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    Liberalizing India’s Economy Is Critical for Global Stability

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    The COVID-19 pandemic is increasing inequality globally and even advanced economies have not been spared. Before the pandemic began in 2020, inequality was on the rise. Decades of globalization, loose monetary policy and the rise of oligopolies have contributed to this phenomenon. In many ways, globalization has kept inflation down. When Walmart imports Chinese goods, Americans get more for less.

    China can manufacture cheaply because labor costs are low. The Chinese Communist Party (CCP) also runs an authoritarian regime. The regime has repressive land and labor laws with scant regard for human rights. Legally, the CCP owns all the land in China and can appropriate any property it wants. Similarly, workers have little recourse to courts and sometimes work in slave-like conditions.

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    A rising China is challenging the postwar global order. Democracies, including the United States, are finding it difficult to meet the challenge for two reasons. First, loose monetary policies in recent years have brought back the specter of inflation. Second, no economy other than China’s can meet the supply needs of advanced economies. From laptops to toys, most goods are made in China.

    Labor arbitrage has defined globalization from its early years. Companies set up factories where wages tend to be lower. This increases revenues and profits, making consumers and shareholders happy. Given rising inflationary expectations, advanced economies need labor arbitrage to keep costs of goods down. At the same time, these democratic societies want to decouple their supply chain from China.

    With the size of its young workforce, India has a unique opportunity to become the new workshop of the world and emerge as a stabilizing global force in a multipolar world. To grasp this historic opportunity, it has to liberalize its economy wisely.

    The Legacy of the Past

    India could do well to heed the lessons of the past. The Soviet Union, Western Europe and the US emerged as strong economies after World War II by leveraging their manufacturing base. The war economy had led to a relentless focus on infrastructure, mass production and industrialization. In the case of Western Europe, the Marshall Plan helped put shattered economies back on track.

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    Over time, these advanced economies deindustrialized and production started shifting to emerging economies. China’s rapprochement with the US allowed it to enter the postwar Western economic system. Reforms in 1978 were critical to its success. The fall of the Soviet Union in 1991 created a brave new world where companies chased cheap production. China, with its size, scale and speedy centralized decision-making, emerged as the big winner.

    As production moved to China, workers lost jobs in advanced economies and other industries did not emerge to retrain and employ them. The Rust Belt in the US has become a synonym for down-at-heel places left behind by globalization. Even as workers grew poorer, shareholders grew wealthier, exacerbating inequality.

    Today, the United States finds itself in a complicated position with China. On the one hand, the Middle Kingdom steals intellectual property, transgresses international law and challenges the US. On the other hand, it supplies American consumers with cheap goods they need. America’s economic stimulus during the pandemic has, in fact, reinforced the country’s dependency on China. So, Washington cannot hold China’s feet to the fire and penalize its bad behavior. Beijing follows its policy of pinpricks short of outright conflict.

    The US dollar is the reserve currency of the world. Since the days of Alan Greenspan, the Federal Reserve has followed a loose monetary policy. After the 2007-08 financial crisis, the US adopted the Japanese playbook from the 1990s and introduced quantitative easing. In practice, this means buying treasury and even corporate bonds to release money into the economy after interest rates touch zero. Such increased liquidity in the US has led to bloated company valuations and allowed the likes of Amazon or Uber to expand their operations. The cost of capital has been so low that profitability in the short or even medium run matters little.

    Loose monetary policy has enabled the US to counter China’s state-subsidized companies to some degree. Yet both policies have distorted the market. The US can only continue with loose monetary policy as long as inflation is low. Should inflation rise, interest rates would also have to rise. This might trigger a stock market collapse, increase the cost of capital for its companies and weaken the global dominance of the US economy.

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    To persist with its economic model and simultaneously contain China, the US needs to curb inflation. This is only possible by shifting some if not all production away from China. Mexico, Vietnam and Bangladesh are possible alternatives. Mexico has a major drug, violence and governance problem. Vietnam and Bangladesh benefit from huge Chinese investment. Therefore, they might not be the best hedge for securing supply chains from the Middle Kingdom, especially if the companies manufacturing in these countries are Chinese.

    As a vibrant democracy with a formidable military, India offers the US and the West a unique hedge against China. For geopolitical reasons alone, manufacturing in India makes sense. However, doing business in the country continues to be difficult because of red tape, corruption, erratic policymaking, a colonial bureaucracy with a socialistic culture and more.

    India’s Nehruvian past still hobbles the nation’s economy. The country adopted socialist command-and-control policies using a colonial-era bureaucracy that prevented the economy from achieving high economic growth. Manufacturing suffered the most. To start a factory, any entrepreneur needed multiple licenses that cost time, money and energy. Poor infrastructure made it difficult for manufacturers to compete with their East Asian counterparts. While wages were low in India, the cost of doing business made many manufacturers uncompetitive.

    Acquiring land in India is still a challenge. The experience of the Tata group in Singur revealed both political and legal risks that still exist. Similarly, convoluted labor laws made hiring and firing onerous, rendering companies inflexible and unable to respond quickly to market demand. Liberalization in 1991 improved matters, but the state continues to choke the supply side of the Indian economy.

    In the second half of the 1990s, liberalization lost momentum. Coalition governments supported by strong interest groups stalled reforms. In fact, India drifted back to left-leaning policies starting 2004 and this severely limited economic growth. For instance, many industrial and infrastructure projects were killed by ministers to protect the environment. India’s toxic legacy of Nehruvian socialism persisted in terms of continuing state intervention. The country never meaningfully transitioned from an agricultural to an industrial economy and still suffers from low productivity. This in turn has constrained consumption and slowed down growth.

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    India’s much-heralded information technology sector only grew because it was new. The government did not exactly know what was going on and, as a result, there were fewer regulations to constrain this sector. Fewer regulations meant that the likes of Infosys and Wipro had greater autonomy in decision-making and fewer bribes to pay.

    Reduce Red Tape

    The first thing that India needs is an overhaul of its colonial-era bureaucracy that resolutely strives to occupy the commanding heights of the economy. It foists endless red tape on business, strangles entrepreneurship and takes too long to make most decisions. Government service is seen as lifelong employment. Once people become bureaucrats, they have little incentive to perform. Like their colonial predecessors, they lord over citizens instead of serving them. Rarely do they craft sensible policies. Even when a government comes up with a good policy, bureaucrats implement it poorly when they are not sabotaging it actively. This must change. Bureaucrats must be accountable to citizens. Performance-linked promotions and dismissal for underperformance are long overdue.

    Over the years, politicians have tried to deliver benefits and services to citizens to win reelection. To get around a corrupt, colonial and dysfunctional bureaucracy, they instituted direct benefit transfers for welfare schemes, emulating other emerging economies like Brazil. This move is necessary but not sufficient. India needs sound economic policymaking directed by domain experts in each administrative department.

    Only members of the Indian Administrative Service (IAS) occupy key positions in the finance ministry. Instead, India needs economists, chartered accountants, finance professionals and those with varied skill sets in this ministry. The treasuries of the US, Britain, Germany and almost every advanced economies have this diversity of talent in their upper echelons.

    There is no reason why economic policymaking in 21st-century India should be monopolized by an archaic IAS. The government has made noise about the lateral entry of professionals into policymaking, but tangible results have been few and far between.

    If the bureaucracy holds India back, so does the judiciary. Nearly 37 million cases are pending in the courts. It takes around six years for a case to be resolved in a subordinate court, over three years in the high courts and another three years in the supreme court. A case that goes all the way to the supreme court takes an average of 10 years to resolve. Many cases get stuck for 20 to 30 years or more.

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    India needs to reform its judicial system if its economy is to thrive. Justice is invariably delayed, if not denied, and it also costs an arm and a leg. Not only does it add to transaction costs, but it also undermines business confidence. Virtual courts have already shown the way forward during the pandemic. A higher number of judges using both in-person and online technology could reduce the seemingly unending number of pending cases.

    Create Efficient Markets

    To improve labor productivity and consumption, the government must reduce inflation and improve purchasing power. For decades after independence in 1947, India was united politically but divided economically. Producers in one state could not sell in other states without paying taxes and, in some cases, bribes. In agricultural markets, they could not even sell in other districts. India’s new goods and services tax (GST) might be imperfect, but it has already made a difference. Even during a pandemic, interstate goods movement rose by 20% and menu costs, a term in economics used for the costs of adapting to changing prices or taxes, dropped because tax filings were done online.

    The 2016 Insolvency and Bankruptcy Code has led to major efficiency gains. Now, lenders can recover their debt more speedily. Bankruptcy proceedings are now much simpler even if haircuts remain high. Unsurprisingly, India has risen in the World Bank Doing Business rankings from 130 in 2016 to 63 in 2020.

    As Atul Singh and Manu Sharma explained in an article on Fair Observer in 2018, non-performing assets of Indian banks have led to a financial crisis. The government could do well to adopt some if not all the reforms the authors suggested. Given rising inflationary pressures because of rising oil prices, India’s central bank can no longer cut rates. So, the government has to be creative in tackling its banking issues and free up liquidity for Indian businesses with great potential to grow. Banks burnt by poor lending in the past and fearful of corruption charges as well must discover the judgment and appetite to lend to deserving businesses in a fast-growing economy that needs credit for capital formation.

    A little-noticed need of the Indian economy is to strengthen its own credit rating systems and agencies. Capital flows are aided by accurate corporate and political risk assessment. The US enjoys a global comparative advantage in attracting investments thanks to the big three homegrown agencies: S&P, Moody’s and Fitch. These agencies tend to fall short in their India assessment. The standards they set give American companies an advantage over Indian ones.

    Therefore, both the private sector and the government must strengthen Indian rating agencies such as CRISIL and ICRA. These agencies are improving continuously. They now have access to increased digital high-frequency data, which they can interpret in the domestic context. As a result, Indian agencies can benchmark corporate or sovereign risk better than their American counterparts for domestic markets. A better benchmarking of risk is likely to deepen the bond market and cause a multiplier effect by enabling companies to raise money for increased capital expenditure.

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    For decades, India followed a socialist model of agriculture, doling out large unsustainable subsidies. As Singh and Sharma explained in a separate article, the Soviet model was the inspiration for the Indian one. Indian agriculture denuded groundwater, emptied government coffers and lowered farm productivity. The current reforms allow farmers to grow what they want and sell wherever they want to bypass parasitic middlemen. The new legislation emulates the US farm bills and promises to boost agricultural production, lower inflation and increase exports. This legislation might also lower rural hunger and improve India’s human capital in the long term.

    India has to transition hundreds of millions from agriculture to industry. Currently, 58% of the country’s population is dependent on agriculture and contributes just 20% to gross domestic product (GDP). All advanced and industrialized economies have a much lower percentage of their populations engaged in agriculture. In the US, the figure is 1.3% and in Vietnam, 43% work in agriculture. The last time the US had 50% of its population engaged in agriculture was in 1870.

    Improve Infrastructure

    To facilitate movement from agriculture to industry, India must invest in infrastructure and urbanization. For decades, its infrastructure has been woefully inadequate. Indian cities are known to be chaotic and do not provide basic services to their citizens. Recently, India launched a $1.9-trillion National Infrastructure Pipeline that is engaged in a rollout of road, rail, seaport and airports to connect centers of manufacturing with points of export. This focus on infrastructure has to be consistent and relentless.

    India could emulate Chinese cities like Chongqing and Shenzhen that could be home to industry and hubs of trade, both domestic and international. Projects like the smart city in Dholera, 80 kilometers from Gujarat’s capital of Ahmedabad, are the way forward. Similarly, the new Production Linked Incentive scheme is the sort of policy India needs. The Tatas are setting up a plant to manufacture lithium-ion batteries under this scheme. Not only could Indian industry meet the needs of a fast-growing market, but it could also be a source of cheap imports for many other countries.

    India must not only focus on metropolises, but also smaller cities and towns where the cost of living is lower. Digitalization of work will allow people to stay in such urban areas. Of course, they will need investment and organization for which India must tap capital and talent not only nationally but internationally. For instance, pension funds in North America and Europe are seeking growth to meet their increasing liabilities. If India could get its act together, investment into Indian markets could be significant.

    A key part of infrastructure that needs reform in a low energy consumption society is the power sector. Gujarat’s growth is underpinned by increased production and improved distribution of electricity. The rest of the country must emulate this westernmost state and Gujarat itself must bring in further reforms. Renewable energy sources such as gas, solar, wind and hydro must grow further. A nationwide energy market would bring in efficiency gains and boost growth.

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    A focus on renewable energy also brings risks and opportunities. Currently, China controls critical metals and rare earths required in electric vehicle and battery manufacturing. Beijing has an effective monopoly over 80% of the world’s cobalt, 50% of lithium, 85% of rare earth oxides and 90% of rare earth metals. A decarbonized future cannot be intrinsically linked to an authoritarian state that has a history of not playing by free market rules.

    India’s $1.1-billion “Deep Ocean Mission” offers a unique opportunity for the country to provide energy security to democratic nations in North America, Europe and elsewhere. As they transition to clean technologies, India can provide a safer, more reliable and benign alternative to an increasingly belligerent China.

    In 2021, India has a historic opportunity to enter a new economic arc. The global conditions could not be more favorable. Advanced economies are looking to decouple from China without triggering inflation. India is the only country with the size and the scale to be an alternative. Its large youth population and rising middle class are powerful tailwinds for high economic growth. Indeed, India owes it not only to its citizens, but also to the rest of the world to get its act together and become a force for global stability at a time of much volatility and uncertainty.

    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’s Highway Construction Is in the Fast Lane

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      When experts look back at the early 2000s, they will observe that India embarked on a construction spree to develop its transport infrastructure. The country is emulating what the United States and Europe did in the previous century and what China and East Asia have done more recently. Traditionally, India focused on railways. For the last 20 years, roads have been the priority. Now, the country is also focusing on its 116 rivers and long coastline to develop commercial waterways. 

      As is well known, various factors contribute to a nation’s development. The most fundamental is the availability of food and water for the population. Here, India has had some success since its independence in 1947. In health care and education, India can and must do better. India also needs to improve safety and security for its citizens and improve the rule of law. The factor most important for India’s development is perhaps transportation because it has the greatest multiplier effect on the economy. As a result, transportation has the greatest potential to improve the lives of ordinary citizens.

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      Transportation infrastructure, such as railways, roads, air traffic and waterways, are the arteries of a country’s economy. The German economy was built on the backbone of an outstanding railway system and the legendary autobahn. The US is knit together by a crisscrossing network of freight trains, interstate highways and airports. Advanced economies like Japan, South Korea, Switzerland and the Netherlands are known for their evolved infrastructure.

      In recent years, China has set the standard for implementing infrastructure at a scale and speed unprecedented in history. Most economists credit spectacular rates of economic growth to Chinese investment in infrastructure. India is betting that building good infrastructure will boost growth, create jobs and raise the standard of living for hundreds of millions.

      Railway and Highway Infrastructure

      According to a 2018 report by NITI Aayog, the premier policy think tank of the Indian government, 59% of all freight in India is transported by road, 35% by railways, 6% by waterways and less than 1% by air.

      On March 31, 2020, India’s railway track length stood at 126,366 kilometers and, on March 31, 2019, the length of national highways was 132,500 kilometers. Per 100 square kilometers, India has more railway tracks and highways than countries like the US and France. This does not necessarily mean India is doing well. South Korea and Japan have over four times the highway length per 100 square kilometers.

      Instead of the density of infrastructure per unit area, density per population size seems to be the more accurate metric. When it comes to infrastructure per million people, India fares very poorly. For instance, Indonesia’s population is merely 20% of India’s, but its highways are twice as long as India’s. South Korea’s population is a tiny 4% of India’s, but its highways are thrice as long as India’s. The top two stars on the infrastructure front are the US and Australia, followed by Japan and France.

      India’s highway network is inadequate for the country’s needs. Highways comprise 1.94% of India’s total road networks but carry a staggering 40% of total road traffic. This means that not only do they suffer high wear and tear, but transportation continues to be a big bottleneck for the economy. It is little surprise that India is finally investing in transport infrastructure.

      After independence in 1947, India underinvested in infrastructure. Two centuries of colonial extraction had left the country with limited resources and almost unlimited public needs. In its early years of independence, India struggled to feed its masses. There was little money to build railways, roads, ports, airports and transport infrastructure.

      India also lacked the expertise to build such infrastructure at scale. Planners, engineers and skilled labor were all in short supply. The nation did not have enough knowledge of transport technology either. There was another challenge in a densely populated democratic country. Infrastructure projects result in the displacement of large numbers of people. Many resist, others negotiate hard and still, others approach their local politicians who start resisting these projects to win votes.

      India’s varied geography also imposed daunting challenges for developing infrastructure. Largely flat countries like Australia and France could focus on railways, which run twice as long as their roads. Mountainous countries like South Korea and Japan have built more roads than railway lines. While plains and plateaus in India are crisscrossed by railway lines, roads are the means of transportation in its extensive mountainous regions.

      A New Focus

      Over the last 20 years, India’s focus has shifted to roads. This began under the coalition National Democratic Alliance (NDA) government led by Atal Bihari Vajpayee of the Bharatiya Janata Party (BJP). Although this government lost the 2004 election, NDA’s vision set in motion transport infrastructure development. In 2014, the BJP-led NDA returned to power and accelerated the building of highways across the country.

      NDA-initiated highway construction was kickstarted by the Golden Quadrilateral, a project connecting India’s four biggest cities: Delhi, Mumbai, Chennai and Kolkata. This boosted economic growth. Since NDA returned to power, India has embarked on Bharatmala Pariyojana, an ambitious project to connect the entire country through a network of highways like the fabled interstate highway system of the US. Even remote regions such as the northeast and Jammu and Kashmir will be covered.

      In the past, India did not measure highways as per international standards. This meant their growth could not be measured and compared easily. To quote management guru Peter F. Drucker, “If you can’t measure it, you can’t improve it.” Since 2018, the measure of highway length in India has been aligned with international standards. While impressive figures on the growth of national highways have been published, their interpretation now is clear and consistent.

      There has also been a steady increase in highway construction rates. In March 2021, it reached 37 kms/day. For the 2020-21 financial year — India’s financial year begins on April 1 and ends on March 31 — road construction averaged 29.81 kms/day. In 2014-15, the rate was 16.61 kms/day. Six years on, the road construction rate has almost doubled and is the fastest India has achieved since independence. The credit goes to Nitin Gadkari, the minister for road transport, one of the star performers of the NDA cabinet. In March, he claimed that India had secured the world record for fastest road construction.

      India’s Evolving Waterways Make a Big Splash

      The oldest civilizations have originated and flourished near major rivers for a simple reason. They provide fresh water, a fundamental human need. Rivers also provided an easy way to travel and transport goods before the advent of roads and railways. Even today, commercial transport of goods via rivers, lakes and oceans continues to cost less than via land. While container ships regularly carry goods across the high seas, most countries no longer use their rivers very well. The US, Australia, Japan, Russia and China are among the few countries that use their rivers and inland waterways well. 

      India has 116 rivers. Potentially, these could provide 35,000 kilometers of waterways and should be tapped. The government set up the Inland Waterways Authority of India in 1986 for “development and regulation of inland waterways for shipping and navigation.” In spite of tremendous cost advantages, waterways’ commercialization received little attention over the next 30 years. In 2016, the NDA declared 111 rivers across India as national waterways, a quantum leap up from five. By 2020, the government operationalized 12 of these waterways. The journey to suitably develop the remaining 99 will be a long and expensive one. However, this investment will cut logistics costs tremendously in the long run and boost India’s competitiveness.

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      Gadkari points out that the cost of logistics in India is 18% of the total cost of production. For China, this figure is 8-10%. Notably, waterways account for 47% of total transportation in China, compared to 3.5% in India. As waterways develop, so will commercial activity along their banks and lead to job creation.

      India has another major underutilized natural resource. It has a long coastline of 7,500 kilometers spread across 14 states. To develop ports and coastal transportation, the government has launched the Sagarmala project. This could achieve what the Golden Quadrilateral did for roads in the past. By 2025, the government aims to increase the share of waterways transportation from 3.5% to 6%, reducing logistics costs, boosting exports and generating 4 million new jobs.

      The Road Ahead

      About 53% of India’s population is under 25 years of age and many of them need jobs. Employed young people are more likely to send their children to school. They are likely to eat better and live longer. So far, India’s growth rate has not exceeded the job creation rate. For social and political stability, the government needs to create jobs. 

      While India’s economy continues to grow, the pace of growth does not match the employment needs of India’s young population. Building infrastructure is one of the best ways to generate employment because of its massive multiplier effect in an emerging economy like India. The country needs competent ministers and bureaucrats with domain expertise such as Gadkari. Key ministries overseeing power and finance in New Delhi and India’s state capitals should emulate this model.

      Along with building infrastructure, India must reform its arcane laws of colonial and socialist heritage to boost economic activity. The government must also reform education and vocational training in collaboration with industry to raise the skills of the workforce, improve employability and increase productivity. This is a tall order, but if India can get its house in order, then domestic and foreign investment would flow in. Then, the country would finally be able to join the Asian tigers as one of the world’s fast-growing economies.

      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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      A Modi-fied India Has Weakened on the World Stage

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      Narendra Modi, the prime minister of India, has completed seven years in office. At the same time, his autocratic leadership has brought the simmering discontent in the foreign policy establishment out in the open. Some members of the Forum of Foreign Ambassadors of India signed an open letter slamming critics of Modi’s foreign policy. On May 31, the government notified the Central Civil Services (Pension) Amendment Rules, 2020, to further muzzle dissent by retired bureaucrats.

      Although rare, such vocal disagreements are not new in India. However, with its economy in shambles and a spate of downgrades by reputed international agencies on democratic values, human development, press freedom and hunger index, the foreign affairs discord will further diminish its global stature.

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      Over the decades, India has seen several significant changes in the way it looks at the world. It went from the idealistic Non-Aligned Movement in the 1950s to a close relationship with the Soviet Union during the Cold War. Now, India has cozied up to the United States to form the Quad, a strategic partnership to counter China that also includes Japan and Australia. India also flirted with BRICS nations for a brief while to form a coalition of developing countries — Brazil, Russia, China and South Africa — which seems to be dying a quiet death.

      All along, India has prided itself in maintaining strategic autonomy. Modi’s megalomania made him believe that he would suddenly catapult India to global power status. Unfortunately, his terms in office have left a muddled mess in its wake.

      Strong Start

      In today’s world of modern warfare and geopolitics, which includes nuclear-armed neighbors in Pakistan and China, Modi’s early years saw inane chatter about “Akhanda Bharat,” the ruling Bharatiya Janata Party’s (BJP) term for undivided India. This idea seeks to regain ancient India’s lost glory by spreading Hinduism’s influence across South Asia. Barring such misplaced euphoria, Modi rode the wave of international goodwill to regularize the border with Bangladesh.

      In western Asia, the Middle East was warming up to Indian influence. Progress was made on a deal to develop Iran’s strategic Chabahar port, which would facilitate overland access to Afghanistan. In 2017, Modi became the first Indian prime minister to visit Israel. India has also improved its relationships with Saudi Arabia and the United Arab Emirates. Yet since the 2017 Doklam standoff on the India-China border that Modi’s team handled well, Beijing has succeeded in building more infrastructure in the region than New Delhi. Though it could also be considered a strategic tie. Despite US objections, the decades-old India-Russia defense partnership evolved from New Delhi being a technology buyer to the recipient of technology transfer and, finally, a defense research and development partner — an evolution that has continued under Modi.

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      India’s perpetual see-saw with Pakistan has continued throughout Modi’s tenure. His initial outreach by inviting then-Prime Minister Nawaz Sharif to his inauguration in 2014 and a surprise stopover in Lahore a year later quickly fizzled out. In 2016, Pakistan-based militants carried out terrorist attacks near the town of Uri in the Indian state of Jammu and Kashmir. In response, India conducted “surgical strikes” across the Line of Control (LoC), which separates the disputed Kashmir region. In 2019, Pakistani militants attacked Indian soldiers in Kashmir. For the first time since 1971, India entered Pakistani airspace to bomb locations that New Delhi claimed to be terrorist training camps.

      The situation between India and Pakistan did not change much. Tensions between the two countries persist. But Modi was reelected in 2019 on the promise of this altered equation of India swiftly and boldly following up on terrorist attacks by Pakistan-based militants.

      The reality was much more nuanced. Despite Indian claims and Pakistani counterclaims, international observers concluded that the two cross-border raids by India were not particularly effective. By blocking access to bombed sites, Pakistan’s side of the story seemed flimsy. However, Islamabad’s downing of an Indian fighter jet in February 2019 and capturing an Indian pilot, who was returned a few days later, appeared to expose holes in India’s defense preparedness. Nonetheless, Modi managed to isolate Pakistan globally and, in 2018, have it included in the gray list of the Financial Action Task Force, the global agency tracking terror financing.

      India’s relations with the West did not improve much. In Europe, other than the Rafale warplanes agreement in 2016, the Modi government was unable to make progress on the stalled trade deal with the EU. To be fair, Brussels was busy rebuilding after the Great Recession and the chaos caused by Brexit. Across the Atlantic, there was optimism in the air. During his final term, US President Barack Obama reluctantly embraced Modi. Later, the bonhomie between Donald Trump and Modi could not prevent a trade war.

      However, India-US defense and strategic cooperation strengthened as Modi built on the hard work of his predecessors, Atal Bihari Vajpayee and Manmohan Singh. The rising threat of China also played its part in developing this relationship. The 2015 agreement between Obama and Modi on nuclear liability issues was followed by a bilateral Logistics Exchange Memorandum of Agreement in 2016 and a Communications Compatibility and Security Agreement in 2018. The Quad seems to be a natural extension of this closer US-India partnership, India’s Act East policy and the Asian pivot of the United States.

      What Changed?

      After a reasonably strong start, Modi’s India has found itself in a muddle. India’s foreign policy failures closely follow the country’s economic decline since 2017-18 and steadily rising majoritarianism. Trump’s erratic, isolationist policies and India’s widening geopolitical deficit vis-à-vis China played a role, but most of Modi’s wounds are self-inflicted.

      For his narrow domestic agenda and to pass the Citizenship Amendment Act (CAA), Modi selectively gave a pathway to citizenship to non-Muslims from the neighboring countries of Afghanistan, Bangladesh and Pakistan. Because it excluded Muslims, even persecuted ones, from these countries, the CAA was criticized and deemed discriminatory.

      In doing so, Modi alienated Bangladesh, which is rapidly modernizing and leaving India behind on most human development and economic indicators. Bangladesh swiftly showed India its place through a diplomatic snub and demonstrated its desire to walk into China’s open arms. Sustained diplomacy over the past year, combined with Modi’s recent trip to Bangladesh and India’s donation of COVID-19 vaccines, repaired some of the damage. While cooling down the CAA rhetoric might help, India’s weakened economy could still push Bangladesh closer to China.

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      Under the Trump administration, the US held a tough stance against Pakistan over what it called “Islamabad’s failure to take action against militant groups.” Aid from Saudi Arabia also dried up due to strained relations between Riyadh and Islamabad. As a result, Pakistan is beholden to China. The China-Pakistan Economic Corridor (CPEC), which passes through Gilgit and Baltistan, a disputed region that both India and Pakistan claim sovereignty over, has cemented China’s grip on Pakistan. New Delhi has not approached the recent ceasefire agreement with Islamabad and the resumption of peace talks from a position of strength. Rather, it is a tacit admission by both weakened parties that peace is mutually beneficial.

      Relationships with the Arab world and Israel remain strong, but Modi has lost the plot with Iran and is losing some ground with Russia. Beijing recently signed a 25-year strategic deal with Tehran and, with its economic clout, is pulling the Kremlin into its sphere of influence. In the pre-Modi era, as a rising economic power, India managed to carve out exceptions for itself to bypass US sanctions against Iran and Russia. Throughout Modi terms in office, China has steadily widened the economic and geopolitical gap with India. New Delhi’s growing weakness vis-a-vis Beijing has resulted in India kowtowing to the US and losing its strategic autonomy.

      Britain’s need for trade partners following its departure from the European Union might lead to a favorable India-UK deal. But a free trade agreement between India and the EU has not seen any significant movement under Modi. US President Joe Biden does not seem to be in any rush to end the trade war his predecessor began with India.

      For all the buzz surrounding The Quad, India is the junior partner that has little to offer to others in terms of economic benefits. New Delhi will enhance its strategic and military cooperation with other like-minded democracies, but it is unlikely to intervene if there is a full-scale confrontation between India and China. Unless the Indian economy becomes efficient and tightly integrates itself with Quad countries, its usefulness to other partners will be limited to its size and strategic location.

      In the Cold War, the US aligned with autocrats and religious fundamentalists, most notably in China and Pakistan, to defeat the Soviet Union. In the new brewing cold war between Washington and Beijing, Quad countries will pay lip service to building democratic institutional capacity in India. However, if push comes to shove, they will partner with an authoritarian India to counter China, which will serve their narrow self-interests.

      India-China Relations

      Modi’s biggest foreign policy failure is India’s frayed relationship with China. His misplaced overconfidence forced him to reject conventional wisdom and embark on a charm offensive with Chinese President Xi Jinping. Modi ignored the Doklam warning and kept expecting Xi to treat India as an equal, despite the crumbling Indian economy. Meanwhile, China had already started reducing New Delhi’s sphere of influence through its outreach to India’s neighbors and offers of economic and strategic partnerships. In 2019, Modi scrapped Article 370 of the Indian Constitution to downgrade the state of Jammu and Kashmir to a union territory status. His deputy, Amit Shah, made unrealistic claims about taking back the China-controlled Aksai Chin. In response, Xi directly occupied Indian territory in Ladakh for almost a year.

      China’s strength and India’s decline are best captured through the different ways the countries approach bonds. China is selling its government bonds internationally at a negative interest rate despite a raging pandemic, ongoing border clashes with India and a 300% debt-to-GDP ratio. Indian bond investors are demanding higher yields even though India’s debt-to-DGP ratio is below 100%.

      With a sizable military and tactical superiority, India was unlikely to lose territory to China. However, through emergency weapons purchases during the Doklam standoff, India paid dearly for Modi and Shah’s hubris and prioritizing domestic politics over national interest.

      Weakened on the World Stage

      Through his speeches, photo-ops with world leaders and tweets, Modi keeps peddling lies and projecting strength to voters. While India’s financial health has deteriorated significantly, the BJP has raised — through anonymous electoral bonds — millions in political donations that fuel Modi’s formidable propaganda machine.

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      The world knows that India is run by a narcissist who has built a false domestic narrative of the country’s global standing to keep winning elections. The West will keep hoping that India gets its act together economically and stops destroying independent institutions so that it becomes a democratic counterweight to China. But that is a battle only Indian voters can lead.

      As India warms up to the Quad, where does it go from here? As a new cold war brews, lessons from the past are informative. While the US used China and Pakistan to dismantle the Soviet Union, China cleverly used its leverage to strengthen its economy and authoritarian communist rule. Meanwhile, Pakistan indulged its military and majoritarian religious leadership to destroy itself from within.

      With his dismantling of democratic institutions and promotion of religious bigotry, Modi has left Indian foreign policy in doldrums. If voters want it to become a vibrant, democratic counterweight to China and a global player that does justice to its potential, India will have to find a leader who understands that issues like a strong economy, independent judiciary and social stability cannot be divorced from its foreign policy but are integral to it.

      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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      in World Politics

      India’s New Agricultural Policy After Decades of Farmer Suffering

      by

      In India, June 5 was a turning point in the history of the country’s agriculture. The government passed three ordinances to unshackle farmers from the restrictive marketing regime that has managed the marketing of agriculture produce for decades. This sweeping stroke promises to bring the entire world of farming technology, post-harvest management and marketing channels at the doorstep of the farmer. The challenge now is to put these promises into action. The national vision of the farm sector is to double the income of farmers by 2022. This move is revolutionary since income is intrinsically linked to how the markets of the harvested produce function.

      First, the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance provides much-awaited freedom of choice to farmers and traders. Now, farmers can sell and purchase produce through trading platforms other than the notorious markets operated by the Agriculture Produce Marketing Committee (APMC). An article published on Fair Observer in 2019 rightly observed how forcing farmers to sell their produce to APMC markets led to the problem of monopsony. As the only buyer of produce, APMC markets faced no competition and offered farmers very low prices. This ordinance promises to increase farmer incomes significantly.

      360° Context: The State of the Indian Republic

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      Second, the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance further empowers farmers by creating a framework for direct engagement with processors, agri-business firms and large retailers.

      Finally, the Essential Commodities (Amendment) Ordinance releases farm produce from the restrictions imposed by the Essential Commodities Act by severely curtailing regulations on farm produce. Such restrictions will now be permissible only under extremely emergent circumstances.

      The trigger for these sweeping changes may have been the disruption in the production and supply chains due to the COVID-19 pandemic. The health crisis and the resulting nationwide lockdown necessitated drastic steps to provide immediate relief to the agriculture sector. However, we must not forget that agricultural marketing reforms have been in public discourse for nearly two decades. In practice, they always appeared to take two steps backward for every step taken forward. Petty politics, instead of agricultural needs, dominated these decisions. Hence the officials of the Ministry of Agriculture deserve recognition. They have used a crisis as an opportunity to free farmers from the oppressive yoke of red tape, rigged markets and little choice.

      Poor Infrastructure, Corruption and Lack of Accessibility

      Before discussing the details of the three ordinances, let us briefly review the existing structure and context of the marketing of agriculture produce. The overarching legislations governing agricultural markets are the APMC acts of the respective Indian states. These were enacted with the laudable objectives of ensuring fair prices to farmers and safeguarding them from the exploitation of middlemen. They aimed to enable farmers to sell their produce easily.

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      These acts created the institution of the APMC, which operates agricultural markets commonly called APMC mandis, the Indian word for a market. Ironically, the APMCs have achieved the precise opposite of what their architects envisaged. In their enthusiasm to ensure stability, most state governments discouraged the rise of private mandis and even criminalized setting up competing markets. This created monstrous monopolies of APMC mandis controlled by influential cartels. Instead of offering fair prices to farmers, these mandis artificially manipulated prices. The management of APMC mandis remained opaque and exploited farmers while claiming to serve them. In particular, small and marginal farmers were at the mercy of wealthy traders at these markets.

      Unsurprisingly, the January 2019 report of the parliamentary standing committee on agriculture noted that the APMC acts had not achieved their purpose. With cartels at APMC mandis dictating the terms of trade, farmers face unreasonable deductions from the sale returns of their produce in the form of market fees, commission charges and other levies that rightfully should be paid by traders. On occasions, these farmers are charged the same fees multiple times. Corruption is rampant. Aside from a handful of exceptions, mandis tend to have poor infrastructure. Basic facilities for post-harvest management of agricultural produce such as grading, sorting and packaging are lacking. Supporting services, such as banks, post offices and resting places, have also failed to develop. If some facilities exist in some mandis, they are of extremely poor quality.

      Additionally, the number of such markets is grossly inadequate. The National Commission on Farmers has recommended that an agriculture market should serve a geographical area of not more than 80 square kilometers, whereas the existing national average is 496 square kilometers. Both the quantity and quality of APMC mandis are lacking. It’s tragic that an institution established to protect farmers from exploitation has become the source of it. It is for this reason that the parliamentary report recommended that creating alternative marketing platforms should be a priority. It observed that the APMC acts had led to restrictive markets and obstructed the emergence of competitive markets. Regrettably, the Indian farmer did not have the right to choose his customer thanks to the APMC acts.

      The APMC mandis tend to be noisy, messy, chaotic and unhygienic. So, it is no surprise that a large number of farmers, especially the small and marginal ones, do not sell to APMC mandis, but they do to intermediaries and unlicensed traders. Though there are no official figures available, various studies place the share of these informal intermediaries or middlemen at 30-55%. The figure is lower in the case of food grains but very high for horticulture produce.

      There exist, in many places, several layers between the farmers and the mandis. Thus, the safety net that these mandis aim to provide farmers is already diluted. The much-maligned middleman has become an integral part of the agriculture marketing system. One of the most significant aspects of the three ordinances promulgated on June 5 is to recognize and integrate these middlemen into a liberalized regulatory framework. Now, they can enter into bona fide trade relations with farmers.

      A New, Better Approach

      In 2003, the Ministry of Agriculture attempted reform after prolonged discussions. It came out with a model legislation for states to emulate: the APMC Marketing (Development and Regulation) Act, 2003. Curiously, the focus here also remained on regulation; the preamble mentions “improved regulation in marketing” before it talks of the “development of an efficient marketing system.” In contrast, the recent ordinances offer a pleasant contrast. The term “regulation” itself has been done away with. The first ordinance declares its objective to be “promotion and facilitation” and the second one “empowerment and protection.” These ordinances present a paradigm shift in Indian agricultural policy.

      The key objectives and their provisions in the trade and commerce ordinance are as follows:

      creation of an ecosystem of freedom of choice to farmers and traders for sale and purchase of farmers’ produce
      formation of competitive alternative trading channels
      promotion of transparent and barrier-free intra-state trade and inter-state trade
      facilitation of trade of produce outside the physical premises of notified markets
      creation of viable electronic trading platforms

      As per the new ordinances, farmers are to be paid on the day of the transaction or within a maximum of three working days. They do away with the onerous licensing system that required farmers to obtain several licenses to trade in different mandis within the same state. Gone is the market fee in the “trading area,” which is defined as any area of transaction outside the present day-notified mandi.

      Now, APMC mandis will now face serious competition and might be spurred into reforming themselves. Further, to the great relief of farmers, the dispute resolution mechanism has been kept simple and local, with preference being accorded to resolution through conciliation. The ordinance also envisages a price information and market intelligence system, thus equipping farmers for determining the price of their produce.

      The key features of the price assurance and farm services ordinance are as follows:

      creation of a national framework on farming agreements
      protection and empowerment of farmers in their engagement with the likes of large agribusiness firms, wholesalers and large retailers
      promotion of remunerative price agreements and a fair and transparent framework

      The ordinance also recognizes the possibility of an adverse impact on the rights of sharecroppers in the changed business environment. Hence, it has a specific provision for protecting their rights. The risk of markets and prices is likely to be transferred from the farmers to the contracting entities. Finally, the essential commodities ordinance clearly states, “the regulatory system needs to be liberalized … for the purpose of increasing the competitiveness in the agriculture sector and enhancing the income of farmers.” Accordingly, regulation of farm produce such as cereals, pulses, oilseeds, edible oils, onions and potatoes is only possible in extraordinary circumstances such as war, famine, a natural calamity of grave nature or an extraordinary price rise.

      Ensuring Lasting Change

      The reforms in agriculture marketing by way of these three ordinances are holistic. A primary problem with earlier legislation was that farmers could only sell their produce to specified traders in particular locations. As a result, farmers have been inevitably pushed to alternative buyers outside the legal framework, including middlemen and direct buyers. Small and marginal farmers suffer from an inherent disadvantage in such an environment. They lack access to market information. Even when they have some information, they lack the capital and technology that high-value crops require. The liberalization of agricultural markets will increase revenue avenues for farmers and improve their monetary returns.

      The proof of the pudding is in eating. The success of the ordinances will be determined by their implementation, which must be carried out in letter and spirit. While the ordinances remove aberrations and deficiencies in the regulatory structure, achieving their goals requires a strengthening of institutional capacity and infrastructure. Investment in agriculture, post-harvest infrastructure and marketing framework are all grossly inadequate. While these reforms should spur investment, it would be premature to expect that to happen automatically. Further efforts and interventions are called for. The big challenge ahead is to implement these reforms in the incredibly diverse markets across the country and to build strong alternatives as envisaged by the new legislation.

      A seemingly unrelated point is important regarding these ordinances. A recent article criticized the bureaucracy for drafting documents in language that was “officialese or bureaucratese.” This pejorative term is used for language full of jargon that is wordy and vague. Such criticism cannot be leveled against these ordinances. They serve as exemplars for other official documents. They are simple, straightforward and eminently understandable. The philosophy, intention and objectives of the ordinances are effectively spelled out in the preambles, which are among the best-drafted government documents in recent times. The trick now lies in achieving what they say.

      *[The author is a former secretary of the Ministry of Fisheries, Animal Husbandry and Dairying for the Indian government.]

      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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      in World Politics

      The State of the Indian Republic

      by

      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.

      Embed from Getty Images

      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