States, Not Markets, are Responsible for Economic Security

Kashmiri demonstrators clashed with Indian police during a protest in the northern city of Srinagar Jammu and Kashmir Feb. 28. Tauseef MustafaAgence France-PresseGetty ImagesThere is good reason to think that the internal and external security problems across India have much to do with the social effects of market-oriented reforms.  The beneficiaries of reforms, the argument continues, should bear the cost of negative externalities.  However reforms, when properly governed, is in fact a powerful force for social good (Bhagwati, 2007).  States, not markets, are usually held responsible for security (Leander, 2008).

The economic security of the state is significantly weakened with abuses by the police and security forces.  The most significant human rights problems in India include extrajudicial killings, torture and rape, as well as corruption at all levels of government (India 2013 Human Rights Report).  According to the report commissioned by the U.S. Congress and published by the State Department separatist violence, life-threatening prison conditions, sex trafficking of children and an atmosphere of impunity resulting from the overburdened judicial system is endemic.

Smaller acts of human agency thus matter.  On the basis of available evidence, such acts can be divided into three categories: movement politics aimed at electoral politics, nonelectoral civic interventions, and initiatives led by local administrations (Varshney, 2002).  How lasting the effect of this political shift depends on what kinds of civic institutions are put in place.

Climate Change, and the Disciplining of States

india-climate-change-2010-1-24-12-11-17 Associate PressIt seems evident India’s high vulnerability and exposure to climate change will slow its economic growth, impact health and development, make poverty reduction more difficult.

The latest report from the U.N. Intergovernmental Panel on Climate Change (IPCC) indicates India is already one of the most disaster-prone nations in the world and many of its 1.2 billion people live in areas to floods, cyclones, and droughts.

Though the report doesn’t have country-specific predictions, its region-wise findings brought out conclusions for states .

Aromar Revi, lead author of one of the chapters of this report, said the impacts of climate change would be felt severely in Indo-Gangetic plains, affecting poor people in the entire region.  “The areas which are facing frequent floods these days may face drought like situation in the distant or near future.  We cannot ignore the changes which are taking place either in the Indus river basin or in Brahmputra river system over the longer period,” said Revi, explaining the implications of the report in Delhi.

Villagers walk through a flooded road at Ibrahimpatnam in Krishna district of Andhra Pradesh India. Mahesh Kumar Associated PressThe responsibility now lies in the hands of the Modi administration to begin organizing responsibility, by endowing states with certain fundamental rights, powers, duties (their sovereign rights), establishing norms of conduct (Aalberts and Werner, 2008) for addressing climate change.   In this way, it becomes possible to discipline states, mitigate risks, and address direct and indirect impacts of climate change on human security.

 

Financing For Infrastructure Development and Affordable Housing

The Reserve Bank of India (RBI) has taken bold step towards ensuring adequate flow of credit to core industries sectors, maintaining price stability and public confidence in the system.  On July 15, the RBI announced operational guidelines for flexible structuring and refinancing of new project loans to infrastructure and for issuance of long term bonds by banks for financing infrastructure project loans and affordable housing.

Shri Arun Jaitley Finance Minister of IndiaIn the Union Budget 2014-15, presented on July 10, 2014, the Honorable Finance Minster, Shri Arun Jaitley announced that:

“Long term financing for infrastructure has been a major constraint in encouraging larger private sector participation in this sector. On the asset side, banks will be encouraged to extend long term loans to infrastructure sector with flexible structuring to absorb potential adverse contingencies.  On the liability side, banks will be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL).”

The reality is there are substantial risks associated with infrastructure at the construction phase, which requires flexible bank financing.  Post-construction, suitably structured long-term loans can be “taken-out” by long term lenders, such as infrastructure funds, pension funds, and insurance companies.  Therefore, banks need the flexibility to structure loans to mitigate risks as well as to ensure easy refinancing.

Infrastructure and affordable housing need relatively long term financing compared to the standard bank loan.  If banks finance such long term loans with short term deposits, they create a risky asset liability mismatch, as well as a need to maintain liquid assets to mitigate the risk of illiquidity.

Innovation, Technology and Competitive Growth

India’s rapidly expanding economy demands innovation and power-generation technology.  The first wind turbine developed and engineered specifically for India’s low wind speed conditions, allows greater energy capture and improved project economics.

GE-Wind-Energy-Turbine. Credit Carsten E. CC BY SA 3.0The result, India is rapidly increasing its power generation using renewable energy.  Renewables now constitute over 5 percent of India’s energy mix by production and 12 percent by installed capacity.

The cost of wind power in particular is now close to grid parity and advancement in technology is making its generation more predictable.

India is poised to deliver high-efficiency output and even more competitive growth.

Trust, Confidence and Making Local Government Work

It is of course only an illusion to think that any government will strike a perfect policy balance between government and governance. Power in the Indian political system, for example, has historically emerged from coalition formation at the lower levels, everyone engaged in it has had a vested interest in keeping the “democratic” game going, though, once again, the stakes are not the same for everyone. (Mitra, 2001). The true challenge lies in devising a scheme where local democracy, elites, and experts can play complementary roles.

“I believe government has no business to do business. The focus should be on Minimum Government but Maximum Governance.”
– Prime Minister Narendra Modi

Prime Minister Narendra Modi propose the judicious use of local government. “Simplifying and streamlining the administrative rules and procedures to make them people-friendly” is certainly a good start. Local government is at its most effective when local institutions enjoy the trust and confidence of local elites and are simultaneously accountable to the local electorate (Mitra, 2001).

Drawing on survey data relating to popular attitudes towards local government and the analysis of case-study and interview Mitra (2001) finds that the experimentation in local democracy has been the least successful in those regions where no autonomous empowerment of subaltern social groups has taken place. Accordingly, the judicious use of local government will infuse new political resources into the political system and enhance the resiliency and legitimacy of the state.

Reimagining India

The Asia Society, Texas Center, recently hosted a panel discussion on the potential of Asia’s next superpower, Reimagining India.

The diasporic community and their material resources are critical for change.

The panelists propose a culturally and geographically unique model for development.  They imagine a strategy for high growth, economic stability, shared prosperity, and environmental sustainability.

Panelist included: Vishakha Desai, Special Advisor for Global Affairs, Columbia University and President Emerita, Asia Society; Ed Emmett, Judge, Harris County; Patrick French, author; Barnik Maitra, Partner, McKinsey; Drayton McLane, Chairman, McLane Group and former owner, Houston Astros; Adil Zainulbhai, Chairman, McKinsey India. (1 hr., 19 min.)

Liberalization, Sovereignty and the Markets

India’s slowdown has had significant spillover effects to the rest of South Asia, and even more so after the financial crisis of 2008.  As Martin Rama and others have shown in their research, there is a clear transmission of the global business cycle on South Asia, but also a significant effect from India on South Asian economies’ GDP growth rates.  Not only do Indian business cycle movements spill over to other economies in the region: the nature and speed of the pass through has significantly changed in the aftermath of the financial crisis of 2008 (Rama, 2012).  This spillover effect adds to the direct effect that other developing countries, the US and other advanced countries have on the legitimacy, power and controls in the region.

Adler-Nissem and Gammeltoft-Hansen (2008) suggests a new approach to the study of State sovereignty, proposing to understand the use of sovereignty as games where States are becoming more instrumental in their claims to sovereignty and skilled in adapting it to the challenges that they face.

I agree the strategic use of State sovereignty in international affairs bears consequences for authority relations.  Further, as I write in a new article, Liberalization, Sovereignty and the Markets (forthcoming 2015), sovereignty  is being instrumentalized by states as well as other exogenous forces in the political economy.  For example, while India is the country most affected by portfolio outflows, the impact is felt across all South Asian economies.  And this is so even if each country faces specific idiosyncratic challenges and shocks to economic performance (Markus Kitzmuller et. al, 2013).