April 23, 2018

Indialogue Newsletter , Aman Thakker

Aman Thakker


This week’s brief looks at the ongoing “cash crunch” in multiple states in India and the constitution of a new Defence Planning Committee headed by the National Security Advisor. I also look a Chinese proposal for a “trans-Himalayan economic corridor” between China, India, and Nepal, as well as Prime Minister Modi’s trip to Europe.

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- Aman

A “Cash Crunch” Hits Multiple States in India

Reports emerged this week that ATMs in multiple states in India had run out of cash, suggesting a shortage of paper currency in states like Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh and Bihar. The government has responded to the reports denying there is a cash shortage, but attributing the lack of supply to unusual demand in those particular states due to “localised phenomenon.” Indeed, a statement by the Finance Ministry outlined that demand in these states had increased unusually in the last three months, and former government officials have pointed toelections, festivals and government payments in social welfare schemes as possible reasons for the rising demand for cash.

Customers waiting in line outside an ATM

Insight: Indeed, elections could definitely be playing a factor. Indeed, state assembly elections are scheduled in Karnataka for May 12, and cash is commonly used for election expenditures. Geographically, a shortage in Andhra Pradesh and Telangana, which border Karnataka, lend further credence to a election-driven spike in demand. However, a number of analysts have pointed to recent other state elections, notably the elections in Gujarat, that did not lead to similar cash shortages.

Many analysts have also pointed to lingering tightness in money supply from the demonetization move undertaken by the government in November of 2016. A number of sources in India have analyzed RBI data, and pointed to a mismatch between the ratio of currency in circulation to gross domestic product since demonetization to argue that the economy needs a greater supply of cash than is currently out there. While a growth in digital transactions could explain why there may be some less currency in circulation, given India’s dependence on cash, a lower supply of currency could be problematic.

Whatever the reasons, the opposition parties have already hit out at the government for “mismanagement” leading to this cash crunch. Independent of the politicization of this issue, a liquidity shock to India’s economy does go against the narrative of the BJP of a government that is efficient and growth-focused. The longer this cash crunch goes on, the more politically problematic it becomes for Prime Minister Modi, given the impact on the informal sector and the voting base of the BJP. Moreover, as CP Chandrasekhar, Professor of Economics at Jawaharlal Nehru University, notes, at a time when the cash supply situation is already tight, even a minor shortage can trigger hoarding due to panic.

China Proposes a China-India-Nepal Corridor

This past Wednesday, Chinese Foreign Minister and State Councillor Wang Yi floated the idea of a trilateral partnership between China, India, and Nepal to establish a “a trans-Himalayan economic corridor” at a press conference with his Nepalese counterpart. Mr. Wang said “I believe that China, Nepal and India are natural friends and partners. We are neighbours connected by the same mountains and rivers.” Mr. Wang also noted that Nepal, which has has already signed on the Belt and Road Initiative, had agreed with China on a “long-term vision of a multi-dimensional cross-Himalaya connectivity network,” but hoped for cooperation from India on a corridor that would benefit all three countries and the region at large.

Nepalese Foreign Minister, Pradeep Kumar Gyawali (left) and Chinese Foreign Minister and State Councillor Wang Yi (right)

Context: The idea for a trans-Himalayan economic corridor is likely another overture to India in the hopes that it would acquiesce to China’s Belt and Road Initiative. However, it would also seek to undermine India’s important role in South Asia, as well as in its bilateral relations with India. Nepal and India have historically been very close, and this attempt at a trilateral agreement aims to put China on equal footing with India vis-à-vis Nepal. While India continues to try and “reset” relations with China, it should not look to this proposal as an idea to join into or participate in.

PM Modi’s Pushes India’s Leadership Role in Europe Trip

Prime Minister Modi was in Europe last week, and had an extremely busy schedule. The narrative at the heart of the trip was India as a willing leader in its engagements. The Prime Minister first visited Sweden, holding bilateral meetings with Swedish Prime Minister Stefan Lofven, as well as attending an India-Nordic Summit with Denmark, Finland, Iceland, Norway and Sweden. Historically, India has overlookedthis region, and so its engagement with these countries is a welcome development.

In particular India and Sweden reached an agreement on sharing of classified information to bolster defence ties between the two countries. The agreement will make it possible for Swedish defence major SAAB, and its India partner, the Adani Group, to bid for the Indian Air Force’s jet procurement process and move forward with manufacturing Gripen aircraft in India under the ‘Make in India’ initiative.

Prime Minister Modi with the leaders of Denmark, Finland, Iceland, Norway and Sweden at the India-Nordic Summit

At the India-Nordic Summit, the six countriesreleased a joint statement pledging to deepen cooperation on a whole host of issues, including global security, economic growth, innovation and climate change. Crucially, all six Prime Ministerreaffirmed the importance of free trade as a catalyst for achieving inclusive growth, and the Nordic countries pledged their support for India’s candidacy for a permanent seat at the United Nations Security Council.

The Prime Minister then headed to London to participate in the Commonwealth Heads of Government Meeting (CHOGM), as well as engage bilaterally with the United Kingdom. At the CHOGM, India indicated that it is ready to take on greater responsibilities in the Commonwealth and play a “leading role” that would be marked by increased Indian activity. Indeed, the Prime Minister announced a massive increase in Indian funding for the Commonwealth, aimed at development and capacity building projects. The funding promisesincluded doubling India’s contribution to the Commonwealth Fund for Technical Cooperation, launching a new Commonwealth sub-fund under the aegis of the India-UN fund in the form of grants of $50 million for 5 years.

India Announces a New Defence Planning Committee

The Government of India announced the creation of a new, permanent “integrated institutional mechanism” called the Defence Planning Committee (DPC). The body, which will be led by India’s National Security Advisor Ajit Doval, will be tasked with preparing a draft national security strategy, undertaking a strategic defence review, and formulating an international defence engagement strategy.

The membership of the committee will includethe Principal Secretary to the Prime Minister, Chairman of the Chiefs of the Staff Committee (COSC), the service chiefs from each of the branches of military, the Defence Secretary, the Foreign Secretary and the Secretary (Expenditure) in the Finance Ministry. The Committee will also include four sub-committees, targeting crucial issues such as:

Policy and Strategy,

Plans and Capability Development,

Defence Diplomacy,

Defence Manufacturing Ecosystem.

National Security Advisor, Ajit Doval, who will head the Defence Planning Committee (DPC)

Why This Matters?: The constitution of this committee is billed as a major reform for India’s defence strategy, capability, and acquisitions. Moreover, the inclusion of the Foreign Secretary and Expenditure Secretary in the decision-making processes of this body will go a long way to overcome the coordination problems of coordination that have previously plagued the government on national security.

Expert Round-Up

Manu Pubby argues “The recently announced Defence Planning Committee (DPC) – an overarching panel that will drive strategy, procurement and diplomacy – will be India’s most powerful military body yet. But it will be running against time, as key decisions need to be taken in the next few months.”

Harsha Kakar notes “The system may work only if all involved move forward in a coordinated manner and the organisation meets at frequent intervals. If it functions akin to the Strategic Planning Group of the NSC, whose meetings are less than infrequent, then this would result in the creation of an additional elephant in government functioning. If the aim is to make the NSA a pseudo Chief of Defence Staff (CDS), then this organisation is doomed to add to problems in the years ahead.”

Abhijit Iyer-Mitra writes “New Defence Planning Committee Not a Well-Thought of Decision Clearly, whoever set up the new Defence Planning Committee had neither read up about such past misadventures, nor had they fully considered the implications. This raises serious questions of institutional transfer of knowledge – especially failures, in this case, the previous defence planning committee set up in 1974.”

Stories you might enjoy:

Milan Vaishnav writes “While elections in India are notoriously difficult to predict, one need not go out on a limb to declare that the ruling Bharatiya Janata Party (BJP) of Prime Minister Narendra Modi would be the clear favourite if the elections were to be held today... Yet the election’s clear front-runner is far from invulnerable. Although the intricacies of the upcoming race remain unknown, underlying structural conditions suggest far rockier terrain may lie ahead.”

Suhasini Haider argues “The government’s foreign policy moves over the past few months represent an unannounced but profound shift in its thinking about the neighbourhood” and that “bold moves to normalise ties with China and Pakistan will enhance India’s standing.”

Snigdha Poonam and Faizan Haider reporton the “25 million people who have applied for the 90,000 jobs advertised by Indian Railways” and their preparations for “a highly competitive exam that will set off the largest recruitment exercise in the world conducted by India’s biggest employer.”

Nupur Anand notes “The Indian government’s clarion call for more job-creating private investments seems to be falling on deaf ears… In financial year 2018, investments worth Rs7.63 lakh crore ($117.35 billion) were scrapped, over 40% (worth Rs3.3 lakh crore) of which were dropped in the last three months alone,” according to a report by the Centre for Monitoring Indian Economy.

Stanly Johny writes “In the three years of its existence, ISIS has made only little inroads into India. Compared to Western countries from where hundreds of Muslims have travelled to ISIS territories, mainly Syria, only less than 100 Indians are believed to have left the country... But still it is a matter of concern that the group is attracting Indian citizens.”

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