THE HINDU EDITORIAL - MAY 5, 2022

 

THE HINDU EDITORIAL – MAY 5, 2022

 

Inevitable increase The RBI’s increase in interest rates was long overdue The penny has dropped. After stubbornly holding off from acting to tame inflation, which has steadily eroded consumers’ purchasing power and derailed broader economic momentum, the RBI’s rate setting panel on Wednesday announced an ‘off-cycle’ increase in benchmark interest rates. The Monetary Policy Committee voted to raise the policy repo rate by 40 basis points to 4.4% with immediate effect. RBI Governor Shaktikanta Das rationalized that letting inflation remain elevated at current levels for too long risked ‘de-anchoring inflation expectations’ and consequently hurting growth and financial stability. While Russia’s invasion of Ukraine and the subsequent western sanctions on Moscow have roiled the outlook for prices on a range of commodities, including wheat, edible oil, crude oil and coal, Indian households’ perception and expectations of inflation have been running well above the RBI’s upper tolerance threshold of 6% for more than two years. That the RBI has been forced to act now, after insisting that price pressures were ‘transitory’, is a belated yet welcome acknowledgment that the economic costs of failing to anchor price stability can potentially be far more deleterious to growth than a relative decrease in the availability of low-cost credit. To cite Mr. Das: “Sustained high inflation… hurts savings, investment, competitiveness and output growth. It has pronounced adverse effects on the poorer segments… by eroding their purchasing power.”    In explaining its decision to raise borrowing costs for the first time in 45 months, the MPC has acknowledged that the overall outlook for inflation has darkened considerably since it met last month. Prices are on a tear globally and inflationary pressures are broadening worldwide. The IMF last month posited that the war in Ukraine was poised to not only slow global growth in 2022 but would also cause inflation to accelerate by 2.6 percentage points to 5.7% in advanced economies this year, and spur a more appreciable quickening of 2.8 percentage points in the case of emerging market and developing economies. With central banks in advanced economies led by the U.S. Federal Reserved pursuing a path of policy normalization, the prospects of volatility in capital flows adding pressure on the exchange rate and consequently heightening the risks of imported inflation have also surely queered the pitch for the RBI. The fact that the novel corona virus is still lurking and it could trigger a fresh wave of infections, as seen in China, adds considerably to the uncertainty. Monetary authorities have also rightly pointed to the impact that the increases in domestic pump prices of petroleum products have had on inflation. The onus is now squarely on the RBI and fiscal authorities to move in lockstep and take every possible measure including cutting fuel taxes to keep inflation from running away and landing the economy in stagflation.   In the time of war India will have to find a way of building ties with Europe without upsetting Russia Prime Minister Narendra Modi’s three-nation visit to Europe comes at a time when the continent is facing its biggest security crisis since the end of the Cold War. In Germany, Mr. Modi and Chancellor Olaf Scholz reiterated the partnership between the two countries. Berlin has also announced €10 billion for bilateral cooperation. In Copenhagen, Mr. Modi attended the India-Nordic summit with leaders of Denmark, Norway, Sweden, Finland, and Iceland. In the last leg, the Prime Minister will hold talks in Paris with French President Emmanuel Macron, who was re-elected recently. While bilateral issues are at the centre of these meetings, the elephant in the room is the Russian invasion of Ukraine. Mr. Modi’s trip comes a few days after the President of the European Commission, Ursula von Der Leyen, visited India. New Delhi’s neutral position on the war has triggered both criticism and engagement from the West. India has seen several high-profile visits from the West, with some top officials pressing New Delhi to cut back on trade with Russia, a traditional strategic partner. Among the Nordic five, Sweden and Finland are now considering dropping their decades-long neutrality and seeking NATO membership.    In Germany, however, both sides showed pragmatism over the Ukraine question. Germany, like India, has deep economic ties with Russia – if for India it is about defence supplies, for Germany, it is for almost 40% of its gas import requirements. While the Russian aggression has prompted Germany to raise its defence spending and join the western sanctions regime, it has been reluctant in sending weapons to Kyiv, compared to other NATO members in Eastern Europe. While Mr. Scholz urged Russian President Vladimir Putting to “stop this senseless murder and withdraw your troops”, Mr. Modi’s response was more measure. He said that no party could emerged victorious and that dialogue was the only way out. India and Germany also unveiled the contours of the next level of their partnership. Germany has said India is its “central partner” in Asia and that close cooperation would continue to expand. Europe is expected to take a more securitized approach to foreign policy from now, given the direction of the Ukraine conflict. In the post-Cold War world when Europe witnessed relative stability, India managed to build strong ties with both the West and Russia. But that era of multi-directional partnerships is facing its strongest test now with the West seeking to “weaken” Russia and Moscow warning of a new world war. The challenge before New Delhi is to build a stronger strategic future with Europe without immediately disrupting its complex but vital partnership with an increasingly isolated, angry Russia.   Economic speed bumps yes, but no breakdown Nepal’s vulnerability is linked to the lack of pragmatic policy interventions and abrupt moves towards self-sufficiency K.V. RAJAN & ATUL. K. THAKUR Nepal’s economic challenges are real, but suggestions that it is already in deep crisis and may be going the Sri Lanka way are probably premature, unfair and unjustified. The surging trade deficit remains a big concern as it is expected to reach $18 billion this fiscal year. A Balance of Payments (BoP) deficit and a spiraling debt liability will pose a very grave risk to the economy that is already in deep trouble. Nepal’s central bank statistics show the country’s inflation averaged 7.14% in the current fiscal, which is the highest in the last 67 months. Emerging scenario There are other worrying trends. The country’s debt to Gross Domestic Product (GDP) ratio has crossed over 40% as of the second quarter of the current fiscal year. What is needed is a prudent fiscal management plan. So is the need to boost demand and empower Micro, Small and Medium Enterprises (MSMEs) with soft institutional liquidity support. To emerge from the shocks caused by the BoP deficit to the tune of NR258.64 billion, the decrease in remittance inflow and the fall in the country’s foreign exchange reserve by 16.3% to NR1,171 billion (in mid-March 2022 from NR1,399.03 billion in mid-July 2021), industry needs hand holding by the government and a rationalization of taxes. Such a collaborative effort will help in increasing national economic productivity and mitigating the systemic risk on the economic front.    A lack of pragmatic policy interventions in Nepal and an abrupt move to reorient economic planning towards ‘self-sufficiency’ has exposed the structural vulnerability of Nepal’s economy. It is also true, and unfortunate, that Nepal’s economy is overtly politicized. Tensions between the Finance Minister, Janardan Sharma, and the Governor of the Central Bank, Maha Prasad Adhikari, with Mr. Sharma suspending Mr. Adhikari for alleged failures in discharging his responsibilities have undoubtedly contributed to the uncertainty. Mr. Adhikari has been reinstated on orders by the country’s Supreme Court, but the damage has been done.    In the short run, the government’s revenue and expenditure should be assessed for minimizing the establishment cost. Especially so, it is needed for provincial governments where the operational part must be dealt with frugally to not burden the economy beyond a point. While several drastic measures such as an import ban on luxury goods and reducing working hours have been announced, these have not quite succeeded in allaying fears of an impending crisis. The ban on imported goods that have no competent alternatives in the domestic market will only hurt the economy until the production of domestically-consumable goods is increased. Fortunately, there are some positive signs of an economic recovery appearing, with tourism picking up thanks to the easing of visa and entry restrictions and foreign remittances also showing an upward trend. These need to be consolidated.     India will, undoubtedly, go the extra mile to help Nepal ensure a speedy and comprehensive recovery. India has not hesitated in being generous and in coming to Sri Lanka’s help despite political considerations which might have suggested other approaches. In Nepal’s case, Prime Minister Sher Bahadur Deuba is a known friend of India who likes to accord priority to development rather than playing to the political gallery.    His recent visit to India was successful in terms of reaching an important understanding on economic cooperation projects. It should be possible for Nepal to expect generous Indian support for its economic recovery to be based on broad-based consensus in Nepal which will also eventually help in resolving bilateral irritants that keep cropping up every now and then.    What Nepal’s national economy is facing today is a sort of crisis in the making.    Of late, the government is finding it difficult to overlook the difficult trade deficit but unfortunately with wrongly-placed measures such as curbing the autonomy of the Nepal Rastra Bank (NRB) and vilifying import per se instead of making interventions for much-needed structural economic reforms. The NRB underlines problem areas such as rising inflation, BoP deficit, decreasing remittance inflow, depleting foreign exchange reserves and burgeoning imports beyond and burgeoning imports beyond an acceptable level. The NRB’s projection of a looming crisis has no takers in the Finance Ministry – that is on making strange short-term provisions rather finding the way out to avert a crisis in making.    Nepal is in dire need of augmenting its preparedness on the domestic economic front along with a need-based infrastructural haul to impart the right momentum to an economy that is overtly politicized and not inspiring enough for big business ideas to prevail and flourish. Nepal’s political economy should get the traction of national consensus to fulfil the aspirations of the people and also reposition the country to the global state with its strengthened economic prowess.    To not give an adverse response to the usual flow of goods and services, the government should lift the ban on imported goods which do not have competent alternatives in the domestic market. Until such time as Nepal makes a move to increase the production of domestically-consumable goods and end the cartel of businesses embracing competition and innovations, it would be helpful if Nepal remains open to successfully complete a mandatory transition of present sort.    There is no magic wand to ensure economic reforms and avert a crisis-like scenario. Nepal’s neighbour and the world’s largest democracy, India, is a fine example of a country that braved a severe BoP crisis in 1991 and transformed the economy through a sustained wave of economic reforms without letting political preferences over-ride significant economic matters. In the time when isolation cannot steer the growth impulses of the economy, it is important for Nepal to cope with the shortage of industrial production and pressure of trade imbalance through excessive imports but without stopping to remain open to the world for healthy collaboration. Geopolitical changes The broad geopolitical and economic trends are also suggestive of doors opening to more active Nepali participation in the Indo-Pacific economic agenda, with the Nepalese Parliament approving the $500 million Millennium Challenge Corporation (MCC) grant from the United States; this could substantially upgrade energy cooperation between India and Nepal, and also India agreeing to the United Kingdom, the European Union and other major investment partners working together in third countries on development projects. Interestingly, the Nepalese seem to have independently made a reassessment of risks in recklessly deepening ties with China, thanks I large measure due to Beijing’s missteps, and the style and the substance of Chinese-delivered assistance.    There is much greater receptivity and a “felt need” across the political spectrum and in public discussion of the genuineness of India’s friendship aimed at contributing to the welfare of people of Nepal. The decision of the Government of India to set up an inter-ministerial standing group under the chairmanship of the Foreign Secretary, to coordinate sections and ensure more rapid follow-up of project decisions is also a welcome step.    Business leaders in India should be encouraged to be proactive in looking for new opportunities in expanding and diversifying trade and investment ties with Nepal including exploring possibilities in the context of a reset of supply chains in the post COVID-19 situation. There is no doubt that the economic challenges in the post COVID-19 situation, and the over-all churning in the geopolitical environment have created an opportunity for both countries to devise innovative approaches to longstanding issues and to aim for new horizons in bilateral cooperation.    It is vital that Nepal deepen its economic ties with India and facilitate joint ventures that create immense economic opportunities. India’s unwavering commitment to peace and prosperity in Nepal and its complementarity in its relations with Nepal will help in creating a healthier economic ecosystem in Nepal. While the economic scenario is troubled – and it is unlikely that Nepal will emerge from it soon – it would be wrong to assume that a condition akin to a breakdown is inevitable in Nepal. Economic adversity has created the space for course correction and Nepal should be encouraged to devise a fresh approach to achieve this through calibrated efforts.   A script for a national footprint, a Telangana hat-trick It remains to be seen whether the TRS’s move to consult election strategist Prashant Kishor will fetch the party dividends K. VENKATESHWARLU At the Telangana Rashtra Samithi (TRS)’s plenary held in Hyderabad recently, when the Telangana Chief Minister, K. Chandrasekhar Rao, made his intentions clear about expanding the party’s national footprint by going at “misgovernance” by the Bharatiya Janata Party hammer and tongs, it was apparent that he was sticking to the script prepared by the high-profile election strategist, Prashant Kishor. ‘A common agenda’ Mr. Kishor had flown down to Hyderabad after his attempt to make headway with advising the Indian National Congress party and even finding a role in it misfired. Mr. Kishor was in confabulations with Mr. Rao over two days and drew up a blueprint on how the TRS could execute its “go national” action plan. Mr. Rao’s assertions at the plenary looked to be much in sync with Mr. Kishor’s strategy of Opposition taking on the BJP in 2024 general election. As if on cue, Mr. Rao, laying bare his national political ambitions, spoke of India needing an “alternative political agenda, and ridding the country of the religious hatred spread by the BJP ruling at the Centre”. He laid emphasis on a common agenda for India and not so much on a political front “to make someone a Prime Minister”. An agenda was needed that included an integrated agricultural policy and reorienting the goals of sectors such as industry to meet the aspirations of the people. He noted that people were tired of the BJP’s single point programme of stoking religious passions across the country and wondered if the United Progressive Alliance was better. Plan for 2023 is unclear These are familiar semantics that have matched Mr. Kishor’s efforts in trying to build alternative political formations across the country to fight the BJP. In recent interviews to the media, Mr. Kishor, who quit his Indian Political Action Committee (I-PAC) Group, revealed his future political trajectory of being on the other side of the BJP camp, citing how the saffron party has drifted away from the basic principles of the Indian Constitution. He went on to suggest a “realignment, redesigning and rebooting” of national and regional parties to counter the BP, putting on the table an “alternative narrative”, all this while exuding confidence that defeating the BJP in the 2024 Lok Sabha elections was indeed in the realm of possibility. In his view, it was not necessary to have a grand pre-poll alliance or project a particular leader as a prime ministerial candidate.    Mr. Kishor and his I-PAC’s strategy for the TRS to realise its pan-India dream may look sound and attractive going by the dramatic preview presented by Mr. Rao at the plenary, but there is no clarity yet on his formulation for the Telangana Assembly elections due in 2023. The TRS will be seeking a mandate for a third term from voters who appear fatigued with the governance and the policies for over eight years now. Mr. Kishor has his task cut out and there is expectation that he will wipe out two-term load of anti-incumbency. Unfulfilled promises Notwithstanding its tall claims, many of the promises made by the TRS remain unfulfilled. Opposition parties, the congress and the BJP, contend that but for a handful of villages in Gajwel (Mr. Rao’s Assembly constituency), Siddipet (represented by Mr. Rao’s nephew and Finance Minister T. Harish Rao) and Sircilla (represented by Mr. Rao’s son, IT Minister, K.T. Rama Rao), not many double bedroom houses have been built anywhere in Telangana. Under “Mission Bhagirathi”, a programme to supply tap water, only 40% of the households have been covered. Round-the –clock free power supply promised to the farm sector is patchy. A plethora of problems haunt the 23 newly carved out districts. After failing to convince the Central government to procure the entire stock of paddy from the State, the TRS government grandly announced that it would do it on its own, but finds the going tough.    The financial situation is not too comfortable either. Far from having in place proactive policy decisions that could checkmate the BJP, the TRS government has been spending beyond its means on non-productive schemes and freebies and then approaching the Centre for relaxing Fiscal Responsibility and Budget Management norms and the allocation of more funds. The Rythu Bandhum the farmers’ investment support scheme, involves an annual outgo of about 16,000 crore rupees. Another new scheme, Dalit Bandhu, which extends 10 lakh rupees assistance to each beneficiary, is estimated t cost about 17,000 crore rupees annually. The TRS government has been heavily dependent on loans from various agencies, touching a whopping 2.41 lakh crore rupees, since the formation of Telangana in 2014.    So will Mr. Kishor’s magic strategy help the TRS turn the tide and pull off a hat-trick? Mr. Rama Rao is skeptical. “People should understand [that] Kishor’s I-PAC is just to supplement our efforts. If we don’t have public support, they can’t save us, PK [Prashant Kishor] or some outsider can’t save a sinking ship….” It is widely believed that Mr. Rao’s national foray is also meant to keep the top political seat in Telangana warm for Mr. Rama Rao. Detractors also point to the fact that Mr. Rao, for all his claims of being a veteran political strategist, may have sent out a signal of being on shaky ground by hiring the services of I-PAC.    I-PAC’s plan of action for the TRS was kicked off amid huge confusion caused by Mr. Kishor’s running with the hare and hunting with hounds strategy – attempting a lateral entry into the Congress in Delhi while lending political advice to the Congress’s arch rival in Hyderabad, the TRS. Among other inputs, he is believed to have almost suggested to the Congress to go for an electoral alliance with the TRS. It caused a furore within the Telangana Congress while the BJP watched with glee at how the two parties plunged into chaos. With Mr. Kishor clearing the air, there was relief in the Congress and TRS camps. Some gains for the BJP Leaving aside the commissioning of a professional political strategist for the elections, the issue is about how the TRS plans to take on a resurgent BJP in Telangana. The BJP has posted some handsome wins in elections to the Greater Hyderabad Municipal Corporation and by-elections to the Dubbak and Huzurabad Assembly constituencies. But for platitudes, TRS has not much to offer. It has not come up with any concrete plan to check the strident hate and polarizing campaign being run by the BJP in Telangana. BJP leaders appear to be getting away making provocative speeches, the recent example being that of the BJP MLA, T. Raja Singh, during the Rama Navami procession in Hyderabad. The TRS’ unwritten understanding with the All India Majlis-e-Ittehadul Muslimeen (MIM) often comes in handy for the BJP to question the TRS’s moral authority to speak and act against communal parties. Yet, with its sights set on grabbing national political space and attention, the TRS still recognises the BJP as being its main political rival.