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      The State of the Indian Republic

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      On August 15, India celebrated 73 years of independence. By some metrics, the country has been a fantastic success. Multi-ethnic states such as Yugoslavia and the Soviet Union collapsed in the early 1990s. In contrast, India is still united despite its bewildering diversity in terms of religion, region, language, caste and class. Its democracy has proved resilient and political power still changes hands peacefully.

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      The Republic of India began as and continues to be an audacious experiment. India’s independence came at a terrible cost. In 1947, the departing British partitioned the country into India and Pakistan, leading to violence and the largest migration in history. Despite the violence and chaos, India chose a pluralistic democracy and inspired other colonized nations to pursue independence.

      Since then, India has changed dramatically. Some trumpet the country’s great achievements. Others damn its monumental failures. In 2020, India still offers insights and lessons to many other nations around the world. With a population of more than 1.3 billion people, the state and health of the Republic of India is a matter of global importance.

      The Story of the Republic

      In seven decades, Indians have become much better off physically and financially on aggregate. For a start, they are living longer. Life expectancy in 1947 was 32 years. Today, it is over 69. During British rule, famine was a part of Indian life. It began with the Great Bengal Famine of 1769-70, which killed 10 million people, a third of the population of Bengal. During World War II, an estimated 3 to 5 million people died as Bengal’s grain was diverted to the overseas British war effort. Since independence in 1947, India has suffered no major famine and has achieved food security for the first time in centuries.

      There are many other achievements. India’s per capita GDP has improved dramatically. Literacy has increased from 11% in 1947 to 74% as per the 2011 census. Social mobility for women and members of lower castes has increased. A Dalit (India’s lowest caste) woman has held office as chief minister of India’s largest state and a woman has been prime minister. India now has nuclear and space programs and is on the verge of great power status.

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      Yet there are warts in the picture. Cambridge economist Joan Robinson had a lifelong love affair with India and famously observed, “Whatever you can rightly say about India, the opposite is also true.” Her observation holds true today.

      Indians may not be dying of hunger, but too many of them are still struggling to get enough food or water. In the 2019 Global Hunger Index, India ranks at a lowly 102 out of 117 qualifying countries. As of 2017, 37.9% of children under 5 were stunted and 14.5% of the population was undernourished. These rates are comparable to countries in sub-Saharan Africa, not in East or Southeast Asia. According to NITI Aayog, the premier policy think tank of the government, India faces the worst water crisis in its history and about 600 million face acute shortages. With nearly 70% of the water contaminated, India ranks 120 out of 122 countries in the water quality index.

      To add insult to injury, India‘s health care system is in crisis. Numerous research papers have chronicled the low quality of primary care facilities for women and children. A study by The Lancet found that 2.4 million Indians die of treatable diseases every year. A 2016 report by the World Health Organization found that 57.3% of India’s doctors did not have a medical qualification. When it came to nurses and midwives, 67.1% had education only up to secondary school level. Rural areas are poorly served. Public health care has declined dramatically. Even the poor turn to private health care where profiteering is rife.

      Like health care, education is in poor health. Annual reports invariably find young Indians lacking in cognitive development, early language and early numeracy. Teachers are often recruited on the basis of bribery. Like doctors, many are not qualified for their jobs. In addition, schools often lack basic facilities like water or electricity. Anyone who can afford to do so sends their children to private schools. For many, the focus of education is clearing entrance examinations to government-run, highly-subsidized elite universities. As a result, a booming $40-billion private coaching industry has emerged, which trains students for such examinations, allowing little space for innovation.

      Like education, India’s environment is in a dire state. The air in cities like Delhi or Bangalore is almost unbreathable. Sewage and industrial waste are discharged into rivers, streams, ponds, lakes and other water bodies. Plastic litters the land, including the high Himalayas. The levels of pollution have made scientists offer repeated warnings about impending environmental disasters to little effect.

      The Indian economy is in a similar state to the environment. Even before the COVID-19 pandemic, growth had stalled and jobs dried up. More than 50% of Indians are under 25 and over 65% under 35. Thanks to selective abortion and gender discrimination, India has higher female mortality and more men than women. These single men present a major national challenge. Thanks to persistently high unemployment, there is a real risk that India’s much-trumpeted demographic dividend could turn into a demographic disaster.

      India’s institutions that are supposed to deal with these challenges are in dangerous decline. In politics, crime pays. Money and muscle power are essential for winning elections. Identity politics in the form of religion, region, caste and class has risen to alarming levels. In bureaucracy, corruption works. Colonial laws and post-independence ones have led to restrictive red tape. Citizens navigate it through bribery, personal networks or political influence.

      Furthermore, elite bureaucrats are held in high esteem. After they clear a grueling exam in their 20s, these mandarins are deemed omniscient. They head everything from exam boards to airlines and move seamlessly across ministries of culture, agriculture and finance. Neither lack of domain expertise nor incompetence holds them back. 

      Like the bureaucracy, India’s judiciary faces major issues. Like Bollywood, the profession of law is known for nepotism, not competence. The judicial system is infamous for its delays. Over 3.7 million, about 10% of the total number of cases, have been pending for over 10 years. Hence, many citizens turn to local crime bosses instead of courts for justice. Many of these criminals go on to run for office. Even the police are accused of behaving like a mafia. With the crumbling of the criminal justice system, they are increasingly taking to vigilante justice and extrajudicial killings.

      The weakening of institutions has gravely undermined the rule of law. The republic may not yet be in peril, but it is not too far off from a major crisis.

      Why Does the Indian Republic Matter?

      When the Soviet Union collapsed in 1991, there were high hopes for a new age of peace and progress. Democracy was the new natural order of the universe. In 2020, that romance with democracy has dimmed. Strongmen are in power in many countries. Polarization runs high. India is no exception to this global trend and it assumes importance for five key reasons.

      First, the Indian republic matters most to its 1.3 billion citizens. Its success would mean better lives for nearly a fifth of humanity.

      Second, if the republic fails to deliver essential services or meet minimal expectations of its citizens, India could experience violence, chaos and even disintegration. The entire region could go up in flames as in 1947 when the British partitioned the country into India and Pakistan.

      Third, India has long been an exemplar for the decolonized world. Countries like Tanzania and South Africa avidly studied India’s imperfect but resilient democracy. India provides a good roadmap for the bumpy transition from a traditional to a democratic society.

      Fourth, the Indian republic offers rich insights for any multicultural, multiethnic, multireligious democracy. The promise and peril of such an experiment are laid bare in India.

      Fifth, India poses difficult questions for our time. Can democracies avoid degenerating into popularity contests between competing special interest groups? If so, how? Can a humongous republic with innumerable moving parts reform itself? If so, what does it take? If not, what lies ahead? Answers to such questions will determine the future course of history.

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      Why Is India’s Opposition Congress Party in Crisis?

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      Allan Octavian Hume, a sidelined official of the British Raj, founded the Indian National Congress (INC) in 1885. Born in Kent, UK, Hume was the quintessential gora sahib (white master) who had gone native. He took the initiative to create a modern political platform in a newly colonized and deeply divided land. The INC went …
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      Can the India-China Confrontation Play Out in East Africa?

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      China and India have never been friendly neighbors. The laws of geopolitics set the two Asian giants against one another. In recent years, Chinese President Xi Jinping’s confrontation with the US and Indian Prime Minister Narendra Modi’s ambitions for a powerful and global India have inflamed nationalism on both sides of the Himalayan border. Bilateral tensions peaked in June, when a border clash in the Himalayan Galwan Valley resulted in the death of 20 Indian soldiers and an unspecified number of Chinese troops.

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      Now, the competition between China and India is moving to Africa, and to East Africa in particular. Since 2000, the continent has witnessed China’s deep and ubiquitous penetration through trade, investments, infrastructures, energy, budget support and security cooperation. In 2008, New Delhi showed a newfound interest in Africa.

      Despite China’s head start, India is trying to catch up to counter Beijing’s predominance over the continent. East Africa is the region where the two Asian powerhouses share vital interests and where their competition will likely play out more seriously.

      India’s Africa Policy

      India–Africa relations are rooted in history. The Indian Ocean constituted a channel of trade and population exchange for centuries. Consequently, East Africa has always enjoyed close ties with India, and around 3 million people of Indian descent live between the Horn and South Africa. After independence from British rule in 1947, India was politically active in Africa as a champion of decolonization and South-South cooperation. The period that followed saw India–Africa relations phase out until New Delhi brought the continent back into the picture from the mid-2000s.

      In economic terms, trade augmented eightfold between 2001 and 2017, making India Africa’s third-largest trading partner with a total exchange worth $62.6 billion. While Chinese trade with the continent largely outnumbers it, India has kept up the pace and investments grew alongside trade, jumping to $54 billion in 2016.

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      As a fast-growing manufacturing power, India places strategic relevance to raw materials for the stability of its supply chain and energy sector. Indeed, New Delhi’s exchange with Africa, like Beijing’s, is driven by natural resources — with oil and gas accounting for approximately two-thirds of the total — followed by gold and other ores.

      Political ties have also strengthened over the years. In 2008, the first India–Africa Forum Summit was launched in New Delhi and took place again in 2011 and 2015, with 41 African heads of state attending; the next conference was scheduled in September 2020. These summits allowed African leaders, on the one hand, to set out their cooperation priorities and India, on the other, to respond accordingly. As a result, India–Africa cooperation pivoted around capacity building, technology transfer and infrastructural investments. Lastly, India has sought support on UN reform, which would be unrealistic without the votes of African countries in the General Assembly.

      Security issues have been on the agenda as well. New Delhi is particularly active in the realm of anti-piracy. After the kidnapping of several Indian citizens by Somali pirates, the Indian navy stepped up its efforts after 2008 and escorted over 1,000 vessels across the Gulf of Aden, sometimes in cooperation with the European Union’s Mission Atalanta.

      Another domain that saw India at the forefront is UN peacekeeping missions. The Indian subcontinent has always been one of the leading suppliers of peacekeepers to UN missions, with 80% of them deployed in Africa. On top of that, Indian defense academies have provided training to the Nigerian, Ethiopian and Tanzanian military.

      Modi and the Challenge to China

      Modi has given further impetus to India–Africa relations. In July 2018, he outlined the 10 guiding principles of India’s engagement with Africa during a visit to Rwanda and Uganda. On that occasion, the prime minister leveraged India’s role in South-South cooperation to advance his credentials as leader of the developing world. Besides rhetoric, Modi moved from words to action by signing a defense agreement with President Paul Kagame of Rwanda and by extending two credit lines worth nearly $200 million to the Ugandan government. He also announced the opening of 18 new diplomatic missions in Africa by 2021, bringing the total to 47.

      The prime minister has placed a keen eye on East Africa, which is set to become the epicenter of the India–China confrontation. The Red Sea and the Gulf of Aden are essential maritime routes for India’s export-oriented economy. China is heavily investing along these two waterways through the “Belt and Road Initiative” (BRI), especially in the port of Djibouti and the Suez Canal.

      Djibouti is indeed becoming yet another element of the Chinese maritime network in the Indian Ocean, along with Pakistan, the Maldives, Sri Lanka, Bangladesh and Myanmar. This network, the so-called “String of Pearls,” geographically surrounds India and is perceived as a strategic nightmare in New Delhi. Therefore, the Chinese expansion in the western Indian Ocean urges India to intervene.

      To counter the BRI in the Indian Ocean, New Delhi launched a similar initiative for East Africa: the Asia-Africa Growth Corridor (AAGC). Conceived in 2016 and still at an early stage, this Indo-Japanese project will attract investments on development, quality infrastructure, institutional connectivity, capacity building and people-to-people cooperation to the region. Due to its anti-Chinese nature, the AAGC primarily targets contested countries like Djibouti and Ethiopia.

      In 2017, Indian President Ram Nath Kovind clustered both countries for his first official visit. At the time, Ethiopia was already the largest beneficiary of India’s scholarship scheme and lines of credit for Africa with $1.1 billion, besides being the scene of the 2011 India-Africa Forum Summit. Djibouti was a relatively new target for New Delhi. In the year of the visit, China opened its first overseas military base in Djibouti. Consequently, Kovind not only signed some cooperation agreements, but he also reportedly expressed India’s interest in a military base on Djiboutian soil, a project still under discussion.

      The geopolitical confrontation between India and China looms on the horizon. Africa — particularly the east — is set to become an arena of such a global, momentous challenge. India has economic, energetic and security reasons to deepen its relations with the continent. Furthermore, China’s ubiquitous presence in Africa and the Indian Ocean is a direct menace to Modi’s global ambitions. Although China is still out of reach, New Delhi’s engagement has been steadily expanding in all fields, and its approach based on soft power looks promising. The concepts of building Africa’s capacities and unleashing its potential, along with the employment of African workers instead of foreign labor like China, have resonated across the continent.

      On the one hand, East Africa is under India’s radar more than any other region of the continent for its strategic position. On the other, East African governments have a long track record of balancing off the influence of external actors. East Africa is also the region where India can rely on a robust diaspora community. Hence, India presents itself as a useful ally to balance China’s growing influence in the region.

      Finally, yet importantly, the US and the European powers might prefer New Delhi’s penetration into the continent at the detriment of China’s, which is perceived as a growing geopolitical threat to the West. East Africa, in sum, might soon become the new battleground of the economic and security confrontation between the two Asian giants.

      *[Fair Observer is a media partner of Gulf State Analytics.]

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      The Solution to India’s China Problem: A Free Tibet

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      India has had a wound around its Himalayan neck ever since it suffered a humiliating defeat to China in 1962. The recent clash between Indian and China soldiers in Galwan Valley on June 15 has only rubbed salt into that wound.

      It has come to this because when China invaded neighboring Tibet in 1950, India was in thrall to the newly-established communist regime under Mao Zedong after a bloody revolution. Ignoring its civilizational relationship with Tibet, India hoped to gain from the emerging power of the People’s Republic of China and thus celebrated “Hindi-Chini bhai bhai,” a popular slogan of the time that translates to “Indians and Chinese are brothers.”

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      After 1962, the Chinese military stood on the doorstep of India across thousands of kilometers in the Himalayas. Proverbially, this border was guarded by only 60 Indian policemen before China’s conquest of Tibet. Pertinently, India never had a border with China before 1950.

      Refuge in India

      If Tibet had remained a free and independent country, today it would have been the 10th largest nation with 2.5 million square kilometers of land. The Tibetan Plateau hosts 46,000 glaciers, nearly one-fourth of the world’s total number. It is a source of numerous rivers, including some of the most mighty ones such as the Indus, Brahmaputra, Mekong and Yangtze. It is shocking that such a vast reservoir of water and natural resources in Asia has been occupied by China and it is even more shocking that it barely gets a mention today.

      Ancient Buddhist culture has been preserved in Tibet over many centuries. In the Indian public psyche, Kailash Mansarovar was part of India. Tibetans used to visit Buddhist pilgrimage sites in India at Sarnath, Bodhgaya, Nalanda and Amravati. The India–Tibet border was irrelevant and people used to cross it freely. Today, that border has two armies facing each other and people no longer cross it.

      After the Dalai Lama took refuge in India in 1959, around 100,000 Tibetans have come to India. Most of them live in the Himalayan regions and the state of Karnataka. The Tibetan seat of power is in Dharamshala, Himachal Pradesh, where the Dalai Lama has set up abode. The Tibetan parliament and government are also based there. Although many Tibetans still dream of a free Tibet, India‘s desire for closer ties with China in the past has led New Delhi to shy away from supporting Tibetan independence. As a refugee in India, the Dalai Lama has spoken of autonomy and adhered to India‘s “One-China” policy.

      In 70 years of Chinese occupation, more than 1 million Tibetans have been killed, 6,000 monasteries destroyed and Tibet’s cultural identity attacked. The Chinese have also proceeded to exploit Tibet’s natural resources. They have cleared forests, bombed mountains and practice strip mining for gold, copper, lithium and other rare earth elements.

      Long Ignored

      The international community has ignored the genocide and exploitation Tibet has experienced over the last seven decades. Powerful nations have made their peace with China for geopolitical and economic reasons. In the process, Tibetans have suffered a lot.

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      Globalization has led over 160 countries trading with China. Western “liberal democrats” blindly accept the “One-China” policy and recognize Tibet as a part of China. Freed of any external pressure, China has become more oppressive in Tibet. Even possessing the Dalai Lama’s photo could land a Tibetan in jail on charges of separatism. Although Tibetan youth do not retaliate like their counterparts in Palestine or Kashmir, they have resorted to self-immolation as a form of protest against Chinese occupation.

      Tibetans still believe that freedom is possible. Until six decades ago, Confucianism and Buddhism were the strongest influences on Chinese society. Communism attacked these twin pillars. Capitalism has shaken them further. Today, the only religion consumerist China worships is money. Yet, as the Chinese are discovering, life is more than money. Tibetans are convinced that China will never be able to conquer their spirit and that they are free until their spirit is free.

      During visits of Chinese leaders, Indian police customarily arrest all Tibetan activists to appease China. Yet young Tibetans take their inspiration from India’s struggle for independence from British rule. Few remember that until 1942, most Indians did not believe they would see freedom in their lifetime. Mahatma Gandhi’s Quit India Movement struggled to gain mass support. Within five years, India became independent because the British Empire collapsed under its own weight. Tibetans believe the same will happen to the modern Chinese empire.

      Chinese Domination

      China has not only occupied Tibet but also Uighur East Turkestan, a Muslim-majority region covering 1.8 million square kilometers now known as Xinjiang. It also occupies 1.2 million square kilometers of southern Mongolia and 84,000 square kilometers of Manchuria. By some calculations, 60% of China’s 9.6 million square kilometers is occupied territory. China’s expansionist designs continue. The “Belt and Road Initiative” is China’s plan to dominate world trade.

      The Chinese Communist Party (CCP) controls all aspects of life in the country. The administration, the judiciary, the legislature, the media and the military are all controlled by the CCP. The party fosters a personality cult around Mao despite his responsibility for the death of millions of people. His portrait still adorns Tiananmen Square, a place made immemorable by the brutal slaughter of unarmed students by armed tanks. That 1989 massacre still stands obliterated from history textbooks and even the internet in China.

      Territorial encroachments and China’s support for Pakistan demonstrate that Beijing has no respect for India’s territorial integrity. There is no reason for India to respect China’s territorial integrity. Beijing is facing international isolation because of the COVID-19 outbreak. From Japan to Bhutan, China’s neighbors are nervous about its expansionism. The time has come for India to stand up to China. It must scrap the “One-China” policy and support Tibet’s nonviolent movement for independence.

      *[An earlier version of this article was published by The Indian Express.]

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      Why Are the Indian and Chinese Economies Decoupling?

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      Many experts argue India is the weaker power unable to take on China. In an article in Foreign Policy, James Crabtree argues that a trade war with China would be a bad idea for India. In his view, India’s “military is inefficient, underequipped, and dogged by procurement corruption scandals.” To develop its military strength, India needs a dynamic economy, and an “inward economic direction” would only benefit China in the long run. Therefore, an India–China decoupling is a terrible idea.

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      These analysts are wrong. Their argument against decoupling is based on three implicit assumptions. First, India is a deeply-divided country unable to act or respond decisively. Second, India is dependent on the Chinese economy for its growth. Third, China’s rise is inexorable and India has no option but to come to terms with it. These assumptions are true, but it is an error of judgment to treat them as unqualified truths.

      A Trip Down Memory Lane

      For Indians with longer historical memories than many of these experts, these arguments sound familiar. Anglo-Saxon publications have long hectored, advised and moralized on Indian issues. On July 5, 2014, the editorial board of The New York Times made a case against India’s membership of the Nuclear Suppliers Group. To be admitted, India needed “to sign the treaty that prohibits nuclear testing, stop producing fissile material, and begin talks with its rivals on nuclear weapons containment.”

      In response, Gurmeet Kanwal, a retired Indian brigadier-turned-defense analyst, called the editorial “partisan and condescending.” Some even saw it as neocolonial. He pointed to “the existential threat posed by two nuclear-armed states on India’s borders” that led India to develop its nuclear weapons capability. Kanwal argued that India had been a “responsible nuclear power” with a “positive record on non-proliferation” and had “consistently supported total nuclear disarmament.” In typical Sikh humor, he advised nuclear ayatollahs to focus on real proliferators and let go of the cap, roll-back and eliminate (CRE) stance they had adopted against India since the 1990s.

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      Just as India stood up to the US on the nuclear issue in the 1990s, it is capable of standing up to China in 2020. An India–China conflict is highly undesirable. Ideally, New Delhi and Beijing should be able to work something out over endless cups of tea. However, sanctimonious advice from foreign experts about dire consequences of an India–China decoupling has to be taken with a bucket, not a pinch, of salt.

      In 1998, India went nuclear despite dire predictions for its economy. Many in Washington assumed that India depended on the West for its economy. Barely seven years prior, India had experienced a serious financial crisis. The Gulf War and slowing exports to the US crippled an economy by rising deficits and increasing debt. The precipitous decline of the Soviet Union meant India no longer had a godfather to bail it out. So severe was India’s 1991 currency crisis that it had to pledge its gold reserves and liberalize its economy to get a bailout from the International Monetary Fund. In 1998, India was better off than in 1991 but certainly not in a strong position. Nuclear tests put it under immense pressure.

      At the UN, the Conference on Disarmament condemned Indian nuclear tests. In the preceding years, India had watched the West ignore the 1989 Tiananmen Square crackdown and fete China for its economic reforms. Condemnation for nuclear tests strengthened, not weakened, India’s response. It stood up to the West, ignored experts and upended nuclear apartheid. Today, India is again in a mood to defy experts and stand up to China.

      Like Love, Trade Is Complicated

      As troops amass on the India–China border, a full-scale economic war has broken out. It is leading to a structural break in the Indian economy. Both public opinion and political leadership is now committed to decoupling from China. In India, there is a ban on 59 Chinese apps by government authorities. Major trade bodies have formally announced boycotts of Chinese products. For instance, the Confederation of All India Traders (CAIT) has listed 3,000 such products. CAIT is a national umbrella organization with 40,000 smaller trade bodies and 70 million traders as members. The government has tightened country of origin rules for e-retailers and other sellers.

      Demand for Chinese products is declining. Xiaomi is no longer India’s top-selling phone. Samsung has replaced it. Increasingly, selling Chinese goods using Southeast Asian free trade agreements is becoming difficult. The existing business model of buying in China and selling in India is under pressure.

      In an additional twist, Indian tax authorities have conducted raids on Chinese companies and individuals for money laundering. It led to the arrest of a Chinese national. Apparently, he was married to a woman from India’s northeast border state of Mizoram, had spuriously obtained an Indian passport and been arrested earlier for espionage. It seems trade is not as simple as experts imagine it to be. Intelligence, influence and geopolitics are inextricably intertwined with trade, business and investment. In the India–China economic relationship, three largely forgotten factors are noteworthy.

      First, India enhanced trade ties with China not only for economic reasons but also geopolitical ones. Becoming a key market and investment destination for China was supposed to reduce the risk of conflict and wean Beijing off Islamabad. Aggressive Chinese actions have made India reconsider this strategy and change tack.

      Second, India’s manufacturing sector is reasonably well developed but has suffered from Chinese competition since China joined the World Trade Organization (WTO) in 2001. A 2018 parliamentary report concluded that Chinese imports were playing “a negative role for [India’s] domestic industry.” The report warned about the loss of jobs, an increase in bad debts for banks, a decline in tax revenues and a worrying dependence on China for critical products. It concluded that China does not play by WTO rules and “the problem of Chinese dumping is a matter of concern across the globe.”

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      India is not alone in having concerns about China’s abuse of WTO rules. A 2018 report to the US Congress expressed concern at “China’s continued embrace of a state-led, mercantilist approach to the economy and trade.” It detailed “substantial costs borne by WTO members as a result of China’s problematic trade regime” and  the challenges presented by its “non-market economic system.” Given China’s track record, there is a case to be made for India taking a more protectionist path.

      There is another tiny little matter. Protectionism has played a key role in industrialization for any latecomer. Furthermore, industrialization has been the key driver of economic growth. In a 2019 article, one of these authors observed that the first major act passed by Congress was the Tariff Act of July 4, 1789. Without protecting its infant industry, the US would not have emerged as an industrial power.

      Since 1978, China has followed the American playbook on steroids. It has powered through the largest and fastest industrialization in history. Its companies enjoy the advantages of infrastructure, cheap financing and political support. Therefore, they have been able to achieve economies of scale. As a result, Indian companies have been blown away. An India-China decoupling might give sectors from aerospace components to advanced pharmaceuticals a second chance.

      Third, Chinese imports into India are nice-to-have, not must-have, goods. Demand for them is elastic unlike the inelastic demand for energy from the Middle East and the US. An India-China trade war that leads to a decoupling of the two economies could lead to short-term pain but has a strong rationale for the longer term.

      The Shape of Things to Come

      In any case, experts forget that India is unlikely to turn entirely inward as it did after independence in 1947. Recently, billions of dollars have poured into India from the US. Reliance Jio, an Indian mobile internet company, raked in $15 billion in 10 weeks. This is indicative of a deeper trend. Given new geopolitical imperatives, India is now looking to boost economic ties with friendly powers. It wants Korean, Japanese, European and American firms to set up shop in the country. Foreign market players who can act nimbly would be in a good position to grab some of the approximately $60 billion China’s trade surplus with India. There are new investment, manufacturing and trading opportunities emerging as the status quo changes and a new order emerges.

      Many economists predict a short-term price shock as Chinese goods stop coming into the country. They forget that India has struggled with jobless growth even during the best of times. Decoupling with China could boost domestic manufacturing not only for large but also for medium and small industries. This would increase employment, tax revenues and even demand thanks to a multiplier effect. Improved job figures further increase political support for decoupling and decrease India’s need to subsidize agriculture so heavily. For decades, agricultural subsidies have put pressure on public finances. If a lower amount is spent on subsidies, pressure on the fiscal deficit would abate.

      To sum up, India has strong reasons to decouple and no longer consider WTO rules sacrosanct. A tectonic shift is underway. After World War II, a new rules-based order emerged. The end of the Cold War strengthened this order and led to visions that Western democracy was the final destination for all societies. With polarization and partisanship at home, Western democracies themselves are in peril. The order that emerged in 1991 is crumbling and a new one is about to emerge. History offers us lessons as to what to expect.

      In the past, India and China focused on their spheres of influence with the Himalayas keeping them apart. Both prospered. In this age of trade, peace and prosperity, a Chola empire based in the modern-day southeastern state of Tamil Nadu ruled Malaysia (Putrajaya), Indonesia (Srivijaya), Sri Lanka and the Maldives. The Middle Kingdom held sway over Mongolia, Korea and Japan. Both India and China could go back to sticking to their historic spheres and to trading with each other.

      At the moment, China has followed salami tactics and encroached on territory India claims as its own. China has also been meddling in Nepal, Myanmar and Sri Lanka, India’s key neighbors. Since  1963, China has been in a close alliance with Pakistan. Yet China has never played a role in the Indian subcontinent and cannot suddenly turn into an overlord here. Therefore, close India-China economic ties no longer make strategic sense.

      Additionally, China disingenuously claims to meet India halfway while insisting that the onus to improve the border situation lies entirely with its neighbor. This is a one-way, not halfway, diplomacy that suggests aggressive intent. The Chinese also seem determined to win the war of narratives and are enlisting the support of free market ayatollahs to do so. It is only natural that the Indian narrative is bound to be different. It is in sync with the new realities of the day, which drive India’s decision to decouple its economy from China. Trade, investment and deep economic ties are a jolly good thing with allies and friends, not with rivals and foes.

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      The Hindu Ethos Is Hurting India’s Republican Spirit

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      The nomination of half-Indian, half-Jamaican California Senator Kamala Harris as the Democratic vice presidential candidate is a historic moment in American politics. The Indian American diaspora is justifiably proud of it. However, back home, it was Prime Minister Narendra Modi’s attending the foundation-laying ceremony to build a temple of Hindu god Ram in Ayodhya at the site of a historic mosque destroyed in 1992 that was treated as a watershed event. Several Hindu secularists and liberals like Ashwin Sanghi have described it as the moment when Hindus finally took a stand against centuries of oppression. The contrast could not be more jarring, and it is worth examining this Hindu ethos.

      Although an atheist, I find several teachings of Hinduism instructive and the author’s arguments troubling. While recounting the history of Islamic and Christian subjugation of Hindus, there is little mention of the role the caste system played in the flight of the downtrodden to other religions, which offered dignity and entry into their places of worship. Without condoning proselytizing in Islam and Christianity, it should be acknowledged that this dark chapter is also glossed over in India’s history textbooks.

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      The selective outrage is further complicated by the recently passed Citizenship Amendment Act (CAA) in which only Muslim refugees from neighboring countries were excluded from seeking fast-track citizenship. Using the author’s logic, either Christians should be left out of the CAA because they have other countries to seek asylum in, or persecuted Muslims from neighboring countries should be included in the CAA.

      While discussing demographic changes, India is compared with Pakistan and Bangladesh. Should a liberal and secular Hindu entertain such comparisons? Or should he have loftier goals of emulating liberal democracies at the forefront of scientific inquiry and technological progress?

      Distorted History

      Since distorted history is the main complaint, when the British colonized India in the 1700s after 1,000 years of Muslim rule, it was still competing with China as the world’s largest economy. Despite more than a millennium of Muslim and Christian proselytizing, 78% of undivided India in 1941 was Hindu. While India’s Muslims grew from 9.9% to 14.2% between 1951 and 2011, Hindus have practically held steady, going from 81% to 79.8%. Religious reorganization among minorities warrants sociological studies, but Islam has not encroached on Hindu territory in independent India. Without condoning the looting and destruction of Hindu temples by Muslims, the origins of this narrative of Hinduism being in danger are worth pondering over.

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      Making common cause with Jewish history by invoking “collective memory” and yearning for an Israel-like muscular Hindu state is another favorite pastime of the “new” India. I admire the tenacity of Israelis in building a developed country in a desert, surrounded by hostile countries, but it is in a constant state of conflict and financially unsustainable without outside support.

      The biggest irony in today’s majoritarian India is that the 150-year British rule, sustained with the help of several Hindu enablers, destroyed the Indian economy. And yet, English is the favored medium of instruction for the majority of children of the right-wing Hindutva brigade, and they would escape India for greener pastures in Britain at the drop of a hat. Hindus searching for pride in Ayodhya are socially trying to emulate regressive Islam while craving a stable, forward-looking, Western-style economy rooted in tolerance.

      Regarding the Supreme Court’s Ayodhya verdict that granted the Hindus sovereignty over the disputed site last year, the author warns us against being selective, but the court has often acknowledged its fallibility. It avoided the question of an earlier existence of a Hindu temple on the disputed land. The court settled a narrower property dispute, ruling that Muslims cannot prove uninterrupted ownership of the land. Given how, since independence, the state allowed Hindus — through acts of omission and commission — to install idols in the disputed structure, the judiciary’s verdict resembles a circular argument. I still believe that a Hindu temple was destroyed to build the Babri Masjid. However, I question the utility of this relitigation of history behind the facade of due process.

      Sanghi’s use of statistics regarding support for suicide bombings in Muslim-majority countries again seems misplaced. Islam was at the forefront of scientific inquiry and cultural supremacy in its heyday, but most of those countries are in decline today. Sympathy for suicide bombings among French, British and American Muslims is worrisome, but deranged non-Muslim gun owners kill more Americans every year than Islamic terrorism does. Should India not align with the US because half of America swears by gun rights? Islam is in dire need of modernization, but the reality is more nuanced than the author’s arguments.

      Equating Modi’s presence at the Ayodhya ceremony with Queen Elizabeth II being the head of the Church of England or with a US president attending the National Prayer Breakfast is equally misleading. I find nothing wrong in Modi attending Diwali or Holi celebrations. The queen of England presiding over the laying of the foundation of a church where a mosque once stood, or an American president breaking ground for a church on land once home to a synagogue, would be a fair comparison.

      No Apology

      Other than the treatment of subjugated castes, I would not expect any apology from Sanghi. While being a proud Hindu, perhaps he also agrees that several other countries broke the shackles of colonization decades before India did.

      If the author believes in individual rights, democracy, free markets, freedom of speech, freedom of religion, gender equality, LGBTQ rights and racial equality, I urge him to defend them. Like other religions, Hinduism’s record on these issues is mixed, and Hindu ethos does not offer any vision resembling a modern republic. He should raise his voice when innocent people are killed by Muslim or Hindu mobs, or when the ruling Bharatiya Janata Party calls anyone questioning the government anti-national. He should denounce Modi when the prime minister decimates institutions like the Election Commission by shunting out his vocal critic Ashok Lavasa.

      Regardless of caste, creed, race or religion, protecting minorities from tyranny of the majority is the ethos of a republic, which is better than the author’s Hindu ethos. We can acknowledge Hinduism’s teachings like vasudhaiva kutumbakam (the whole world is one family) or agree that Hinduism examines the human condition better than most other religions and still fight for the Republic of India. Unfortunately, while the Congress party swung too far in favor of minorities, Modi has now unleashed the majority. In the process, he has destroyed the economy, and the real loser of this ethos is the Indian common man.

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      India and China: A Time for Diplomacy, Not Confrontation

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      Chinese and Indian forces have pulled back from their confrontation in the Himalayas, but the tensions that set off the deadly encounter this past June — the first on the China–India border since 1975 — are not going away. Indeed, a poisonous combination of local disputes, regional antagonisms and colonial history could pose a serious danger to peace in Asia.

      In part, the problem is Britain’s colonial legacy. The “border” in dispute is an arbitrary line drawn across terrain that doesn’t lend itself to clear boundaries. The architect, Henry McMahon, drew it to maximize British control of a region that was in play during the 19th-century “Great Game” between England and Russia for control of Central Asia. Local concerns were irrelevant.

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      The treaty was signed between Tibet and Britain in 1914. Although India accepts the 550-mile McMahon Line as the border between India and China, the Chinese have never recognized the boundary. Mortimer Durand, Britain’s lead colonial officer in India, drew a similar “border” in 1893 between Pakistan (India’s “Northern Territories” at the time) and Afghanistan that Kabul has never accepted, and which is still the source of friction between the two countries. Colonialism may be gone, but its effects still linger.

      Although the target for the McMahon Line was Russia, it has always been a sore spot for China, not only because Beijing’s protests were ignored, but also because the Chinese saw it as a potential security risk for its western provinces. England had already humiliated China in the two Opium Wars as well as by seizing Shanghai and Hong Kong. If it could lop off Tibet — which China sees as part of its empire — so might another country… like India.

      A Threat to China?

      Indeed, when Indian Prime Minister Narendra Modi unilaterally revoked Article 370 of the Indian Constitution and absorbed Jammu and Kashmir in 2019, the Chinese saw the grab as a threat to the security of Tibet and its restive western province of Xinjiang. The area in which the recent fighting took place, the Galwan Valley, is close to a road linking Tibet with Xinjiang.

      The nearby Aksai Chin, which China seized from India in the 1962 border war, not only controls the Tibet-Xinjiang highway, but also the area through which China is building an oil pipeline. The Chinese see the pipeline — which will go from the Pakistani port of Gwadar to Kashgar in Xinjiang — as a way to bypass key choke points in the Indian Ocean controlled by the US Navy.

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      The $62-billion project is part of the China-Pakistan Economic Corridor, a piece of the huge Belt and Road Initiative to build infrastructure and increase trade between South Asia, Central Asia, the Middle East, Europe, and China.

      China moves 80% of its oil by sea and is increasingly nervous about a budding naval alliance between the United States and Beijing’s regional rivals, India and Japan. In the yearly Malabar exercises, the three powers’ war-game closes the Malacca Straits through which virtually all of China’s oil passes. The Pakistan-China pipeline oil will be more expensive than tanker supplied oil — one estimate is five times more — but it will be secure from the US.

      In 2019, however, Indian Home Minister Amit Shah pledged to take back Aksai Chin from China, thus exposing the pipeline to potential Indian interdiction.

      From China’s point of view the bleak landscape of rock, ice and very little oxygen is central to its strategy of securing access to energy supplies. The region is also part of what is called the world’s “third pole,” the vast snowfields and glaciers that supply the water for 11 countries in the region, including India and China. Together, these two countries make up a third of the world’s population but have access to only 10% of the globe’s water supplies. By 2030, half of India’s population — 700 million people — will lack adequate drinking water.

      The “pole” is the source of 10 major rivers, most of them fed by the more than 14,000 thousand glaciers that dot the Himalayas and the Hindu Kush. By 2100, two-thirds of those glaciers will be gone, the victims of climate change. China largely controls the “pole.” It may be stony and cold, but it is the lifeblood to 11 countries in the region.

      Back in Time

      The recent standoff has a history. In 2017, Indian and Chinese troops faced-off in Doklam — Dongland to China — the area where Tibet, Bhutan and Sikkim come together. There were fistfights and lots of pushing and shoving, but casualties consisted of black eyes and bloody noses. But the 73-day confrontation apparently shocked the Chinese. “For China, the Doklam stand-off raised fundamental questions regarding the nature of India’s threat,” says Yun Sun, a senior fellow at the Stimson Center in Washington.

      Doklam happened just as relations with the Trump administration were headed south, although tensions between Washington and Beijing date back to the 1998-99 Taiwan crisis. At that time, President Bill Clinton sent two aircraft carrier battle groups to the area, one of which traversed the Taiwan Straits between the island and the mainland. The incident humiliated China, which re-tooled its military and built up its navy in the aftermath.

      In 2003, President George W. Bush wooed India to join Japan, South Korea and Australia in a regional alliance aimed at “containing” China. The initiative was only partly successful, but it alarmed China. Beijing saw the Obama administration’s “Asia pivot” and the current tensions with the Trump administration as part of the same strategy. If one adds to this the US anti-missile systems in South Korea, the deployment of 1,500 Marines to Australia and the buildup of American bases in Guam and Wake, it is easy to see why the Chinese would conclude that Washington had it out for them.

      China has responded aggressively, seizing and fortifying disputed islands and reefs, and claiming virtually all of the South China Sea as home waters. It has rammed and sunk Vietnamese fishing vessels, bullied Malaysian oil rigs and routinely violated Taiwan’s airspace.

      China has also strengthened relations with neighbors that India formally dominated, including Sri Lanka, Bangladesh, Nepal and the Maldives, initiatives which India resents. In short, there are some delicate diplomatic issues in the region, ones whose solutions are ill-served by military posturing or arms races.

      The dust-up in the Galwan Valley was partly an extension of China’s growing assertiveness in Asia. But the Modi government has also been extremely provocative, particularly in its illegal seizure of Jammu and Kashmir. In the Galwan incident, the Indians were building an airfield and a bridge near the Chinese border that would have allowed Indian armor and modern aircraft to potentially threaten Chinese forces.

      Dangerous Thoughts

      There is a current in the Indian military that would like to erase the drubbing India took in its 1962 border war with China. The thinking is that the current Indian military is far stronger and better armed than it was 58 years ago, and it has more experience than the Chinese People’s Liberation Army. The last time the Chinese army went to war was its ill-fated invasion of Vietnam in 1979.

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      But that is dangerous thinking. India’s “experience” consists mainly of terrorizing Kashmiri civilians and an occasional firefight with lightly-armed insurgents. In 1962, India’s and China’s economies were similar in size. Today, China’s economy is five times larger and its military budget four times greater.

      China is clearly concerned that it might face a two-front war: India to its south, the US and its allies to the west. That is not a comfortable position, and one that presents dangers to the entire region. Pushing a nuclear-armed country into a corner is never a good idea.

      The Chinese need to accept some of the blame for the current tensions. Beijing has bullied smaller countries in the region and refused to accept the World Court’s ruling on its illegal occupation of a Philippine reef. Its heavy-handed approach to Hong Kong and Taiwan, and its oppressive treatment of its Uighur Muslim minority in Xinjiang, is winning it no friends, regionally and internationally.

      There is no evidence that the US, India and China want a war, one whose effect on the international economy would make COVID-19 look like a mild head cold. But since all three powers are nuclear-armed, there is always the possibility — even if remote — of things getting out of hand.

      In reality, all three countries desperately need one another if the world is to confront the existential dangers of climate change, nuclear war and pandemics. It is a time for diplomacy and cooperation, not confrontation.

      *[This article was originally published by FPIF.]

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      What Has COVID-19 Done to Small Businesses?

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      Small and medium-sized enterprises (SMEs) are businesses with revenues, assets or employees below a certain threshold. SMEs are important to the health of any country as they tend to form the backbone of the economy. When compared to large enterprises, SMEs are generally greater in number, employ far more people, are often situated in clusters and typically entrepreneurial in nature. They drive local economic development, propel job creation and foster growth and innovation.

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      According to the World Bank, SMEs represent about 90% of businesses and 50% of employment worldwide. In the United States, 30 million small businesses make up 44% of GDP, 99% of the total businesses and 48% of the workforce, amounting to 57 million jobs. In India, the SME sector consists of about 63 million enterprises, contributing to 45% of manufacturing output and over 28% of GDP while employing 111 million people. SMEs in China form the engine of the economy comprising 30 million entities, constituting 99.6% of enterprises and 80% of national employment. They also hold more than 70% of the country’s patents and account for more than 60% of GDP, contributing more than 50% of tax collections.

      Different Countries Define SMEs Differently

      Though most experts agree on the crucial role SMEs play in any economy, the definition of an SME varies by country. In the US, the Small Business Administration (SBA) defines SMEs broadly as those with fewer than 500 employees and $7 million in annual receipts, although specific definitions exist by business and sector. Annual receipts can range from $1 million for farms to $40 million for hospitals. Services businesses such as retail and construction are generally classified by annual receipts, while manufacturing and utilities are measured by headcount. In June, the Indian government revised its SME definitions, expanding the revenue caps on medium and small enterprises from $7 million and $1.5 million to $35 million and $7 million respectively. In the United Kingdom, a small business is defined as having less than 50 employees and turnover under £10 million ($12.7 million), whereas a medium business has less than 250 employees and turnover under £50 million. 

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      Proper definitions matter. If SMEs are classified well, their access to capital and other resources can improve. They can apply for grants, get tax exemptions, collaborate on research with governments or universities or access other schemes. This gives SMEs better opportunities to survive and thrive.

      Since SMEs tend to be the biggest employers in most economies, a good policy to promote them creates jobs and develops worker skills. Furthermore, proper definitions enable governments to focus their efforts regarding SMEs and level the playing field for them vis-a-vis large corporations.

      Given the scale and nature of their business models, SMEs operate at the mercy of vagaries of the economy, geopolitical events and local policies. They battle competition from multinational giants, volatile cash flows, fickle customers, demanding suppliers and constantly churning employees. But the COVID-19 pandemic has crossed all boundaries. While the 2000 crisis was a dot-com bust and 2008 was a collapse of the financial systems, 2020 is clearly the SME crisis. It is Murphy’s Law at its extreme — anything that can go wrong has indeed gone wrong.

      The coronavirus crisis started off in early 2020 as a supply shock, which has now turned into a demand shock, impacting customers, employees, markets and suppliers alike. The consequences can be potentially catastrophic with the International Monetary Fund estimating that SME shutdowns in G20 countries could surge from 4% pre-COVID to 12% post-COVID, with bankruptcy rates in the services sector increasing by more than 20%.

      SMEs are bearing the brunt of the economic and financial fallout from the COVID-19 pandemic, not least because many were already in duress before the crisis. This could have a domino effect on the economy, given the pivotal role played by SMEs. Therefore, it comes as no surprise that most governments have sought to intercede legislatively with their fiscal might to ameliorate the predicament of SMEs.

      Indian and American Response

      It is instructive to note how different countries have responded to the economic crisis. India is a good country to start with. In early May, the government announced a 20-trillion-rupee ($250 billion) stimulus package called Atmanirbhar, equivalent to 10% of India’s GDP. It was a mixture of fiscal and monetary support, packed as credit guarantees and a slew of other measures. The centerpiece was an ambitious 3-trillion-rupee ($40 billion) initiative for SMEs, including instant collateral-free loans, subordinate debt of 200 billion rupees ($2.5 billion) for stressed micro, small and medium enterprises (MSMEs), and a 500-billion-rupee ($6.5 billion) equity infusion. Perhaps the largest component of the stimulus was the Emergency Credit Line Guarantee Scheme (ECLGS) that provides additional working capital and term loans of up to 20% of outstanding credit. 

      Although the scheme received positive feedback, the initial uptake was slow. On the supply front, bankers fretted about future delinquencies arising out of such accounts as the credit guarantees only covered incremental debt. On the demand side, SMEs were worried about taking on additional leverage when there is uncertainty about economic revival. Moreover, a 20% incremental loan may not suffice to service payrolls and operating expenses and keep business alive.

      Also, while this scheme addressed existing borrowers, the fate of those who are not current borrowers is unclear. While initial traction for the scheme was low, the recent momentum has been encouraging. The finance ministry reports that as of July 15, banks have sanctioned 1.2 trillion rupees ($16 billion), of which 700 billion rupees ($9 billion) have been disbursed largely by public sector banks, although private sector banks have joined in lately.

      Meanwhile, even the largest global economy has struggled with its SME relief program. In mid-March, US President Donald Trump approved a $2.2-trillion package under the Coronavirus Aid, Relief and Economic Security (CARES) Act to help Americans struggling amid the pandemic. One of the signature initiatives under the act was the $660-billion Paycheck Protection Program (PPP) aimed at helping small businesses with their payroll and operating expenses. This program was distinct from its peers in its loan forgiveness part, in which the repayment of the loan portion used to cover the first eight weeks of payroll, rent, utilities and mortgage would be waived. 

      The program, though well-intentioned, has struggled with execution issues exacerbated by labyrinthian rules. Matters came to a head when the initial tranche of $349 billion ran out in April. The program had to be refinanced but, by June, it was closed down with $130 billion of unused funds in its coffers. The program was restarted again and extended to August by Congress.

      Worse, the program saw refunds from borrowers who were unclear about the utilization rules. Loan forgiveness would be valid only if the amount was utilized within eight weeks. This stipulation made SMEs wary because their goal was to use cash judiciously and optimize the use of the borrowed amount to last as long as possible. These rules have since been amended by the Small Business Administration. It now gives SMEs 24 weeks to use the borrowed funds and allows them more flexibility on the use of funds. In any case, questions have been raised about capital not reaching targeted businesses and unintended parties benefiting instead. 

      Despite the changes in SBA rules, the jury is still out on whether more SMEs will take out PPP loans. Some are lobbying for full loan forgiveness. However, dispensing of repayment requirements essentially creates handouts that could lead to the lowering of fiscal discipline and increasing incentive for fraud. A recent proposal by two professors, one from Princeton and the other from Stanford, suggests “evergreening” of existing debt, a practice that involves providing new loans to pay off previous ones. Though innovative, it is not quite clear how such a policy would provide better benefits compared to a loan repayment moratorium, especially when it comes to influencing future credit behavior. 

      In addition to the PPP program, the SBA has announced the Economic Injury Disaster Loans (EIDL) program. This offers SMEs working capital loans up to $2 million to help overcome their loss of revenue. The program was closed down on July 13 after granting $20 billion to 6 million SMEs. Maintaining equitability and efficacy in the distribution process has been a challenge, though.

      European Responses

      Europe’s largest economy, on the other hand, has fared relatively better. In early April, German Chancellor Angela Merkel announced a €1.1-trillion ($1.3 trillion) stimulus termed the “bazooka.” This constituted a €600-billion rescue program, including €500 billion worth of guarantees for loans to companies. The German state-owned bank KfW is taking care of the lending. The program also includes a cash injection of €50 billion for micro-enterprises and €2 billion in venture capital financing for startups, which no major economy has successfully managed to execute. Notably, the centerpiece of the German program is the announcement of unlimited government guarantees covering SME loans up to €800,000. These loans are instantly approved for profitable companies.

      Berlin’s relief measures were specifically targeted at supporting Germany’s pride, the Mittelstand. This term refers to the 440,000 SMEs that form the backbone of the German economy. They employ 13 million people and account for 34% of GDP. Many of these firms manufacture highly-specialized products for niche markets, such as high-tech parts for health care and auto sectors, making them crucial to Germany’s success as an export giant. Not surprisingly, these companies have seen a contraction in revenues, especially the ones that depend on global supply chains. 

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      The swift implementation of these initiatives, coupled with the resilience of the Mittelstand, is demonstrating that SMEs can survive and thrive in this environment. The Germans have also been preaching and practicing fiscal prudence in normal times, which has now worked in their favor. Germany can afford to inject capital and do whatever it takes to save its SMEs.

      Since its first stimulus, Berlin has followed up with an additional €130-billion package consisting of tax, SME loans and spending measures aimed at stimulating demand. This included a €46-billion green stimulus focused on innovation and sustainable projects such as e-mobility and battery technology. In keeping with the German tradition, the SMEs who make the Mittelstand have stayed agile as well. They are diversifying their customer base and pivoting their business models to more recession-proof sectors. 

      The UK, another major world economy, also launched an array of relief measures, including the Coronavirus Business Interruption Loan Scheme (CBILS) worth £330 billion ($420 billion). This was designed to support British SMEs with cash for their payroll and operating expenditure. It also announced the Bounce Back Loan Scheme (BBLS) focused on smaller businesses. This enjoyed a better launch than CBILS because the latter, with its larger loan quantum, required more vetting and paperwork.

      Loans from the CBILS initiative, although interest-free for a year, are only 80% guaranteed by the government. This makes banks less willing to lend during these troubled times because they are afraid of losing 20% of the loan amount. This slows credit outflow and starves SMEs of much-needed capital. As of July 15, less than 10% of the allotted capital had been utilized, which banks blame on an inadequately designed scheme. By mid-July, only £11.9 billion had been disbursed to 54,500 companies through the CBILS and £31.7 billion to 1 million smaller firms through the BBLS.

      Businesses have sought modifications from policymakers to existing schemes. These include hiking government guarantees for loans to 100% and waiving personal guarantees for small loans. The Treasury has agreed to some of these demands. Critics also point to structural deficiencies in the system. They believe the administrative authority for SME loans should be a proper small business bank instead of the British Business Bank, which was not designed for SMEs. Already, the UK government has warned that £36 billion in COVID loans may default. More drastic measures seem to be on the way, including a COVID bad bank to house toxic SME assets.

      Responses Elsewhere

      Economies around the world have been responding to disruption by COVID-19. It is impossible to examine every response in this article, but Japan’s case deserves examination. The world’s third-largest economy had been battling a recession even before the pandemic. Declining consumption, falling tourism and plunging exports were increasing the pressure on an aging society with a spiraling debt of over $12.2 trillion. The pandemic has strained Japan’s fiscal health further.

      In response to the pandemic, the Bank of Japan announced a 75-trillion-yen ($700 billion) package for financing SMEs, which included zero-interest unsecured loans. Additionally, the National Diet, Japan’s parliament, enacted a second supplementary budget, which featured rent payment support and expanded employment maintenance subsidies for SMEs.

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      The execution of these programs has been tardy. The government’s 2015 digitalization drive is still incomplete, impacting the distribution of subsidies and the implementation of other relief measures. Of the more than 400,000 applications for employment adjustment subsidies, only 80,000 companies received aid by mid-June. Application procedures are unnecessarily complex, adding to the woes of SMEs.

      Any discussion on SMEs in the global economy would be incomplete without examining China, which was the first country to deal with the COVID-19 disease. In February,  the government announced a 1.2-trillion-renminbi ($174 billion) monetary stimulus. Large state-owned banks were ordered to increase lending to SMEs by at least 30% in the first half of 2020. Three of these banks alone were supposed to lend 350 billion renminbi ($49.7 million) to small businesses at preferential rates. In addition, Beijing encouraged local policymakers to provide fiscal support to keep SMEs afloat.

      China’s stimulus seems more understated compared to other major economies and their own 2008 bailout package. After controlling the first COVID-19 wave in March, the Chinese have focused on restarting the economy and reopening businesses instead of relief measures and bailouts.

      In February, surveys in China showed that 30% of SMEs had experienced a 50% decline in revenue. Surveys also found that 60% of SMEs had only three months of cash left. At the end of March, almost half a million small businesses across China had closed and new business registrations fell by more than 30% compared to last year. The resumption of work has been an uphill struggle. In April, the production rate of SMEs had crossed 82% of capacity, but the sentiment had remained pessimistic. Notably, the Small and Medium Enterprise Index (SMEI) had risen from 51.7 in May to 53.3 in June, indicating that SMEs are slowly reviving.

      With the easing of lockdown measures, domestic demand in China has picked up, driving SME sales. In turn, greater demand is increasing production activity and accelerating capacity utilization, causing a mild rise in hiring. The green shoots of recovery of Chinese SMEs should encourage authorities worldwide. 

      Policy Lessons for the Future

      Governing nation-states is an arduous task at the best of times and especially so in a nightmarish year of dystopian proportions. No wonder governments worldwide have appeared underprepared to combat the COVID-19 crisis. Whilst predicting a global pandemic of this scale would be next to impossible, there were early warning signs that severe disruptions to global health care, supply chains and business models were imminent. Yet scenario planning and stress testing of economic models has been flawed, impacting the swift rollout of relief measures.

      The crisis has also underlined the importance of fiscal discipline when economies are doing well. Countries that do so can build a robust balance sheet to leverage during troubled times. This crisis also brings home the importance of evaluating and reevaluating the efficacy of the entities that deal with SMEs. Policymaking is an iterative process, especially when it comes to SMEs and bodies that oversee them must be overhauled periodically.

      Importantly, policies pertaining to SMEs must have inputs from those with domain expertise. Structures must take into account execution capabilities and speed of delivery. Instant loan approvals with suboptimal due diligence have to be constantly balanced against longer vetting but slower turnarounds. Similarly, policymakers have to analyze the various types of instruments, fiscal and monetary, that can be used for SMEs. What works in one country may not work for another. 

      It is important to remember the nuances of different policy measures, such as guarantees, forgiveness, monitoring and moratoriums. Guarantees are a sound instrument for relief but are potential claims on the government’s balance sheet and contingent liabilities. They also have little economic value if capital is not promptly delivered to SMEs. Forgiveness provisions have their own issues. They may be important in a crisis but could incentivize subpar credit behavior in the future. Similarly, monitoring is important but is impractical when millions of SMEs are involved. There is no way any authority can keep a tab on the intended usage of funds. Finally, moratoriums have their own problems. Businesses could misuse moratoriums, putting pressure on banks and making accounting difficult. They were cheered at the onset of the crisis but further extensions could be costly to the ecosystem. 

      Going forward, governments need to prepare for the long haul. The consequences of the COVID-19 pandemic will stay with us for the foreseeable future. What began as a liquidity crisis might well become a solvency crisis for SMEs despite the best attempts to avoid that eventuality. If that does happen, governments will need to plan for efficient debt restructuring. They will have to institute insolvency management processes while figuring out how to handle bad asset pools. In simple language, governments will have to make tough decisions as to distributing gains and losses not only among those living but also future generations.

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More