November 2018


This month, the Indian news media focused on a mix of political and economic news with coverage focused on the 10th anniversary of the Mumbai terror attacks, the commencement of the construction of a historic corridor between India and Pakistan, and the overhaul of India’s credit rating agencies underway.

10th Anniversary of the 26/11 Terror Attacks

On November 26, 2008, a group of terrorists attacked multiple locations across India, killing 174 people and injuring over 300 more.  Earlier this month, on the 10th anniversary of the attacks, a number of op-ed articles were published in various news publications, with columnists weighing in on lessons learned from the attacks and reflecting on the events that transpired ten years ago.  Writing for the Hindu, former National Security Advisor, M.K. Narayanan opined that while the number of terrorist attacks may have declined in the ten years following the attacks of 26/11, it is important for India’s security establishment to remain vigilant, particularly against new methods of terror. Notwithstanding increased vigil and streamlining of the counter-terrorism apparatus, the ground reality is that newer methodologies, newer concepts more daringly executed, and more deeply laid plans of terrorist groups have made the world a less safe place.   The actual number of terror attacks may have declined in recent years, but this does not mean that the situation is better than what existed a decade ago.  Terrorism remains a major threat, and with modern refinements, new terrorist methodologies and terrorism mutating into a global franchise, the threat potential has become greater.  One new variant is the concept of ‘enabled terror’ or ‘remote controlled terror’, viz. violence conceived and guided by a controller thousands of miles away.  Today the ‘lone wolf’ is, more often than not, part of a remote-controlled initiative, with a controller choosing the target, the nature of the attack and even the weaponry to be used.  Internet-enabled terrorism and resort to remote plotting is thus the new threat.  Operating behind a wall of anonymity, random terror is likely to become the new terror imperative. There are no ready-made answers to this new threat.  Vigilance is important, but remaining ahead of the curve is even more vital.”

A column in Business Standard written by a former Indian Navy commander echoed a similar sentiment, stating that India needs to continue to improve its preparedness to deal with such attacks.  Today, fair progress has been made in getting these two imperatives in some order just as there has been substantial increase in coastal platforms available to the Navy and the Coast Guard and Marine Police forces of coastal states but there are still many loopholes to be plugged.  A National Maritime Agency (NMA) mooted by this government in 2014 to oversee activities at sea is only on paper and a great number of our more than two lakh fishing boats are still to fit automatic identification systems; not all coastal states have beefed up their marine police sufficiently.  There are air and coastal sea patrols at random and a few radar stations have been set up and some coordinating mechanisms put in place in major ports but these are only basic measures.  The sea has no check points or perimeter fencing.  Sanitizing it is very difficult and unity of command and control is essential.  Whether raids like that of ten years ago can happen again is debatable but to think that they can be ruled out will be premature; mindsets across the border are not going to change anytime soon.  Simply put, we need to further tighten our preparedness to cope with such situations in which, sadly, the terrorists will always hold the initiative.”

Finally, an editorial in the Print chose to reflect on the events that transpired ten years ago and their impact on India’s upper class, which were targeted during the attacks that took place at two luxury hotels in Mumbai.  “These attacks had brought terror to the doorstep of the classes that had long insulated themselves from our system of politics and governance.  Over the years as our governance declined, or failed to keep pace with our society or economy, all of us learnt to become individual, sovereign republics.  We send our children to private schools, get treatment only in private hospitals, have our own security in gated communities, never need to use public transport, even own diesel gensets to produce power, and in many parts of the country, arrange our own water supply, either through our own borewells or tankers.  Then we suddenly get hit in one area — physical safety, law and order — which is still entirely in the hands of the government… Yes, our governance sucks, we argued.  But the solution for the Mumbai upper crust in the winter of 2008 was not to secede from it as well… The solution, we said then, lies in returning to the “system”, and challenging and changing it from within.  Just as the poorer and the middle classes do around the country.  Despite all the anger, disappointments and cynicism over the decades, more and more Indians are coming out to vote.  They do not always love their politicians, they often vote them out. But they do it by using the power of the vote, not by disowning it.”


Construction of Historic Corridor Between India and Pakistan Commences

Earlier this month, India and Pakistan commenced construction work on the construction of the Kartarpur corridor, which aims to facilitate the visa-free travel of Sikhs to a religious holy site located in Pakistan.  The event received mixed news coverage in India, with some publications optimistic that this be an important turning point in relations between both countries, but others still skeptical, given on-going border skirmishes and militant attacks in Kashmir.  An op-ed in the Indian Express expressed hope, stating that if the construction of the Kartarpur corridor was successful, it could mark the first of many initiatives undertaken by both countries to improve ties.  If the Mumbai attacks represent the accumulated negative legacy of the relationship, the surprising breakthrough on Kartarpur points to a potentially positive future… ‘Religious diplomacy’ — or using faith to bring people and nations together — has been very much part of Modi’s foreign policy in his outreach to the neighbouring countries in the Subcontinent and beyond.  It was also framed as a priority in the joint statement issued after his talks with Pakistan Prime Minister Nawaz Sharif at Ufa in July 2015…  If there is one place ripe for quick advances in bilateral relations it is the Punjab.  The pent-up demands for cross-border commercial cooperation and people-to-people contact is immense in the Punjab, which has borne so much of the Partition’s tragic burden.  If there is political will, a lot of steps — relating to religious tourism, overland commerce, cross-border trade in electricity and hydrocarbons — can be taken.”

Writing for the Print, veteran journalist Shekhar Gupta was less optimistic, arguing that the power of the Pakistan Army meant that it was unlikely that the construction of this corridor would help improve relations between India and Pakistan.  “Be realistic.  On my first visit to Pakistan, eminent Pakistani lawyer, politician and activist Aitzaz Ahsan had described Zia’s party-less Muhammad Khan Junejo government as “bonsai democracy”.  Pretty to look at from the outside, but never allowed to grow roots and branches outside of its little shelf-space… Over the decades, Pakistan has cemented that template.  One who challenges it, goes to jail, exile, death or all three.  Khan is smart, not stupid.  In all evidence so far, he’s Pakistan’s first volunteer bonsai.  His intentions are unclear and don’t matter.  His limitations do, and these are clear.  That’s the fundamental reality to remember before we get breathless over a gesture, an event, a speech, a pilgrimage.”

An editorial in Livemint appeared to be on the fence, stating that the construction of the Kartarpur corridor was certainly cause for hope, but ultimately, the ball lies in Pakistan’s court.  “While peaceniks on either side have cause for hope, it is also a fact that India has been at the very same crossroads on several occasions.  Former prime minister Atal Bihari Vajpayee had journeyed by road in a historic trip to Lahore via the Wagah border in search of peace; something to which the Pakistani Army responded by unleashing through its terror proxies the assault in Kargil and later an attack on the Indian Parliament…  The proverbial ball, as they say, is in Pakistan’s court.  Pushed into a corner by unprecedented belligerence from the White House under President Donald Trump, the options before Pakistan are rapidly shrinking.  The rapidly changing scenario in West Asia is only complicating things further.  The odds suggest that our troubled neighbour needs to grab the life line thrown to it; but history and experience tell us otherwise.”


Reforming India’s Credit Ratings Agencies

Following the default in September of IL&FS, a large infrastructure lender, which triggered a correction in equity markets and constrained short-term debt liquidity, India’s credit rating agencies have come under the media spotlight, having assigned high ratings to the company until late into the crisis, and triggering reforms by the regulator and the government to improve future performance and transparency.  In their coverage of these reform efforts Livemint suggested a series of measures to align India’s credit rating agencies with international best practices:  “To be effective, rating agencies have to be impartial judges of credit quality.  This is not possible if they have other non-rating businesses that they are marketing to the same corporates who they are rating.  Solution: Rating agencies should be forced to divest from non-rating business… [Secondly,] according to current practice, the borrower picks the rating agency that will rate their debt.  Thus, instead of an impartial judge, the rating agency is a seller trying to entice the buyer (the borrower) into buying its rating service.  One can very well imagine what will happen… The drastic solution is for a regulator (say RBI or Sebi) to pick the rating agency… The less drastic solution is to encourage unsolicited ratings, and also to ensure that the borrowers disclose all ratings and not just the ratings they end up accepting.  This will give greater confidence to the rating agencies to tell the truth and not have to cater to the borrower.” Beyond suggestions to improve the agencies themselves though, the article also outlined initiatives that financial institutions in India could undertake to reduce their reliance on credit ratings as a whole: “[There is an] over-reliance on ratings in regulations… Solution: Provide alternatives to ratings.  One should try to reduce the reliance on ratings in regulation.  For example, banks should have a minimum amount of capital based on the total assets, and not just on risk-weighted assets.

The Indian Express also advocated for further reform, but was complimentary of recent initiatives undertaken by the Indian government to drive change in the credit rating industry.  “ [The regulator’s] new rules now mandate the CRAs to disclose the name of the parent company, group or government which is expected to infuse funds to service debt if the support of the parent group is factored in the credit rating along with the rationale for the expectation.  The CRAs will also have to provide the list of all subsidiaries or group companies which are consolidated for rating purposes and the rationale for consolidation.  The raters will have to focus more on liquidity [among other reforms]… Regulators worldwide have come down hard on rating agencies after the 2008 crisis.  Yet, it is a moot point as to whether this greater oversight of CRAs will lead to a perceptible improvement in the credit rating exerciser or credit discipline without a sufficient deterrent.  That’s why Indian regulators, too, should perhaps consider imposing monetary fines or penalties, which could hurt not just banks or other financial institutions but also credit rating agencies to force a behavioural change and ensure that they carry out correctives.  In turn, the regulators should help the rating agencies to better access credit information of the smaller companies.

Finally, the Economic Times argued that while rating agencies in India need to do better, the successful path forward requires multiple key stakeholders in India’s financial system to work together.  All stakeholders have to work together to develop the market for lower than AAA-rated papers right up to the BBB category, if not non-investment grade.  The investment guidelines for all domestic investors should facilitate investments in higher yield papers.  This may help to reduce the pressures on the credit rating agencies to live up to the expectations of large issuers in the market.  Rating agencies have to be more responsible and careful while assigning fresh ratings, especially before assigning any AAA rating.  This would ensure that ratings remain stable and does not require overnight correction.   Finally, issuers should be made accountable for high quality and timely disclosure of management action and other information promptly and proactively with the rating agency.”





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