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South Asia

Demonetization and its impact on Indian Economy



On November 8, Indian Prime Minister Narendra Modi took a historic decision by announcing that the high-denomination notes (Rs 500 and Rs 1,000) then in circulation would cease to be legal tender.

With demonetization effort 86% of India’s currency was nullified that aimed to wash the stock of ‘black market’s cash supply’ and counterfeit notes out of the economy and convert it into the licit, banked and taxable, part of the economy. To reduce the impact of sudden commercial collapse, a 50 day period ensued where the population could (ideally) exchange their canceled cash for newly designed 500 and 2,000 rupee notes or deposit them into bank accounts. Irrespective of the widespread anguish and household disturbances, an optimistic sentiment shown in favour of the decision.

Cash is the preferred mode of transaction in India and only less than half the population uses banking system for monetary transactions. An immediate public anger appeared against the mismanaged and unprepared banking system. The banks didn’t have enough of the newly designed banknotes (Rs 500 and Rs 2000) to distribute in exchange for the canceled notes. The move has also led to a shortage of lower denomination notes such as Rs 100 and Rs 50 that are still legal tender, as people have taken to conserving whatever cash they have in hand. The demonization initiative has caused a sudden breakdown in India’s commerce and the unbanked and informal economy is hard hit. Trade across all aspects of the economy has interrupted, and sectors like agriculture, fishing, and the huge informal market were almost shut down during the initial days of announcement. The informal sector in India employs more than a majority of the workers and most transactions are in cash. Disruption to this system could endanger the employment and livelihood of weaker sections of society. The change disturbed the lives of ordinary people, led to widespread need and major job losses for the poor.

Nevertheless, although India’s demonetization move was apparently mismanaged in the beginning, the effects at micro level look advantageous. For instance, all sorts of illegal activities, like terrorist financing, etc. have been completely hit after the announcement. The demonetization process has also repaired India’s counterfeiting problem for the near to mid-term. The cash-centric black market for the most part ceased to function with the nullification of the bulk of its currency. It has also been reported that the new 500 and 2,000 rupee notes are less vulnerable to counterfeiting, having advanced security features. It is also thought that the drive will wipe out a measure of corruption and tax evasion in India’s real estate market. Growth in cash-intensive sectors such as real estate, construction and FMCG is likely to take a hit in the short term as consumers are deferring purchases. The real-estate market is likely to come to a standstill with property prices likely to fall and the possible tax inquiries following demonetization will affect both consumption and investment in the formal and informal sectors. However, there is a positive side to the story, over the medium term, there would be benefits through higher government spending and greater financial inclusion. Also, the movement of household savings from physical to financial will help boost growth, according to Yes Bank BSE 0.90 % report.

With exchange of the old currency notes coming to an end, many people are forced to open accounts to save their money. It is estimated that banks have opened about 30 lakh (and still counting) new accounts since the demonetization drive began on November 8. India’s largest bank, State Bank of India (SBI), with its 17,097 branches — half of which are in the rural and semi-urban areas – is opening 50,000 accounts a day. The leading consumer internet companies in India (Flipkart, Snapdeal, Shopclues, CCAvenues, Ola and Oyo Rooms) have applauded the move, saying it will pave the way for digital payments, aid the process of financial inclusion and the overall transformation in the economy will translate into long-term benefits for the industry. Payments companies Paytm and Freecharge saw a surge in adoption of their digital wallets. According to market experts, the growth of digital payments and wallets is the first phase of the impact and will give big boost to lending and credit as the digital records of merchants will expand and create more demand in the second phase.

Even though demonetization move created adverse short-term policy impact the real impact of must be assessed in the medium/long term. The reduction in overall investments, both in the formal and informal sectors, would certainly reduce economic growth potential. However, the move need to be followed up with ensuing actions to remain effective. These actions relate primarily to structural changes to make the system more lawful, reducing too much bureaucracy, make the tax system simple and transparent. In addition, a greater effort is required to include the informal sector and ensure effectiveness and the illegal activities such as generation of black money and corruption should not be channeled back into the economy.

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South Asia

India’s Military Spending and South Asian Security



Over the past several years, unprecedented military modernization in Pakistan’s immediate neighbour, India, has worsened South Asia’s security environment. India’s heavy military spending and its unstoppable quest for the acquisition of sophisticated weapons have threatened regional stability. Indian desire to acquire global power status through military means has further been intensified as a result of US assistance particularly in former’s defence sector. Within quick span of time, defence trade between India and the US has shot from $1 billion to over $15 billion leaving other regional powers in the state of security consciousness.

India’s obsession with its military build-up doesn’t end here. According to the Stockholm International peace Research Institute (SIPRI) a prestigious international institute dedicated to research into conflict, armaments, arms control and disarmament, India, once again tops the list as world’s largest weapons importer. This is not a new development as previously, India also topped the list for the same reason.

As per SIPRI estimates, Russia remains top arms supplier to India. However, surprisingly arms deliveries from the US increased more than six-fold in the five-year period to the India. This trend in long run will definitely reduce market space for Russian arms and ammunition to India.

Despite the fact that, India’s unbridled military modernization is the primary impetus behind South Asian instability, global power’s economic expediencies in South Asia also undermines delicate conventional parity between India and Pakistan. For instance, Indo-US strategic partnership, which apparently touted as US’ China containment policy, seems more of a Pakistan containment policy. Much of the US provided weapon-tech to India is more useful against Pakistan in a conventional warfare. Almost 70% of Indian military troops and weapon system are deployed against Line of Control, (LOC). Interestingly, peaceful settlement of Docklam issue between China and India as well as sky-rocketing bilateral trade between both countries, which has reached to $84.44 billion last year, makes prospects of conflict almost impossible.

However, in contrast to aforementioned facts, the influx of massive military hardware from western capitals to India continues and in certain cases the flow of arms has gained momentum. There are two primary motives behind India’s overwhelming spending in defence industry.

First, India aspires for greater role in global environment and in certain ways it has been demonstrating its will and capability to influence global dynamics. India’s successful test of Agni-5, a long-range ballistic missile, capable of carrying nuclear weapons with a strike range of more than 3,000 miles, is a practical demonstration of its military capabilities to influence other powers around the globe. For hawkish policy makers in New Delhi, a strong military power can extend India’s global influence.

Secondly, India is following a policy of coercion at regional level primarily, against Pakistan which shares history of hostility and violence due to longstanding territorial disputes such as Kashmir. There is growing perception in New Delhi that militarily strong India can dictate South Asian affairs. That’s why India has been consistently opposing diplomacy and dialogue for peaceful resolution of disputes. Therefore, to meet its foreign policy goals, which are based on coercion and usage of hard power, India spends massive in military build-up.

Ironically, South Asia is called as nuclear flashpoint due to history of animosity and violent conflicts between India and Pakistan. With its mighty military power, India has emerged as the most potent threat for not just Pakistan but also a security challenge for other powers in the region.

Given the advantage it has in terms of nuclear missiles, military hardware and submarine fleet, India has been trying to create an environment conducive to wage limited war against Pakistan. For that, India has not just developed its military doctrine, Cold Start Doctrine, but also initiated and sponsored sub conventional war in Pakistan’s chaotic province, Balochistan.

In such circumstances, Pakistan needs to maintain delicate conventional military balance vis-à-vis India. Despite the fact, Pakistan has been facing number of issues at national, regional and international levels which include on-going military operation in tribal areas to hostile border skirmishes; a robust military modernization plan has become inevitable. A militarily strong Pakistan will be able to maintain its territorial integrity against aggressive yet militarily mighty India.

It’s an open fact that Pakistan has consistently called for peaceful resolution of all outstanding disputes and it has offered to resume diplomacy and dialogue over Kashmir dispute. Unfortunately, India’s cold response has not only restricted Pakistan’s peaceful overtures but also refused to accept third-party mediation in peaceful settlement of Kashmir issue. This clearly shows that, current ruling regime in India is not serious for peaceful settlement, rather more inclined to use of force and coercion. Under such circumstances, Pakistan needs to strengthen its force posture to pre-empt any kind of misadventure from its adversary. However, Pakistan, as it has done in past, must embrace peaceful overtures to bring stability in the region.

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South Asia

US Call for a New Relationship



U.S. Secretary of State Rex Tillerson meets with Pakistan's Foreign Minister Khawaja Muhammad

‘Trust, but verify’ an Old Russian proverb that President Reagan liked to repeat often. Trump is neither the first President nor he is going to be the last to criticize Pakistan of deceit and threaten to cut off American assistance. Notwithstanding, the last six decades of the US support, the US has failed completely in cultivating an ally in Pakistan nor has it meaningfully changed the nature of its relationship with Pakistan, which can be best described as ‘transactional’. A quid-pro-quo relationship between the two has never been established with regards to the assistance they both offered to each other. In truth, United States has never really trusted Pakistan.

President Trump avowed in his New Afghan Strategy that the US has been paying Pakistan ‘billions of billions of dollars at the same time they are housing the very terrorists that we are fighting for’ but the mantra should be put to a halt. Likewise, the US must be conveyed boldly to stop continuing its false claims that Pakistan shelters the ‘agents of chaos’ and be reminded that friends don’t put each other on notices.

Similarly, statements and avowals that India now is a strongest ally to the US, disturbs Pakistan, chiefly because of the irony at Trump administration’s part which only sees the glittering Indian market but pay no heed to the growing Indian cease fire violations across the LoC and the atrocities India commits against the unarmed civilians of the Indian held Kashmir.

The recent visits and statements however by the senior US officials and Trump’s aides reflect the US call for a new relationship between the US and Pakistan, which once used to be close allies in the US led ‘Global War on Terror’.

Pakistan’s foreign policy makers at this point in time must be mindful of the fact that the US is a major trading partner and should adhere to a relationship more than ‘transactional’. Moreover, the risks and fears at the US part of ‘rampant destabilization and civil war in Afghanistan’ increments further the region already devoid of trust. For, nobody actually knows whether the US will stay or eventually leave Afghanistan.

The Afghan war has now become a war of logistics, in words of Sun Tzu ‘the line between order and disorder lies in logistics’, Pakistani supply lines thus provide Islamabad with a leverage in absence of shorter, cheaper and acceptable alternative routes. Given these circumstances, Pakistan should make best use of the US call towards a more robust bilateral relationship.

The move for a ‘new relationship’ and improved ties began last week with senior Trump aide’s visit to Islamabad to hold talks with Pakistani leaders.  Earlier also the impressions that Pakistan and the US were on a collision course were dispelled by a top US general. Likewise, US department’s acting Assistant Secretary for South and Central Asia Alice Wells asserted that the US was not thinking of cutting its ties rather assured that the US still cogitate Pakistan indispensable to the resolve in Afghanistan.

The aforesaid developments clearly indicate that the strained US-Pakistan relations would improve soon and that the suspension in the military aid is also not permanent.

To conclude, achieving long term stability and defeating the insurgency in the region will be difficult without Pakistan’s support and assistance.

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South Asia

Special Economic Zones and CPEC



Economic Expansion, high prices and inflation are the issues on which one can talk for hours. The scarcity of resources, energy crises and lack of industrial modernization are the challenges which Pakistan has been facing for past many decades. Despite the advantages of geographical setting, the country could not sufficiently expand its economy until 20thcentury. However, the China-Pakistan Economic Corridor (CPEC) has brought with it various infrastructural, energy, and industrial projects that show smooth progress in these sectors. One of the most significant developments is the establishment of Special Economic Zones (SEZs) under the Long Term Plan (LTP) of CPEC.SEZ is a physically protected area with definite geographic boundaries under which the investors and the developers enjoy duty free benefits and streamlined procedures, set up by the government.  After the successful completion of the Early Harvest Program (EHP), the governments of China and Pakistan aspire to complete the Long Term Plan (LTP) of CPEC. As a key route to success, the LTP has been divided into three phases and the work on the first phase has already started. SEZs are on the first priority list of the first Phase of LTP. While utilizing the strategic location of Pakistan and the rich resources, the SEZ will contribute a framework for Pakistan’s domestic industries, and local economy.

The government has planned to establish nine Special Economic Zones (SEZs) in all the four provinces, federal areas and Gilgit-Baltistan under the framework of CPEC, which would be completed in a period of three years. Pakistan has conducted feasibilities of 5 SEZs which focuses only on the infrastructure. The three prioritized SEZs to be completed in the first phase of LTP are M3 Industrial City in Faisalabad, Punjab, Chinese SEZ Dhabeji, Sindh and Hattar SEZ in KP province. While the remaining six sites include Rashakai Economic Zone, M-1 Noshera, Bostan Industrial Zone District Pishin, AllamaIqbal Industrial City, Moqpondass SEZ in Gilgit-Baltistan, ICT Model Industrial Zone Islamabad, Development of Industrial Park on Pakistan Steel Mills Land at port Qasim near Karachi, Special Economic Zone at Mirpur AJK, Mohmand Marble city.

Although, there are general misunderstandings regarding the industrial ramifications of the SEZ’s under CPEC due to large number of Chinese firms and the exemption in the tax rates offered to them. However, the LTP of CPEC shows that these SEZ’s will offer the country with a great opportunity to accelerate industrialization because they are beneficial for all the international and domestic investors. So far in the history, SEZs have been the reason of economic boost in countries around the globe. Now this is a matter of concern that either these SEZs will make Pakistan a center of economic modernization and trade ventures or not. The economist and financial experts are optimistic about Pakistan’s emergence as one of the fast growing and promising global economy.

While stepping towards the era of industrialization, Pakistan faces a number of issues that have so far refrain the industries to understand their growth potential. Some of the chief hindrances to investment in Pakistan include poor security; non-availability of infrastructure and power crises, rent-seeking regulators, and cumbersome tax administration, etc. among many others.

Likewise the entrepreneurs in Pakistan have certain reservation with the incentives proposed by the government and SEZs for the investors and enterprises including ten-year exemption from all taxes on imported capital goods and exemption from tax on income accruable from development and operations in SEZs for a period of ten years. Although these incentives will be beneficial for the foreign investors at large but at the same time it will provide Pakistani enterprises with the opportunity to collaborate with the Chinese firms and launch joint ventures of mutual interests and benefits. This will be further beneficial for the annual Gross Domestic Product (GDP) growth of Pakistan. Moreover it will bring Foreign Direct Investment (FDI) in the country thus generating the foreign revenue.

Subsequently it is significant to keep in mind that in Pakistan there are certain security and political factors due to which the SEZ’s may face challenges. Hence forth to conquer these challenges provincial harmony among all the provinces and mutual consensus between the public sector and private sector is needed. SEZs under CPEC will be a life-time opportunity for Pakistani companies to work together with Chinese companies for the development of export-oriented manufacturing industries. Therefore, Pakistan should increase its products in the Chinese market and raise the ratio of its export while decreasing the trade deficit by lowering the imports.

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