Pak JIT to visit Pathankot AFB - Modi's "Jaswant" moment?

For a government that has been generally pilloried for not being "radical" enough in its policy interventions, the Modi government has lately shown a strange penchant for spending an enormous amount of political capital on small impact initiatives.

The latest of them is the visit of the Pak JIT to India to investigate the Pathankot AFB terror attack. to be sure, this isnt unprecedented, there was a Pakistani Judicial Commission that visited India in 2012 to record the testimony of witnesses. But there are key differences between 2012 and 2016. For one, the composition of the Pak team - this time, it consists purely of police/intelligence officials, including a junior officer of the ISI. But more intriguingly, its the access accorded to the team that is curious. The Pak team will visit Pathankot AFB, though it has been said that they would not be allowed inside the "Technical area" (the part of the AFB that houses aircraft and missile/radar systems). Somewhat facetiously this would be the first time an ISI (and a MI) officer would "officially" set foot inside an Indian AFB.

What isnt quite clear is the purpose of the visit. All terrorists involved in the attack have been killed. The terror scene would have been cleaned up two months after the incident to afford any great forensic work. Witnesses, barring the Punjab Police SP Salwinder Singh (and his two associates) whose car was ostensibly hijacked by the terrorists, most others would be basically "victims" of the attack and personnel posted in the AFB. By definition they wont have much value to add about the Pakistan connection of the attack, which is the purported objective of the visit.

Question therefore is, what is it that the Pakistani team will do that could not have been done over electronic means in terms of data sharing? Or is it just optics to keep the pressure on Pakistan?

Whatever it is, odds are that this would have an outcome not much different from what has been seen in 26/11. JeM, while not being as strategic an asset for the Pak establishment as LeT is, is still too valuable to be given up on a platter. Not when the establishment thinks that it has substantial strategic leverage thanks to China (CPEC deal) and the upcoming US withdrawal from Afghanistan. Especially as there is no quid pro quo on the table from India, either on Kashmir or for that matter on Afghanistan.

For the Narendra Modi govt, this could end up uncannily like IC814, Jaswant Singh escorting the JeM chief Masood Azhar (and two others) to Afghanistan. It was an imagery (of a culmination of bad strategic choices, starting from Lahore bus yatra) that BJP has been hard pressed to live down. As the hardline nationalist party, the BJP has a certain amount of political leeway in making concessions on Pakistan. But optics without tangible outcomes come back to bite hard.

JeM/Masood Azhar seems to be a case of deja vu for the BJP!

Small Savings rate cuts - How to lose friends and make daft policy

Dogma plays an important role in both politics and economics. After all both are inexact sciences (latter more than the former), hence value of data is always secondary to the primacy of dogma.

Even granting for that though, the decision by the Modi government yesterday to reduce administered interest rates on small savings defies all logic. One, it alienates a core constituency of the BJP, the urban middle class, that was already chaffing at the margins for the Union Budget gaffe on EPF taxation (hastily rescinded). Two, it doesnt even make sense from a purist, macroeconomic standpoint!

Lets go through the market fundamentalist view of why small savings rates needed to come down. The view is simple - as long as households (in other words middle class folks with some disposable income) have alternative savings instruments in the form of PPF/NSC (and other small savings products) with high tax-free interest rates, banks would not be able reduce interest rates on their deposits. So while RBI could cut policy rates, the ability of banks to pass those rates on to borrowers would be circumscribed by the fact that they face unfair competition for deposits in the form of small savings with high interest rates.

Like most market fundamentalist dogmas, the hypothesis doesnt stand basic empirical scrutiny. Lets look at the data on household financial savings in India. Over the last few years, household financial savings have been hovering around the 10% of GDP mark. And they get deployed in a variety of instruments - Bank deposits, shares, Life Insurance, PF, and Small Savings. Look at the composition below.



The numbers are self explanatory. Bank deposits account for a massive 48% of all savings deployed by households in financial assets. Where is that big "transmission roadblock" culprit, Small Savings? Well, its consolidated in the section Claims on Government. And its marketshare? 5.6%! ALL the other components of household financial savings - deposits, insurance, pensions, shares, UTI - are subject to market determined interest rates.

In other words, a small implicit subsidy in 5% of the flows prevents rate cut transmission in 95% of the flows!

This is a classic example of tilting at windmills and brandishing a reformist sword - unfortunately, the financial Don Quixotes have impact far exceeding the spanish dilettante!

Lets also go further and examine the other point - what about the cost to the government of such largesse (towards small savings scheme). The latest Economic Survey has the data.


As can be seen, interest rate subsidy on PPF (the largest, and ostensibly the "unfairest" component of small savings), is ~12000 crores. The other small savings products (PO savings, KVC etc) are used to fund state government deficits, and hence the interest is serviced  by state governments. Lets say that the subsidy on account of all other small savings product is a similar amount. So the total subsidy on account of administered interest rates is ~24000 crores.

For a country with zero social security, is that a big number for rudimentary safety net? In terms of fiscal impact, the notional loss to the government on account of corporate tax exemptions add up to nearly 6 lac crores.

Its clear therefore that purely from an economics standpoint, the reduction of rates on small savings doesnt stand up to basic scrutiny. It seems to be a case of the government giving in to a "financial market populist" demand. However, the political cost of this far outstrips any benefit on the monetary side. For a government that has been so cautious about anything radical, this is a classical "penny wise pound foolish".

One Rank One Pension: Its impact on the defence budget

Published as an Issue Brief by the Observer Research Foundation (ORF)

http://www.orfonline.org/research/one-rank-one-pension-its-impact-on-the-defence-budget/

The One Rank One Pension (OROP) scheme will pay a uniform pension to armed forces personnel, who retire with the same rank after the same length of service, regardless of their date of retirement. It has quickly become one of the most politicised of all military issues in the country today, which may be called odd, given that the political class rarely takes interest in matters related to the military. Indeed, the debate over OROP, ostensibly an employee-benefit programme, has become a leitmotif of all that is wrong with the nation's treatment of the military. Lost in the political din, however, is the key question of affordability. Not being discussed either are questions on long-pending structural reforms in the military, on issues like officer shortages and the need for modernisation. This paper examines the potential impact of OROP on the nation's coffers.

Pathankot - operational win, narrative defeat?

The country has been seized of the audacious terror strike on IAF's Pathankot base for the last few days. The general media (and "expert") analyses seems to be converging around describing the operation as a disaster, with the consensus view being that this is as much of a fiasco operationally (though not in terms of casualties) as Mumbai 26/11.

As an armchair enthusiast, I find the above conclusion a bit puzzling. First up, what would have been the objectives of the folks that planned and executed this fidayeen attack?

1. Spring a surprise attack on a high profile military target to highlight India's vulnerabilities to such jihadi assaults.
2. Destroy aircraft and military assets, if possible.
3. Take hostages to prolong the operation and inflict large casualties, both military and civilian.
4. Perhaps most importantly, capture the media narrative.

So from the perspective of the jihadi groups, how did the outcomes stack up?

1. The attack wasnt a surprise, there was advance intelligence, and forces were waiting for them (even if the specific target wasnt known).
2. No military asset was destroyed. Indeed, IAF aircraft from the air base made repeated sorties in support of the operation. In other words the offensive capacity of the airbase was maintained while the terror attack was on.
3. No hostages were taken, no civilians were killed. Military casualties were high, and something that perhaps could have been minimised.
4. This was the success. The attack and its aftermath has surely captured the media narrative, and shaped it in the direction that the jihadis would have liked.

Tactically therefore, how was the operation a "failure", given that we denied the jihadis most of the desired tactical objectives? It would be interesting to compare this with a very similar incident, where an airbase was attacked with pretty much similar objectives. This was the Taliban attack on Camp Bastion. Camp Bastion is one of the largest coalition logistics and offensive air support base in Afghanistan, situated in the frontier Helmand province. During the attack, it housed a fleet of US Marine Corps (USMC) Harrier fighter aircraft, besides transport aircraft and choppers. Brief summary of the attack in the link below.

https://en.wikipedia.org/wiki/September_2012_Camp_Bastion_raid

In short, the attack managed to destroy or damage 9 aircraft, including 8 Harrier fighters. While military casualties were low (2 killed), the tactical success for the Taliban was huge. And this despite the fact that Bastion, unlike Pathankot was not a family station, and hence housed only combat and support troops (not large numbers of civilians that slow down operations and increase risk of casualties).

While intelligence on an impending attack was much less specific for Bastion than it was for Pathankot, it was a military base in a combat zone (and hence always expecting to be attacked and therefore on hair trigger alert all the time).

It seems where we have lost out is on the media narrative. Seems as if we have managed to achieve in the media for the jihadis that they couldnt in the attack itself. The focus of the media narrative has been on blaming NSA, caviling over choice of forces (NSG versus Army) etc. Its important to control the media narrative in asymmetric conflict, and we seem to have a long way to go. Not just for the government, but for us collectively as a society.

Net Neutrality - regulatory confusion leading to faux debate?

"Net neutrality" has been trending in the social media for quite some time. Thanks to Facebook's aggressive courting of even the main stream media in the last few weeks (with full page ads, Op-eds by Mark Zuckerberg himself et al), the matter has suddenly acquired an even higher profile. As is usually the case with anything digital, acronyms and jargons have taken over the discourse - data discrimination, Freebasic.

It would be useful to look at what the issue really is, and which side of the divide makes more sense.

As of today, access to internet requires subscription to a data plan from a telecom company (telco). Data plans typically are more expensive than vanilla voice plans, though the pricing has been coming off steadily.What Facebook is proposing in partnership with Reliance Communication (RCom) is a "limited access" concept. In this, accessing FB will be free, ie, a subscriber without a data plan would be able to access FB. According to FB (and others on its side of the debate) argue is that this would enhance internet access to people who cannot afford expensive data plans. FB claims that this would increase the pace of internet penetration in India by 50%.

Naysayers on the other hand have two basic objections. One, it violates the concept of "net neutrality", ie, all internet sites should be equally accessible. And two, free FB messenger (say) through RCom will restrict growth of newer, disruptive messenger apps as both FB and RCom would/could act as gatekeepers preventing access to the latter through expensive data. Andy Mukherjee, the Bloomberg columnist has weighed in with the objections quite well in a Livemint article today.

http://www.livemint.com/Opinion/elkKQzTLVAru6wKc44OUMN/Mark-Zuckerbergs-Internet-gift-to-India-looks-like-a-trap.html

I think the issues are twofold.

The first is a philosophical question. And that is simply whether data (internet) is a free commons (like air, sunlight) or a scarce natural resource (like coal, oil). The fact is that the decision on this question has already been taken. Bandwidth has been defined as a natural resource and the government auctions the same for a lot of money. Given the general acceptance of this approach, the society wants to treat internet as commercial consumer service.

The second question therefore is, what should be the regulatory approach towards this service? Coverage, or neutrality? to me its a faux divide.Taking instance from other utility and consumer services, the evidence is actually very strong in favour of differential pricing strategies (of the type advocated by FB) leading to enhanced coverage. Even utilities that are natural monopolies like power distribution, have expanded coverage through differential tariffs. On the other hand, utilities subject to intense competition have shown even better results. None better than telcos on voice telephony, where differential tariffs based on user groups, specific services (like toll free), usage duration and a lot more have made telephony cheaper and enormously helped coverage.

The scenario today is the following - when I surf www, whether I log on to FB or Google or MSN, I pay as per my data plan. A chap who cant afford the data plan is not on www today. Tomorrow, my telco would offer a plan that would make accessing FB free. Will that increase my time on FB? Very unlikely. But that certainly would pull the other chap into www, even if only for FB (and such other "sponsored" sites). Will that increase data tariffs on X-subsidisation? Given the intense competition in the space, virtually unlikely.

Which brings us to the question of neutrality, or access. That is NOT a commercial question, left to RCom or FB. That is a regulatory responsibility. As long as the regulator ensures that RCom is obliged to provide me as speedy an access to MSN messenger as it does to FB messenger, even if it is for a price, anything else doesnt matter. New apps will have the same opportunity to disrupt FB from the "paying customer" population that they have today. Technically, the free internet users accessing FB arent even a customer base for anyone today, hence net net (as they say in banking), it doesnt matter.

This leaves a last, somewhat disturbing point to address. And that is a fear that somehow free access to some sites/apps will "hook" the poor to the internet, and they will start spending money on other, "non-free" sites/apps to their own detriment. This betrays a liberal condescension for the ability of poor to make rational judgements. Not very different from saying that if you give the poor money (instead of subsidy) they will blow it up on alcohol and marriages. As an axiom, this has been debunked time and again (Esther Duflo/Abhijit Banerjee's Poor Economics is a good source of the data).

We should not let class divides come in the way of digital inclusion and exacerbate the digital divide.

Make in India in defence - Very old wine in old bottle?

One of the signature initiatives of the Narendra Modi government has been the "Make in India" campaign. While the broad thrust of the campaign, which is to boost share of domestic manufacturing in GDP, is unexceptionable, the relevance of the same at a brass-tacks level merits close scrutiny. Especially true in the area of defence, where a host industrial houses - Reliance, M&M, Adani, Tata - have been setting up JVs and acquiring companies (eg, Reliance acquisition of Pipavav Port) with foreign OEMs in anticipation of large "Make in India" orders. 

The big question though is, what exactly is "Make in India" as far as defence manufacturing is concerned?

These are early days yet, but the recently concluded deal with Russia to manufacture Kamov Ka226 Utility Helicopters (UH) provides some indications. From press reports following the PM's recent visit to Russia, 200 of these choppers will be manufactured in India. The spokesman of the External Affairs Ministry described this as the "first project for a major defence platform under the Make In India mission". Interestingly, the lead Indian "partner" for this estimated USD 1 billion contract is reported to be Hindustan Aeronautics Limited (HAL), and not Reliance Defence, which was widely tipped to bag the contract earlier.

While details are sketchy yet, the template is intriguing. The Ka226 platform is slated to replace the legacy Chetak/Cheetah platforms operated by both Indian Army and Indian Air Force. Chetak and Cheetah are Indian versions of the Aerospatiale Alouette III and SA315B Lama respectively. They have been manufactured under license by HAL in India since the early '70s, with more than 600 choppers having been manufactured till date. Over the last four decades, while some modifications have been attempted (most ambitious of which was the Cheetal - a re-engined Chetak fitted with a new engine), the basic aircraft has remained the same. HAL hasnt carried out any major upgrades of the airframes. Worryingly, four decades of what has essentially been "Make in India" hasnt enabled HAL to develop a successor airframe. 

LUH - the (yet another) successor that wasnt?
The Light Utility Helicopter (LUH) programme, which was slated to replace the Chetak/Cheetah has been in development for a decade. The first test flight of LUH has seen multiple postponements, with the last reported date (Dec 2015) being the latest in a string of missed deadlines.

Moving away from the UH programme, the storyline is actually one of deja vu. HAL has been manufacturing fighter aircraft (Gnat/Ajeet, Mig21/27, Jaguar, Su30), utility aircraft (Do228). 

License Manufacturing - the pig's lip
In other words, for large defence platform and sub-system acquisitions, both aeronautical and land systems (T72 tanks for example), "Make in India" has been in place for a very long time. Traditionally it has been known by a sexed down axiom,ie, license manufacturing. The signature feature of license manufacturing of course was the monopoly of the public sector as the main assembly line integrator of the platforms. It would either be a DPSU (like HAL) or the Ordnance Factory Board (OFB).

In none of the programmes though have the assembly line experience enabled HAL develop, test and deploy the next generation of the aircraft/aero-engine. Each platform has been and is being replaced by fresh imports. Even platform upgrades, eg, the Bison upgrade for Mig21, required foreign OEM support.

Nor has license manufacturing enabled India to be self sufficient in key sub-systems like aero-engines. HAL has been manufacturing the Al31 engines (used in Su30) for nearly a decade. This license manufacturing experience has been of little relevance in enabling India develop its own series of aero engines.

In short, license manufacturing hasnt provided the gateway to the future.

National programmes like the Light Combat Aircraft (LCA) have been executed in design/R&D mode outside of HAL.

Make in India - lipstick on the pig's lip
The sequence of events begs the basic question - what are the objectives of "Make in India" in defence? How is it different from the erstwhile license manufacturing regime?
1. Ensure continued maintenance of the aircraft over its lifetime in India?
2. To build assembly line manufacturing experience?
3. Ensure deployment of part of the expenditure back into the domestic economy as investment?
4. Create a private sector ecosystem of major integrator?

The general experience on maintenance of platforms is that a well funded logistics chain is a lot more important than assembly line manufacturing base. IAF has superb uptime with the Mirage 2000 (which wasnt assembled in India), but is part of a first class French logistics footprint. On the other hand, Su30, 220 of which will be eventually assembled in India, has a terrible uptime record (as successive CAG reports).

Experience over the years also shows that skillsets built in "screw driver" manufacturing imparts no sustainable transferable skillsets that can be transferred to the next generation of major platforms. Major technology transfers are only in name, and critical technologies are almost never truly transferred.The general sense also is that such creation of new assembly lines in India inflates the final cost of the platform (we have seen that in Su30, and also during the recent Rafale MMRCA negotations).

Is the basic intent therefore to create a private sector ecosystem? One that will be more efficient in retaining and transferring skillsets to other programmes? That could be a worthy endeavour, one that will play out in the long run. However, if that indeed is the objective, giving the Ka226 contract to HAL militates against the same.

Unless Make in India is to be a shiny lipstick on the pig's lip, the government needs to be clear on what it means for a domestic Military Industrial Complex.

India-China Border Dispute – the Real Issue is Tibet

This was published in the China-India Brief of the Lee Kuan Yew School of Public Policy (National University of Singapore)

http://lkyspp.nus.edu.sg/cag/publication/china-india-brief/china-india-brief-46

China, along with the US and Pakistan, have traditionally been the largest files handled by any Indian Prime Minister on the foreign policy front. The Modi government has set out on an interesting dynamic. On one hand there are substantive discussions with China on trade and investments (including on one of Modi’s pet projects, High Speed Railway). On the other hand, the government has broken from the past by sending out clear signals on countering Chinese influence in Asia. Modi’s statement on “expansionist powers” in Japan, the Indo-US joint statement on South China Sea, resurrection of the India-US-Japan-Australia maritime exercises – the messaging from India has been quite loud.

While a certain amount of the Indo-China equation is driven by their recent history and rising power and status, the biggest irritant in the Indo-Chinese equation has been the border issue. While the border has been tranquil for a long time (the last “hot” activity was in 1986, in the Sundorong Chu area), the disputed nature of the boundary lends itself to periodic media frenzy over “incursions”. The two sides have been engaged in border resolution talks for many years now, but progress has been painfully slow. Recently Ajit Doval, the National Security Advisor was appointed as the Special Representative (SR) of India in the Indo-China talks on the boundary question. By itself, the development was largely routine – India’s Special Representative has traditionally been the NSA over the last decade and a half. But the announcement brought into sharp relief the longstanding nature of the dispute.

Despite a formal dispute resolution mechanism, and the fact that the two countries are headed by men of formidable political clout, progress on the border has been slow. From available accounts, the sticking points are largely to do with Chinese claims on Indian “red lines” (eg, a demand to cede the Tawang tract) rather than the other way round. The Indian side has been keen on a “give and take” compromise around status quo positions, not least because each Indian government has been subjected to enormous domestic media pressure around the incursions by Chinese troops. At times these have been ill-timed with high profile visits (the latest one during President Xi Jinping’s visit to India). This is something that all Indian governments have been keen to avoid at least in part so as to get on with economic interactions with China.

However, besides competing claims around the MacMahon line, the elephant in the room is something else – Tibet. In fact for China, the key issue is all about Tibet. While China has outstanding border/boundary disputes with all its neighbours (much like India), very few are the existentialist nature of Tibet (the other being Taiwan). Despite successive Indian governments assuring China of India’s official recognition of Chinese suzerainty over Tibet, Chinese fears around India’s “Tibet card” emanates out of multiple prongs – political, religious/philosophical and military.

First, the presence of the Dalai Lama, along with a full-fledged and well developed government-in-exile in India. While the government-in-exile represents little by the way of military influence, the seat of power and the persona of Dalai Lama together exert enormous moral and political influence around the world. The Chinese did not fail to notice that Narendra Modi invited Lobsang Sangay, the Prime Minister of the Tibetan government-in-exile, for his swearing-in ceremony. India’s sponsorship of his seat and the enormous social goodwill and influence of the Dalai Lama in India’s state and civil society stand in sharp relief to how global leaders keep an hands-off distance from His Holiness in deference to Chinese sentiments.

Second, the strategic importance of Tawang. Tawang is the second highest seat of Tibetan Mahayana Buddhism, and the monastery there exercises enormous moral/philosophical influence over Tibetans. Indian “occupation” of the tract and monastery means that the Chinese perceive a philosophical “chicken’s neck” for the Chinese occupation of Tibet. This influence isn’t restricted to Tawang alone. The traditional influence (both spiritual and temporal) of Tibet’s historic monasteries  (Drepung, Ganden, etc), which have been desecrated/destroyed by the Chinese, is now to be found in similar Tibetan establishments around India.

Third, while Tibet has been largely peaceful in the public eye, small and big bushfires continue flaring up every now and then. Every time there is a flare-up, there are mirroring reactions in India, within the large Tibetan community as well as civil society, panned widely by India’s loud and free media.

Fourth, India maintains a large force of Tibetan exiles under the operational command of the Indian Army, the Special Frontier Force (SFF). The SFF, staffed largely from among the Tibetan exiles living in India and led by Indian Army officers, was set up soon after the Indo-China war in 1962, with initial help from the CIA. Over the years, the force (also known as the Vikas Regiment) has developed into a fine fighting force, having participated in multiple military campaigns in Bangladesh (1971) and Kargil (1998), as well as counter insurgency operations in J&K and North East. SFF has grown in importance and prestige over the years and is typically led by a senior Indian Army officer (the current Army Chief, Gen Dalbir Singh Suhag being one). The presence of this large, professional fighting force is a red rag to the Chinese, akin to an armed Tibetan fifth column in India.

In short, the Chinese have a deep fear of a strong Tibet card in Indian hands. Any settlement of the border dispute is actually predicated on the Indian government visibly d eliminating the various elements of this card. Unfortunately, India is unlikely to oblige beyond what it has already done, that is, affirm Chinese suzerainty over Tibet. Anything else would invite a tremendous backlash from both voters and the strategic community in India.

Which is why Ajit Doval (and his Chinese counterpart, Yang Jiechi) have an unenviable task – that of going through the motions without really getting to the crux of the issue!