K.M. Chandrasekhar

K.M. Chandrasekhar

There is an atmosphere of confusion in the political and economic scenario worldwide. The legal and legislative developments around Brexit and the initiation of impeachment proceedings against President Trump have hogged the headlines in the global media, pushing into the background for the time being the declining global economic situation and fears of recession in a year or two as well as other global events like fires in the Amazon rain forests. In India, the economic situation continues to deteriorate, as the August data show. The supply side reforms announced by the Finance Minister had an immediate, dramatic effect on stock prices but there are no clear indications as yet on how higher incomes in the hands of corporates will translate into aggregate demand which is a sine qua non for reversal of the economic downturn. On the political front, while Indian diplomacy continues to flourish, as exemplified by the event in Houston, doubts linger around the wisdom of Modi’s open endorsement of Trump for another tenure as President and the situation in Kashmir continues to remain murky and gloomy. The redeeming situation, so far as Indian governance is concerned, is that the political supremacy of Modi continues to be unchallenged, following the 2019 elections, and the failure of Opposition Parties to present any credible alternative roadmap. Such political strength, as Modi has presently, could make it easier to take strong corrective policy decisions , but it could also lead to ill-conceived decisions like demonetisation which is now widely recognised as the event that set the economy back when it was on a strong growth trajectory.

I must say that, had I been a policy maker in the UK, the Brexit issue would have totally foxed me. The Irish backstop is, of course, the key issue as far as Brexit is concerned. As a part of the European Union, British goods and services can flow freely within Europe. When Brexit becomes a reality, as desired by the British people by a small majority in June 2016, there will be hard customs barriers between the UK and the rest of Europe. The problem arises in respect of Ireland, which is an island split in two, Northern Ireland forming part of UK and the rest of Ireland constituting the independent Irish Republic. While UK has voted to opt out of the EU, the Irish Republic will continue to remain in it. Legally, this will lead to a hard barrier between two parts of Ireland, which is not acceptable to the Irish people. Teresa May’s deal with the EU involved an Irish backstop, facilitating free movement across the Irish border as a temporary measure .

However, this will effectively mean that UK remains within the European common market until alternative solutions can be found to integrate the British and European markets. This was not acceptable to the Brexit hard liners in the UK. Boris Johnson attempted to find a way around this by hinting at being flexible on agrifoods, hardening the sea border between the two islands and finding “ technological “ solutions, but this has so far not carried much conviction.

The confusion about Brexit is reflected in the Labour Party’s convention on September 23rd, which was intended to crystallise a Brexit policy. Instead, three alternative motions emerged, one intended to “ reflect the overwhelming view of its members and voters who want to stay in the EU”, the second “ to campaign energetically for a public vote and to stay in the EU in the referendum” and a third, moved by the Labour Party leader, Jeremy Corbyn himself, calling for the Party to take a decision “ through a special one-day conference, following the election of a Labour Government.”

While Boris Johnson is determined to leave the EU with a deal or no deal on the appointed date, October 31st, the British Parliament is rightly apprehensive of the economic consequences of a disorderly exit from the European Union and has voted in favour of seeking a three month extension for the final Brexit deal from the European Union. By getting the Queen’s approval to prorogue Parliament, Johnson played for time to adopt a hard ball approach with European negotiators. The Supreme Court of UK, however, upset the apple cart by ruling that the Prime Minister had misled the Queen, that the Parliament was illegally prorogued and that it should be deemed never to have happened. The situation remains as unclear as before and the future of Johnson as well as the main Opposition Party, the Labour Party, seems uncertain. Jeremy Corbyn is becoming increasingly unpopular, as a recent survey shows, with 58% of the voters wanting him to step down from leadership of the Labour Party. Indeed, the Liberal Democrats, out of the reckoning for many decades, appear to be making a strong comeback on the British political stage.

On top of uncertainties in our own economy and the lacklustre domestic market for goods and services produced by Indian manufacturers, the prevalent confusion regarding Brexit could add to the woes of India Inc. India has deep-rooted business connections with the UK, arising from our colonial past, our knowledge of the English language and our familiarity and linkages with British industry and business. The share of UK in the GDP of EU is 18% . The Eurozone imported 85 billion Euros worth of goods and services from India in 2017 and UK’s share of trade with India in that year was put at 18 billion pounds by the UK Department of International Trade. We have about 800 Indian companies in Britain and many entrepreneurs of Indian origin. They will have to reinvent their linkages and strategies since they have been working hitherto on the assumption that they could service the whole EU market from the UK. As it is, the uncertainties caused by the movement away from prevailing free trade policies in the Trump era has resulted in shrinking of business. The pressures of relocation arising out of Brexit will require Indian investors in the UK to recalibrate their approaches. Jaguar Land Rover, for example, is reported to be reacting to the slowdown by cutting 4500 jobs. On the trade policy front, too, India will have to quickly re-assess its position. We have been attempting to negotiate a trade agreement with the EU in a desultory fashion. We now have to look at UK separately. British tariffs may undergo changes, trade preferences may change, hence a new range of policy and customs responses would have to be worked out. The impact of Brexit on immigration into the UK cannot be predicted. Will the expected fall in the number of migrants from Europe make movement into Britain easier for migrants from the Commonwealth countries? Or will immigration policies become more restrictive as UK struggles with its own economy?

Brexit adds to the general atmosphere of gloom that pervades the world economy. The UNCTAD Trade and Development Report for 2019 paints a gloomy picture. Global growth rate is expected to fall from 3% to 2.3% this year. The Report says, “A spluttering north, a general slowdown in the south and rising levels of debt everywhere are hanging over the global economy: these combined with increased market volatility, a fractured multilateral system and mounting uncertainty, are framing the immediate policy challenge.” The OECD says that the global economy could enter a new low-growth phase. Voices predicting a global recession by 2020 are growing in strength.

It is within the overall context of gloom and doom in the global economy that India has to find its way. India’s strength lies in its huge domestic market, in its unrealised production potential, in its unutilised capacity. The situation today is not comforting. Manufacturing activity slumped to a 15 month low in August and factories have had to cut down on production. The Nikkei Purchasing Managers Index, considered to be an index of business confidence,fell to 51.4, the lowest since May 2018. Pollyanna de Lima, principal economist at IHS Markit, was quoted in Economic Times ( 2nd September) as saying, “ Most PMI indices moved lower, including key health-check measures for new orders, output and employment.Another worrying sign was the first drop of input buying for 15 months, which reflected a mixture of intentional reductions in stocks and shortages of available finance.”

The Government has, in recent weeks, come out with some supply side measures and the RBI has worked within its limits to promote liquidity and availability of finance. While these are laudable and signify concern regarding the overall economic slowdown, they have to be supplemented with demand- side stimulus. There is an obvious need for increased public investment, more retail lending by financial institutions, creating more employment, particularly in rural areas, and putting more money into the hands of consumers through transfers or tax cuts or higher support prices for agricultural produce. The answers will have to be found, and found quickly.

The Brexit episode is still unfolding. Watching its various twists and turns on television and reading about them in newspapers and periodicals, several striking features of British democracy present themselves. Our democracy, which is built on the Westminster model, would do well to take note of them. First and foremost is the Supreme Court’s unanimous decision, strongly expressed, reversing the government’s attempt to prorogue Parliament until the end of October. This is a clear indication of the independence and integrity of the judiciary, which has to be an essential part of any governmental system built on checks and balances. The same feature was evident in the hearings of the Congressional Committee on Intelligence in the US which kicked off the impeachment proceedings. The second feature is the manner in which the Speaker conducts proceedings fairly towards all, perhaps leaning a bit more towards the Opposition. Another feature is that the proceedings are conducted with dignity, each side willing to listen fully to whoever is speaking. There is no attempt at any time to shout down any speaker and there are no expressions of uncontrolled anger of the kind we see sometimes in our Parliament or Legislative Assemblies. It is intriguing that even Tory Party members cross the floor when they cannot agree with their own government and that the government still functions despite having palpably lost its majority. Our own legislatures at the national and State level will hopefully rise to the same levels of sobriety and maturity over time.