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25 May 2024 : The Hindu Editorial

Editorial 1 : The missing links in IMEC, as shown by the Gaza war

Context

On May 13, 2024, India and Iran finally signed a 10-year long-term bilateral contract for the operation of Chabahar Port. The Port is more important than just a bridge linking India with Iran. It is a critical economic route that links India with Afghanistan and the Central Asian countries.

 

IMEC

  • But before this, a similar, and equally important, connectivity project, the IMEC, or the India-Middle East-Europe Corridor, was signed on the sidelines of the G-20 summit in New Delhi on September 9, 2023 by the European Union, France, Germany, India, Italy, Saudi Arabia, the United Arab Emirates (UAE) and the United States.
  • Designed and formulated under the Partnership for Global Infrastructure and Investment (PGII), it aims to stimulate economic development through enhanced connectivity and economic integration between Asia, the Arabian Gulf and Europe.

 

As a counter to the BRI

  • The IMEC will comprise two separate corridors — an east corridor connecting India to the Arabian Gulf and a northern corridor connecting the Arabian Gulf to Europe.
  •  In addition to existing maritime and road transport routes, it will include a railway network that aims to be a reliable and cost-effective cross-border ship-to-rail transit network for goods and services to transit.
  • The corridor also envisages along the railway route, the laying of cable for electricity and digital connectivity and a pipeline for clean hydrogen export.
  •  In its plan, the Indian ports of Kandla, Mumbai and Mundra will be connected by sea links to Fujairah, Jebel Ali and Abu Dhabi in the UAE in the east, followed by the rail-road link through Saudi Arabia and Jordan and onwards to Europe in the west by the port of Haifa in Israel, and along with the ports in Marseille in France, Messina in Italy and Piraeus in Greece.

  • This 4,800 kilometre-long IMEC corridor aims to secure regional supply chains, increase trade accessibility and improve trade facilitation across regions.
  • Currently, much of the trade between India and Europe is through the Suez Canal as there is no overland access due to Pakistan being located to India’s west overland.
  • The IMEC will thus help overcome this obstacle and also cut down on the time, distance and costs of transit of goods from India to Europe significantly.
  • It is estimated that the time and cost of transporting goods to Europe from India will be reduced by 40% and 30%, respectively.
  • It is also being touted as an effective counter to China’s Belt and Road Initiative (BRI) in the region — and, therefore, has the U.S. as one of its major stakeholders.

 

The shadow of the Gaza war

  • But even before the potential impact of this path-breaking project could be examined by experts, the war in Gaza broke out on October 7, less than a month after its announcement.
  • As a result, the whole project was stalled. However, the Gaza war has amply proven that the IMEC has serious missing links in its current form.
  • During the course of this war, the Houthis in Yemen have blocked the ships of Israel and its western allies from access to the Red Sea.
  •  Despite naval deployment by the U.S. Navy and Europe, the Houthis have not been deterred and have successfully targeted those ships
  • As a result, Israel and its western allies have been forced to take the longer route across the Cape of Good Hope in South Africa, increasing shipping time as well as insurance costs.
  • During the same period, Iran has repeatedly threatened to close the Strait of Hormuz in the north through which most crude oil and natural gas is shipped to other parts of the world, including India.
  • In fact, a similar situation happened during the Persian Gulf Crisis in the summer of 2019.
  • During this period, there were repeated incidents of Iran intercepting ships in the Persian Gulf and the Strait of Hormuz. The Indian Navy had to launch ‘Operation Sankalp’ in order to ensure the safe passage of Indian flagged ships through the Persian Gulf.
  • There were armed security teams from the Indian Navy on Indian flag ships transiting the Persian Gulf.
  • In Israel, two of its major ports, Eilat and Haifa, have suffered heavy losses due to disruption in trade through the Red Sea and also the targeting of these critical ports by Hamas and its allies.
  •  A consortium led by India’s Adani Group purchased Haifa port in January 2023, expecting an expansion and an increase in traffic but the Gaza war has put everything on hold.

 

Other issues

  • The problem  is that all the ports of the UAE are located in the Persian Gulf and are well within the Strait of Hormuz. Therefore, they will always be threatened by any conflict situation in the Persian Gulf.
  • Oman provides the perfect foil to this threat. Its ports open up into the Arabian Sea, well away from direct influence of an Iranian threat. It also offers the closest and direct link to ports in India.
  • Traditionally too, merchants in Oman and India have traded for centuries through small boats called ‘dhows’ and Oman is considered India’s gateway to West Asia.
  • Oman is also an acceptable partner politically in the region as it has good relations with all stakeholders, including Israel.
  • Similarly, towards the West, instead of the ports of Israel, there has to be an alternate spur of the IMEC traversing through Egypt and ending at any of its major ports in the Mediterranean Sea — this will provide a safe and direct sea route to ports in Europe.
  • Egypt is also a major player in West Asia and its inclusion will only help balance out the regional dynamics too.

 

Conclusion

  • With the inclusion of Oman to the east and Egypt to the west, the IMEC can be made safe from disruptions from future conflicts and can, therefore, be considered vital to plug the critical missing links in the current structure of the IMEC.
  • The IMEC is a futuristic and path-breaking initiative. Building upon the wave of reconciliation within West Asia triggered by the Abraham Accords, this could be an ideal foil not only to China’s BRI but also as a useful tool to better integrate the region and insulate it from threats posed to connectivity due to conflict.

Editorial 2 : Welcome bounty

Context

The recent decision by the Reserve Bank of India’s board to transfer a record surplus of almost ₹2.11 lakh crore to the Union Government for 2023-24 will serve as a welcome shot in the arm for the new government when it presents its Budget in July.

 

The approach of RBI

  • The transfer should give the next Finance Minister a fair bit of elbow room when computing the spending and fiscal math.

 

  • The surge in transferable surplus reflects the prudent asset management approach adopted by the Indian central bank, at a time of lingering global uncertainty and widespread policy tightening by central banks worldwide seeking to restore price stability.

 

The reasons for the surplus

  • While the specifics of the RBI’s 2023-24 balance sheet will be known in the coming days, clearly a combination of substantial gains from higher interest income earned on its holdings of overseas securities and the gains from its interventions in the foreign exchange market to smoothen volatility in the rupee’s moves must have contributed in swelling the surplus.
  • The weekly statistical supplement shows that the total foreign exchange reserves had increased by $67.1 billion over the course of 12 months to $645.58 billion.
  •  Income from Liquidity Adjustment Facility (LAF) operations also contributed to the overall surplus.

 

The Determination of Allocation of Dividends

  • The surplus calculation was based on the Economic Capital Framework (ECF) recommended by the Bimal Jalan committee, which advised the RBI to maintain a Contingent Risk Buffer (CRB) between 5.5% and 6.5% of its balance sheet.
  • Contingency risk buffer is a specific provision fund kept by the central bank primarily to be used during any unexpected and unforeseen contingencies.
  • This risk provisioning is made primarily from retained earnings and only then is the surplus income transferred to the government as dividends.
  • This range includes provisions for monetary and financial stability risks as well as credit and operational risks.
  • RBI transfers its surplus, which is the excess of income over expenditure, to the government as per Section 47 of the Reserve Bank of India Act, 1934.

 

RBI’s Income, Expenditure and Surplus

  • Income:- Interest from Government Securities, Open Market Operations (OMOs), Foreign Exchange Operations, Interest on Loans and Advances and lastly Income from LAF.
  • Expenditures:-  Operating Expenses, Interest Paid on Deposits and Borrowings, Currency Issue Expenses, Provisioning for Contingencies and Reserves.
  • Surplus :- Net income derived from the total income (sources of income) minus total expenditure (expenses) , Reserve funds and contingency provisions for financial stability and emergencies.

 

The Benefits

  • By raising the level of provisioning by 50 basis points to 6.5% of its balance sheet size for 2023-24, the central bank has clearly signalled its increased confidence in the health of the domestic economy even as it strengthens the buffer against any sudden threats to stability from unexpected developments in the global financial system.
  • For the new government that will assume office after the results of the ongoing general election are declared on June 4, the bountiful surplus transfer from the RBI will give it an opportunity to raise capital spending, especially at a time when the key engine of private consumption expenditure is still in search of sustained tailwinds.
  • The opportunity to use some of the additional bonanza to bridge the fiscal gap can also help strengthen the government’s finances and reassure investors of its commitment to the fiscal consolidation road map.

 

Conclusion

The RBI has in its own quiet way paved the path for the next government to start with confidence in the resilience of the economy.