March 2020 will have slipped below it.  The drop in employment (number of people above 14 years of age who work) of around 13 percentage points (Mahesh Vyas CMIE ) from 39.5% pre-Covid to 26.1% in April which recovered to 35.7% in June would indicate this.  .  

Reducing their contingency cost arising out of inadequate basic public services is a must-do. Emergency hospital care, insurance cover for hospitalization, clinics for out-patient care, public health support, decent comprehensive education, including tuition support for laggards and micro-financing for livelihoods are basic social services on which an additional 1% of GDP needs to be spent progressively. 

Financing this expenditure from tax-exempt, hybrid, tradable, social impact mutual funds can leverage scarce public finance. A government guarantee assuring private investors in these MFs a minimum return equal to a yearly fixed deposit but with the possibility of an upside, based on the performance of the individual fund, can enhance their marketability.

On meeting the Covid challenge 81% feel the government responded effectively – down from 93% in early April but still a positive vote for the Modi government. (cvoterindia survey)

Calming the Dragon

This brings us to the third challenge of containing China. Our approach to China must ensure that they have no incentive to grab more of our territory. 

Howard W. French (Everything Under the Heavens 2017 ) an American journalist, with experience in China, believes a sense of precariousness and self-doubt, driven by the Imperial tradition of being judged by whether the realm grew or shrank under ones watch, rather than a belief in inevitable triumph, is what drives “Emperor” Xi’s muscular geo-politics.

There is not much we can do to allay ancient Imperial fears, except to make Chinese adventurism, on our territory, too expensive to attempt. Clubbing together, as India is doing, with the US and its allies – Japan and Australia, is consequently inevitable as a backstop arrangement for facing any future assault with strength.

The real decision before us is a domestic one on how best to allocate the defence budget. Farming out the Indo Pacific to others in the Quad to protect, whilst we concentrate on investing in our land border defense systems, seems the most optimum and near-term option. 

It is also a good strategy to calm the Dragon by giving it what it values most – lucrative business wrapped within an approach of inclusive neighborliness, albeit undergirded by steel rather than mere faith or belief. 

India’s misadventures abroad have been few. We are too far behind China’s massive economic heft and growing military capability to be a credible threat. We have much to gain from continued economic cooperation with China, just as the East Asian economies have. 

Opening up to Chinese investment, as indeed to all foreign investment; continuing to strive towards ASEAN tariff protection levels – we are of comparable economic size but at far lower trade to GDP levels; keeping the INR competitive to protect domestic manufacturing, reducing the high-interest margins our banks charge customers and diluting the implicit tax on industry and commerce imposed by high transaction cost and inflated public utilities tariffs, are the pathways to full economic recovery and respectful co-existence in Asia.

Also available at TOI Blogs June 20, 2020

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