China Warrants A Definitive International Response

The popular wisdom goes that large militarised nations can no longer afford a conflict. Particularly so if they are nuclear-armed. This old chestnut has been regaining currency recently, as the world comes to terms with China’s perfidy in the context of the Wuhan virus transmission. At the face of it, it is certainly true. There is nothing to be gained in the world by a full-scale nuclear confrontation resulting in global annihilation. However, it’s equally true that nuclear-armed countries have indeed been in a state of active conflict (US and Russia, in Vietnam and Afghanistan) and even limited war (India and Pakistan in Kargil and PoK) despite the nuclear overhang being real. Further, China does continue to use military action against India, which is nuclear, and against east Asian countries that have their security underwritten by the nuclear-armed US. Therefore, clearly, the scenario is not as simple as going to war or not going to war. The situation calls for a nuanced exploration of various factors and looking for space and role of hard power in the emergent circumstances.

To be clear, the spectre of strife is not something that has happened only because of the pandemic. This is something that had been building up over the years, as China dropped its mask of ‘peaceful rise’ and replaced it with ‘wolf warrior’. The transition from Deng Xiaoping’s carefully cultivated façade of interdependence was gradually replaced by the Han supremacist reality of Chinese culture by succeeding Chinese Premiers, till Xi Jinping dispensed even with the pretence of such. After the changing economic dynamics in Obama era, where the US economy took a severe hit coupled with rise in Chinese strengths, the new Chinese leadership did not feel the need to maintain appearances, leading to a Chinese international policy more in line with the deeply held beliefs of the Communist Party of China (CCP).

However, this gradually evolving dynamics have come to a head due to the current events. It’s no longer even possible for Chinese apologists in the free countries to propagandise the friendly image of gentle panda-like Chinese that they had been peddling for last many years.

It is now clear that there is an intense conflict that’s currently underway between China and most of the rest of the world, a handful of Chinese lackey countries being holdouts. This friction encompasses all dimensions of international relations. The Chinese hegemon is contesting social, trade, economy, military, diplomatic and geographical boundaries in different theatres with different countries. It is no longer possible to hope that these contentions will resolve themselves naturally with an evolution in the Chinese mindset as the country’s trade integrates with the world. As the roster of these issues is long enough to merit a separate piece on its own, for readers looking to validate the same may refer to an excellent piece on Sirf News outlining many of them.

Now that we know China, what next?

The only question that then remains is what we the world are going to do about it. It is here that discussions on whether war is a possibility begins to be of import, clearly suggesting that the situation is dire enough to consider extreme possibilities. However, most of the discussions that raise this topic do so with the view of explaining why war is either not possible or not a good idea. In current times, the suggested response range from “US needs to be nicer to China and all will be well” and “There is no problem but for war-mongering Trump and Co” [I]China-US war unlikely despite rising hostility [II]A Cold War With China Would Be a Mistake [III]The United States Can’t Ditch China Yet to “We may have a cold war but it’s a bad idea” [IV]Is a US-China Cold War already underway? [V]The US-China ‘cold war’ is here — and Beijing may start targeting Washington’s allies, analysts say [VI]US and China: edging towards a new type of cold war?, only a few calls for a complete revisiting of global order have been made so far[VII]The Wuhan Virus Pandemic has cleaned the slate for a new world order, one where India plays a crucial role.

An examination of the current set of responses shows a clear pattern in the range of opinions. Born from the Chinese propaganda from either Chinese publications or their mouthpieces outside, come the view of the world would be a nice place if everyone was nicer to China and people accepted that Chinese are doing the nicest things possible in the interest of the world at large, and while there may be a few hiccups, but certainly the best way of addressing them is in seeing Chinese point of view. However even the more supposedly “independent” voices seem to think that even a minor tussle would be a bad idea, and in their conception don’t see it going beyond restricted trade and diplomatic measures.

Such views, which talk of limited response are very amiss. For one, most them gloss over the scope of the problems, in both their breadth across the world, and depth of each where they are. They appear based more on hope of “things will somehow work out” to fear of “conflict is always bad”. These are more based in a belief system born of naivety or lack of courage than real world understanding of the problems.

The fact remains, that without being pressured, the Chinese state has no incentive whatsoever to change their ways. After all, what exactly does China stand to lose by not pursuing more of the same otherwise? It can steamroll Hong Kong into being another Chinese province under repressive state laws. It can take over the Spratly islands, push out Filipino and Vietnamese fishermen from Indo-China sea. It can continue currency manipulation and send out yet another coronavirus. Why would they stop? To have them pursue a different path, deterrence to current actions is, therefore, a must.

So, what would the face of deterrence be to shape CPC to be open to the world? Would a “Cold War”, where the world restraints China through economic actions and diplomatic sanctions work?

Selection of response vectors

Before we go too far, the fact that China needs to be held accountable at many basic criteria is certainly true. From there it does flow that various trade practices and even domestic economic management especially vis a vis international commerce needs to be called into question. Further, there can be no disagreement that the free world takes a stand against the totalitarian repressive state that China is. We need to support the pro-democracy and free speech movements within the country through positive discrimination of persecuted individuals as well as sanctions against China for indulging in these practices. The challenge here is to know whether that would be enough. To this we know the answer unequivocally, it would not be. There are two main reasons for the same.

Firstly, China is in the middle of a push for dominance across the complete spectrum of statecraft. It seeks to modify opinions using paid propaganda in other countries while tightly controlling the media at home. It seeks free trade outside while following extremely restrictive systems at home. It seeks to dominate Tibet and Hong Kong with police action while expecting protection for Chinese in Africa. It physically attacks fishing of competing nations using a combination of military and civilian vessels. It threatens Taiwan militarily. It routinely sends its army to Indian borders for probing missions.

When faced with an implacable contender playing across the board, it will have to be countered in each dimension. Leaving any avenue unchecked would allow it to build pressure through flanking moves. This means that Chinese use of force, must be countered where applied on a local basis and cannot be glossed over.

At this point of time, we should remind ourselves, that the cold war was cold only in as much that large-scale military confrontations did not happen in European continent. There were several hot wars, fought either through proxies, or even with direct involvement in some theaters. This is the second key point. While planning for a cold war, it is important to remember that a military aspect is always critical to success of the match. The whole game may not be predicated on violence, but often enough ground level changes must be affected and there is no other instrument than force to make those.

It stands to reason that use of military options will be an integral part of the strategy which would go towards checkmating China along with other instruments of state policy.

Options for power projection

Based on what we have so far there emerges a need to explore the use of force, but to a level that stays short of crossing the threshold towards full-fledged war. As it turns out, unlike widely believed there are several options on the table, and all they need essentially is political will to make them happen.

To begin with, a key aspect of the framework will be for the many affected countries to work in unison. This is critical for two reasons; one the geography of the region is politically fragmented with many small countries ringing the beast. By itself, most of these countries are ill-equipped to take a strong stance. China utilizes this to keep the region off balance and push for territorial gains and influence peddling where it can’t have direct control. Secondly, there is always a moral imperative needed prior to the use of force, and an alliance builds the just cause for necessary steps.

In practical terms, what we need to see are military alliances in the South-East Asia and East Asian regions. These military alliances need to be more than lip services though. Deployment of manpower and equipment, such as ships etc. in partner countries on an ongoing and reciprocal basis, is the need of the hour. This also means that the partner countries put aside their differences of geopolitical at least for some short to mid-term timeframes. Extending the same, there is need for the countries to purchase and supply military equipment to each other. India for example can supply Brahmos to Vietnam along with training for Vietnamese officers.

At this juncture, it is important to note, that the naval aspect of the framework under consideration is possibly the most crucial part of it. As we know, a large part of confrontation is likely to happen over waters of the Indian Ocean, Pacific and Indo-China Sea. Over these lie the critical trade routes, for the world, for the region and for China. About 25% of global trade passes through the Indo-China sea, with 40% of Chinese trade and 30% of Indian trade. Securing and controlling these would be crucial for commerce but is also important for other maritime economic activities such as fishing which are essential for countries in that region. It is imperative to have these corridors secured for an open international order where no one country may dictate terms.

We have already seen multi-lateral exercises in the region, along with freedom of navigation missions [VIII]India joins US, Japan, and Philippines for naval drills in South China Sea [IX]US Navy Ship Replenishes Indian Navy Ship in South China Sea and the need of the hour is to step up the same. These need to be expanded in a number of missions, as well as in the number of countries and vessels participating them.

However, effective as naval operations are, its not possible to have a permanent presence of ships over a vast oceanic area. There is a critical need to supplement the same with land bases supporting these operations. An option increasingly coming to the fore is to ring-fence the region with guard posts, often multi-lateral, acting as control points. An example of such could be US troops stationed in Taiwan and Japan, along with their hardware assets. Electronic intelligence posts, anti-shipping missile batteries, coastal defence crafts would all be housed there provided oversight and means of control. In addition, these could provide berthing stations for larger ships in their freedom of navigation movement.

Already the US is moving towards basing long-range land-based missiles in Taiwan, a powerful counterforce instrument. [X]Special Report: US rearms to nullify China’s missile supremacy This is in line with US identification of China as the number one threat to the world order, with their defence secretary calling it out explicitly just a while back [XI]US Defence Secretary Mark Esper says China a ‘rising threat’ to world order. The US is pirouetting NATO’s focus to China [XII]Time to stand up to China, says NATO chief Jens Stoltenberg and it is expected that the US and NATO will look at moving assets from European theatre to the Pacific rim region.

Calibrating the level of response

Important as the above measures are, they still are within the ambit of deterrence, i.e. the premise here is that presence of military alliances and patrolling in force will constraint Chinese from pursuing a more hostile strategy. The problem here though is, that China has already demonstrated willingness to disregard many existing red lines and play chicken with existing disincentives. Also, deterrence by its very nature in defensive, and cedes the initiative with the actor willing to play offence. It follows that a measure of coercion is needed in the mix. There again exist a possible range of steps for a willing collective to take.

There has so far been no real effort to reach out to the people under CCP’s heavy hand to provide them succour. At the least, modern advances in information technology should be used to make sure they have breathing space in terms of availability of information. The currently hermetically sealed Chinese internet space needs to be systematically breached so that the Chinese people can access the world outside closed space. In parallel, the secrecy maintained by the Junta needs to be broken for the rest of the world. White Hat hackers need to access information from a range of Chinese information caches and make it available across the world often and in full. It should no longer be possible for Xi’s henchmen to hide their crimes from the comity of nations. There is nothing more dangerous to a closed culture than a free flow of information, and this itself will be debilitating to the communist apparatus. Information warfare is something that can easily be carried out below the “hot” threshold and are expected to be pushed aggressively. The measures listed below can be extended to active degradation of Chinese technology infrastructure on a regular basis, hampering operations of their economic and military assets as well.

There is one more dynamic measure that needs to be applied in the short term though, and probably the one likely to cause maximum frisson. It is now time, that countries directly impacted by Chinese physical aggression, respond in kind. While we have had India do that repeatedly, even right now on an ongoing basis, the other countries have not. Malaysia, Vietnam, the Philippines amongst others have had their marine vessels damaged or sunk, their fisheries devastated, deliberate destruction of sensitive ecological zones and so on. These countries have not been able to even extract minor retribution for the damages suffered. Its part lack of military prowess and part being beholden to China economically. It is important that the multi-lateral initiatives enable these countries with enough confidence to react against attacks on them independently or in participation with an international force. The sinking of a Vietnamese fishing boat must result in capture or destruction of the Chinese militia vessel responsible. If immediate retaliation can not be mounted, this should cause of Vietnamese navy to stop and seize multiple Chinese cargo vessels transiting near their country even if in high seas. The law of seas allows for military navies to seize merchantmen on “valid” suspicion of criminal activity, and this law can be engaged to target civilian Chinese shipping in a quid pro quo manner. Costs must be bought to bear on China every time it breaks international law, or a humanitarian convention. It must be swift and proportionate. These must on a sustained basis across all dimensions of international engagements. And when these extend to the domain of arms, it must be addressed in the same language. The only way the international order can survive if the world is willing to put in the hard work to protect and support the values it is based on. Otherwise the devolution into a patchwork of “liberated zones” is soon to follow.

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Deconstructing Manmohan’s Speech

[dropcap]E[/dropcap]ven as the stories around demonetisation continue to dominate the media and the news cycle in our country, human stories of Indians dealing with cash access decline is getting replaces with political stories that have now come to dominate the front pages of media. Of the various developments on this dimension, the one to find more significant attention was Manmohan’s Singh’s rather brief speech of less than 700 words in Rajya Sabha. In itself the speech was not significant, it was on expected lines,  a reaffirmation of Congress’s stated position and did not add any new material over what had been already said by other members of the party, neither did the speech delve into details of economics or politics. If we were to disconnect the speech from the person who presented it, it would not merit publication even as an opinion piece in any meaningful media channel. Nevertheless since the adage of the messenger being the message is not untrue in real world, a speech by once economist and ex-PM ended up gathering attention and some analysis. While the attention has been neutral, the analysis of the speech has been mostly negative, calling into attention the crimes of commission and omission by Manmohan’s government and his track record and its variance with the current position.

Image result for UPA scams

The examination of the economic content has largely been on lines of correctness of the few statements Manmohan managed on the actual topic in the message, calling into attention the lack of sanctity of the estimate of impact on GDP, how it differed from mature studies with proven methodologies. In addition, apart from various analyses, the actual economic data available since the step, even though limited, surprisingly points to a positive impact on economy rather than a negative one. This indicates that significantly more rigorous studies are needed to assess the true impact rather than throwaway predictions. However even if the speech was of questionable merit and has been widely critiqued, there are still aspects to those which need to be examined, as it forms the main axis of the political attack on the demonetization effort by the current government.

The climax of Manmohan’s speech has been the characterization of the move as an “organized loot”, and this was the eye-catching phrase which has headlined his effort in Rajya Sabha. Let us therefore focus on the centerpiece of the speech of the erstwhile appointee PM. A loot by its basic definition, involves transfer of assets from one party to another, by force. While a politician of the ilk of Mamta Banarjee can get away with such throwaway statements under the amnesty for rhetoric they have, an economist like Singh cannot be allowed this leeway without risk to his remaining credibility. Surely, as he isn’t Humpty Dumpty, he must know what he’s saying when he chooses his words? And if he does so, then it is incumbent on him to explain the mechanics of the loot, specifically whom has the money been taken from and who is the party is it has gone to? The largest part of the Indian populace have either deposited the money they has as cash into their accounts, or have converted them into new notes. To speak of the translation of money from the idle physical form of cash to a interest earning deposit in the bank as loot, is exceptionally ridiculous if it has to come from anyone with a modicum of economic knowledge and even more so from someone of Manmohan’s background. What then explains such a statement ? This is an important aspect, but to understand the rational, let us first look at some aspects of history before we tie them together.

 As we have suspected before and has been reaffirmed since by the government, the effort towards demonetisation is targeted towards a less-cash economy, which in turn supports the aims of eradication of black money and fake Indian currency. It is the 500 and the 1000 rupee notes, which have formed the base of the two problems plaguing Indian economy, but how have things come such a pass where the challenges of fake currency and black money need precipitate such mammoth steps to tackle them? This situation has not come about in a single day, and has been building up over the 2004-2014 period, and the mechanics of both these have been the high-value currency notes in operation. Over 2004 to 2014, the high value currency notes were allowed to grow unchecked, in far greater proportion to the overall cash supply than before. A related development though was the lack of security of Indian currency in the same period. The De La Rue scam was uncovered when the Panama papers were leaked by Wikileaks but have not seen sufficient media traction. The exposé brought into light the affair where currency note suppliers were pushing substandard inputs, while being shielded by handsomely paid middlemen who kept the government occupied elsewhere.

Image result for fake currency network

The security lapses do not stop there unfortunately. High quality ink which is used to print the notes, is a cornerstone of currency sanctity and that too has been compromised. Not only does the supplier of ink to Indian operations also supply to countries like Pakistan, but there have also been incredible lapses such as letting shipments getting stolen. The UPA government over the 10 years of its existence appears to have taken an exceptionally lackadaisical approach towards the problem with no real and specific steps to curb black currency, while at the same time encouraged increased distribution of high value notes. This has caused hoarding and distribution of black cash and FICN (Fake Indian Currency Notes) much easier.

Clearly, if there is a set of assets which are being taken away by force, it is the FICN network as the hordes of black currency. These will reflect in government treasuries as unclaimed bills. Only If someone does not see the government as having a moral right to disrupt illegal operations, one may then characterize Prime Minister Modi’s step, taking assets away from the international currency networks and black money operators, as a loot. Indeed force has been used to transfer assets, for some it would be a moral force, but to those who don’t necessarily see it that way, the textbook definition fits. Given that Manmohan’s limited economic observations are indeed repudiated and his past government has been directly implicated in various scams and acts of mis-governance, it begs the question as to who are the parties, for which Manmohan Singh’s heart cries out in pain? When he rose up to speak in Rajya Sabha, something he is not known for, it was certainly not the Indian people of Assam, whom he ostensibly represents, speaking through him. The only possibility which remains is then the illegal economy that grew under his stewardship and it must be on behalf of this corrupt system that he is batting now, as he was alleged to have done before.


Modi Got His Maths Right

[dropcap]O[/dropcap]ne of the first casualties in the din of the noise around demonetisation has been a failure to really debate, understand and grasp the full contours of the changing landscape as the new world unfolds right in front of our eyes. This is rather depressing. We, with a ringside view of one of the most drastic moves in the history of independent India, are not watching the show, but getting distracted with frivolities of partisan politics. The situation is aggravated by the hate for an individual that results in freak shows, blocking the real picture. The invocation of tatvampushan apavrinu [Ishavasya Upanishad] has never been apter than now, as the face of reality is clouded by the gold of dubious origins, seen as puppets dancing on a string on the world stage.

To do ourselves justice, therefore, we must step back and take a detached look at the myriad data points whirling in the dust storm. Nothing aids detachment as much as the cool clean breeze of mathematics. Let us be guided by the numbers to see if we can make some bold predictions about the nature of what the Indian economic situation will be after the impact of demonetisation plays out.

The basics first. The Indian GDP is estimated to be 125.41 lakh crore, and the cash circulation in India before demonetisation was to the tune of 17.54 lakh crore, making it nearly 14% of cash-to-GDP ratio (the current official estimates are 12%), one of the highest in the world, compared to similar economies at 4-5% of cash to GDP ratio. Even the traders of India, a community notorious for loving their money in liquid cash, have felt the pain of the cost of cash enough to commission a white paper on it. The more controversial, but interesting, numbers are on the scale of ‘black money’ in the system. Its estimates vary wildly — from 5% to 30%.

rationHowever, typically, the size of the black economy in the Indian system is considered to be around 20% of the GDP, based on a World Bank study, whose methodologies have been reused by the Union government even during the Congress regime. This takes the size of the black economy to be at Rs 25 lakh crore to Rs 28 lakh crore. On the other hand, typically, cash as the percentage of the black economy is estimated safely to be around 25% of the black GDP. That the black cash in the system is to the tune of 4.5 lakh crore would, thus, be a conservative estimate. Some prior studies have kept the size of the black cash to be at 3.35 lakh crore. Of course, we are already familiar with the figure of Rs 15 lakh, which is 86% figure of the cash in high denomination notes.

Armed with the numbers then, we can begin to make sense out of the mayhem. The cash in circulation is worth about Rs 17.5 lakh crore, and about Rs 4.5 lakh crore is the amount in black, which will be burned at the end of this exercise. That is, when the demonetisation is done, the government does not expect cash in circulation worth Rs 4.5 lakh crore to be returned as it is from dubious sources. Or, the amount will be subject to a heavy penalty and cease to exist. Assuming that the black cash is essentially in high-value notes (a very safe assumption), there is Rs 13 lakh crore worth of legitimate cash in circulation. Now, if the government is indeed seized of the problem of cash, and wants to promote cashless transactions, clearly it would like to see a lower amount of cash floating around. Assuming a figure of 5% of the cash-to-GDP ratio in line with other similar economies, it would like to see no more than Rs 9 lakh crore of cash in circulation. Of this amount, around Rs 2.5 lakh crore of cash was in small denominations in the system already before the exercise started. This essentially means that Rs 6.5 lakh crore of cash is what the GoI will replace in lieu of the Rs 15 lakh crore it will take out.

New currency notes

If the reasoning above is correct, we will see Rs 15 lakh crore worth of high denomination notes being replaced by only Rs 6.5 lakh crore of cash. However, not all of the replacement will be in similar high denomination notes. Of the replaced cash, a significant portion will be in small denomination notes. It may be noted that, even before the new high denomination notes were introduced, around Rs 50,000 crore of new cash was injected in small denomination notes. Let us say, finally, of the new cash, the amount in the form of high-denomination notes is Rs 4 lakh crore (we can revisit this calculation later).

500-2000Therefore, apart from the Rs 4.5 lakh of black money being burnt, we expect that Rs 6.5 lakh crore of high denomination notes will never come back to the market. Put another way, only 25% of high-value denomination will come back. Considering it’s a bold prediction, let’s see how it stacks up against available information.

Based on reports available so far, around Rs 60,000 crore to Rs 1 lakh crore of money has been distributed, as against Rs 3.5 lakh crore to Rs 6 lakh crore of deposits being mopped up. This number is indeed less than the 25% range that we expect. Further, we hear that it would take 6 months to print sufficient bank notes, which means that in the 50 days that the government has, only 25% of high denomination notes will come back.

Now, is this indeed a goal that the BJP-led NDA government is pursuing? Or, are we reading a pattern in the numbers which don’t exist? Well, as far back as July of this year, before the IDS started, and much before the mayhem of 8 November set in, Prime Minister Narendra Modi had already spelt out his intentions for all those who were open to listening to him.

Much like his 2012 speech in Gujarati as a chief minister asking for demonetisation, we cannot say that the man has not been consistent in what he has wanted to do — and about his views on the same. If one is not sufficiently convinced, one can refer to a more recent data point, where Finance Minster Arun Jaitley talked about the reliance for cash being something the government wanted to discourage.

Women display pass books of their bank accounts opened under the Pradhan Mantri Jan Dhan Yojana. PTI
Women in Patna display pass books of their bank accounts opened under the Pradhan Mantri Jan Dhan Yojana. [Photo: PTI]
It is amply clear that apart from the more volubly stated goals of the effort, the one of removal of fake currency and destruction of the black economy, a significant drive is to have a cashless economy. Certainly, a cashless economy does serve the first two goals; so it’s not really in conflict, but a cashless or a low-cash economy is actually a bigger change being asked of the Indian populace than the stated goals. While there is an easy acceptance of the first two goals, Indians are by nature fiscally conservative, preferring cash-based transactions. The reduction of cash in the system under the exercise is the bitter medicine of a changed behaviour that the government is asking Indians to swallow — with the sugar coating of more acceptable ends.One would be tempted to argue that this is a coercive method for social engineering; however, we do need to note that despite the Jan Dhan Yojana being a significant success in terms of 20 crores of additional uncovered population brought within the umbrella of formal banking, the new bank account holders have only started making use of them post demonetisation. That is even to move towards a system which is beneficial, a certain institutional push is needed. A single pronged strategy may not go all the way, but a two-pronged strategy would arguably give better results, and now we are now seeing the second prong of the JAM scheme in action.