Mitras Analysis of News : 4-05-2017

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1.Switching the Financial Year cycle (Indian Express, Business standard)

2.The dragon beckons (The Hindu)

3.H1B visa effect in USA (The Hindu)

4.Explained: Why India should not be apprehensive of China’s new aircraft carrier!

 

1.Switching the Financial Year cycle (Indian Express, Business standard)

Synoptic line: It throws light on recent proposal by the government to switch the financial year to calendar year. (GS paper II)

Overview

  • Barely a week after Prime Minister spoke about aligning the fiscal year (FY) with the calendar year in a speech at the Niti Aayog, the Madhya Pradesh government has announced that it will implement the change by presenting its budget for 2018 in December this year.
  • The proposal had evoked mixed responses with the Niti Aayog supporting it and the industry body, ASSOCHAM, issuing a sharp critique.

Analysis

  • The April-March fiscal was adopted in 1867 in line with the practice in imperial Britain. The Congress government in 1984 gave a shot at changing the financial year, appointing former RBI governor LK Jha to head a committee to explore the benefits of such a move. The idea was to ensure speedy allocation of funds during drought years.
  • The finance ministry (FM) had mooted a change in the FY in July last year, arguing that the April-March cycle does not allow budget-makers to have a proper assessment of the monsoon. It had described the calendar year as more in sync with the rhythms of rural development and infrastructure-related activities in the country.
  • A committee headed by the former Chief Economic Advisor, Shankar Acharya, has been set up to examine the suitability of moving to a new financial year cycle. The panel has submitted its report, but its contents are yet to be made public.
  • Moreover, In December, after the committee submitted its report, the ministry denied an imminent change in the FY. It talked of reviewing the Acharya committee report and stated that changing the FY would “require a lot of preparations”.
  • A suggestion was to be put forward to discuss the proposal in both the Houses of parliament before walking away from a 150-year-old tradition. But the decision by MP government open huge areas to be concerned.

Benefits of the proposal

  1. Since agriculture contributes more than 15% to India’s GDP and above 58% rural households depend on farm yields, many experts have supported this move.
  1. Exporters have said that any change in the financial year to align with the calendar one is a welcome move. This will allow for a proper mapping of India’s foreign trade vis-à-vis global trade, something which is difficult to do right now.
  1. There are several reasons for switching the financial year and the primary one being that it would arm the government with levers to effectively and adequately reorient the budget formulation exercise.
  1. Niti Aayog’s discussion paper has cited recommendations of Administrative Reforms Commissions in the 1950s. It contended that the April-March year prevented policymakers and the government from taking into account the monsoon situation important because the Budget is an important tool to address socio-economic requirements, and the farm sector dominates the country’s socio-economic dynamics. They also pointed to the higher share of the farm sector in the output of some northern states.

Criticism of the proposal

  1. The ASSOCHAM, had argued that changing the financial year will not only mean a change in book-keeping, but also in the entire infrastructure of accounting software, taxation systems, human resource practices involving huge costs for both big and small industries. The shift would cost hundreds of crores of rupees.
  1. Aligning the FY with the calendar year would require the budget to be presented in October or November, about the time when sowing for rabi crops most importantly, wheat and mustard — begins. It defies logic as to how the finance minister will conduct this exercise with, at best, a sketchy idea of the harvest next year.
  1. In fact, April-March may be better aligned to the agricultural season. By March-end, the rabi crop (wheat, mustard, chana) is due for harvesting, and agricultural operations are more or less complete in terms of crop growth — only harvesting and marketing remains.
  1. The January-December cycle could be like being caught in no-man’s land: the kharif crop would have been harvested by early December, but rabi sowings would still be on, and would continue until about mid-January. With the crop not even halfway through its growth period, any assessment of rabi production would be difficult.
  1. After years, many of India’s corporates had switched to financial year reporting ending in March. As they prepare to equip themselves for the rollout of the Goods and Service Tax, they will have to start thinking of another disruption once the federal government too takes a decision to change the financial year. The transactional costs are going to be high.
  1. Article 150 of the Constitution, which deals with the content and form of accounts of the union government and the states, says the accounts shall be kept in such form as the President may, on the advice of the Comptroller and Auditor General of India, prescribe. It is not clear whether the state that has first rushed to carry out this change has followed the proper constitutional procedure.
  1. What is even worse is that the minister will have virtually zero information of the monsoon next year.

Way ahead

  • From an agricultural standpoint, in fact, July-June would be the ideal financial year, as kharif sowings peak in July with the arrival of the monsoon a month earlier. By End-June, the rabi crop too would have been completely harvested and marketed; which would mean that we would actually be starting a new year.
  • Seen this way, the April-March financial year may not be perfect, but may still be better than January-December. There is another, larger point which is about whether the impact on a sector whose contribution to national income has declined to well below 20%, should be the driver for such a major change.

Question: What are the merits of switching to calendar year by giving up the practice of financial year? What can be the threats that it can pose for accounting process? 

 

2.The dragon beckons (The Hindu)

 Synoptic line: It throws light on issue of Belt and road initiative (BRI) of China and scope for give and take for India’s participation. (GS paper II)

Overview

  • The ambitious Belt and Road Initiative (BRI), a trade and infrastructure strategy, is based on the ancient roads and is aimed at creating a transnational network to connect Asia with Europe and Asia and promote common development among all countries involved.
  • The United Nations General Assembly, the UN Security Council and APEC have all incorporated or reflected Belt and Road cooperation in their resolutions and documents.
  • However, India objected to join BRI essentially on the grounds that the China Pakistan Economic Corridor (CPEC), a flagship project of BRI which runs between Xinjiang and Gwadar in Balochistan, goes through territories India claims, namely Pakistan-occupied Kashmir (PoK) and Gilgit-Baltistan. India has also indicated that it sees BRI as a unilateral, national initiative of the Chinese which other countries are not obligated to buy into.

OBOR OR BRI

  • China’s most ambitious foreign policy and economic initiatives for building of a Silk Road Economic Belt and a 21st Century Maritime Silk Road, collectively referred to as One Belt One Road (OBOR). The Chinese recently changed the name as BRI (belt and road initiative).
  • OBOR projects, if pursued vigorously are expected to connect the ‘heartland’ with the ‘rim land through continental and maritime routes and thus at one stroke make the rising China indispensable in the calculations of any country in the region.

This policy has two components:

  1. Belt– The “One Belt” refers to the land-based “Silk Road Economic Belt”. Here Beijing aims to connect the country’s underdeveloped hinterland to Europe through Central Asia.
  1. Road– The “One Road” references the ocean-going “Maritime Silk Road”. It is to connect the fast-growing South East Asian region to China’s southern provinces through ports and railways.

The Belt and Road Forum for International Cooperation (BRF) 

  • The Belt and Road Forum for International Cooperation is a high-profile international meeting on the Belt and Road Initiative, a China-proposed trade and infrastructure plan connecting Asia with Europe and Africa.
  • The principal role of the forum is to showcase international endorsement of Chinese President’s strategic vision of economic cooperation for peace.

Objectives of BRI

  • The general objectives of the BRI are finding outlets for excess capacity of Chinese manufacturing and construction industries, increasing economic activity in its relatively underdeveloped western region, and creating alternative energy supply routes to the choke points of the Straits of Hormuz and Malacca, through which almost all of China’s maritime oil imports pass.
  • The OBOR is much more than connectivity cum economic program; it is also a comprehensive diplomatic initiative of a rising China. It is an instrument of China’s diplomatic objective of ensuring that Asia and the World recognize China as a great power.
  • The general strategic objective of OBOR is to increase China’s influence in the countries covered, to reduce US influence in these countries, and to preempt any potential increase in influence of US or its allies. More concretely, the goal is to establish a strategic presence in these countries, including through sale of military equipment.

The strategic dimension of OBOR has two clear components:

  1. To secure Central Asian and other neighboring Islamic States (Pakistan, Afghanistan, Iran) from becoming a base for Xinjiang liberation movements.
  1. A revival of the old “Great Game”, to develop land routes from continental Asia (China) to the Indian Ocean (through the Bay of Bengal, Arabian Sea and Gulf of Iran).

India and BRI

  • India is opposed to Chinese BRI initiative since the China-Pakistan Economic Corridor (CPEC) passes through the Indian Territory. Indian government stated that the connectivity cannot undermine the sovereignty of other nations. India has also refused to attend the Belt and Road Summit.
  • The sovereignty issue needs to be addressed between India and China; new routes will be open for Chinese goods to both India and Afghanistan, it will promote India, Pakistan and Afghanistan trade. The BRI project will open more links of trade between India and other countries. Further, India does not enjoy much leverage to guide ocean trade markets despite having proximity to the sea and a strong navy.
  • China’s argument, that India would be “isolating” itself by staying out, is a pressure tactic: roads, ports and railways are public goods, which cannot be open to some and closed to others, based on nationality.

Way ahead

  • India and China need to ensure that their differences on political questions do not prevent both sides from advancing economic cooperation, something both countries have struggled to lately.
  • If China will renegotiate the boundary with the relevant sovereign country and if India’s political and strategic concerns are met, the initiative could be seen as viable. However, tense bilateral relations with China, deep mistrusts and India’s growing concerns over Chinese hegemonic intentions in South Asia and Indo-Pacific region make it practically unlikely that India will ever consider joining this project.

Question: What should be the optimum stand for India regarding BRI in which India can get advantage vis-à-vis Pakistan?

 

3.H1B visa effect in USA (The Hindu)

 Synoptic line: It throws light on the recent move by Infosys to hire American workers in light of H1B visa crackdown. (GS paper II and III)

Overview

  • Infosys, among India’s largest software services companies, said it plans to hire 10,000 American workers over the next two years. As part of this initiative, Infosys will open four new technology and innovation hubs across the country.
  • The move assumes significance in the wake of an increasingly loud anti-offshoring campaign that has sought preference to locals for jobs in the U.S. than for immigrants.

The decision

  • Infosys Ltd said it plans to hire 10,000 Americans in the next two years, following criticism from the Donald Trump administration that the company and other outsourcing firms are unfairly taking jobs away from US workers.
  • Infosys, which employs about 200,000 people around the world, will expand its local hiring in the US while adding four hubs to research technologies such as artificial intelligence and machine learning.
  • The first location will open in Indiana in August 2017 and is expected to create 2,000 jobs for American workers by 2021.
  • India’s outsourcing firms have come under attack for allegedly displacing American workers with employees from overseas.
  • These centres would also serve clients in key industries such as financial services, manufacturing, healthcare, retail and energy.

Implications of the decision

  • Indian IT companies have been under pressure to adapt nimbly to the restrictive visa regimes being put in place not just in the U.S. but also in key markets such as the U.K. and Australia. As a matter of fact, these companies had been gearing up to become visa-independent even before Mr. Trump’s rise to power.
  • For instance, in 2016, Tata Consultancy Services, another IT giant, made only about 4,000 U.S. visa applications, compared to about 14,000 a year before. The trend is likely to only strengthen.
  • Not surprisingly, there is now increasing speculation that many Indian IT giants will refrain from sponsoring H-1B visas for junior engineers.
  • The IT service firms which advise large companies on tech issues and carry out a range of tasks for them, from managing back-end computing systems to high-level programming rely heavily on the H1-B visa program. The recent crackdown on visa regime by US can have growth implications for the IT firms.

 Way ahead

  • While individual companies adapt to the new political economy in the West, it does not diminish New Delhi’s responsibility to make a case for more open immigration policies for India’s skilled workers. The economic rationale behind the free movement of labour is that it promotes economic efficiency.
  • It is obvious that the tightening of immigration is likely to have a net negative effect on the global economy. Also, investment in advanced technologies itself, such as by Infosys, could be a measure to deal with high labour costs in the U.S. Artificial intelligence has already helped IT companies cut labour costs.

Question: Starting with the move by Infosys to hire American nationals, is it a threat to Indian immigrants aspiring to enter USA?

Explained

4.Why India should not be apprehensive of China’s new aircraft carrier! (GS paper II)

Background

  • China has launched its first domestically built aircraft carrier, which will join an existing one bought second-hand from Ukraine, amid rising tensions over North Korea and worries about Beijing’s assertiveness in the South China Sea.
  • Construction of the Type 001A carrier which may be named Shandong started in 2013 and it is likely to be commissioned in 2020. It will be China’s second carrier after it commissioned a modified Ukrainian Kuznetsov class aircraft cruiser Varyaginto its navy as Liaoning in 2012.

 The Chinese move

  • Along with their role in protecting China’s maritime interests, Chinese naval strategists see the carrier programme as being “about having naval power commensurate with China’s international status, to impress both external and domestic audiences.
  • China is believed to be planning to build at least two and possibly up to four additional carriers, with one of them, the Type 002, reported to be under construction at a shipyard outside Shanghai. They are expected to be closer in size to the US navy’s nuclear-powered 100,000-ton Nimitz-class ships.

Why it may not be threat to India and India will still dominate IOR (Indian Ocean region)

  1. The Shandong has only been launched, it doesn’t mean it’s ready for operational deployment. It will undergo outfitting with various systems and then undergo sea trials before being commissioned around 2020. India launched its first indigenous carrier, Vikrant,in 2013 and it is likely to be commissioned in the early 2020s after delays for various reasons.
  1. China’s existing carrier, the Liaoning,is being used to train the crew to operate aircraft carriers and is not on operational deployment yet. Compare this with India’s aircraft carrier: The INS Vikramaditya is fully operational. And India also has decades of experience in operating aircraft carriers, it has used them in warfare.
  1. Even after China commissions the Shandong, it will not send both its carriers on permanent deployment in the Indian Ocean. China’s primary areas of interest are the hotly contested waters and islands of the East and South China Sea. The US maintains a potent naval presence in the area. China will maintain both its carriers there although it will make symbolic port visits in the Indian Ocean region especially to Gwadar in Pakistan.
  1. The two Chinese carriers are conventionally powered, not nuclear, which means they cannot be put on extended deployment. They lack the logistics capability to operate far away from Chinese shores.
  1. China has to contend with India’s two unsinkable aircraft carriers: the Andaman and Nicobar Islands located close to the choke point of Malacca Strait and the Indian mainland itself which juts into the Indian Ocean. The Andamans has India’s only tri-services command and there are plans to beef up military presence there.
  1. India has multinational cooperation in the maritime domain primarily with the US and Japan. India and the US share information on China’s maritime movements and train extensively during Exercise Malabar.
  1. Moreover, to break India’s dominance in the Indian Ocean, China has invested in a number of port projects in India’s neighbourhood, referred to as string of pearls. All of them, including China’s expected naval base in Gwadar in Pakistan, are within range of India’s land-based fighters and missiles.
  1. Finally, India does not have to match China in the numbers game. The former has the geographical advantage. With over 40 warships under construction, it will have nearly 200 warships by 2025. China has to contend with multiple naval powers in its core areas of interest. The US navy looms large. Japan has a powerful navy with advanced warships and submarines. It recently commissioned its second helicopter carrier, which could carry the F-35B stealth fighter. South Korea has a potent navy and Vietnam has acquired Russian Kilo-class submarines to counter the mightier Chinese navy.

Way ahead

  • India has to prepare for any Chinese threat. It should beef up its air defence and land-based anti-ship missiles in the Andaman and Nicobar Islands as well as peninsular India. Stationing the S-400 surface-to-air missile system that India plans to acquire in the Andamans will cover 500,000 sq. km of airspace over the Bay of Bengal. All major Indian warships are being equipped with Barak 8 long-range surface-to-air missiles along with the supersonic Brahmos anti-ship cruise missiles.

Question: What should be the strategy of India with respect to Indian Ocean region, so that India can become a responsible regional power?

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