Editorial 1: India notices to Pak: The Indus Waters Treaty
Recent Context:
- Recently, India has issued a notice to Islamabad seeking modification of the more than six-decade-old Indus Waters Treaty (IWT) that governs the sharing of waters of six rivers in the Indus system between the two countries.
- Indian government said that the notice follows Pakistan’s continued “intransigence” in implementing the treaty, by raising repeated objections to the construction of hydel projects on the Indian side
- The notice, sent on January 25 through the Commissioner for Indus Waters, gives Pakistan 90 days to consider entering into intergovernmental negotiations to rectify the material breach of the treaty.
- “This process would also update the IWT to incorporate the lessons learned over the last 62 years,
What is the history of the dispute over the hydel projects?
- The notice appears to be a fallout of a longstanding dispute over two hydroelectric power projects that India is constructing
- one on the Kishanganga river, a tributary of Jhelum, and the other on the Chenab.
- Pakistan has raised objections to these projects, and dispute resolution mechanisms under the Treaty have been invoked multiple times. But a full resolution has not been reached.
- In 2015, Pakistan asked that a Neutral Expert should be appointed to examine its technical objections to the Kishanganga and Ratle HEPs. But the following year, Pakistan unilaterally retracted this request, and proposed that a Court of Arbitration should adjudicate on its objections.
- In August 2016, Pakistan had approached the World Bank, which had brokered the 1960 Treaty, seeking the constitution of a Court of Arbitration under the relevant dispute redressal provisions of the Treaty.
- Instead of responding to Pakistan’s request for a Court of Arbitration, India moved a separate application asking for the appointment of a Neutral Expert, which is a lower level of dispute resolution provided in the Treaty. India had argued that Pakistan’s request for a Court of Arbitration violated the graded mechanism of dispute resolution in the Treaty.
|
And what happened with the two applications moved by Pakistan and India?
- The World Bank, the third party to the Treaty and the acknowledged arbiter of disputes was, meanwhile, faced with a unique situation of having received two separate requests for the same dispute. New Delhi feels that the World Bank is just a facilitator and has a limited role.
- On December 12, 2016, the World Bank had announced a “pause” in the separate processes initiated by India and Pakistan under the Indus Waters Treaty to allow the two countries to consider alternative ways to resolve their disagreements.
- The regular meetings of Indus Waters Commissioners resumed in 2017, and India tried to use these to find mutually agreeable solutions between 2017 and 2022. Pakistan, however, refused to discuss these issues at these meetings, sources said.
- At Pakistan’s continued insistence, the World Bank, in March last year, initiated actions on the requests of both India and Pakistan. On March 31, 2022, the World Bank decided to resume the process of appointing a Neutral Expert and a Chairman for the Court of Arbitration. In October last year, the Bank named Michel Lino as the Neutral Expert and Prof. Sean Murphy as Chairman of the Court of Arbitration.
- Such parallel consideration of same issues is not provided for in any provisions of the Treaty, and India has been repeatedly citing the possibility of the two processes delivering contradictory rulings, which could lead to an unprecedented and legally untenable situation, which is unforeseen in Treaty provisions.
What exactly is the dispute redressal mechanism laid down under the Treaty?
- The dispute redressal mechanism provided under Article IX of the IWT is a graded mechanism.
- It’s a 3-level mechanism. So, whenever India plans to start a project, under the Indus Water Treaty, it has to inform Pakistan that it is planning to build a project.
- Pakistan might oppose it and ask for more details. That would mean there is a question — and in case there is a question, that question has to be clarified between the two sides at the level of the Indus Commissioners.
- If that difference is not resolved by them, then the level is raised. The question then becomes a difference. That difference is to be resolved by another set mechanism, which is the Neutral Expert. It is at this stage that the World Bank comes into picture.
- In case the Neutral Expert says that they are not able to resolve the difference, or that the issue needs an interpretation of the Treaty, then that difference becomes a dispute. It then goes to the third stage — the Court of Arbitration.
- To sum up, it’s a very graded and sequential mechanism — first Commissioner, then Neutral Expert, and only then the Court of Arbitration.
What is India’s notice about, and what are its implications here onward?
- While the immediate provocation for the modification is to address the issue of two parallel mechanisms, at this point, the implications of India’s notice for modifying the treaty are not very clear.
- Article XII (3) of the Treaty that India has invoked is not a dispute redressal mechanism. It is in effect, a provision to amend the Treaty.
- However, an amendment or modification can happen only through a “duly ratified Treaty concluded for that purpose between the two governments”. Pakistan is under no obligation to agree to India’s proposal.
- As of now, it is not clear what happens if Pakistan does not respond to India’s notice within the 90-day period.
- The next provision in the Treaty, Article XII (4), provides for the termination of the Treaty through a similar process “a duly ratified Treaty concluded for that purpose between the two governments”.
- India has not spelled out exactly what it wants modified in the Treaty. But over the last few years, especially since the Uri attack, there has been a growing demand in India to use the Indus Waters Treaty as a strategic tool, considering that India has a natural advantage being the upper riparian state.
Conclusion
- India has not fully utilized its rights over the waters of the three east-flowing rivers Ravi, Beas and Sutlej — over which India has full control under the Treaty.
- It has also not adequately utilized the limited rights over the three west flowing rivers — Indus, Chenab and Jhelum — which are meant for Pakistan.
- Therefore, India should make effort for the utilization of allocated river water and resolving of the issue between both the nation with peace. Discussion and negotiation.
Editorial 2: Budget 2023 should lay the path to 2047
Recent Context:
- Recently, the first advance estimates released by the National Statistical Office showed that GDP in constant prices in FY23 was 8.6 per cent higher than the pre-Covid year of FY20.
- In other words, India had a growth rate of 2.86 per cent per annum in the last three years. Also note that the pre-Covid year, FY20, had a low base with 3.7 per cent growth.
- Therefore, the need to focus on higher growth in the forthcoming budget, medium and long-term, is obvious.
- The budget also should keep in mind global headwinds such as geopolitical factors, slowdown of growth in the US, Europe and China, the implications of the Ukraine-Russia war, high inflation etc. Though China lifting Covid-19 restrictions may give some hope for the global economy.
What are some of the good things in the earlier two budgets?
- First, they were transparent on fiscal deficit numbers by including the earlier off-budget numbers.
- Second, they gave a push to capital expenditure and infrastructure.
- Third is the path towards fiscal consolidation. The next budget will, hopefully, continue these three good measures.
Investment and exports: The two main drivers of GDP growth
- It is known that the investment rate (gross capital formation as per cent of GDP) has declined from 39 per cent in 2011-12 to 31 per cent in 2019-20.
- If India wants to become a developed country by 2047, the investment rate has to increase to 36 per cent or more. In the last few years, the government has increased capex in the budgets from Rs 4.12 trillion in FY 21 to Rs 5.54 trillion in FY22 to Rs 7.5 trillion in FY23. In both FY22 and FY23, the increase in capex was around 35 per cent.
- The government should continue to expand capital expenditure.
- The RBI estimated that the fiscal impact multiplier for capital expenditure is 1.32 while for total expenditure (capital+revenue) it is 0.72. It indicates that only capex leads to a proportionately higher rise in GDP.
Whether the government should increase capex by 35 per cent and announce an outlay of Rs 10 trillion for FY24 in the next budget?
- The increase need not be at the same pace as in earlier two budgets. The high growth rates in the 2000s in India was mainly due to high levels of private investment, particularly corporate investment apart from the household sector
- Private sector capex is showing a recovery after two years of the pandemic. The twin balance-sheet problem has receded now as companies are deleveraging and the banking sector has cleaned up its balance sheet. Credit growth is around 17 per cent.
- Apart from retail, corporate credit growth is also reviving. The PLI (production linked incentives) scheme may attract some investment. But, in order to promote private investment, measures may be needed to achieve price, fiscal and financial stability, to ensure policy certainty, and improve ease of doing business including reducing the cost of business.
Regarding, medium-term fiscal consolidation and export led growth:
- Regarding the budget, medium-term fiscal consolidation is important given the high combined fiscal deficit of around 9 per cent and public debt of nearly 90 per cent. Interest payments of the central government constitute 24 per cent of the budget and 43 per cent of the revenue receipts.
- The government may stick to the fiscal deficit target of 6.4 per cent in FY23 because of higher revenues and higher nominal GDP growth of 15.4 per cent. Over the medium term, bringing down the fiscal deficit to 3 per cent to 4 per cent is important for raising private investment.
- The second driver of growth is exports as it is one of the main engines of growth and employment creation.
- For higher growth of exports, the country needs a liberal, stable and consistent trade policy regime. Unfortunately, government policies with respect to international trade have turned increasingly protectionist. International trade is mostly dependent on global value chains.
- Import duties hamper this process because they increase the cost of importing, thereby disrupting the production chain. The “Look East” policy is also important.
Question over Short-term (fiscal and monetary policy) and long-term factors based growth:
- Regarding the template for the next 25 years, the government has to focus on both short and long-term factors.
- In the short term, monetary and fiscal policies may have to support growth and take care of the global headwinds so that these policies would not lead to disruption of growth.
- Similarly, India has to address its long-term structural problems if it wants to be a developed country by 2047. While there has been recovery from the pandemic, there still remain concerns for medium to long-term growth.
- The challenges lie in achieving high and sustainable GDP growth, creating sufficient number of quality jobs, achieving a low and stable inflation and financial stability, and addressing climate change.
Other Economic factors which are essentially for economic growth and development:
- Demographic dividend:
- India has a major advantage of the demographic dividend. Apart from raising productivity and boosting private investment, education and skill development call for special attention. Another long-term challenge is the structural transformation.
- Indian agriculture has to be transformed and farm incomes raised. Labour intensive manufacturing is considered the solution for structural transformation, labour absorption and exports
- Manufacturing sector: There is scope for expansion in manufacturing including the MSME sector. Manufacturing and services should be promoted simultaneously.
- Quality in health and education sectors and skills is another structural issue.
- Reducing carbon emissions and accelerating energy transition is a challenge and opportunity.
- Digital transformation can contribute substantially for higher growth in future.
- The impact of technology and mechanisation on employment has to be assessed. But, the low participation rates of women in the labour market are also a concern.
Conclusion:
- India today is the fifth largest economy. It is likely to overtake Germany and Japan and become the third largest economy in a decade. However, India ranks 142 out of 197 countries on per capita income.
- As former RBI governor C Rangarajan mentioned recently, India has no choice but to grow fast given the present level of per capita income. The role of states is equally or more important in raising growth and jobs.