Ambitions in South China Sea and India ASEAN trade ties

The first full moon after Diwali (Indian festival of lights) marks the beginning of a seven day long festival of Bali Jatra (Journey to Bali) in Cuttack (a city in Eastern state of Orissa). Small boats made of dried banana tree stump are sailed into lakes and rivers to commemorate the annual sailing season to Bali. Traders in ancient times would set sail to present day Indonesia with retreating monsoon winds and come back with advancing monsoon. Items like ivory, sandalwood, textile etc were exported and spices were imported. This perhaps was the first engagement of India with what now has become ASEAN (Association of South East Asian Nations, a trade bloc). The ships no longer sail to Bali from there and business and cultural contacts were virtually lost in post independence era. Things however have started to change since the last decade. 

Towards an integrated Asia

India is now a summit level partner with ASEAN and has already signed a free trade agreement (FTA) in goods. Bilateral trade has seen a sharp increase. Provisional data posted by ministry of commerce shows the trade between ASEAN and India at USD 79.2 billion (10% of total trade and an increase of 41% over the last year). This figure is expected to reach USD 100 billion in the next couple of years. On 20^th and 21^st December 2012 Delhi will hold the India – ASEAN Commemorative summit to mark twenty years of partnership. A FTA for services and investments is expected to be finalised with ASEAN during this summit. The FTA once signed (formal adoption around August 2013) will open up ASEAN for Indian companies to provide services in sectors like finance, accounting, law, medicine, media and communication, business process outsourcing, tourism etc. Inter regional investment will also get a boost as a result of the FTA.

There is a lot of potential for trade between India and ASEAN, especially due to a stable political environment and steady economic growth. These trade and service pact however have to be supplemented by a strong infrastructure network. Surface connectivity is absent between the two regions. With changes in Myanmar politics Trans ASEAN surface connectivity seems more likely than ever before. The intra ASEAN business and trade has made great progress in the past decades but connectivity is still a big issue. Crossing borders on land is a challenge and eats up a lot of time (not a good thing for people and goods waiting to cross over). Compared to the ease of crossing land borders in Europe ASEAN is still a long way to go. During his address, Prime Minister Singh spoke about the urgency to build the India – Myanmar – Thailand trilateral highway and further connect it to Cambodia and Vietnam in future. The urgency should now flow from the dais to pouring asphalt.

Apart from the business aspect of the summit there is a parallel strategic effort going on in the region. India has dispatched a sail training ship, INS Sudarshini on a commemorative expedition to the ASEAN countries. The ship is retracing the routes which the ships from Cuttack might have taken, along the Monsoon route. At the time of writing this blog the ship was anchored near Manila waiting for its next call at Da Nang in Vietnam. The journey would take it across the fiercely disputed South China Sea. Straits Times, a widely read newspaper in Singapore covered the summit under a headline, “Amid China tensions, South-East Asia looks to India”. This is in reference to the recent aggressive stance taken by China in the South China Sea, where it virtually claims all of it as its sovereign territory. India is obviously worried about the Chinese advances (an Indian ship while in Vietnam territory was allegedly warned to retreat from Chinese waters earlier this year). India has increased its military engagement with ASEAN countries in the recent past. It has conducted joint naval exercise with Singapore, Indonesia, Malaysia and The Philippines. India’s navy chief Admiral D. K. Joshi’s comment on India’s preparedness to intervene in South China Sea saw The Philippines welcome such a move. These steps might be seen as India’s willingness to play a greater role in the region.

The South China Sea is of strategic importance to not just China but to the larger Asia Pacific region too. Its proximity to the Strait of Malacca is the primary reason of concern in the immediate future. A quarter of world trade is carried out through the straits which is a busy shipping lane connecting the Indian Ocean to the Pacific. Chinese presences in the disputed waters will make it easy for it to control the trade routes. India’s involvement is seen as a counter balance to an aggressive China by the ASEAN and by US and Australia. The India – ASEAN summit has definitely proved to be of economic importance. Its strategic importance is yet to be seen.

   

                                                         

Cash in my pockets

For the fiscal year 2011-12 India poured in a total of 2.16 lakh crore rupees (USD 39.7 billion) in subsidy. The three major heads under which this subsidy is rolled out are food, fertilizer and fuel. All three heads have equal share in the booty. The total cost of subsidy is three times the planned outlay for ministry of health and family welfare or just bit lower than the total planned outlay for defense at USD 40.44 billion. It’s not too difficult to get a perspective on how much money is spent on subsidy. Most of the subsidy under all the three categories either fails to reach the true beneficiary or is misused. The public distribution system (PDS) (barring in Madhya Pradesh and Chattisgarh) is highly corrupt and inefficient. Food grains are siphoned off and sold in the open market. Grains meant for PDS rots in open due to lack of proper storage. Cheap fertilizer has lead to indiscriminate usage and reduced soil quality and has made food unsafe. Free power and subsidised fuel has also done little benefit to the farmers. A report by Central Ground Water Board has indicated sharp decline in water table in Northern India. Most of the decline can be attributed to overdrawing of ground water due to free access to electricity and fuel. A big hole is burnt in the national budget with little benefit to show.

Cash or kind? 

The government has finally woken up to the fact and will roll out the first direct cash transfer scheme in the country. It will start in the New Year beginning 1^st January 2013. The idea is to transfer cash directly into the accounts of entitled families and selling the food grains in open market. The argument given by the government is that this will increase the supply in open market (food which was held back to be distributed through PDS will now enter the market) and hence bring the prices down marginally. People will have a choice to buy what they want and when they want. Corruption in the system will be put to an end. These arguments seem plausible, given that such schemes have benefited poor people in other countries as well. The move is also seen as a trump card by the central government for the general elections due in 2014. The scheme is intended to be fully operational by that time. Some states are however unhappy about the scheme. The chief minister of Chhattisgarh has written to the prime minister to withdraw direct cash transfer. He has a valid reason. The credit for good governance will no longer go to the local government, which streamlined the PDS system in Chhattisgarh.

Subsidies are bad for an economy and are worse the way they are handed out at the moment. The new step is indeed a much needed change. The government however should not make it easy for the beneficiaries to get the money. The idea of subsidy is to help the poor balance their budgets so that they can come out of poverty over a period of time. Handing out cash without any conditions will not bring about that change. Proven systems of conditional cash assistance exist in the developing world. The most effective and recognized being the “Bolsa Familia” of Brazil. It is aimed at reducing poverty by direct cash transfer. The aid is linked to the beneficiaries sending their children to school and getting them vaccinated as per the schedule. The cash assistance helps them to top up their limited incomes and schooling and timely vaccination of their children helps in creating a healthy and educated workforce for future.

The Indian system should learn from such schemes and implement some checks and balances. First step would be to set a limit to such assistance. People should not be given lifelong subsidies. Once they know it is unlimited the incentive to work towards it is gone. The benefit should be set to last a certain number of years and after that it will automatically cease. This will ensure that the beneficiaries will utilize the money judiciously. The benefit should also be tied to milestones like in the Brazilian system of children attending school or regular vaccination. Demographic measures like population control and balancing the sex ratio too can be incorporated in the system. Biometric identification (which will be linked to each bank account) of all family members should be used to verify the claims. There is a whole lot which can be done to pull millions out of poverty. The government should be judicious the way it uses public money and make its welfare schemes sustainable rather than populist.