Guest Blog

Unconventional War

By Dr. Arvind Virmani


State sponsored Terrorism is unconventional War. Unconventional war can only be won by asymmetric/unconventional means: Different Strategy, tactics, weapons, training, resources. It will be a grave mistake to try & fight such a long term unconventional war with conventional means such as complete mobilization or the fabled Cold Start Doctrine. Armed forces and security agencies need new thinking and approach and completely different level of human resources & training and type & quality of equipment from the conventional. For instance the use of Aerostats equipped with infrared cameras to detect infiltration and use of armed drones to attack terrorists, instead of Hercules aircraft for detection (used in Pathankot) or attack helicopters to detect & attack them.
Asymmetric Defense
Given the entrenched conventional Defense thinking in the three services, para-military border forces, State police, politicians media & intelligentsia, we need an Asymmetric Defense doctrine (ADS) to give all players broad guidance on how to approach this issue. The National Security Advisor should anchor and guide the formulation of such a doctrine and ensure co-ordination, integration & effectiveness of the diverse elements of unconventional Defense. The creation of an empowered Chief of Defense Staff (4 star CDS) with responsibility for strategic planning, HRD & equipment acquisition decisions, would help accelerate the change. There are arguments for and against the creation of a Special Forces Command under the CDS, given that each branch already has its own special forces. However, a special department/division for unconventional/asymmetric warfare is needed within the Integrated defense Staff (IDS), which includes designated posts for RAW and other intelligence agencies. Its first task could be to develop an Asymmetric Defense Strategy (ADS). As noted earlier this may requires unconventional ways of thinking and operating that are alien to regular armed forces. Under the guidance of the NSA, it could also sort out some of the operational issues (such as co-ordination) that arise in case of a terrorist attack on a defense installation or area & develop SOPs for the same.
Formation of the Triad of counter terror (CT) institutions: NIA, NATGRID, NCTC is needed to improve internal defense. A review of intelligence institutions may, however, suggest greater integration of overlapping functions through fewer organizations.
The foundation of unconventional Defense is precise actionable intelligence. We need a quantum jump in capability across Asia (central, west & east). For instance the quality of intelligence required to carry out a precision drone strike is higher than the average quality of intelligence currently available, even for S Asia. Local language competence/skills and cultural understanding are essential for obtaining good intelligence and for recruitment of assets. The capabilities of RAW must be strengthened to deal with State sponsored terrorism as well as potential future threats from Middle East & North Africa. Central Asia and South East Asia must not be underestimated as potential geographies for intelligence.
A critical (new) aspect of asymmetric war is the public narrative, domestic & international. Media is a fundamental theater of unconventional war. Indian media barons, anchors & personalities, must educate themselves on this issue & then educate the Indian public about unconventional/asymmetric war that we have faced for >20 yrs & how to counter it. For instance, it is well recognized that an important objective of terrorism is to create panic & uncertainty and instill fear and paranoia in the population. Therefore the calmness and collectedness with which the government and all other institutions of democracy and society function during such an attack is a measure of our success. Thus it is a mark of their failure when the PM and Cabinet ministers are able to go about their schedule business without interruption.
The media is an important instrument for creating & influencing public, political and intellectual opinion in democratic countries (including India & USA). An important element of Pakistan’s media game plan is to convince its targeted audience that it is more sincere in its search for peace than India, despite its periodic nuclear saber rattling and continued sponsorship of cross-border terrorism. The complex game of India-Pakistan talks, including subjects to be discussed and how, which country cancelled, started or restarted talks, is a tactical tool for achieving its public relations objective. Both war mongering and peace mongering (e.g. criticism of Indian government instead of Pakistan for stalled talks) helps support Pakistan’s media narrative. A balanced approach by discussants and analysts on Indian media, supports India’s National interests.
Diplomacy is a vital element of how other countries, their foreign policy experts and informed global public opinion perceives terrorism carried out against us. Thus Pakistan has successfully convinced the US, many of its allies and Indian track II participants, that (a) General Kayani’s policy of tacitly allowing extreme Islamism to flourish under his charge, has been replaced by General Sharif’s policy of countering internal terrorism & extremism. (b) It is the hard line attitude/approach of PM Modi & his hard-line supporters that is the main roadblock to India-Pakistan peace [not Pakistan’s unchanged strategy of terrorism (by pet terrorists like Let, JeM & HeM) under the nuclear umbrella].
PM Modi’s surprising halt in Lahore, the discussions leading up to it, and the subsequent terrorist assault on Pathankot Air base has given the lie to this false narrative. Indian diplomacy and media must ensure that global public opinion understands & appreciates this point. Indian strategic interlocutors must also ensure that we get the equipment (e.g. armed drones) and technology needed to deal with cross-border terrorism.
A long term perspective is essential for dealing with an opponent whose long term objective is to undermine India’s Strategic position in the region and whose Medium term objective is territorial aggrandizement. Short term revenge cannot & must not be our objective. Our primary goal is deterrence of terror. But terror will only cease when it entails unacceptable asymmetric cost on the sponsors of terror against us. Acquisition and demonstration of the capability for doing so, is long overdue and must be achieved by 2018 end. The National Security Advisor and to some extent his boss will be judged on their success in this matter during the 2019 election.

Dr Arvind Virmani, Chairman Policy Foundation
January 8, 2016

Responding to Pakistan’s Challenge

By Brig. Arun Sahgal

Reams are being written about lack of India’s Pakistan policy or more specifically policy to impose costs for waging relentless proxy war through terrorist organizations, subversion in Kashmir and indigenous Indian organizations like SIMI and IM. These terrorist outfits are being subverted by ideologically driven radicalism.

This is coming about in the face of open provocations by the likes of Hamid Gul who are challenging India to respond in kind if it has the gumption. NSA, in his recent remarks in Mumbai has talked about ‘proportionate response’ to Pakistani provocations but the larger question is options in the face of calculated Pakistan strategy of provoking India.

Years of neglect and impervious political decision making has resulted in non development of credible asymmetric capabilities even as Pakistan continues to blame India for activities in Karachi or Baluchistan. There is no point in crying over spilt milk, these asymmetric capabilities will require time and political resolve to develop. This leaves India very much with the option of punitive conventional response. There is a tendency among the strategic community which percolates to policy makers that conventional Indian response that could provoke Pakistan’s nuclear thresholds. This notion needs detailed analysis and Pakistan’s bluff called.

India needs to unequivocally declare that India’s see’s unabated proxy war as breakdown of conventional deterrence and reserves the right to appropriate military response. Mere articulation will not be enough? India’s standoff military or what is euphemistically called “non contact” capabilities must be exploited and demonstrated. This will require close coordination between intelligence agencies and the armed forces. Possible option could be targeting various elements of terror network and their support structures which can be internationally highlighted as state sponsored. No doubt there will be noise and brinkmanship by Pakistan and even some military action, it will be important for Indian state to not only ride these out but inflict retaliatory punitive costs. What is being proposed is cross border strikes on targets (not merely camps) which India believes supports the terror network.

Second is developing capability and capacities for “Myanmar Raid” like operation. Action will be required to degrade surveillance and communication systems, backed by credible force insertion capability. Without going into too much details idea is to demonstrate will and resolve. These actions must be initiated in the backdrop of limited mobilization of conventional forces and quick response if so required. There is no doubt that Pakistan will respond by some sort of military action however surprise and speed of action backed by credible retaliatory capability will provide requites payoffs. This will require orchestration of operations both at military and national levels including diplomatic shaping of environment. The notion that Pakistan is operating on interior lines is a myth. With recent redeployments in Northern and Western commands adequate forces are available for quick response backed by credible and deterrent air power, which must be the backbone given are relative air superiority.
There are many other options which can be considered to demonstrate Indian will and resolve. These no doubt have escalatory nuances, but what is the point of raving about conventional superiority if it cannot be leveraged. There is perception in Pakistani military elites whom the author has been meeting in Track II Dialogues over last three years that India has no response to proxy war and conventional escalation can be checkmated by battlefield nuclear weapons. It is this myth India will have to challenge and debase. No doubt it carries a risk but sooner than later Indian state will have to demonstrate this resolve if it does want to be subsumed by rising tide of radicalism and Pakistan’s state sponsored terror. If any lessons are to be drawn we should look at what happened in 1971 war and how Pakistani forces capitulated against Indian manoeuvre and resolve. The doctrine of ‘retribution’ already stands vindicated in the NATO and American air strikes against ISIL in Iraq, Syria and Libya.
Perception of Sino – Pak collusion is overplayed particularly the two front war. Chinese are pragmatic; they realize the scenario of ongoing India – Pakistan confrontation is going to be harmful to its one road – one belt policy on which hinges its economic development and extended sphere of influence. Any precipitate action by Chinese will surely and firmly push India into American camp a development which will be grievous to its Asian and global ambitions. Pakistan it must be realized is a bit player with nuclear weapons, who’s utility in the “Great Asian Game” at best is marginal. From Chinese perspective strong Indian economic and military power which is antagonistic to China will be antithesis to its ambitions. Therefore it will be nuanced player which can be balanced by broader Indo – Pacific partnerships that India is attempting to evolve. Put simply there are limits to which China will go in supporting Pakistan?

So coming back to Pakistan, I am afraid in the developing scenario, India should go through the current round of bilateral negotiations with Pakistan impressing upon them the consequences of its support to cross border terror and the proxy war. It is very unlikely Pakistan will take heed, knowing a little about their thinking and mindset. It is when they try and exploit our perceived weakness India should retaliate suddenly, resolutely and without respite. Message of retribution and costs must be driven home.

Last word; such a policy or option cannot succeed without bipartisan support. This is an imperative. In its resolve to take military action perpetrated by Pakistan; nation must stand firm and united. Unless we develop such credible response capability and political resolve India will continue to bleed not only in J&K or Punjab but across its length and breadth. Indian dream will be truly and fully become unrealizable.

Brig Arun Sahgal, PhD (Retd)
Executive Director
Forum for Strategic Initiative
E Mail – brigarun.sahagl@gma

PM Modi’s Foreign Policy


The completion of Prime Minister Narendra Modi’s visit to USA means that he has now interacted with the leaders of four of the five countries/regions on his list of foreign policy priorities. These wereoutlined in the President’s address to the opening session of the new Parliament (SAARC, China, Japan, Russia, USA).  It is therefore an appropriate time to take stock.In this note we focus on two questions: One, what are the underlying changes in the directions of India’s Foreign policy. In other words, is PM Modi’s Foreign Policylikely to differ from that of SG-MMS‘s?Two, what were the objectives of PM Modi’s foreign policy actions in first four months, to what extent have they been achieved and what remains to be done?

Directional Change

Every country’s foreign policy has, after a change of government (whether democratic or autocratic), elements of continuity and change.  India under PM Modi is no different. If I were to put a number to it, I would estimate a change factor of 10% at this point, potentially going up to 20% by the end of the five year term.  What are these changes in direction and emphasis? These changes have not necessarily been explicitly articulated by the new government, but in my view, are implicit in their pragmatic actions and “view of the world.”There are four areas in which I see an emerging change in emphasis: The centrality of economic & technological development, the integrations of domestic and foreign policy with respect to this objective, the emphasis on “national power” including “military power” and “Soft power” and a reduction in self-imposed constraints on actions that third counties may construe as inimical to their interests.

The first change in foreign policy isa much greater attention to economic objectives. This is not merely a reiteration of the economic development objective that has been India’s mantra since independence, but a recognition of the role of “technology” (broadly defined) in all aspects of economic development & economic power.   This involves an implicit benchmarking of the technological capabilities of the Indian economy with respect to the global best practices and/or global technology frontier, a perception of large gaps across much of the economy and the goal of bridging these gaps through domestic and foreign economic policy. How this is different from earlier regimes is reflected in two policy initiatives: The “Swach Bharat” campaign which doesn’t involve “high technology” but does reflect a huge gap in sanitation systems and practices between India and the developed countries and will require innovative technological, management, social and public solutions. The second is the “Digital India” campaign, which recognizes the gap between India and digitization frontier, but treats it as an opportunity to solve problems of governance and corruption as well as its innovative use for health education & training needs of a population four times the size of the largest developed country(leap frogging). It is probably the first time that an Indian PM elucidated India’s economic & technological objective abroad(“India First”),  identified  the specific role that each country could play in achieving these objective and made that the center piece of the discussion with that country!

The second change is a much greater integration of domestic and foreign policy.Though the talk about integrating national economic policies and foreign policies started in the 1990s, this has only been episodically reflected in domestic or foreign policy.  The Indian Prime Minister mentioned both the programs (“Swach Bharat”, Digital India/smart cities) in his public statements in the USA &Japan. In his meetings with leaders of countries which are more advanced in terms of any aspect of economy or technology, he has been very explicit about Indian objectives with respect to economic development and technological catch up and in exploring how these countries can help India close these gaps. The message to all inside and outside the government is quite clear: Both domestic and international policy can/must/will be used to close the economic and technological gap with more advanced countries across the entire spectrum from basic sanitation to defense vehicles, aircraft & ships to the frontiers of cyber space & outer space.“India First” means that what India needs/wants from each economic & technology power will be expressed with greater clarity & specificity andthese counties have to respond  with counter demands for what they want in return. India’s decisions will then be based on comparative benefit-cost ratio of dealing with different countries on a defined set of issues. This contrasts with a policy of “non-alignment” where other countries/powers lay out their goals and demands and India responds by weaving  a “non-aligned” path between them.

The thirdchange is a greater emphasis on overall national power, a pyramid consisting of a broad economic base, with a solid  block of military power resting on it, topped by a smaller cone of “soft power”. By now it is widely recognized that economic power forms the foundation of National power (base of a pyramid). However, this government recognizes (much more) explicitly the role of strategic technology and military power as the second major block in the Pyramid of national power. This is vital for deterring aggression, dampening aggressive designs and insuring peace.New developments in war & aggression(cross-border terrorism, use of non-state actors, foreign ideologues-mercenaries) mean that our capabilities in these areas must cover a much wider spectrum.  Though earlier governments were aware of the new forms of aggression being adopted by antagonists, there was a great reluctance to admit that this constituted a new form of war and to boldly and openly defend against this new form of aggression. This is (in my judgment) already in the process of change, both in terms of capabilities in counter-terrorism and offensive-defense against non-state actors, but even more importantly in willingness to take calculated risks in using these covert capabilities. Deterrence is however only effective, if the adversary using these tactics is convinced that the new government will respond to asymmetric warfare with appropriate actions across a much broader menu of conventional & unconventional options.  As the diplomatic signals being sent to Pakistan (e.g. cancellation of Secretary level talks) did not appear to be getting through to the “deep state”, it became necessary to signal the seriousness of the change in overall strategy, through a heightened (conventional) response to border firing/cease fire violations. Similarly unconventional psychological warfare & “creeping annexation” tactics on the northern border are being countered by bold new plans (e.g. the “Macmohan highway in Arunachal) that have both a conventional defensive and a signaling component.

Another relatively neglected element of strategic-defense power that will receive much greater attention is the capability to produce all types of defense equipment in India. “Self-sufficiency” has been a slogan from the days of “Nehruvian Socialism,” yet it has played second fiddle to the goal of preserving an increasing inefficient Public sector monopoly over the means of (defense) production and ideological squeamishness about foreign participation in JVs located in India.  This defense public sector veto over use of private domestic & foreign capabilities for defense production within India is being decisively broken by the new government, to give primacy to goal-achievement over ideology.The ability and willingness to transfer technology and help build skills & research capabilities at minimum cost, will consequently play a much more important role in relations with Japan, Russia, USA and EU countries.The reinvigorated approach to national security is likely to manifest itself in a reversal (over the next five years) of the trend decline in ratio of defense expenditures to GDP (since the BOP crises of 1991).

There will also be a greater emphasis on the third dimension of national power, global socio-politics and “soft power”. This includes the expansion of common ground based on religious and cultural heritage & history of India (e.g. Hinduism viz. Nepal, Buddhism viz. E & SE Asia, Yoga viz. West, and possibly Shia Islam viz Iran), as well as the Indian diaspora across the World. PM Modi’s speech to the Indian diaspora in New York, USA, was a very successful attempt to inspire the diaspora to contribute to the economic & technological development of India, either directly or indirectly through political participation in their country of citizenship.

   The fourth change is a recognition that the aggressive intentions of ideologically driven foes can not be dampened by economic relations and sops; in fact they may have the opposite effect of signaling weakness to be exploited or a superiority to be resented. In other words economic power and economic relations can complement but notsubstitute for strategic-defense power and international security relationships in deterring aggression. Thus India’s economic relationships with potential adversaries (and friends) can be pursued relatively independently from the security relationship, without one constraining the other or being a hostage to it.  This is most clearly apparent from the meetings PM Modi held with President Xi Jinping of China, the economic agreements reached and the formation of the BRICs Bank and AIB (Asian Infrastructure Bank). Further neither the economic nor the security relationship with one country (friend or foe) will be allowed to constrain the economic or security relationship with any other country(e.g. economic & security co-operation withJapan and Vietnam).Both will be evaluated in terms of the primary objectives of closing the economic and technological gap and building national power, in a pragmatic forward looking manner without any ideological blinkers or historical baggage.

Opening Moves

Short Term/Immediate goals of PM Modi’s foreign policy initiatives from the day he took the oath of office seemed to have three (partly) overlapping ones: One goal was to establish his credentials as a National and International leader.  During the general election campaign most political analysts had predicted that Shri Modi a State leader wouldn’t be able to rise above his regional origins and limitations.  Mr. Modi wanted to lay this specter to rest quickly & decisively so he could focus on achieving his development objectives. The second goal was to put India back on the global stage, from which it had fallen off during the last 3-4 years (according to all objective analysts and observers).In this he was backed/supported by advise from virtually all international relations experts inside & outside the government.  In this process he also wanted to convey to the World, the change in foreign-domestic policy emphasis of his government along the lines elucidated above.  The dramatic outreach to SAARC countries, the meetings with leaders of Japan, China and USA, and a flurry of meetings with other countries (eg Australia, UK, France), complemented by a number of foreign trips by the President and the EAM, has achieved both these goals.

The third goal was to re-establish international investorconfidence in Indian economy and polity.  The results of the general election, in which the BJP and its allies won a decisive majority in the Lok Sabha, had already opened the flood gates of capital inflows into India, before Shri Modi was sworn in as Prime Minister.  However, this had not been reflected in a similar increase in gross fixed capital formation(GFCF). It was therefore felt necessary to communicate directly with the large foreign direct investors(FDI). The PMs goal was to gain their trust& understanding of his seriousness in reversing the effects of obstructive policies & procedures that resulted in the collapse in growth of GFCF and removing bottlenecks in investment in infrastructure, manufacturing etc.. The US private sector is the most important source of technology and foreign investment across a broad spectrum of industries. The PM was largely successful in establishing trust. However, given that Foreign direct investment usually follows domestic investment and both were waiting to see action on certain known policy & regulatory problems, full restoration awaits action on the domestic policy & regulatory front. Now that two important State elections are over and the government has re-started the reform process, we will soon be able to judge whether enough has been done to revive GFCF from the second half of 2014-15.

US Reset &Realism

In the Modi government’s foreign policy priorities, as outlined in the President’s speech to the new Parliament put US arithmetically at fifth position in its list (behind SAARC, China, Japan and Russia). However the US is still the sole super power and likely to remain so for at least a decade and stands head and shoulders above others in the depth and breadth of strategic and defense technology. Thus it was particularly important for the PM to reset Indo-US relations to 2009-10, by sweeping out problems created in 2010-13. It was correspondingly important for the US govt to take the Modi led government on board and to understand its changed priorities. The reset of Indo-US relations has been achieved.  There appears to be a deeper understanding on and heightened co-operation in counter-terrorism(safe havens,“financial and tactical support for networks such as Al Qaeda, Lashkar-e Taiba, Jaish-e-Mohammad, the D-Company, and  Haqqanis”). There are also hints of enhanced cooperation inDefense procurement, production and technology development and on Maritime Security in the Indian Ocean and Indo-Pacific Region. The former includes (a) An extension of the Framework forUS-IndiaDefense Relationship(2005) and a Reinvigoration & expansion of Political-MilitaryDialogue. (b)The setting up of Task Force under Defense Trade &Technology Initiative, whose first meeting was in Sept 2014, to decide on specific projects & technologies. Maritime security is to be enhanced through likely technology transfers to the Indian Navy (e.g the magnetic catapult for Indian aircraft carrier) and an expansion of Malabar exercises.

Is it unclear to what extent a genuine strategic partnership between USA and India will develop given the differences in perspective between a rich global power and a poor regional one. The USA, like many rich countries is a net exporter of technology with high per capita but low incremental, pollutionwhile India is a net technology importer with low per capita but high incremental, pollution). These differences need to be recognized and dealt with objectively& fairly. There is also a difference in perspective between the US with a profitable capital-intensive & export competitive Agriculture sector and India with a labor-intensive, low productivity, subsistence agriculture with 66% of population dependent on it.  There seems however to be the beginning of a pragmatic approach to resolving these differences and/or minimizing the negative fallout of unresolved differences. There are also some differences arising from the Global interests of a “Super Power” and the regional focus of India, which is still two decades away from becoming a “Great Power.”However, the reasonably high convergence of interests on maritime security in the Indian Ocean (and Indo-Pacific)and on terrorism,can form the core of a strategic understanding, whilepragmatically allowing for greater differentiation in the respective approaches toindividual countries in West Asia.


        The PM Modi led Indian government is changing the emphasis of India’s Foreign and National security policies. Elements of this change in approach are already visible. These involve a clearer definition of Indian interests (“India First”) in terms of economic and technological development, a greater focus on these goals in foreign policy and a consequent integration of domestic and foreign policies. Other changes involve a greater focus on development of national power, in particular an enhancement of the somewhat neglected element of military power, its broader definition to include asymmetric warfare of which State financed-directed non-state actors are a dangerous part, and a jettisoning of self-imposed constraints of ideology and misplaced fear of offending other countries who display no such squeamishness in their behavior.[i]   Overall a much more confident, credible and effective national security-foreign policy is predicted to emerge over the next five years.

A shorter version of this article appeared  on the Op Ed page of The Hindu, on 1st November, 2014under the banner, “Recalibrating India’s Foreign Policy “, .

[i] One must, however warn against the unfortunate tendency of some prominent Indians toward bombast & hyperbole. Those who accuse PM Nehru of publicly making tall claims and assertive statements viz China, after denuding & hollowing out the armed forces through neglect & resource starvation, should be very careful about chest thumping based on hypothetical (future) capabilities that will take decades to build.

Pakistan Army Action: Possible Motivation

On January 8, 2013 Pakistani soldiers crossed over the ‘Line of Control” in Mandhar sector of J&K and killed two soldiers, beheaded one of them and took the head back as a trophy.  Most of the discussion in the media has focused on the response that India has made or should make to this specific act. This note focuses on possible motives and motivation behind this act and how this should shape our response.


                As far as the Pakistan Army is concerned the most important event that will shape its behavior in the next two years is the accelerated withdrawal of the US from Afghanistan.  This withdrawal provides it a golden opportunity to restore its hegemony in Afghanistan.  Ideally the Army would like to reestablish the dominant position it had before the Taliban driven out of Afghanistan and established its headquarters and operating bases in Pakistan (Quetta Shura, Waziristan, ‘Taliban prisoners!’ ).  Failing this it would be happy with a regime that sub serves the Pakistan Army’s interests.  This is likely to be the central and most vital objective of the Pakistan Army and its primary operational instrument the ISI,during the next two-three years.

The tantalizing hints of a change in Pakistan Army doctrine purportedly downgrading India’s unchallenged position as “sole enemy,” are likely diplomatic publicity designed to restore Western perceptions of Army led Pakistan as a “trusted ally”.  At the same time the Jehadis within the Army–ISI and the “Good Taliban” need to be reassured.  The following statement ofMaj-Gen Asim Saleem Bajwa, DG, Inter-Services Public Relations (ISPR)keeps open the possibility of doing both:“Army prepares for all forms of threats. Sub-conventional threat is a reality and is a part of a threat matrix faced by our country. But it doesn’t mean that the conventional threat has receded(quoted in the Express Tribune).”

Signal to Who?

What then could be the motivation for this relatively small but aggressive action across the LOC?  Several commentators have asserted that this action is designed to send a signal to the Indian Army.To buttress this argument they have pointed to the increase in cease-fire violations compared to a year ago.  It has been argued that with the resumption of military and civilian Aid to Pakistan, the Army is again emboldened to ratchet up hostile actions against India, without fear of a serious response from the Indian Government.  The factors mentioned by these analysts are certainly relevant for the assessment of the motivation and timing of specific actions of the Pakistan Army and ISI.  However, another possibility is that the hostile action is a signal to Pakistan’s own Jehadi’s, both within the army and outside it.


One of the interesting pointers in this direction is the statement of LeT’s Hafiz Saeed, that this incident was part of the hostile and violent Indian actions across Pakistan and India’s repeated attempts to undermine peace!  When a terrorist wanted by the USA, with a reward on his head,a hate monger who gives vitriolic speeches against Indians, talks about “Peace” it is worth noting!  Not because it reflects a change of heart, but because it reflects what his handlers would like him to say.  The fact that newspapers report that he visited POK a few days before the aggressive act, and may have had a direct or indirect role, suggests that the Army wanted the Jihadists to be fully aware of this action, even if India downplayed it (as perhaps they mistakenly expected).  Subsequently he gave an interview to the Us press trying to portray himself as an ordinary person

The second pointer is how quickly Pakistan’s civilian government (EAM Rabani) responded by its diplomatic statement of willingness to refer the incident to the UN, knowing full well that with Pakistan currently chairing the UN security council, India would be more than usually reluctant to refer the incident to anyone outside established bilateral channels.  The civilian government has repeatedly faced demands from Pakistani Jihadists to take India to the UN on Kashmir.  This was followed by an appeal from the OIC for a fact finding team to J&K.  The Army knew beforehand that such an opportunity could arise and perhaps used it as an argument to obtain prior Civilian government approval for limited action on the LOC, that could be used to counter Jehadi criticism of the Army and government “inaction” on Kashmir.  A third pointer is the discovery of mines with Pakistani markings from the Maoist insurgents and reports of ISI activity in the troubled Rhongiya areas on the Myanmar-Bangladesh border.  The Huriyat leaders who visited Pakistan soon after the incident were reportedly told by the Army brass as well as the leaders of the LeT and the JeM not to participate in any Indian Govt peace initiative for the next year.  More recently the release of ‘Afghan Prisoners’ purportedly to meet the Afghan demand (for handover of Taliban leaders based in Pakistan)half way and to aid theAfghan peace process has been followed by reports that the released leaders are back fighting the US forces.  As the middle ranks of the Taliban fighters had been depleted by US drone strikes, the Pakistan Army as usual thought it could play both sides of the aisle by replenishing depleted Taliban ranks in Afghanistan while  presenting this as a peace gesture to the Afghan government (and the USA/UK).


The hostile Pakistani army action across the LOC is a signal to the Pakistani jihadists(once referred to by a Pakistani friend in Washington as “Paltu Kuttas” – ‘Pet dogs’ )that thePakistan army and Government are not abandoningtheir anti-India policy, in their respective quests:  The Army for a dominant role in Afghanistan,financed and underwritten to the maximum extent possible by the USA and the civilian government for normalization of relations with India so as to remove the stigma of being dubbed “terrorist central” and to reduce the control of the Army over the political system and government.  The greater challenge for India is therefore to,

(a) Help stave off a fundamentalist takeover of Afghanistan,and (b) Prepare for a renewed threat to India (including J&K) from Pakistan controlled jihadists operating from fundamentalist(re-)controlled regions of Afghanistan.  This requires a multipronged Indian effort to increase the cost to the Pakistan Army of a policy of training, financing and directing jihadists and terrorists across the sub-content.

Original Version is in Blog:

Indo-Pakistan Relations a la Nawaz Sharif


    In an earlier note in this journal I had outlined how Pakistan policy towards use of Jehad against India is likely to evolve with the departure of US/NATO troops from Afghanistan in 2014 (  The recent fairly successful election in Pakistan has given rise to intense speculation of the changed prospects of better relations between the two countries.  Aggressive questions by Indian Media have forced Nawaz Sharif to express positive sentiments about peace with India and to invite the Indian PM for events normally not attended by foreign dignitaries.  This has already given rise to a counter statement by Syed Salahuddin, head of HizbulMujahideen(HM) and member of the Jehad Council warning him not to dilute Pakistan’s anti-India policy. What is the likely policy orientation of a Nawaz Sharif led Civilian Pakistan Government and how if at all is it likely be to be different from policy under the previous Civilian Government?

Nawaz’s Support Base

  Nawaz Sharif owes his clear victory in the election at least in part to, (a) The branding of PPP & ANP as “secular parties” by the Tehrik-e-Taliban Pakistan (TTP) and its deceleration of war on them during the elections (assassinations/bombing of their candidates, workers and supporteres). (b) Close relations with and support of the Jehadi parties in Punjab like the Jamat U Dawa(JuD) / Lakshar-e-Toiba(LeT) and the Jaish-e-Mohammad(JM).  Add to this the votes and seats won by Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) and the Jamat e Islami (JI), the religious fundamentalist base is large.  Like any good politician he is unlikely to openly challenge the objectives of these parties (e.g. Salafi/Wahabi Islamization of Kashmir), which he perhaps shares.  He may however, try to convince them to change their strategy and tactics in the interest of Pakistan’s global image and failing economy.

The other part of his support base, the lower middle class youth looking for jobs and earning opportunities and businessmen looking for profits, could in contrast provide him with an equally strong base for normalizing economic relations and exploring new avenues for mutual economic benefit.  To the extent that terrorist bombings and assassinations in Pakistan are a threat to foreign, non-resident Pakistani and even domestic investment (capital flight), the base could support strong measures to restore law and order in Pakistan.

Pakistan Army Objective

  As I wrote earlier, ”   As far as the Pakistan Army is concerned the most important event that will shape its behavior in the next two years is the accelerated withdrawal of the US from Afghanistan. This withdrawal provides it a golden opportunity to restore its hegemony in Afghanistan.  Ideally the Army would like to reestablish the dominant position it had before the Taliban was driven out of Afghanistan and established its headquarters and operating bases in Pakistan (QuetaShura, Wazirstan et al).  Failing this it would be happy with a regime that sub-serves the Pakistan Army’s interests.  This is likely to be the central and most vital objective of the Pakistan Army and its primary operational instrument the ISI, during the next two-three years.”

I concluded that, ” The hostile Pakistani army action across the LOC is a signal to the Pakistani jihadists that the Pakistan army and Government are not abandoning their anti-India policy, in their respective quests:  The Army for a dominant role in Afghanistan, financed and underwritten to the maximum extent possible by the USA and the Civilian Government for normalization of relations with India so as to remove the stigma of being dubbed “terrorist central” and to reduce the control of thee Army over the political system and government.”

Democratically Elected PM

     Nawaz Sharif’s assumption of the reins of government with a democratic mandate reinforces these conclusions and fleshes them out more clearly.  Nawaz Sharif in full co-operation of the Army is likely to promote a shift of Jehad related activities (promoting, training, organising, managing jehad), out of Pakistan and into Afghanistan and the badlands of the Af-Pak borders to increase deniablity.  As he said,  he will “not allow Bombay type attacks from the soil of Pakistan.”  He may also try to moderate the Jehadi’s anti-India & anti-US rhetoric and to keep it out of media that can be accessed easily by foreigners and foreign (including Indian) media. On the other hand he may give a freer hand to diplomats and Jehadi’s on speaking about Kashmir related issues, while simultaneously stepping up the decibal level on the need for Indo-Pak peace.

Economic Relations

    If Nawaz Sharif and his party choose, they can bring about complete normalization of economic-business relations(including investment), trade and transit (to Afghanistan & Central Asia) policy and infrastructure connectivity between Pakistan (+PoK/AK) and India (including J&K). As these are mutually beneficial relations, on our side the need is to meet each other half way (there is no need for special concessions by either party).  many of these ideas were discussed at a Seminar that I attended at the Wilson Center in Washington with eminent Pakistani economists & retired bureaucrats in late 2012. If Pakistan chooses it could become the trading and transport hub for connecting thriving economies of  Central Asia, India, Afghanistan (mineral resource potential) and Iran/Gulf countries. The TAPI pipeline project could be brought more firmly on the agenda.  Permanent Normal Trading Status (MFN) is economically minor but politically important foundation on which this mutually beneficial relationship can be built. As noted by many observers, the two Punjabs could play a very important role in creating the positive narrative to smooth the political path.

     In this, I differ somewhat with MrShyam Saran (BS 15/5/13) who favors an incremental approach. I would favor an approach that asks the new government how quickly and how far they are willing to go on all economically related issues and be willing to move as fast as they are able to do.  I must warn that moving fast does not mean making asymmetric concessions: If the new democratically elected government of Pakistan cannot convince its on electorate of the benefits to Pakistan of economic normalization, then no amount of concessions can help in convincing the masses: They would merely be seen as attempts to bribe special interests to adopt anti-national policies.  Both bilateral and SAARC processes need to be activated to provide a greater flexibility.

        On our side, we need to isolate such non-concessional, mutually beneficial relations from becoming hostage to jehadist bombings in India.  Empty gesture that do not harm the Pakistan Military, its terrorist instrument the ISI, and the Jehadists managed by them, have no effect on their behavior.  We really have to be more innovative and bolder in disrupting the Jehad supply chain and taking the fight to them.


     In my view there is likely to be little or no substantive change in policy towards cross border Jehad, though it may be better nuanced and supported by a more credible civilian government narrative, which will again fool many analysts in the West (you can fool some of the people all of the time).  However, the new government has the support base and democratic mandate to take significant steps towards normalization of economic relations with India.  We should be prepared to meet them half way to wherever and however quickly they want to move on this area.

Original Version in Blog at

Chinese checkers in Arunachal and Ladakh

ByArvind Virmani

    News reports indicate that the People’s Liberation Army(PLA), has established a temporary post of five tents with 50 soldiers,19 miles inside the Line of Control (LAC).  Though Chinese patrolling outside its 1960 claim line and inside our LAC are not unusual, the establishment of a tent camp so far inside Indian Territory is noteworthy.  What is China’s motivation and what if anything should India do about it?  In my view the Chinese move in Ladakh is reminiscent of its earlier maneuvers on Arunachal Pradesh.  Both were designed to extend its (1960) claim line beyond what it had established in 1962.

Arunachal Pradesh

An earlier note titled, ‘China’s Foreign Policy under New Leadership’,stated that,[i]“in 2006 there were indications of the emergence of differences within the Chinese leadership on policy towards India.  On the one hand President Hu Jintao’s visit to India in November 2006, seemed to go pretty well, with a fairly positive Joint Declaration at the end of the visit. On the other hand, just before the visit, the Chinese Ambassador to India, Sun Yuxi gratuitously queered the pitch by bluntly claiming that the Indian State of Arunachal Pradesh was entirely a part of China.  Wiki leaks later reported that both the Indian and Chinese leadership were surprised by this undiplomatic (in your face) statement prior to a goodwill visit of the Chinese Party Chief and President.  A number of other pinpricks to India followed, such as refusal of visas to residents of Jammu and Kashmir.”

“In May 2007 China refused to grant a visa to an Indian Administrative Service (IAS) officer from Arunachal Pradesh, suggesting that there was a viewpoint within the leadership arguing for a tougher stance on the India-China border issue.  It is possible that the hardline viewpoint, generally associated (by scholars) with the PLA, were drawing negative implications for China from the Indo-US Civil Nuclear Agreement signed in July 2005 and that this negative view took about a year to emerge and even longer to be heard and discussed in the Standing Committee.”

Having laid down a clear marker of its changed claims in Arunachal Pradesh, China later reached a compromise with respect to multilateral loans to N E India, and also toned down its public professions of the same.  However, if the issue is ever raised again by anyone, expect to hear a loud and aggressive reiteration of the Arunachal Claims.


It is highly likely that the recent incursion/provocation in Ladakh is an attempt to do on the Western sector what has already been accomplished in the Eastern sector in the second half of the 2000s.  The timing of the move is related both to the need for the Party General Secretary and Chairman of the Military Commission Xi Jingping to establish his hardline credentials vis-à-vis India and the forthcoming visit of the Prime Minister, Li Keqiang.  It needs to be recalled that, the PM belongs to the Hu Jintao faction of the party, both having spent a considerable part of their career in the Communist Youth League.  In my view Hu and therefore, probably Li have a relatively soft line view of India.  Thus it was necessary for the PLA, with the approval of the Military Commission Chairman, to lay down a clear marker for Li’s visit to India.  This is the Chinese version of the classic western “Bad cop, Good cop” routine of dealing with India.

Fore-Warned is Fore-Armed?

The note of December 2012said that, “In May 2012 China started issuing E passports , which it was later discovered (news broke only in November 2012)  contained  a map of China that included Arunachal Pradesh, Aksai Chin and the South China Sea as part of China.  Analysts have made statements down playing the significance of this move, but to the author it is the culmination of a process of a five year debate within the party and a signal of China’s international aspirations/agenda for the next 5 years.”

“India is in a somewhat anomalous position.  On the one hand, India is the third largest economy in the world. Even though it is 40% of the Chinese economy, it was the same size as China as recently as 2003.  Viewed from China’s perspective it currently looks like a very chaotic place that is unlikely to close the gap with China.  On the other hand it is home to the Dalai Lama and borders the Tibetan Autonomous Region of China, “a core national interest” of the Chinese leadership.  Thus policy has fluctuated between soft and hard line, depending on developments in Tibet and the international situation.  There is in our judgment a high probability that China’s approach to India will continue unchanged from one that has emerged since 2007, which is to lay down an extended claim (beyond what Premier Chou en Lai officially offered to settle in 1960), freeze the border discussions till such time as India concedes its bottom line demandand continue to develop relations on other fronts.”


As analysts have pointed out the harsh Winter will in any case force the PLA troops to withdraw to their permanent camps within the Chinese area of the LAC in Ladakh (outcome B).  Whether they will do so well before the Winter(outcome A) or whether they will return next summer (outcome C) is still uncertain.  The army should prepare (or dust off) an appropriate contingency plan for both adverse possibilities (B & C) and be authorized to act on it.   It is likely that growth & fiscal deficit concerns and resultant cut in Defense budget have given a wrong signal to China.  India should therefor raise defense FDI limits to 74% and promote joint venture between Indian and USA, European and Japanese private sectors.  At the same time, we should not cancel the visit of premier Li to India.

The two pronged approach outlined in the December 2012 note remains valid: “India must  continue to pursue greater economic and diplomatic interaction and co-operation with China so that those elements in China who still believe in “peaceful rise” are in a position to make a convincing case for a resolution of the border issue.” In the medium term it is also, “imperative for India to strengthen its defenses and diplomacy to effectively deter an attack, by raising the cost and risk to the attacker.”

Post Script

    Since this article was written during the last week of April,[ii] the issue of China’s incursion into the ODB area of Ladakh has been resolved, with the PLA dismantling their tents inside the LAC and returning to their earlier claim line(outcome B).  However, just as in the case of Arunachal, it should not be assumed that the issue is resolved permanently. Outcome C is still possible.  India must learn to pursue its relations with other countries such as Japan, USA (and even Taiwan) without obsessively worrying about what China will think. The new Japanese government provides a golden opportunity for coordinating our diplomatic, defense production and R&D co-operation with Japan.    On the other hand it is very clear that the policy of “Speaking softly but carrying a big(ger) stick” is the right one in dealing with China. In this context I am not convinced about the suggestion made by many analysts in the past month, to take a publicly aggressive stance on Tibet.

Post Script 2

The good cop routine towards India started on May 8 with the release by the Chinese Academy of Social Sciences (CASS) of the Blue Book.  This was followed on May 10, with a commentary in Xinhua[iii] about achieving “win-win results.”On May 13th Qin Gang, the Chief of the Information Department of the Foreign Ministry unfroze the issue of negotiating the “FrameworkAgreement” on the Sino-Indian boundary (that China had apparently frozen a couple of years back).  Though PM Li Keqiangwill formally act as the Good cop during his forthcoming visit to India (May 19-21), it should not be forgotten that any proposals made by China have the approval of the Party Secretary, XiJingping, just as the PLA incursion had the approval of the Chairman of the Military Commission Xi.[iv]It is therefore likely that the Chinese version of the “Good cop, Bad cop” approach for testing Indian intentions and resolve, was proposed and discussed in Beijing, in early 2013.

The objective of this whole strategy was to probe Indian weakness, resolve and determination and use it to determine the balance between a hardline and soft line approach. In other words to fine tune the balance between economic demands and political concessions.  The media has played an important role in warning the government that the public would hold the government accountable for its foreign policy towards China.  At the same, by not losing its cool under media pressure, the Foreign Minister and the Government have demonstrated that they will not be swayed by emotions, but are as firm on protecting (core) national interest as China.  A final judgment must however await a detailed examination of the agreements signed during Premier Li’s visit.

Source: This appeared in the Blog (a shorter version appeared in the Hindu a day later)


[ii]On April 27th 2013. A version of this note appeared in the Indian Express op ed page on May 8, 2013, under the banner, “How to anticipate China”. See,


[iv]Chairman Xi outlined his five principles of Sino-Indian relations around March 20 (, while the PLA incursion into Indian side of the LAC occurred on April 15 ( ).

India and WTO

By Arvind Virmani
At the start of the Doha Round of WTO negotiations, I warned against confusing the Economics and GeoPolitics of WTO negotiations [Virmani(2003)]. I quote extensively from this note (below) because it remains relevant today, in the context of the decision of the Indian Government to make approval of the agreement of “Trade Facilitation” contingent on a commitment to revise the agreement on Food subsidies.I conclude with an economic analysis of protection and subsidies that clarifies the economic issues and puts them in proper perspective
Distinguishing Economics from Geo-Politics
“Economic theory and empirical analysis as understood and accepted by academics in the USA, Europe and the emerging market economies, says that removal of controls, restrictions and obstacles to Imports will by and large lead to an increase in the welfare of both the importing and the exporting countries. Then why is it that each country ignores what its own academics tell it with respect to policy reforms and focuses mostly on the import restrictions imposed by other countries on its export items (whether these are goods, services or factors)? The answer is politics. In every country, politics imposes a cost on the nation as a whole while benefiting some sub-set of individuals. The geopolitics of negotiations is motivated by a desire to transfer some of the national costs of policy distortions onto other countries, while retaining as much of the benefits for sub-groups within the country. A good example of this from the rich countries is the multi-fibre agreement (MFA).
One implication of this strategic approach to multilateral economic rules is that there can be an apparent dichotomy between our domestic reform intentions and actions and our public posture and negotiating stance at WTO. Economic analysis must drive our (autonomous) reforms in the external sector irrespective of what happens (or does not happen) at WTO. That is, liberalisation is beneficial to the country and must continue independent of the WTO and at a pace and timing of our choice. Economic analysis also provides us with the true costs and benefits to our citizens, of specific policy changes. This forms the basis of our evaluation of what rules we should be willing to accept in the negotiations- those resulting in policy change that have a higher benefit to us in any case. Conversely it also determines which changes we should resist conceding (those that have higher cost). The public position that we take at the negotiation need not however lay all this out publicly for other countries. In the tactics and strategy of negotiations, politics/geo-politics will inevitably play a substantial role.”Virmani(2003)
Trade Facilitation
“Trade facilitation is the global equivalent of the Indian mantra, ‘red tape and bureaucracy’ in international trade (import-export) system. Trade facilitation would directly address this problem on which there is a national consensus (with the exception of the customs bureaucracy).”
“From the perspective of politics/geo-politics therefore, it is quite rational for India to concede to others on any of the Singapore issues if and only if we gain concessions and benefits in other areas. In other words we must use these as counters to bargain for what would not be available to us otherwise. It should be remembered however that these bargains are sometimes informal, on the sidelines of the formal negotiations or a meeting in another capital.”Virmani(2003)
WTO Negotiations on Agriculture
“Agriculture is an area where the economic arguments of rich countries are very weak (because of high subsidies) while those of poor countries are relatively strong. It is quite clear that many countries in the EU and to a lesser extent the USA are hostage to agriculture producers who constitute a small fraction of their population. On our side a large proportion of the population is dependent on agriculture, lives in rural areas, is very poor and less educated and has little access to up to date and relevant knowledge. This puts their lively hood and sometimes even their survival at risk from exogenous shocks. Over the last few years we have also raised the import duties on a number of agricultural products above the peak rate. The inter-ministerial expert group argued that in the interest of economic efficiency, these should be brought down to the peak rate, with an intermediate step of two times the peak rate. In the meanwhile, we should carry out a thorough de-control and reform of the agriculture, agro-processing and food retail sectors (as detailed in a Planning commission working paper).
As far as the WTO negotiations are concerned, however, offence is the best form of defence. We should marshal the global NGOs to expose the hypocrisy of the rich countries vis-à-vis free trade and verbal concern for the poor (while giving subsidies to rich farmers that destroy poor agriculturists jobs). The outcome of this will either be a stalemate (both rich and poor countries retain their preferred distortions) or less likely a trade-off relating to (one or more of) the Singapore issues. A commitment to reduce rich country agricultural subsidies in return for a reduction in (bound) tariff rates on agricultural goods in poor countries the third but least likely possibility.” Virmani (2003)
Economics Of Food Subsidy
In several articles during the last year I opposed the Food Security Bill on the grounds that it was barking up the wrong tree. As I showed the real problem is child malnutrition and this requires improved sanitation not more food. However, we now have the food security Act and the Govt. has to implement it as it stands, until it is amended or redirected. If the pessimistic calculations of the fiscal critics of the Act come true, implementation will involve huge subsidies. There is a fear in the Indian bureaucracy, that unless the exiting WTO subsidy limits are changed, India could be constantly in the dock at the WTO, having to answer to Global agricultural exporters for domestic subsidies. To put this fear in perspective, we need to understand the three aspects of Agricultural protection-subsidy:
(1) Production Subsidies (Sf)
Subsidies on agricultural inputs given to the farmer, such as fertilizer, electricity and water, that reduce the cost of production. If the subsidy per unit of output is Sf = s Pd this will reduce domestic market price from Pd to Pd’ = Pd – Sf = (1-s) Pd. The last WTO agreement on Agriculture puts a limit on production subsidies of 10% based on a three year average of prices prevailing at the time the agreement was signed (1986-88). This is clearly outdated and needs to be updated to current/recent price levels. Once this is done a 10% subsidy limit would mean that input subsidies cannot exceed 1.8% of GDP (as GDP from agriculture is about 18% of total GDP). Current input subsidies are less than 1% of GDP. To pump even more than this amount into agriculture input subsidies instead of into enhancement of agricultural productivity, would be reflective of very bad agricultural policy. In the medium term, direct income transfers to poor farmers could eliminate even the need for this level of input subsidy.

(2) Tariff Protection (t)
Protection of domestic agricultural/food output through tariffs (and QRs). If the effective tariff rate is t this will mean that with World Price Pw ,Pd’= (1+t) Pw or Pd= (1+t) Pw + Sf= [(1+t)/1-s)] Pw . The effective tariff rates on Wheat and rice have varied between 5% and 10% in the recent past, without exceeding the latter.
The WTO agreements on tariffs, stipulates that the “actual” tariff rate cannot be higher than the “bound tariff rates”. Even though our peak tariff rate on non-agriculturalgoods is 10%, the bound rates on agriculture are two to three times the bound rates on non-agriculture imports. Therefore elimination of input subsidies could be offset by raising the import tariffs to t’ = s + t (1+s), thus keeping the degree of import protection to farmers unchanged.
(3) Consumer subsidies (Sc)
Consumer subsidies reduce the price of food paid by the consumer (Pc) below the market price. Pc = Pd’- Sc = (1+t) Pw -Sc . There are no WTO limits on consumer food subsidies. However, our consumer subsidies are provided through the FCI which also runs the price support system for farmers. Therefore it is not always clear what part of the subsidy given to FCI is compensation for its inefficiency and corruption and how much is a subsidy to consumers.
Further, foreign producers argue that the MSP acts as a subsidy to farmers and must be included in the production subsidy calculation, as the Govt. does not allow foreign agriculture producers to supply FCI imported agricultural produce at the MSP. Though this point is debatable, it could be another issue for putting Government in the dock at the WTO. If food subsidies were provided directly to consumers through a food debit/credit card or a bank account(instead of through FCI), the issue would not arise.
The Indian Government has stated that it is willing to continue discussion on the Bali issues when the WTO meets again in September after a recess. It seems to me that a reasonable compromise that meets the domestic political objectives of India as well as of Agricultural exporters such as the USA and Australia is possible before the end of the year given a genuine desire to reach agreement, instead of trying to scapegoat India.

IMF Quota Formula Flawed: A simple test

The Emerging economies, particularly Brazil, India and Russia, have called for a fundamental reform of the IMF Quota Formula, arguing that the formula is fundamentally flawed.  The Advanced Economies, particularly rich countries of Europe, have asserted that the formula is just fine and minor tweaking may be all that is required.  Our earlier blogs and papers have addressed this issue from the philosophical and analytical angle. This blog presents a simple test to determine whether the formula is flawed.  the same test can also be applied to check whether any proposed change in the form represents a serious effort at reform.

One simple numerical measure of the flaws in the formula is what in the IMF’s esoteric parlance is known as “over representation” and “under representation” of member countries.  This is the difference, for each member, between the actual quota share (AQS) and the calculated Quota share (CQS).  We can easily calculate the AQS and CQS which would prevail after the 14th General Quota review based on data available in 2010 (termed the 2010 quota reform) and calculate the difference X=AQS – CQS.  In IMF parlance countries with a positive X (AQS > CQS) are defined as “over represented” at the IMF, while those with a negative X (AQS< CQS) are defined as “under represented.” Table 4 summarizes the number of such countries among the set of Advanced Economies (AEs) and Emerging Market and Developing Countries (EMDCs).

Table 1: Statistical Measure of Bias in Flawed Formula

Number (%) of countries

                                                     Over represented         Under represented

Advanced Economies (AEs)                5 (24%)                         16 (76%)

Emerging Economies (EMDCs)         100 (70%)                       42 (30%)

          Table 1 shows that 76% of the AEs are “Under represented” while 70% of the EMDCs are “Over represented.”  Thus the formula is clearly biased in favor of the AEs and against the EMDCs and needs to be reformed.

A minimal test of a Quota formula reform would be whether the quota formula reform removes this statistical bias i.e. whether the new formula yields a CQS that evenly distributes the number of AEs and EMDCs in the two categories.

Source Blog dated October 15, 2012:

Reforming The IMF Quota Formula


The IMFC and G-20 meetings of April 2012 and June 2012 directed that work should proceed on simple and transparent quota formula that better reflects members’ relative positions in the world economy and that any realignment is expected to result in the increases in the quota shares of dynamic economies in line with their relative positions in the world economy, and hence likely in the share of EMDCs as a whole; and that steps shall be taken to protect the voice and representation of the poorest members (IMFC, April 2012-emphasis ours). This was elaborated in the G- 20 Leaders summit declaration at Los Cabos which “stated that the distribution of quotas based on the formula should better reflect the relative weights of IMF members in the world economy, which have changed substantially in view of the strong GDP growth in dynamic emerging markets and developing countries” and regarding “the importance of protecting the voice and representation of the poorest members”.
This requires a re-evaluation of the existing variables in the Quota Formula.
The only conceptually sound measure of the real share of an economy in World GDP is its GDP measured in Purchasing Power Parity Prices. Thus, this variable best captures a country’s contribution to and its stake in the Global economy. It must therefore be the core variable in the Quota formula, with a dominant weight. It has been clearly shown in numerous simulations that the greater the weight of this variable in the Quota formula, the higher the CQS of the Low and middle income countries. However, because of the long history of the use of GDP at market prices and as a possible indicator of that part of the IMF’s mandate that is not already captured by GDP PPP, the GDP blend has been accepted as a compromise by a plurality of IMF members. It remains a potential consensus candidate for the simplest, most transparent (two variable) formula.
The openness variable has been justified as a measure of inter-connectedness and the stake of countries in the global economy. Much of the interconnectedness that this openness measure captures is the interconnectedness of countries within the Euro Area / European Union. It is not clear whether intra-EU interconnectedness has any relevance to the rest of the World. To the extent that interconnectedness implies a stake, it only mirrors the European countries stake in the Euro and the EU. Thus Intra-European ‘openness’ may be relevant for the ECB or a “European Monetary Fund” but appears to have little relevance to an ‘International’ institution. The limited relevance for the rest of the World becomes starkly clear when we compare the share of ‘openness’ of the EU27 with that of the USA. The USA’s 13.1% share of the ‘openness’ variable is less than 1/3rd of the 41.1% share of the EU27. The argument for ‘openness’ implies that the EU has more than three times the US stake in, or commitment to, the World Economic or Monetary system. This defies both reason (logic) and common sense!
Financial Openness is even more problematic. Besides sharing the anomalies and biases of the current openness variable, it has additional problems. The problem of tax havens has already been noted (By definition tax havens imply openness to tax evaders and avoiders). The large financial sectors of the ‘financially open’ economies are a threat not only to their own economy and peoples, but also to the growth and well being of the rest of the World. This has been amply demonstrated by the continuing financial crisis. The inclusion of financial openness in the quota formula would be analogous to appointing financial capitalists (as against real entrepreneurs) as financial regulators. The consequences of regulatory negligence and capture are still being exposed: Namely, (a) Government bailouts paid for by the general public (moral hazard). (b) Exorbitant profits and salaries attained by exploiting asymmetric information and cozy monopolies, through actions bordering on, or crossing into, fraud. (c) Dutch disease, sudden stops and periodic liquidity freezes in the rest of the world (negative externalities). If we have learnt anything about moral hazard, asymmetric information and negative externalities, it is that external risk creating economies, with large open financial sectors, should be penalized not rewarded with quotas.
Financial Contribution
Financial contribution in an equity based organization must be related to the quota formula, which simultaneously determines vote share and contribution share. Foreign Aid is an obligation of the rich countries, accepted by the people of these countries since WWII. Consequently, any reward for rich contributors to subsidy programs for the poorest (e.g. PRGT) must come at the expense of rich non-contributors. A transfer of these obligations from the high income to the middle and other low income countries through the quota formula is unacceptable.
Temporary funding, in the form of unsubsidized loans from member governments to the IMF cannot be equated to permanent equity funding and permanent vote share. The rules for temporary funding and its use can be framed to give a greater say in the use of these specified funds to the contributors, without permanently distorting the formula. An alternative, even better solution would be to raise such temporary debt funds directly from global financial markets, in which case the issue is moot.
Measurement and Format
Implementation of the IMFC and G20 decisions requires simulations designed to give voice and representation to the poor developing countries. There are several choices: (i) A compressed population variable (suggested by Ralph Bryant). (ii) The share of the poor or weighted poverty ratio (suggested in IMF WP/11/208). (iii) A scaled and capped variability measure (suggested by the G24 secretariat). Further the interests of the small open economies, particularly middle income countries, could easily be safeguarded by a compressed and capped version of this variable. Such a procedure would also reduce anomalies that have been repeatedly pointed out over the past decade, such as the ridiculously high share of Luxemburg in openness. The practice of averaging, which delays adjustment of CQS to economic changes, also requires a thorough reassessment.

Source Blog dated July 17, 2012:

PM Modi’s Foreign Policy Priorities President’s AddressTo Parliament

President’s AddressTo Parliament
PM Modi’s government has used the vehicle of the President’s address to spell out its foreign policy priorities: These are, (1) SAARC countries, who are also India’s close neighbors in South Asia, (2) China, a neighbor and a Great power, which does and will continue to impinge directly on Indian interests, (3) Japan, a longstanding economic power house, which can help transform Indian Infrastructure and economy, (4)Russia a long time Strategic and defense technology partnerand (5) Super Power USA which has multifarious possibilities for partnership, whose promise has still to be fully realized. (6) The European powers (i.e. UK, France, Germany), which still have areas of technological and strategic strength from which India can benefit.Though SAARC, a pluri-lateral organization is mentioned, the focus is clearly on bilateral relations with this set of countries, which together will have a high priority in the nation’s foreign policy. Underlying these is a more hard headed evaluation that real gains to India can come only from give and take between these countries and India rather than from (drawn out discussion at or with) multilateral and regional fora.

Foreign Policy Approach
The selective list of countries mentioned in the speech, are those that can have the greatest impact on India’s economic development, the welfare of its people and its national security. India’s “values” and “soft power” will be balanced with “pragmatism” to achieve “mutually beneficial relations.” These words and inaugural actions, suggest that neither self-imposed ideological shackles nor fearful assumptions about the impact of bilateral relations on third countries, will be a constraint in pursuing India’s interests. However, PM Modi’s previously articulated interest in foreign economic relations (trade & investment) to promote India’s economic and technological development suggests a much greater emphasis on opportunities for mutual economic gain.
The Modi led government is likely to shun grandiose concepts of global architecture and global governance and focus pragmatically on its economic and National security goals. It is likely to have a business-like approach: Identifying opportunities and threats and pragmatically going about using the former and minimizing the latter, in co-operation with whichever country is most helpful in each case. This does not imply an absence of strategic objectives, strategic doctrine or plan, but a shift in emphasis away from philosophical principles and ideology to more specific achievable objectives.
A peaceful, economically integrated neighborhood tops the nation’s foreign policy agenda outlined in the President’s address. Historically, this included Myanmar, but the latter is now a member of ASEAN not SAARC. Similarly, Tibet a part of India’s historical neighbor hood, has for obvious regions to be dealt with as part of China policy. The early invitation to SAARC leaders is suggestive of the fact, that the new government will give much closer attention to the SAARC countries than the previous one. Pakistan as the second largest country in SAARC, will undoubtedly get its due share (no more, no less) of attention within this grouping, both from the perspective of peace and security within the region and with respect to mutually beneficial economic integration and regional growth.
China: Threat or Opportunity
China, a great power neighbor obviously requires the sustained and serious foreign policy attention from India. With the possible exception of China, all other countries in the Modi Govt’s list of foreign policy priorities can be seen as providing opportunities for economic and technological development. So is China, the second country on the list, a threat or an opportunity? China’s actions on its land (Indian) and maritime borders (S China sea and E China sea) have alerted the World to the “potential” threat of a rising and aggressive China. But the unravelling of China’s Export-Investment led growth model after the Global financial meltdown, suggeststhat the ultra-nationalist actions may be an attempt by the Chinese Communist Party leaders to divert public attention away from slowing economic growth to foreign concerns. Counter-action of its aggressive actions by its maritime neighbors also provide a cautionary warning to its leadership and may strengthen those elements in China that are “pragmatic” and genuinely believe in “mutually beneficial relations” with India. If this is true, then China can be converted from a potential threat into a potential opportunity for India.
There are three basic issues that need to be addressedfor India-China relations to become a win-win opportunity for both: (1) A border settlement: Premier Chou en Lai provided a template and a map which is reportedly still available in the Indian archive, but from which the Chinese have resiled. This long buried proposal along with the India-China border agreement of 2005, can be the basis for a border settlement in which China accepts India’s claimsin the East and India broadly accepts China’s 1960s claims in the West. (2) The great asymmetry in trade relations arising from the ability of the Party(CCP) to control imports from India without any formal procedure. The massive trade imbalance can only be corrected if the party issues clear instructions to this effect. India can provide greater access to China’s construction exports and FDI in infrastructure, in return for a shift of China’s Labor intensive export industries to India (some of its parts & components would also be imported from China). (3)China’s nuclear and missile proliferation to India’s neighbors: By formally agreeing to support India’s entry into UNSC, NSG, MTCR, Wassanar group etc. China can partially assuage the deep distrust that such proliferation has aroused.
To the surprise of some, Japan an economic power, is listed ahead of the USA on the list of countries that have priority in PM Modi’s administration. The primary reason for this is the perception that the Japanese government has the financial wherewithal, the ability and (under PM Abe) the will to help India solve its infrastructure problems, meet its energy deficits and efficient use of natural resources and thus accelerate economic growth significantly. It also has a wide range of technological capabilities that it can use to help upgrade India’s strategic R&D and technological abilities. Given historical cultural links, shared democratic perspective and geographical location, it has the potential of becoming a true and equal “Strategic partner” for India in a decade or so, if it can resolve the political divisions between traditional, older pacifists and younger, modern, nationalists.
Russia is a valued partner because of its co-operation in developing strategic technology for mutual benefit. Despite the fact that its Defense industry was disrupted by the collapse of the USSR and has never quite recovered enough to meet its cost and time commitments, it remains a major partner. Its large energy and natural resources also have potential, which has not been fully exploited for mutual benefit.
After a great start to the India-US strategic relationship under the Bush administration and some successes during the Obama administration(a la Ashton Carter, former Deputy defence secretary), the India-USA relationship has become increasingly transactional after the global financial crisis. We must however, be careful to distinguish between the Security related and Economic aspects of the relationship. The former has the potential to become a solid and mutually satisfying strategic partnership while the latter is inherently more transactional, given the divergence in economic interests. As the Modi led government has few if any ideological constraints& self-imposed restrictions, there is an opportunity to transform the Indo-US security partnership (strategic technology, defense production, national defense, terrorism and internal security).
With the Govt’s desire to harness private investment & entrepreneurship private business relations are bound to flourish, given US firms are (in general) still the most technologically advanced and competitive in the World. Thus it is advisable to use government to government interactions on economic policies to minimize the politically inspired conflicts between the two countries, through honest ‘give and take’ and transactional deals to satisfy vested interests and political pressure groups.
Sometimes, a simple slogan can catch the essence of a new approach to National security and international relations. For PM Modi’s government there are in my view two such that people will eventually use to describe the new approach adopted by the Indian Government. These are,
(1) Speak Softly but Carry a Bigger Stick (‘speaking softly’ may not come easy to some in BJP vis-a-vis Pakistan or China, but must be done e.g. “We want peace with Pakistan but it cannot be achieved through nuclear blackmail, terrorism and mutilation of our soldiers;” Similarly a ‘bigger stick’ is best signaled through informal channels rather than derogatory/rude language. Finally those who accuse PM Nehru of making empty threats vizChina in 1961-2, shouldn’t make the same mistake themselves).
(2) Deterrence without Delusions(of converting ideologically driven opponents into peace-nicks through “Pappi-Jhappi” style of International Relations. National Power & the ‘will to use it’ is the only way to deter or dissuade aggression and in this context, “Actions speak louder than words”).

Source: Blog dated June 9, 2014: