Answers: Mains Marathon – UPSC Mains Current Affairs Questions – November 15

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Q.1 India and China will hold the 20th round of border talks in the end of December, the first since the 73 days standoff at Doklam. Discuss the Indo – China border conflict in light of the above statement. Also discuss the commercial relations between them. (GS-2)

Introduction

• India – China relations have undergone dramatic changes over the past five decades, ranging from the 1950‘s with a deep hostility in the 1960‘s and 1970‘s to a rapprochement in the 1980‘s and a readjustment since the demise of Soviet Union.
• The modern relationship began in 1950 when India was among the first countries to end formal ties with the Republic of China and recognize the PRC as the legitimate government of Mainland China. China and India are the two most populous countries and fastest growing major economies in the world.
• India and China are playing an increasingly important role in the world economy. A better relationship would boost trade ties, investments and employment in the two countries, and even augment global growth.

The Indo-China border conflict

• Sovereignty over two large and various smaller separated pieces of territory have been contested between China and India

1.    The westernmost, Aksai Chin, is claimed by India as part of the state of Jammu and Kashmir and region of Ladakh but is controlled and administered as part of the Chinese autonomous region of Xinjiang.

• It is a virtually uninhabited high-altitude wasteland crossed by theXinjiang-Tibet Highway.

2.    The other large disputed territory, the easternmost, lies south of theMcMahon Line. It was formerly referred to as the North East Frontier Agency, and is now called Arunachal Pradesh.

• The McMahon Line was part of the 1914Simla Convention between British India and Tibet, an agreement rejected by China.

What were the troubled areas between India and China?

• Chinese road building project in the Himalayas has become the center of an escalating border dispute between India and China, with both sides accusing the other of territorial intrusions.
• The controversial road which runs through the disputed Doklam Plateau, on the unmarked border between China and Bhutan.
• China is becoming a major hurdle to India’s membership to NSG.

The commercial relations between the nations

• Trade volume between the two countries in the beginning of the century, year 2000, stood at US$ 3 billion.
• In 2008, bilateral trade reached US$ 51.8 billion with China replacing the United States as India’s largest “Goods trading partner.”
• In 2011 bilateral trade reached an all-time high of US$ 73.9 billion.
• In 2016, India’s top exports to China included diamonds, cotton yarn, iron ore, copper and organic chemicals.
• In 2016, China exports of electrical machinery and equipment saw an increase of 26.83%to US$ 16.98 billion.
• India was the largest export destination of Fertilizers exports from China.
• There are three border trade points between India and China viz. Nathu La Pass (Sikkim), Shipki La Pass (Himachal Pradesh) and Lipulekh Pass (Uttarakhand).

Investments

• According to data released by China’s Ministry of Commerce, the Chinese investment in India in Jan-Mar 2017 were to the tune of US$ 73 million.
• Cumulative Investment in India till March 2017 stood at US$ 4.91 billion.
• According to data released by China’s Ministry of Commerce, the cumulative Indian investment in China till March 2017 reached US$705 million.

Economic Relations

• India-China economic relations constitute an important element of the strategic and cooperative partnership between the two countries.
• Several institutional mechanisms have been established for enhancing and strengthening economic cooperation between the two countries.
• In accordance with the MoU signed during Chinese Premier Wen Jiabao’s visit to India in April 2005, the two sides have since successfully held eight Financial Dialogues in April 2006, December 2007, January 2009, September 2010,November 2011, September 2013, December 2014 and August 2016 respectively.

Q.2 China advocated India to shed its objections to the China Pakistan Economic Corridor (CPEC) and take benefit from the Belt and Road Initiative (BRI). In reference to above statement, Explain how both OBOR and CPEC is a threat to India and how should India counter it. (GS-2)

Introduction

• CPEC (China-Pakistan Economic Corridor) already runs through the Indian Territory illegally occupied by Pakistan, signing OBOR at such violations would be disrespectful towards our own sovereignty.
• It poses a major security threat to India as Beijing is trying to encircle New Delhi by undertaking construction projects in the neighbouring countries
• Joining OBOR can give legitimacy to the alleged state-sponsored terrorism from Pakistan,that can now spread to the rest of J&K.
• China is trying to connect railway lines to Pakistan, Myanmar, Nepal and Bangladesh primarily with a view to further create far greater difficulty for India from the security point of view

OBOR

• The most ambitious project of Xi Jinping announced in year 2013 is referred to as One Belt One Road.
• There are 2 components of this initiative: the Silk Road Economic Belt and the 21st Century Maritime Silk Road (exhibit
• The Silk Road Economic Belt is envisioned as three routes connecting China to Europe (via Central Asia), the Persian Gulf, the Mediterranean (through West Asia), and the Indian Ocean (via South Asia).
• The 21st Century Maritime Silk Road is planned to create connections among regional waterways.
• It focuses on improving connectivity among Asian countries Africa, China and Europe.
• The main crux is to grow land routes as well as maritime routes.
• The policy is significant to China as it aims to boost its deistic growth.
• China’s uses OBOR as a strategy for economic diplomacy.

Significance of OBOR

• Creating an infrastructure and providing connectivity to foster economic cooperation as partners in development are the explicit objectives. Its implicit objectives include both economic and political.
• OBOR could help earn higher returns on surplus savings or capital exports and it could provide a new source of external demand.
• It could use the excess capacities in railways, steel, metals and cement, to provide work for their construction companies, while using their experience of infrastructure projects.
• OBOR is a means of extending political spheres of influence, mostly in Africa at present, to South East Asia, South Asia, Central Asia and West Asia. It is about buying regional leadership in the quest for hegemony.
• It is a stepping stone for China’s aspirations of global leadership by creating a rival to the transatlantic economic area with the US at its apex.
• OBOR should make the world recognize the global aspirations of China.

China-Pakistan economic cooperation (CPEC)

• China-Pakistan cooperation projects are focused on four areas:
• Energy projects, transport infrastructure, Gwadar Port, and industrial cooperation.
• Major energy projects include construction of a 300 megawatt solar power plant by Chinese company Synergy, and work has already started on more than half of the remaining sixteen planned energy projects.
• In terms of transport infrastructure, reconstruction and upgrade works of the Karakoram Highway (KKH) within Pakistan are underway
• The construction of the Karachi-Lahore Motorway also started this March.
• For the development of Gwadar Port, on November 11, 2015, Pakistan handed over 280 hectares of land use rights to a Chinese company for a term of forty-three years, and construction on new facilities is already underway.
• Chinese projects in Pakistan under the China-Pakistan Economic Corridor already employ more than 6,000 Pakistani workers, showing that the close relationship between China and Pakistan has already moved from the policy announcement to the project implementation stage.
• The amount of funds involved, the depth of the exchanges, and the number of people participating is unprecedented in relations between these two countries.

A great threat to India

• For India, to be a part of OBOR or to not be, has been a dilemma for some year but in May the government decided not to.
• The decision appears to be strong keeping sovereignty as the main agenda upfront.
• Being part of OBOR would have raised several questions on connectivity, financial responsibility, transparency and the environment.

Ways to counter OBOR

• India should ramp internal connectivity.
• It should modernize connectivity across its land and maritime frontiers with neighbouring countries.
• India must work with countries like China did with Japan and multilateral institutions to develop regional connectivity in the Indian Subcontinent and beyond.
• India’s vision document on ASIA- AFRICA GROWTH CORRIDOR can be a good front.
• India and Japan has launched their own infrastructure development projects to balance OBOR- GREAT WALL.
• There is proposed corridor Bangladesh, China, India and Myanmar-Economic Corridor (BCIM-EC) involving four nations and has generated much interests as well as concerns.
• BCIM agenda is transforming landlocked and underdeveloped border regions of the countries involved, the latter pays more attention to the strategic implications it might have on the region.

Q.3 The Reserve Bank of India (RBI) continues to remain the net purchaser of the U.S. currency after it bought $1.259 billion in September from the spot market. In line with the exchange business, discuss the impact of the intervention and RBI’S role as a custodian of the Indian Foreign exchange market. (GS-3)

Introduction

• In September, RBI bought $3.788 billion, while it sold $2.529 billion in the spot market.
• In August too, the central bank was net purchaser of 3.226 billion of the greenback, buying $4.556 billion and selling $1.330 billion in the spot market.

Why does RBI intervene in the foreign market?

• The RBI intervenes in the foreign market to contain volatility in the rupee and not set a price band.
• In FY17, RBI had a net purchase of 12.351 billion of the U.S. currency as it bought $71.764 billion and sold $59.413 billion in the spot market.
• The RBI has been intervening in the currency markets because a weaker currency pushes up the country’s import bill – you pay more rupees for the same amount of dollars – and contributes to the current account deficit.
• It is also indicative of a country’s economic health and a weaker currency is a signal to investors that the economy is not being well-managed.
• India has a huge import bill largely because it buys almost 80 per cent of its oil from abroad, and a weak rupee can wreak havoc with the government’s finances.
• Market decides the value of the rupee and the central bank only intervene to halt volatile currency movements caused by speculative trades.

What is the impact of the intervention?

• The reason that the rupee has continued to fall is because the RBI is caught in a cycle where it has to battle inflation, liquidity crunch and a falling rupee at the same time.
• Unfortunately, any action it takes to tackle one could be negated by the others. To tackle inflation, the RBI must keep rates high and liquidity tight, but that can stifle economic growth and push the currency down.
• If it sells dollars to support the currency, that too sucks liquidity out, choking growth. Slower growth makes India an unattractive destination for foreign investors, which in turn leads to drying up of dollar flow.
• But if it releases too much liquidity into the system, inflation could go into double digits and push the value of the rupee down, completing the vicious cycle.

RBI as a custodian of India’s foreign exchange reserves

• The RBI acts as the custodian of the country’s foreign exchange reserves, manages exchange control and acts as the agent of the government in respect of India’s membership of the IMF.
• Exchange control was first imposed in India in September 1939 at the outbreak of World War II and has been continued since. Under it, control was imposed on both the receipts and payments of foreign exchange.
• The foreign exchange regulations under the law required that all foreign exchange receipts whether on account of export earnings, investment earnings, or capital receipts, whether oh private account or on government account, must be sold to the RBI either directly or through authorized dealers (mostly major commercial banks).
• This resulted in centralization of country’s foreign exchange reserves with the RBI and facilitated planned utilization of these reserves, because all payments in foreign exchange were also controlled by the authorities.
• The exchange control was so operated as to restrict the demand for foreign exchange within the limits of the available supplies of it.
• Foreign exchange was rationed among competing demands for it according to the government policy.
• All this became essential in the context of actual or potential shortage of foreign exchange, which had been an important constraint on India’s efforts at planned economic development, most of the time.