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India’s Fiscal Deficit: Recent Trends and How to Tackle It

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Role of any government in the  economy is an essential  one where it takes decision on receipts and  expenditure. Total expenditure and total receipt are the two important features of budget yearly presented by government. Fiscal deficit actually refers to the excess of the spending over the revenues.[1] It  is calculated as a percentage of the  GDP.[2]  

Gross fiscal deficit or GFD is basically the excess of the total expenditure which includes the loans, net of recovery, over receipts of revenue (which includes external grants) and receipts of non-debt capital.[3] Net fiscal deficit is the GFD minus net lending.[4] 

Whenever fiscal balance is in positive then it is considered to be beneficial as revenue  is above  expenditure. Whereas, negative fiscal balance in fact means borrowings on which an economy depends on and is seldom bad.[5]   

Targets for fiscal deficit  are set annually  that  India fails to follow . We will see through this paper why is fiscal deficit happening , what impact it has on economy,  how  demonetisation and GST has impacted it and also how to use it to tackle the economic problems.  

Why Is Fiscal Deficithappening?

 Tax evasions by various organisations along with various other factors, leads to a loss in revenue for government that leads to fiscal deficit.

The Union budget, for 2019-20, estimated fiscal deficit to be 3.3% of GDP or Rs 7.03 lakh crores.[6] The overly-optimistic revenue estimations for 2019-20, was further worsened by the reduction in corporate income taxes (CIT), for which there were no expenditure or revenue offsetting steps been taken. This could result in the government breaching, by about 50 basis points, its fiscal deficit goal.[7]  Cutting CIT to the extent of Rs. 1.45 trillion, was mainly done to lift the weakening economy.[8]The fiscal impact would be felt much sooner than the decision’s growth impact.[9] 

The government ended August 2019, with a Rs 4.36 lakh crores revenue deficit.[10] As of mid-November, the Center mopped up just 6 lakh crores in direct taxes, that is about 50% less of the current direct tax revenue goal of 13.35 lakh crores.[11] This will lead to an increase in fiscal deficit. 

Comptroller and Auditor General or CAG stated that government’s key deficit numbers might be substantially higher than mentioned in the budget. CAG has therefore, asked whether or not extra-budgetary resources taken into account in budget reflect the true picture.[12] The CAG re-calculated, 2017-18 fiscal deficit to reveal that it is 5.85% actually. Government reported a 3.46% fiscal deficit that year.[13]  The fiscal numbers of the government over past few years are under heavy scrutiny as growth has been sluggish since year 2016’s third quarter.

Impact Of Fiscal Deficit On Economy

Fiscal deficit is similar to a vicious cycle. Fiscal deficit has dire consequences on the economy as the government borrowings is in fact one of the last resorts left with the government and that results in higher interest rates in the market.[14] 

Higher interest rates are resulted because markets are doubtful about repayment by the government;  due to which the government bears high interest rates, for this perceived risk that later puts the government into further debt, hence being a vicious pattern.   Higher the rates, lower is the scope of private investment that decreases resources that are available for the private sector investment. High government borrowings can have various potential hazards that are mentioned below.  

The Crowding Out Effect

The government to cover up for its deficit borrow more from the private sector in form of bonds. By selling the bonds it takes money from the private sector. When the private lenders lend money to the government, they actually lend it out, of their savings/ profits. The savings of the private sector gets reduced which lessens itsability to invest which ultimately crowds out the private investment, out of the market.[15]

Therefore, government spending increases and the private spending reduces. Since the government spending’s are considered less effective than private spending this is bad for the economy. The government during a fiscal deficit in fact does two things: increases borrowings or increases tax revenue.

INCREASES TAX REVENUE- Whenever the government increases tax, it does it by actually increasing corporate taxes, income taxes etc. which results in a reduction in disposable income of the firms, so this increase in the government spending does not really result in increase in the aggregate demand(AD).[16]

The increase in the government spending becomes offset by the decrease in the AD   that is due to decrease in the disposable income. When the private sector has lesser money, it even spends lesser in the private projects.

Inflation 

When the government sticks to not borrowing of money but actually ‘monetisation’, inflation occurs,[17] which increases the money supply in the market. Therefore, aggregate demand too increases causing inflation. Fiscal deficit can also imply an increment in the government spending’s which then increases AD that results in higher price levels of services and goods.

Higher Taxes 

Whenever the debt to GDP ratio amplifies, the government requires to increase the tax revenue which it does by increasing its tax rates.[18] 

Impact of demonetisation and goods and service tax(GST) on fiscal deficit

Demonetization changed our currency system providing the people an incentive to use and spend money in a much productive way than letting cash lying around. Cash lying around was deposited in the banks and eventually people started trusting digital payments. Banks also experienced a surge in liquidity. Banks then deposited this sum, through different windows such as SLR, to RBI. This resulted in an increase in the government treasury. The raids for the black money also led to an increase in revenue. This resulted in an increase in income taxpayers. Income taxpayers grew by 9.1 million. There had been an 80% rise, above the average annual increase, in taxpayers.[19] The rise was also reflected in the filing of IT returns and the payment of advance tax. While in the evaluation year 2016-17 the figure of taxpayers increased, in the next year the rate of growth fell to acquainted levels.

But demonetization affected India’s MSMEs badly. Micro-industry owners weren’t ready to cope with the lasting effects of demonetization. Therefore, a lot of micro-industry workers lost their jobs and also went back to their villages. These companies therefore had a low growth rate of 1%.[20]   

The primary goal demonetisation was tackling black money, at which it failed. Since the system has recovered 99.3% of the demonetized notes, it indicates that the activity didn’t bring enough “black money”.[21] This could be because just a tiny portion of tax evasion takes place in cash. 

It resulted in job cuts which led to higher unemployment rates.[22] Job losses led to lower productivity and the decrease in liquidity disrupted India’s cash-based economic structure, which devastated unorganized sector. Though, demonetisation led to higher tax revenue, the cumulative losses arising from the move left a scar on economy, which had an impact on GDP and fiscal deficit. Since demonetisation the GDP, has decreased to 5% (July-September 2019) from 8.8% (July-September 2016).[23] In FY20, fiscal deficit breached Rs 7lakh crores mark.[24]

By removing the cascading effect of multiple central and state taxes, GST has worked to increase profit and reduce costs of doing business. This could attract investment which would lead to an increase in GDP.  The increase in GDP would result in an increase in revenue for the government since taxes will increase. The GST is a type of tax that is consumption based and not anymore production based.

During the first 6 months, of the GST implementation, indirect taxpayers increased by 50%, partially due to several small businesses actively opting to be a part of the GST in attempt utilise input tax credits.[25] Even with a wider base, however, GST revenues were underwhelming.[26] Indirect tax collections of the Center in the post-GST era, rose by just 1.8% from the year earlier in April-September 2018, far slower than the growth of 5.6% seen in the full year of 2017-18 and even smaller than the growth of over 20 percent in the previous two years.[27] This is primarily because of decrease in economic activity, sluggish demand and compliance issues. 

Therefore, flawed GST implementation, coupled with demonetisation, served as the catalyst in India’s growth slowdown, which opened doors to fresh economic problems and affected the fiscal deficit.[28] 

Measures To Control Fiscal Deficit

There are two methods of restraining fiscal deficit. First, if the government decreases its expenditure, second, if it increases its revenue. There are again ways to achieve on both the ends.    

Reduce Expenditure 

SALE OR CLOSURE OF SICK UNITS  

India is a centre for the public sector undertakings(PSUs). Several of these PSUs are not making profits and demand more than giving. So, selling or closing the non-viable, sick industry would decrease the government spending on them.[29]

REDUCE SUBSIDY PAYMENTS

The subsidy bill is more than 10% of GDP, of which the non-merit subsidies add up to 5.7%.[30] Rationalization these could free up to 6% of fiscal space.[31]

REDUCE INTEREST PAYMENT  

India’s government is paying a lot of interest in previous years loans. Approximately one-fourth of the Indian spending of the budget went to interest payments.[32]   Therefore, government borrowings need to be reduced in order to decrease interest payments resulting in lower expenditure. 

Increase In Revenue   

PREVENT EVASION AND INCREASE TAX REVENUE 

Government needs to take measures to stop tax evasion and streamline the process of tax so that taxpayer base of the country widens which will lead to higher taxation. Agriculture could be included in the tax net, because distinguishing jobs cannot be the criterion for not paying tax, but rather it should be centered on high and low income.  In fact, people for evading taxes disguise their non-agricultural income as agricultural income.  

DISINVESTMENT 

Disinvestment is PSUs offers the government funding to cover the fiscal deficit and also has long-term advantages, as this money can be spent or invested in productiveuses that would generate jobs, increasing revenue and taxpayers.[33] The government has targeted mobilising 1.05 lakh crores by the means of disinvestment.[34]

ECONOMIC GROWTH

 Business promotion will help the economy to flourish. If the economy grows, the government tax revenue increases. It includes setting up a framework conducive to businesses and environmental improvement. 

Conclusion

India’s fiscal deficit, for many years, has been a concern. Although, fiscal deficit affects the economy in many ways like by increasing inflation, increasing interest rates, crowding out private investment, etc., it can be helpful when borrowings are done for productive uses, which can amplify government revenue. It can also be controlled by several measures when it is harmful for the country. The government, in recent years, has taken several reforms like introducing GST and demonetisation, the effects of these can be observed on the fiscal deficit.

A fiscal stimulus dose is needed to revive the growth rate of the economy. The stimulus size will be calculated by the constraints on debt servicing, borrowing capacity and Indian sovereign rating concerns. A downgrade will raise borrowing costs not only for government, but also for private sector; this could cause a freeze in the portfolio funds which track indices passively and has been flowing into India. In addition, such a freeze can strain the exchange rate of the rupee, which could drop abruptly. The possibility of a sudden cessation or reversal of foreign flows is serious, and our fiscal managers cannot neglect it. That is the price you pay for being not able to pay, in your own currency, for imports. It is undeniable that foreign inflows are required, at least in order to pay for capital goods and imported oil.

As India’s fiscal space is at a risk, it can also be assisted with easier monetary policy. Monetary policy must maintain a loosening or easing bias, given the economy’s cyclical weakness, at least till the predicted recovery takes hold.  

To be effective or successful in fiscal policy, it must be counter-cyclical, so a larger deficit in a year like a recession is all right. Every valuable additional fiscal rupee must result in a boost in consumption and growth immediately. The tax on capital gains ought not be abandoned, as stock market being at a high, as these are progressive direct taxes. Because Google, Apple, Microsoft, Amazon and Facebook, five of the world’s most successful entities, in India have a huge customer base, a digital tax should be imposed. The GST rate must be rationalized. This could give the fiscal buck, a greater turnout than a reduction in the individual income tax, which is borne only by about 3% of the population. This should be followed by a base expansion. The compensation formula provided to states for their failures in GST collections could be revised, as they too should bear some of the fiscal pain. 


[1]“Definition of ‘Fiscal Deficit” (December 2018) <https://economictimes.indiatimes.com/definition/Fiscal-Deficit>

[2]Will Kenton, “Fiscal Deficit” (August 2019) <https://www.investopedia.com/terms/f/fiscaldeficit.asp>

[3]“India’s Economy Dashboard” The economic times (February 1, 2019) <https://economictimes.indiatimes.com/news/economy/indias-economy-dashboard/what-is-economy-dashboard/slideshow/67755935.cms>

[4] Ibid 3.

[5]Sean Ross, “Understanding the Effects of Fiscal Deficits on an Economy” (August 2019) <https://www.investopedia.com/ask/answers/021015/what-effect-fiscal-deficit-economy.asp>

[6]Singh K, “August Fiscal Deficit at 78.7% Of 2019-20 Target ”The economic times (September 30, 2019) <https://economictimes.indiatimes.com/news/economy/indicators/august-fiscal-deficit-at-78-7-of-2019-20-target/articleshow/71377147.cms?from=mdr>

[7]Asit Kumar Misra, “IMF says India should avoid fiscal stimulus, opt for easing policy” (May 2019) <https://www.livemint.com/news/india/imf-says-no-to-fiscal-stimulus-okay-with-further-monetary-policy-easing-11577181218530.html>

[8]“Fiscal deficit hits 93% of budget estimate at ₹6.52 trillion till Sept-end” (October 2019) <https://www.livemint.com/news/india/fiscal-deficit-hits-93-of-budget-estimate-at-rs-6-52-trillion-till-sept-end-11572526967720.html>

[9]Asit Ranjan Misra, “Corporate tax cut may widen fiscal deficit by 40 bps: Fitch Ratings” (October 2019) <https://www.livemint.com/politics/policy/india-s-fiscal-deficit-may-shoot-up-to-3-7-in-fy20-fitch-ratings-1569489629214.html>

[10]Ibid 6.

[11] Nandi S, “More Steps to Revive Growth Soon: Finance Minister Nirmala Sitharaman” livemint (December 7, 2019) <https://www.livemint.com/news/india/more-steps-to-revive-growth-soon-finance-minister-nirmala-sitharaman-11575706380335.html >

[12]Narayanan D, “CAG Demonstrates How Govt Relies on off-Budget Resources to Fund Deficit” Economic times (July 25, 2019) <https://economictimes.indiatimes.com/news/economy/indicators/cag-demonstrates-how-govt-relies-on-off-budget-resources-to-fund-deficit/articleshow/70360281.cms> accessed December 26, 2019.

[13]Ibid 12.

[14]Reem Heakel , “Forces That Causes Changes in Interest Rates” (August 2019) <https://www.investopedia.com/insights/forces-behind-interest-rates/>

[15]Rajesh Kumar, “De-jargoned | Crowding out” (September 2012) <https://www.livemint.com/Money/x5B8XGNuQXqeZzZ6RU41jJ/Dejargoned–Crowding-out.html>

[16]Tenjvan Pettingar, “Crowding Out” (Economics Help,2017) <https://www.economicshelp.org/blog/1013/economics/crowding-out/>

[17]Chandavarkar, Anand G. “Monetization of Developing Economies (Monétisation Des Économies En Développement) (Monetización De Las Economías En Vías De Desarrollo).” Staff Papers (International Monetary Fund), vol. 24, no. 3, 1977, pp. 665–721. JSTOR, www.jstor.org/stable/3866500

[18]Julia Kagan , “Gdp Tax Ration” (July 2019) <https://www.investopedia.com/terms/t/tax-to-gdp-ratio.asp>   

[19]Ibid 18.

[20]Aishwarya Krishnan“Demonetization Anniversary: Decoding the Effects of Indian Currency Notes Ban” (May 2019) <https://economictimes.indiatimes.com/tdmc/your-money/demonetization-anniversary-decoding-the-effects-of-indian-currency-notes-ban/articleshow/61579118.cms?from=mdr>

[21]Ibid 20.

[22]Koustav Das, “Three years after demonetisation: Lot of sound and fury signifying nothing” (November 2019) <https://www.indiatoday.in/business/story/demonetisation-three-year-anniversary-economic-slump-gdp-unemployment-negative-growth-outlook-1617099-2019-11-08 >

[23]Ibid 42.

[24]Ibid 42.

[25] Kundu T, “How GST and Demonetisation Impacted Govt Finances” livemint (November 5, 2018) <https://www.livemint.com/Industry/pkS48kM47yZbxS49jL6MSN/How-GST-and-demonetisation-impacted-government-finances.html>

[26] “Dip in GST Collections Tells a Story” The hindu business line (October 3, 2019) <https://www.thehindubusinessline.com/opinion/quick-take/dip-in-gst-collections-tells-a-story/article29585185.ece>

[27]Ibid 20.

[28]Ibid 19.

[29]Devika Kher, “Divestment: More than just revenue” (May 2016) <https://www.livemint.com/Opinion/ZxVQBVNoq8UbqDwVhCMY6M/Divestment-More-than-just-revenue.html>

[30]Nikita Kwatra, “How government can fund a growth revival” ,(November 2019) <https://www.livemint.com/news/india/how-the-government-can-fund-a-growth-revival-11574237638358.html>

[31]Ibid 24.

[32]Krishnaand Tripathi, “Budget 2019: Do you know, a fourth of India’s Budget goes into interest payment?” (January 2019) <https://www.financialexpress.com/budget/budget-2019-do-you-know-a-fourth-of-indias-budget-goes-into-interest-payment/1454897/

[33]Smriti Jain, “Budget 2014: Five prescriptions for Narendra Modi to tackle fiscal deficit” (The Economic Times,2014) <https://economictimes.indiatimes.com/news/economy/policy/budget-2014-five-prescriptions-for-narendra-modi-to-tackle-fiscal-deficit/articleshow/37697902.cms>

[34]“Cabinet approves new strategic disinvestment process” , (October 2019)<//economictimes.indiatimes.com/articleshow/71445908.cms?from=mdr&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst,https://economictimes.indiatimes.com/news/economy/policy/cabinet-approves-new-strategic-disinvestment-process/articleshow/71445908.cms?from=mdr>

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Rohingya Influx and its Economic Significance for Bangladesh

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Authors:Shuva Das & Sherajul Mustajib Sharif*

It is generally perceived that refugees are curse for host countries though the former often play positive roles for the latter. The context of Bangladesh over hosting Rohingya refugees is portrayed in such a way that demonstrates they are solely an obvious danger for the country in the areas of its economy, politics, environment, health, and security. The above argument is true but it is a one-sided view which is enough to make hospitable Bangladeshis hostile against the Rohingya. Thus, it is crucial to explore in which areas the Rohingya have made positive contributions in Bangladesh. In this article, we intend to elucidate the economic benefits offered by the displaced Rohingya for the host country.

Brief Overview of the Rohingya Crisis

The Rohingya crisis is one of the worst humanitarian disasters in the modern world. The degree of violence and persecution taken against the Rohingya by the military of Myanmar has reached in an extremely horrendous extent in which an UN fact finding team in 2018 found genocidal elements. The Rohingya are an ethno-religious Muslim minority group of Myanmar. Though they have lived in Rakhine state of the country for centuries, to the Burmese government and Buddhists they are illegal Bengali immigrants who came from the present Bangladesh to Rakhine State for works during British colonial rule. The Burmese government withdrew their citizenship status through the “1982 Citizenship Act”, rendering them stateless. Since 1978, they have experienced several brutal military crackdowns and every time they have taken shelter in Bangladesh. In particular, since 2017 when the military of Myanmar launched “clearance operation” against the Rohingya in retaliation of an insurgent attack allegedly carried out by a Rohingya rebel group known as the Arakan Rohingya Salvation Army on several police posts, a significant number of Rohingya, over 740,000, have fled to Bangladesh from Myanmar. This number with the previously remaining Rohingya refugees has exceeded the one-million mark in the host country, intensifying the level of strain on it.

Economic Advantages Offered by the Rohingya Refugees

Bangladesh is a small developing country and with a population of about 16.7 million, it is the world’s eighth most populous country. In these circumstances, over one additional million Rohingya refugees are competing with cheaper labor against many local people for jobs in the Rohingya-hosted areas in the Cox’s Bazar district of the nation, and they have put extreme pressure on its limited resources. Nonetheless, to graduate from the pool of the UN’s Least Developed Countries, with the massive refugee burden Bangladesh successfully accomplished all three required criteria in 2018 and is on track to be graduated by 2024. On an average, the real GDP growth of the country from 2017 to the running 2020 has also remained stable at around 7.70. The Rohingya influx has immense significance on the thriving economy of Bangladesh.

To begin with, Rohingya refugees have created numerous job opportunities for many Bangladeshi people who are working as volunteers, relief specialists, researchers, health workers and so on in almost 150 national and international aid groups and non-governmental organizations currently operating in Rohingya camps. In the United Nations High Commissioner for Refugees (UNHCR), for instance, more than 200 Bangladeshis have been employed to enhance its operational efficiency on the refugee crisis. Through working in humanitarian organizations, they are earning not only handsome salaries but quality skills. Besides, a good number of local people of the Rohingya-hosted areas in Bangladesh are doing transportation jobs to convey goods in the Rohingya camps.

Another vital point is that an entrepreneurial spark is currently seen among local host population. International donor agencies provide relief goods to Rohingya refugees who sell these to local traders to bring diversity in their daily meals. Local entrepreneurs purchase the relief products from Rohingya refugees at very low rate and sell these to their fellow Bangladeshis in a profitable price. Apart from this, the UNHCR took an ambitious project in 2019, under which 250 poor women of Cox’s Bazar along with equal number of Rohingya women have been given training in cloth crafting. And it has the will to train more women. Backward female population of Bangladesh can, in this manner, be empowered to be entrepreneurs, and effectively integrated into its booming economy.

Last but not least, International Organization for Migration, and the UN Food and Agriculture Organization in 2018 provided micro gardening kits to 25,000 Rohingya and 25,000 host households. This has opened a new economic window in South Eastern Bangladesh. To feed their gardens, the Rohingya purchase compost from Bangladeshi women. In addition to eating, they sell their produce in the host community market thereby generating a number of local vegetable dealers. The combined production of the Rohingya refugee and host families by micro gardening are enormously contributing to alleviate an estimated 50,000 metric ton yearly food deficit in Cox’s Bazar.

Concluding Remarks

Rohingya refugees have brought an economic boon for Bangladesh in multidimensional aspects. Because of them, many skilled and unskilled Bangladeshi people, especially women, have found their income sources. Positive contributions of the Rohingya should not be underestimated though these are less worthy if weighed against the overall drawbacks they have caused for the host nation. Since the Rohingya crisis is a protracted one having no possible certainty to be resolved soon, the government of Bangladesh needs not only to continue their diplomatic pressure against Myanmar but to focus on how effectively they can benefit from the displaced population in economic aspects.

*Sherajul Mustajib Sharif holds his BSS and MSS degrees from the Department of International Relations, University of Chittagong, Chittagong, Bangladesh.

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WTO’s ‘Crown Jewel’ Under Existential Crisis: Problem Explained

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World Trade Organization (WTO) is an international body that acts as a watchdog keeping an eye on the rules of trade between nations. WTO came into operation in 1995 and was founded as a successor to the General Agreement on Tariffs and Trade (GATT), which was incorporated in 1948. It acts as a forum where WTO members discuss and negotiate trade issues. Moreover, it works in the form of different multilateral as well as plurilateral WTO agreements. These agreements live at the heart of WTO as they deal with different aspects of trade policy.  Agreements like General Agreement on Trades and Tariffs; General Agreement on Trade in Services; The Agreement on Trade-Related Aspects of Intellectual Property Rights etc. forms the centerpiece of WTO.  Through these agreements, one WTO member enters into obligations and formulates the relation of reciprocity with the other WTO member.

Undeniably, the Dispute Settlement System (DSS) that works under the WTO is considered to be the ‘crown jewel’. No matter how stringent the laws are, unless they couldn’t be enforced, they are of not much worth. DSS functions as an effective mechanism to settle disputes and to enforce obligations in case of violation by any WTO member.  The ration d’etre of giving birth to DSS was to ensure settlement of disputes in a timely and structured manner.  DSS is committed to impede and further mitigate trade imbalances between stronger and weaker players by having their disputes to be settled on the verge of rules and not power. Since the day it came into force in 1995, 595 disputes have been brought before the DSS and out of which 350+ disputes are settled.

DSS is governed by the Dispute Settlement Body (DSB) through the rules incorporated in Disputes Settlement Understanding (DSU).  The DSS works as a two-tier redressal forum and is the most important and busiest international tribunal having a binding authority on the parties to the dispute once they adopt the report of findings. On the first level comes the Consultation as per Article 4 of the DSU rules. Article 4 states that “each WTO member undertakes to accord sympathetic consideration to and afford adequate opportunity for consultation regarding any representations made by another Member concerning measures affecting the operation of any covered agreement taken within the territory of the former.” Therefore, Consultation is mandatory before any dispute is addressed to DSB. Once the consultation is failed, the complaining party can request the DSB under Article 6 for the establishment of a panel body that shall aim to settle the disputes between the parties.

On the top of the hierarchy comes the appellate body which shall hear the appeal from panel cases. Any party to the dispute can formally notify DSB of its decision to appeal. Under Article 17 of the DSU rules, DSB shall establish a standing appellate body. Unlike the Panel body, the appellate body is a permanent body composed of seven persons out of which three shall serve on any one case. These members are appointed for a term of four years. It is the duty of DSB to ensure that the vacancies shall be filled as they arise so as to confirm the smooth and timely functioning of the hierarchical mechanism of dispute redressal. Principally, the decision under DSB is taken through consensus methodology. Article 2.4 of DSU explains this method stating that “the consensus is said to be achieved when no WTO member, present at the meeting, formally opposes to the proposed decision”.

The genesis of the crisis is attributable to the U.S. who through its non-consensus has blocked the selection procedure to fill the vacancies alarming in the Appellate Body. The minimum requirement for Appellate Body to function is at least three persons out of total strength of seven. However, on 11th December 2019, the term of two of the remaining three members came to an end. At present, the Appellate Body has only one member and thus, it is dysfunctional and the resolution mechanism has brought to a grinding halt. The political façade started long back in 2017 when the U.S. cleared its intention of not allowing the selection procedure to taken place in order to fill the vacancies in the Appellate Body. Nonetheless, the Appellate Body continued its function as the compositional requirement was manageable due to the tenure of three of its members remaining but ultimately the crisis knocked the doors of WTO in the last month of 2019.

Although, at present, the composition of the Panel Body has not been interjected and the process of addressing disputes through Panel Body is still in continuance. However, the problem is as per the trends, in 67 percent of the cases, one of the parties to the dispute appeals the finding of the panel body and thus; when the Appellate Body is itself dysfunctional, the order remains non-binding and the whole mechanism of the dispute resolution is disrupted severing the gravity of the political disaster. The reasons for the U.S. to block the normal functioning of the Appellate Body have been shared with other countries as well. Fortunately, no other country has repelled in the way the U.S. is exclaiming to address the loopholes. The dissatisfaction of the U.S. administration with the WTO is not a secret anymore when Mr. Donald Trump labeled the WTO as ‘disaster’ for their nation.

The reason for the U.S. to express dissatisfaction is because of the overreaching power that Appellate Body enjoys. To combat that, on a lighter note, the U.S. has shown a preference of going back to the non-binding dispute settlement system that was prevalent at the time of GATT, 1948. Ironically, it was the U.S. who during the Uruguay round of negotiations (1986-1994) pressured and voted for creating a dispute redressal system that is binding and enforceable, however as the tables have turned now and the Appellate Body has become an irksome affair for the U.S.

The central issue of the U.S. to cordon the appointment revolves around the problem ofjudicial overreach.  To elaborate the claim, the U.S. believes that the dispute settlement system interprets the WTO rules in such a way that instead of simplifying, it rather creates new obligations for the WTO members. What the U.S. believes is that the Appellate Body drifts away from its original mandate due to its practice of issuing decisions that either burden the WTO members with new obligations or diminishes the right they enjoyed earlier.

Further, the U.S. has raised the objections against the procedural irregularities by the Appellate Body. Entangling the issues of the procedure, firstly, the U.S.has pointed out the contradiction of the DSU rules adopted by the WTO members and the Appellate Body Working procedure which are drawn up by the Appellate Body itself. As per the Rule 15 of the latter, it allows the Appellate Body members to remain on board and to continue to serve on appeals which are pending during their terms; however, as per Article 17.9 of the former, a member enjoys the position for a fixed four-year term. Thus, the Appellate Body working procedures violate the provisional requirement as laid down in DSU rules.

The second procedural issue raised by the U.S. deals with the violation of completing the report by Appellate Body within the time frame of 90 days as prescribed by the DSU rules. The US has pointed out that the extraordinary delay violates the mandate of a speedy trial and further it negates the right of the complaining party as well as the party brought to dispute due to the hauling of their economies to a hiatus. It is the belief of the U.S. that the prospective incapacitation of the Appellate Body is undoubtedly a menace for the WTO and its members because once the report of panel body is appealed, it cannot be made enforceable unless the appellate body decides and thus, it holds the country for the indefinite timeframe not authorizing the party to retaliate on whose favour the panel body decided the dispute.

It is indisputable that the DSS need to undergo a series of reform in order to gain the lost confidence. Unfortunately, the step taken by the U.S. has been termed as harsh and politically motivated. One move of the U.S. has paralyzed the ability of the ‘crown jewel’ to resolve international trade disputes. Even going against the decision of the U.S. and outcasting the consensus power it holds won’t serve the purpose as the U.S. is an important player of WTO and if the U.S. is not a party to it; the WTO would be synonymous to a toothless tiger. 

Nevertheless, arbitration under Article 25 of the DSU rules can act as an alternative to the hierarchal redressal system, as well as, solving disputes through bilateral agreements can be another alternative during the time of this existential crisis. The proposed idea of forming a Multi-party Interim Appellate arrangement will not succumb for long because the U.S. will not be its part and as it is certain, U.S. forms a considerable part of international trade, thus, there will again be a situation of deadlock. Moreover, choosing such interim mechanisms for the long run can raise a threat to the uniformity of rulings that WTO embraces. All in all, WTO is currently under jeopardy and it can be the beginning of the end if a solution to the crisis is not found in a timely manner. As of now, the Supreme Court of the international Trade ceases to exist and is in a life or death moment.

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Economy

How Local Governments in China can Utilize New Infrastructure Policy to Promote Development

Chan Kung

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Authors: Chan Kung and Wei Hongxu*

In an effort to promote economic recovery, the central government, local governments, and enterprises have placed high expectations on the investment of new infrastructure, hoping it would promote the development of the digital economy, so as to enhance the internal driving force of economic development. Especially when the scale of local special bonds is expected to be increased and again issued ahead of schedule, many local governments hope to seize the opportunity of digital economy development and increase investment in new infrastructure areas to drive regional economic development. Unlike the conventional economy and conventional infrastructure investment, the new infrastructure is not a simple way to boost investment, but rather to help the conventional industries realize digital and intelligent transformation as soon as possible, and to create new consumption, new manufacturing, and new services. While the new infrastructure investment brings a new economic model, it is different from the past in terms of content, mode, and financing channels. It requires local governments to make corresponding changes with market-oriented thinking.

New infrastructure investment is not only the demand side of local users, but also the supply side of technology investment. From the perspective of the scope of new infrastructure, new infrastructure projects include 5G base stations, ultra-high voltage (UHV) electricity, industrial Internet, intercity high-speed railway, intercity rail transit, new energy vehicle charging piles, artificial intelligence, and Big Data centers. At present, rail transit and new energy infrastructure are not much different from conventional infrastructure investment. The degree of local participation of UHV electricity is limited, while the investment in other aspects, such as 5G base stations and Big Data centers, is relatively mature in technology and has good market supply capacity. In other aspects, it is more necessary to start from the aspects of technology research and industrial cultivation, and to invest in projects that encourage innovation and industrial park construction. Therefore, this requires not only clear investment objectives on the demand side, but also needs to expand the supply side such as technology research and application at the same time, which undoubtedly increases the complexity of new infrastructure investment.

At the same time, the sources and financing channels of new infrastructure investment still need to be explored. Recently, local governments in China have begun planning to finance new infrastructure projects through issuing special bonds, and many local governments have put new infrastructure projects on their agenda. Some market analysts believe that at present, 5G is still mainly invested in base stations. Generally, telecommunications companies such as China Unicom and Mobile Communications can invest on their own without issuing special bonds, thereby the special bonds can be invested in projects related to data centers. However, such projects are only available in first-tier cities, and there are not many such projects in second-tier, third-tier, fourth-tier, and fifth-tier cities. New infrastructure projects should be more market-driven and local governments should avoid excessive involvement via direct investment in industrial projects. Local governments also need to promote the public-private partnership (PPP) model and introduce more social capital to improve efficiency and broaden financing sources.

Even for new infrastructure projects funded by special bonds, attention should be paid to the financing capacity of the projects to avoid adding to the financial burden. There are two main ideas for the new infrastructure special bond declaration projects in many provinces. One is to build a digital information application platform at the county and district level based on the resources of the provincial and municipal cloud platforms. The second is to promote the optimization and upgrading of conventional infrastructure projects with the theme of digital and wisdom. Some local finance people worry that many of these projects are packaged around the concept of “new infrastructure” and are mostly non-yielding or low-yielding projects that may require the government to cover future bond payments. Therefore, the special bond for new infrastructure construction should be invested in public welfare projects that can generate income, rather than public welfare projects that do not.

At the same time, there are new requirements for investment entities in new infrastructure investment. Some financial institutions said that after the issuance of new infrastructure special bonds, most of them will eventually be invested in local urban projects. However, local urban projects were good at conventional infrastructure construction, unfamiliar with new infrastructure construction, and lacks experience in new infrastructure project operation. If we speed up the construction of new infrastructure projects without considering the actual situation, it will easily lead to the mismatch between the capacity and the project requirements, and drag on the development of local governments and enterprises. In particular, unlike conventional investment in forming fixed assets, a considerable part of new infrastructure investment in research, personnel training, and other forms of intangible assets will be formed. The conventional urban investment model does not have the ability to use and dispose of these assets. At the same time, the large amount of hardware equipment invested in the new infrastructure is different from the conventional “iron and steel foundation”. Its wear and tear, operation, and upgrading all require continuous follow-up investment, which cannot be “invested all at once.” These are also not available in some conventional urban investment enterprises. If the local government cultivates and supports relevant enterprises by means of industrial investment, it needs more consideration in terms of income distribution and asset management. Such investment cannot be simply measured by the unit of land and capital, but more in the form of equity investment such as industrial funds and venture capital. In this respect, the local government needs to have the investment entities and relevant personnel with the ability to invest in relevant industries.

Different from the past, local governments need to play their roles in market construction and maintenance, investment entities, and end-users in promoting new infrastructure investment and the development of the digital economy. In the cultivation of the digital market, market demand, and the maintenance of the market order, local governments should play the role as a supervisor, take the development of the market as the guide, and develop the local digital market. In terms of investment, it is necessary to start with basic research and development and personnel training, promote market-oriented investment and technological innovation to enhance the competitiveness of the digital industry. In terms of end-users, it is necessary to integrate their own digital resources, establish a public digital space, and expand digital demand with the digital transformation of public services and government affairs as the direction. These three new roles are the basic problems to be solved in the process of promoting new infrastructure.

While much attention has been paid to new infrastructure, the reality is that, in terms of overall size, it needs to be recognized that infrastructure investment is still dominated by conventional infrastructure projects, with new infrastructure as defined by the market accounting for less than 15%. ANBOUND is not a proponent of separating infrastructure from the old and the new, so one cannot fully “bet” on new infrastructure to revive the post-pandemic economy. From the perspective of economic development trends and current reality, the role of new infrastructure is to promote the coordinated and integrated development of digital technology to industry and regional economy. Therefore, local governments need to make good use of fiscal expansion policies and financing tools to build new infrastructure, rather than investing for investment’s sake, they need to pay attention to the trend of economic digitization and promote the market efficiency and the expansion of market space.

Final analysis conclusion:

Promoting economic recovery and the development of the digital economy with new infrastructure are the keys to current macro policies. In this regard, local governments need to pay attention to the differences between the new infrastructure and the conventional infrastructure model, and they need to make corresponding adjustments in the investment model and development thinking so as to give full play to the efficiency of the digital economy.

*Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound

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