Author: cpradmin

Setting the context for state electricity regulatory agencies in India

Electricity is a concurrent list subject, with a federal dimension in the sharing of power and responsibility between the Centre and States. This reflects in the structure of electricity regulation in India. The Central Electricity Regulatory Commission (CERC) regulates tariffs for generating companies owned or controlled by the Central Government, those with an inter-State dimension, and those concerned with inter-State transmission of electricity. The State Electricity Regulatory Commissions (SERCs) regulate tariffs for generation, supply, transmission and wheeling of electricity within the States.

State Electricity Boards (SEBs) were set up by the Electricity (Supply) Act, 1948 to oversee generation, transmission and distribution activities. These were the backbone of the electricity infrastructure, and controlled 70 percent of electricity generation and almost all distribution by 1991. State governments performed the tariff-setting role. The decision on electricity pricing was often made with political considerations, and this led to a sharp deterioration of the financial condition and management practices of SEBs. A failed attempt to privatize the sector in 1991 was followed by a World Bank-supported reform effort in the state of Orissa, organized around unbundling and privatization in the sector. Several states followed in its steps, and in 1998 the Ministry of Power did the same through the Electricity Regulatory Commissions Act, 1998.

The CERC and SERCs were set up under the 1998 Act (later reconstituted under the Electricity Act, 2003) with the objectives of depoliticizing the sector and incentivizing private investment. The Electricity Act, 2003, designed to consolidate the various laws governing the electricity sector, brought in two key changes: (i) generation was delicensed; (ii) SEBs were to be ‘unbundled’ or separated into uni-functional utilities.

State in focus – West Bengal

The West Bengal Electricity Regulatory Commission (WBERC) was constituted in January 1999, under the Electricity Regulatory Commissions Act, 1998. It later came under the purview of the Electricity Act, 2003. The WBERC regulates the generation, supply, transmission, and wheeling of electricity (wholesale, bulk, and retail) within the state. It regulates power purchases and procurement processes, issues licenses, and determines tariffs for electricity operations in the State. The Commission also specifies and enforces standards with respect to quality, continuity and reliability of service by licensees. It is responsible for adjudicating disputes between licensees and distribution companies. Consumer grievances are addressed at the level of the utilities or the licensees. The Electricity Act stipulates that forums for redressal of consumer grievances be set up by all licensees. Consumers whose grievances are not settled by this forum or those who are aggrieved by the decision of this forum can approach the Ombudsman appointed by the State Commission. The WBERC primarily has a standards-setting and policy advisory role quite similar to the CERC, but limited to the state, and is bound to follow national electricity and tariff policy in the discharge of its functions.

As per Section 82 of the Electricity Act, a State Commission shall consist of 3 members, including the Chairperson. All members of the Commission are appointed on the recommendation of a Selection Committee chaired by a judge of the relevant High Court, and comprising the Chief Secretary of the State, the Chairperson of the Authority (for the selection of a member) or the Chairperson of the Central Commission (for the selection of the State Commission Chairperson).

These comments are being submitted in response to the ‘Notice for Public Consultation’ dated 30.06.2022 issued by the Ministry of Environment, Forest and Climate Change (MoEFCC) inviting comments/ suggestions on proposed amendments to the Air (Prevention and Control of Pollution) Act 1981 (Air Act).

The regulatory framework governing air quality in the country needs to be reformed urgently. Significant parts of the Indian population are exposed to air quality that does not meet the National Ambient Air Quality Standards. This crisis of poor air quality is neither urban-centric, nor seasonal, and its impact on public health is staggering. Apart from respiratory and cardiovascular diseases that are commonly associated with air pollution, it is also associated with diabetes, cardiovascular disease, adverse birth outcomes, and ocular conditions, and emerging evidence shows it may lead to other adverse health outcomes like dementia and neurodevelopmental disorders.

Many aspects of the regulatory framework need to be reformed or strengthened to appropriately deal with the nature and scale of the air pollution crisis. One of the key aspects is the ability of the regulatory agencies to enforce the law. Their failure in effectively doing so – evident from the poor quality of air experienced in most parts of the country – is attributable to various factors including institutional constraints, poor monitoring capacity, misalignment of statutory objectives and stated policy goals, and flawed legal design. The proposed amendments are limited to only one factor – the design of the Air Act in terms of punishments for offences.

To the extent the proposed amendments introduce monetary penalties per se for certain offences under the Air Act, the amendments are a welcome move. However, in our opinion, the proposed amendments need to be withdrawn and reconsidered for primarily two reasons: first, they are legally untenable due to excessive delegation of essential legislative functions; and second, the proposed regulatory framework, that will include Adjudicating Officers with the power to impose financial penalties, does not appear to be well-equipped to deal with violation of the law and its impact. Apart from this, there are several errors and inconsistencies in the proposed text which make its implementation problematic.

Our comments are divided into three sections. Section I discusses why the proposed amendments are legally untenable; Section II discusses why the proposed institutional framework will not reduce violations of the law; and section III lists some of the errors and inconsistencies in the text of the proposed amendments.

You can access the comments here.

The State Capacity Initiative at the Centre for Policy Research (CPR), the Forum of Indian Regulators (FOIR) and the Indian Institute of Corporate Affairs (IICA) organised the following talk in the ‘Know Your Regulator’ talk series:

‘Know Your Regulator’: Mr Debasish Panda, Chairperson, Insurance Regulatory and Development Authority of India

In Conversation:
Mr Debasish Panda, Chairperson, Insurance Regulatory and Development Authority of India
Dr KP Krishnan, Honorary Research Professor, CPR
Dr Abha Yadav, Associate Professor, IICA and Director, FOIR
Dr Rohit Chandra, Assistant Professor, School of Public Policy, IIT Delhi and Visiting Fellow, CPR

The briefing note can be accessed here.

Conversation summary:

Problems that IRDAI was set up to address

The evolution of the insurance sector in India has three distinct phases –
1. 1938 – 1956: In the pre-nationalisation era, small and medium-sized insurance companies operated under the Controller of Insurance. This period is marked by considerable dissatisfaction among policy holders for not getting their dues on time. This was also a time where many mergers and liquidations took place. There were no clear regulations to protect policyholders.
2. 1956 – 2000: This era is marked by nationalisation. The Life Insurance Corporation (LIC) was nationalised in 1956 and subsequently, five non-life companies were nationalised in 1972. While policyholders’ interests were better protected in this era, growth was slow and there was little choice for consumers because of a rather monopolistic market consisting of four or five public sector companies.
3. Post-2000: The Malhotra Committee was set up and recommended a series of reforms for the insurance sector. IRDAI was given shape during this time. Initially, it was a purely regulatory body and at some point, based on Parliamentary committee recommendations, IRDAI was also assigned a development mandate.

In the era prior to liberalisation, there were several issues concerning policyholders and the slow growth of the sector. Specifically, these issues included a limited choice of products, costly products, low awareness and customer dissatisfaction regarding claim settlements. There were also issues with respect to the lapse of policies; term plans were not encouraged. In addition to these, there was also a limited spread of rural and welfare-oriented insurance.

The supply side was marked by a lack of competition because a lot of items were under tariff. In general, the lack of market discipline was witnessed. Professional standards in underwriting and risk management were not set. The aforementioned issues did not enable the sector to grow in an anticipated manner.

The IRDAI was set up with a clear mandate to protect policyholders and to ensure an orderly growth of the insurance industry. The liberalisation era witnessed the re-entry of the private sector alongside the public sector. Foreign Direct Investment (FDI) was allowed in the insurance sector. Companies also began listing during this regime. With such interventions, a number of companies came into the insurance market. In general terms, this is how the sector evolved.

The insurance industry also supports the economy in a huge way. The Assets Under Management (AUM) pump fuel into the economy by putting these resources into productive instruments for growth and development, promoting trade and commerce and promoting infrastructure development in the country.

Regulatory method: elements of executive, adjudicatory and legislative functions

Executive functions: Section 14 of the IRDAI Act casts a duty on the authority to regulate, promote and ensure orderly growth of the insurance and reinsurance business. This is done through a host of regulations. The Authority also issues directions, master circulars and guidelines. Through these means, the industry is regulated in an orderly manner, making sure that it is always in a position to honour the commitment made to citizens/constituents. The Authority also plays a supervisory role, as part of which it keeps a watch on the risk profile of insurance companies including whether they have maintained requisite solvency at all points of time, where the risks are sitting on company balance sheets etc. Crucial aspects such as these are constantly monitored through either an offsite mechanism or an onsite examination. It is through such mechanisms that the Authority tries to ensure the financial soundness of the company and its market contribution.

The IRDAI is also empowered to register and regulate the insurance entities. Once registered with the IRDAI, insurance entities are free to operate in the market, i.e. sell their products and service their clients. The Authority also approves changes in the shareholding, to make sure that risk is not concentrated in the hands of a few. The Authority also allows the issuance of other forms of capital other than equity or shareholders’ own money. The appointment and remuneration of the CEO and other corporate governance-related matters are handled by the IRDAI. This ensures that the entities are regulated in a proper manner.

Adjudicatory functions – Section 14(2) of the IRDAI Act empowers the regulator to adjudicate disputes between insurers and intermediaries or between the insurance intermediaries. It also provides powers to adjudicate and impose penalties, if required.

Legislative functions – The government frames the rules under the Act, whereas the Authority can frame regulations, as mentioned previously.

Role of the Central Government

The Central Government determines the policy framework, the broad guidelines and decides the sectoral focus that it wants. It is in charge of the statute and amendments made to the statute from time to time, depending on the needs of the citizens and the markets. Rules under the statute are framed by the government. It also appoints the Chairperson, other members and part-time Directors of the Authority. There are mechanisms where the Authority works closely with the government, for instance, the Financial Sector Development Council (FSDC), which is chaired by the Union Finance Minister. All the regulators are part of this forum, and inter-regulatory issues or issues that a regulator needs to flag before the government secretaries of the concerned ministries are discussed. This is an important and responsible committee which looks at issues pertaining to regulators including inter- regulatory issues.

Organisational structure

The Authority has a Chairperson with five full-time members and four part-time members. The city of Hyderabad is the headquarters for the IRDAI. It has two regional offices, one each in Mumbai and Delhi. There are close to 250 officers working in IRDAI. The Authority also has the flexibility of adding more personnel who may be recruited directly from the market at the level of assistant managers, through an all-India competitive examination and through an independent entity agency. There are officers in levels such as assistant managers and executive directors, who go up in the hierarchy through written examination and interviews. They also gain marks for the qualifications acquired through their course of service in the Authority. The Authority has professionals with wide-ranging experience, with qualifications in actuarial sciences, chartered accountancy, cost accountancy, law, engineering, technology and management. I think the organisation is rightly sized at present, but maybe as we go along we will add more layers of domain experts as required.

How IRDAI fulfils the objective of consumer protection

The essence lies in ensuring adequate access, affordability and fair value of insurance products for, both, prospective and existing policy holders. This has to be supported by necessary awareness, guidance and seamless servicing of claims. The third is a 360-degree framework which would include insurance, multiple distribution channels and service providers, academic institutions, data repositories and a network of ombudsmen (for speedy redressal of grievances). All of the aforementioned are in position to facilitate access, to service insurance and claim settlement process of the policyholders. The Authority has also framed the Protection of Policyholders Regulations, in 2017, which is applicable to all insurers, distribution channels and intermediaries, other regulators, and to policyholders. The broader objective of all this is: (i) policyholder-centric governance; (ii) fulfilment of obligations towards policy holders; (iii) best practices of sales and services of insurance policies in order to protect policyholders’ interest. Through these regulations, we have asked insurance companies to mandate a board-approved policy which would include the steps they are taking to enhance insurance awareness, service parameters including the turnaround time for settlement of claims, procedures they have established within their companies for expeditious complaint resolution, and the steps taken to prevent mis-selling and unfair business practices. They have also been mandated to display the service parameters and turnaround time prominently on their website for the benefit of consumers. The Authority also prescribed that certain essential data be provided in the insurance prospectus, for a prospective policyholder to read it and understand the scope of the benefits, the extent of insurance cover and the exclusions, policy conditions, and contact details of the insurer in case of the need for correspondence.

There is a concept of a free look policy, where the consumer can opt-out of the policy if it does not work for them. For a refund of the premium, the consumer can opt-out within 15 days if the policy was obtained physically, and can similarly opt-out within 30 days if it has been obtained online. Barring only the adjustments made for risk premium, and expenses such as medical tests or stamp duty, the consumer will receive a full refund. In case of a delay in refund, there is a penal interest of 2% above bank rate which the insurance company pays to the policyholder.

Nature of complaints made to the IRDAI

Generally, the complaints would be regarding settlement amounts being less than expected, mis-selling, delay in claims settlement, operational details about the policy etc. A host of such issues come up before the IRDAI from the policyholders. The Authority has now asked insurance companies to appoint grievance redressal officers. We are toying with the idea of having an internal ombudsman within the organisation, because a grievance redressal officer will have limited capacity to deal with complaints, whereas an internal ombudsman will perhaps be given a greater responsibility to settle the claim taking into account the policyholders’ complaints.

The IRDAI has also set up a portal called the Integrated Grievance Management System (IGMS), that acts as an interface between policyholders, IRDAI and the other entities (insurance companies and intermediaries). All complaints are registered in this System, and then sent to the insurance companies, after which the latter takes appropriate corrective action. This System is being analysed in detail, and we want to bring in data analytics to understand the number and nature of complaints, companies and their locations. Data analytics will help us identify the root cause of complaints and also take immediate corrective action.

We are also trying to revive the IGMS, which we now intend to call Bima Bharosa. This portal will be a more dynamic one and shall take care of customers’ needs in a time-bound manner. It will also take feedback directly from the customer, which helps in further improving the system. Thus, in the next couple of months we should have a more robust redressal system.

Key players in the insurance sector

The key stakeholders in the insurance ecosystem are insurers, policyholders, and intermediaries (about 40 to 50 lakh agents and entities). We periodically interact with all of them. We are trying to introduce an institutional arrangement to make these interactions more frequent, so that we understand the pain points that the industry is facing. The focus is on reaching out to every citizen in the country. The goal is to have a fully insured society – in order to do this, we are doing a gap analysis, trying to understand the current capacity and the number of additional companies and the capital to be augmented to existing players, whether distribution channels are working properly, their productivity, whether we need more technology-based solutions etc. All of these are on our drawing board. We are working to increase insurance penetration not only in terms of number of policyholders, but also the number of new policies issued.

Aspects of the insurance business that need regulatory scrutiny

The Authority has two roles to play: (i) a developmental role, where we need to ensure that insurance penetration, density and reach grows; and the (ii) regulation of financial soundness and market conduct of companies. We are trying to balance both such that the insurance sector grows in an orderly fashion.

Regulatory supervision is exercised on all relevant aspects – financial soundness, prudential norms, valuation of actuarial liabilities (existing and future), matching capital requirements, maintaining solvency at all points of time (since one does not know when the risk is going to unfold). All these aspects are factored through our prudential norms. How do we do this? This is done through onsite and offsite supervision, monitoring and overseeing various periodical returns and submissions that the insurance entities provide to the Authority, inspections (onsite) by a team of officers from IRDAI, regulatory actions wherever required (through issuance of directions, advisories, show cause notices and imposition of penalties).

As far as investment of assets (aggregated through policyholders’ money) are concerned, the IRDAI has a set of regulations on how such money is to be invested – some of this is in the statute and some are in the regulations we issue. Together, these give us an insight into how insurance companies are doing in terms of their investment returns, solvency, capital matching with the business they underwrite.

Regarding the governance issue, positions like CEO, CFO, Chief Actuarial Officer, Chief Distribution Officer, Chief Risk Officer, are critical in addressing the issues that we are concerned with. Currently, the IRDAI uses a traditional method of looking at risk factors – we are trying to move towards a risk-based supervision framework which will be enabled by technology. Within the IRDAI, we have created a vertical which is working on mission mode and engaging with industry so that we move hand-in-hand. We are also trying to move away from the factor-based method of considering solvency, towards a risk-based capital framework. There are countries which use a risk-based capital regime. We have a dedicated vertical working on this, engaging with stakeholders and building the technology required for this. The risk-based supervisory framework is expected to be ready in six to nine months, and the risk-based capital regime is expected to take two to three years’ time.

Challenges faced by IRDAI in regulatory enforcement and possible solutions

Enforcement is required when compliance is not up to the mark. Currently, a lot of supervision is compliance-based, but the risk-based supervisory framework is a much more potent tool. We have a lot of rule-based regulation here – with the industry maturing, we want to move away from rule-based to principle-based regulation. The principle gives bandwidth to the insurance companies and other stakeholders to operate within that framework. The regulator then does not need to specify each and every thing. For example, until now, every product to be launched by the insurance company needed prior approval of the regulator. We have now done away with it because the industry is mature and knows what price to set based on actuarial calculations (done by actuaries who are certified by the IRDAI). We have asked them to have a board-level policy for product certification – this will create internal checks and balances. After this, the regulator will obviously monitor how the product behaves in the market and what traction it gets, what complaints it receives on the product, and so on. As such, consumers have more choice now since companies can come up with more innovations and launch their products on-time without being delayed by the regulator. All health and non- life products do not need prior regulatory approval, except for the category of small ticket policyholders. For life products, we have given away all term-policy covers. Prior approval is still needed for long- term savings and pension products, but this will be further liberalised.

Through technology, a lot of offsite enforcement and monitoring of deviations can be done. We are also looking at newer tools. For example, through the IGMS website, which we now call the Bima Bharosa, we will get a lot of feedback on whether compliance is happening despite the regulations being in place. Thus, this newer regime that we are moving towards will see a lot of issues being resolved through the use of technology and data. Data is crucial for (i) proper pricing, which will give consumers better choices; (ii) processing of claims; and (iii) designing products that are more personalised. In order to address this, we have a repository or transactional data bureau called the Insurance Information Bureau (IIB). This is not optimally functioning, hence we are focusing on reforming the body into a professional body comprising people with the requisite background and expertise (for instance, a chief data scientist, a chief technology officer, CEO and so on). This body is probably going to be industry-led, with the regulator having an oversight function – because this data is most useful for the industry for appreciating and processing claims, which ultimately benefits the customer. This service should also come up in the next few months.

Professional organisations that IRDAI regulates

Typically, we do not regulate these organisations, but there is some kind of an oversight – otherwise, these are all self-regulatory bodies.

The most important one for us is the Institute of Actuaries in India because actuarial sciences is critical to insurance. It is a self-regulatory body but we have a representative on the Board who tries to bring up issues faced by the insurance sector. Some time ago, the insurance sector was struggling to find actuaries, but with efforts taken through IRDAI representatives and adequate steps taken by the government, there is now a reasonable supply of good actuaries in the country. In fact, a host of young people who joined IRDAI as engineers or management graduates have now acquired the actuarial qualification.

We are also closely associated with the Institute of Chartered Accountants of India (ICAI) and the Institute of Company Secretaries of India (ICSI). There is another professional body called the Indian Institute of Insurance Surveyors and Loss Assessors (IIISLA) which we associate with. As far as the councils are concerned, the General Insurance Council (GIC) and Life Insurance Council (LIC) are represented largely by insurers and other stakeholders (some nominees are from IRDAI and some from the government). These bodies are expected to take up issues concerning their respective industries, stakeholders and policyholders. While these two councils have existed for years, we discovered a lack of professional approach to bring up issues. We have recently met with the Chairpersons of the bodies and asked them to bring in more experts and knowledge partners so that they not only look at issues faced by the insurance companies in the country but also learn from international best practices. These councils can come up with papers to the IRDAI on a continuous or periodic basis so that we as a regulator are alive to the problems faced by them and can take care of them in a manner serving the larger interests of the sector. We are working to make these councils more professional, vibrant and robust so that they can complement and supplement our efforts and be responsive to the needs of the industry. The councils have already started that process – I recently saw an advertisement for a CEO with market-driven salary.

Capacity building in IRDAI

Every organisation needs some amount of capacity building since market trends change over time and new market instruments emerge. With the advent of technology, these challenges will be greater and we need to be alive to that. At IRDAI, I would say that we have a good amount of expertise in finance, actuarial science, management, technology and risk management, however, capacity augmentation and development is a continuous process. We have a series of programs for capacity building by way of training of people within the country and abroad to acquire domain expertise. We make it free of cost for people to acquire the requisite skill set. At the same time, we mandate some of the training that people must undergo. We are trying to build capacity in four areas– (i) risk-based supervisory framework; (ii) risk-based capital regime; (iii) human resources; and (iv) IFRS and IndAS.

Emerging technologies in the insurance sector

I recently met more than 200 players in the Insurtech world in Bangalore – there were interactions, presentations and roundtable discussions, and this ecosystem is raring to go. At IRDAI, we have already developed a regulatory sandbox mechanism where the proof of a concept is being allowed to be tested on the ground. We have found that the regulatory sandbox has certain shortcomings, for instance, currently, an applicant can only apply in two cohorts. We are revamping the system to make it a continuous process. Earlier, we allowed applicants to test their product for up to six months, now we are proposing to expand that to three years particularly for life products. Thus, we are working on a dynamic regulation that shall come up in the next few days. With new insurance technology coming in, we need to build capacity to regulate them in a manner that they do what they ought to do in terms of market conduct.

Finally, we are looking at allowing smaller players in the market. The penetration of banking in this country has happened through differentiated players. Similarly, for insurance, we are looking at micro-insurance players – niche players and regional players – coming into the segment. This will entail amendments to the Act, to allow companies with lesser capital to enter. However, it will help us with the objective of insurance penetration in unserved and underserved areas in the country.

Consumer protection issues and how IRDAI is addressing them

The IRDAI is reviewing existing systems, and trying to make them more responsive and robust. We are working on root cause analyses, on bringing in other forms of technology like robotic process automation, and so on. We are running a hackathon (shortly) where we will state these problems and how to resolve them using technology.

Bima Bharosa portal will become more vibrant, robust, responsive and take care of many issues. For the ombudsman mechanism, we have tasked the responsibility with an insurance ombudsman committee, where we have experts being led by a former Additional Chief Secretary level officer from the IAS. We are also contemplating an internal ombudsman within insurance companies.

We are trying to make disclosures furthermore in the larger interest of the policyholders. They ought to have more information to make a choice of what kind of policy to buy. Claim servicing and settlement is also something we will focus on very closely as far as turnaround times are concerned. All of this will need to happen on a technology platform. Hence, we are mainstreaming technology and incentivising adoption of technology in our regulations (which is expected to be out in a month’s time). The policyholder remains at the centre of our framework, and we are working to ensure that grievances do not arise, even if it means changing the terms of policy.

Views on regulatory convergence and a larger reform of the financial sector

The FSDC will be a very useful forum. One example of a common regulatory issue is the KYC. There is no need to reinvent the wheel each time when the same KYC can be used by all regulators. I believe a new mechanism is being contemplated by the Department of Revenue – e-KYC Setu – a bridge between me, the customer and the UPI. The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) is another repository that has all the data. There is some element of concern with regard to the Prevention of Money Laundering Act (PMLA) where the last user of the CKYC data will have to update the information with regard to residential address, etc. which actually amounts to redoing the whole exercise once again. This is a concern that we will try to address in the next FSDC meeting. With the advent of new technologies, we should be able to take care of problems faced by the customer, whether they buy a financial, banking or insurance product. This forum is going to be important in addressing these concerns.

In terms of the reform of the financial sector, the IRDAI wants to move from rule-based to principle-based regulation. We have already delegated the product certification to insurance companies, and are considering some other things that the regulator currently does that can be delegated to the companies. We are looking at mainstreaming technology, a risk-based supervisory framework, risk-based capital regime, IFRS – these are some of the new reforms we have initiated and are trying to take forward.

We are also looking at value-added services to be incorporated in insurance. For example, a person aged around thirty five years would be reluctant to take health cover since they do not expect to go to the hospital in the next ten-fifteen years. Insurance companies can offer them services to make insurance attractive to this population segment – for example, offering a yoga membership, gym membership, an annual check-up, free ambulance service to their parents or nursing services – all of this should come in the bucket of value-added services.

The reason why insurance companies do not do this now is because the legal framework does not have clarity on this. As such, we need to carve out a space for these services. Further, a lot of capital will be required for companies to provide value-added services along with insurance because the same solvency norms will apply to them. If we can provide for them to set up a joint venture or a subsidiary and charge a fee for it rather than charging a premium, more people will be attracted to buying these kinds of insurance products. IRDAI is working on providing the technological platform for insurance companies to be able to provide these services.

Major disruptions that IRDAI is envisioning – the future of insurance sales

Technology is going to be the major disruptor. Everyone has to adapt to this sooner or later. We are nudging insurance companies to come up with a technology-backed insurance platform that they can create or their own or co-create or partner or collaborate on. A large number of players that want to enter the insurance sector are coming in with a technology solution. For instance, I found a crop insurance idea interesting – a parametric kind of insurance based on technology. Similarly, in the case of health insurance, for outpatient charges, there are concerns about frauds but a couple of players with technology solutions have already filed their applications on this subject.

Technology will be the enabler that allows reach to thousands of people at a point in time as opposed to the traditional agency network that only allows reach of two-four persons in a day. While we still need the agency network and some of the other traditional channels, we are nudging them to go down the technology route. Standalone digital players are now coming in, niche players have started filing applications, and as we go along, there will be a larger number of players backed by technology and end-to-end solutions. I expect them to come up with solutions that will compete with each other in terms of turnaround time for settlement of claims. Thus, technology would be the biggest disruptor and enabler in terms of customer satisfaction and reaching out to millions of people.

The key focus areas for us are as follows: (i) every life in this country must be insured – nobody should die without life insurance; technology will be crucial to achieve this goal, (ii) property insurance – people at the bottom of the pyramid (lower income segments and those who are calamity-prone) should be able afford property insurance cover, (iii) micro, small and medium-sized enterprises should be insured because there is a lot of potential in covering business risks and hopefully we will come up with solutions for this.

We constantly engage with the industry and have institutionalised bi-monthly meetings with insurance companies and other stakeholders, and open houses on the 15 th of every month. This is how we are looking to take care of disruptions.

Balancing public sector and private sector insurance

I think the market is so huge, innovations are so large and the scope is so broad that there is plenty of room for both public and private insurance to operate within the system. At IRDAI, we are completely agnostic about whether insurance offered is public or private. We want robust players with more capital so that they can underwrite more. The IRDAI has made the entry of new players absolutely seamless now – in a span of two Board meetings we are nudging them to come up with their final submission so that we can hand them a registration certificate to operate. In the past one and a half months, we have had more than twelve new applicants who want to start their own entity for insurance in India.

Financial independence of IRDAI

Financially, we are self-reliant. We do not need as much money to operate, but we put to good use whatever we have.

Risk profiles of individual entities

The risk-based supervisory framework and the risk-based capital regime are going to be game changers.

Balancing the commercial/market-related aspects of regulation with the more procedural aspects

The IRDAI is comfortable in balancing the expectations of the government, the public, the industry, the intermediaries and the professional organisations that are operating in this ecosystem. I view the regulator’s role here as one of a big facilitator apart from its supervisory role Some issues on which I plan to engage further with the industry includes how to facilitate growth of the sector by 15-20% CAGR or more, how to bring our insurance penetration closer to the world average in the next 4-5 years and then the G7 average. These are the aspirations we have at the IRDAI. Additionally, work that is underway includes putting in place more robust frameworks as far as prudential norms are concerned. The FSDC mechanism is another important platform for us to sort out a lot of issues which are inter- regulatory in nature. The insurance sector has tremendous potential, a huge market, and an increasing number of investors are looking to enter the sector. The policyholders will end up with a better deal as we go along, replete with more technology tools, better pricing, better underwriting, better claim servicing and processing.

Since the start of this calendar year, annual consumer price index (CPI) inflation has ruled not only above the Reserve Bank of India’s (RBI) target of 4%, but even its upper tolerance level of 6%, for every month from January to May. If we take the 38 months from April 2019 to May 2022 – roughly coinciding with the Narendra Modi-led government’s second term (Modi 2.0) – CPI inflation has exceeded the 4% target in as many as 32 months and even the 6% ceiling in 18 months. This has been seen by many as a failure on the part of the central bank to adhere to its inflation-targeting mandate, enshrined in law since June 2016 (https://bit.ly/3b1JJbZ and https://bit.ly/3OcrDCp).

The above “failure” is in contrast to the “success” achieved in the Modi government’s first term (Modi 1.0). During that period, roughly from April 2014 to March 2019, the 6% ceiling was breached only in 6 out of the 60 months. Moreover, CPI inflation was contained within 4% in 23 out of the 60 months. A far cry from the 6 out of 38 in Modi 2.0, with even those six being in the first six months from April to September 2019!

But the story isn’t just about overall retail inflation. During Modi 1.0, year-on-year general CPI inflation averaged 4.49%. It was even lower, at 3.52 per cent, for the consumer food price index (CFPI) inflation, with the latter ruling below the former in as many as 38 out of the 60 months. In other words, while inflation in general was benign, food inflation was even more so. That trend was visible particularly after September 2016, as can be seen from Chart 1.

It’s been quite the opposite in Modi 2.0. Overall CPI inflation has averaged 5.59% during these 38 months, 1.1 percentage points higher than in Modi 1.0. No less striking is CFPI inflation, which has averaged even higher, at 6.21% or almost 2.7 percentage points more than during Modi 1.0. In 18 out of the 38 months, food inflation has exceeded general CPI inflation, while also exhibiting greater volatility, as Chart 2 shows. For both the government and RBI, food inflation has been the bugbear – due to greater political sensitivity and less amenability to control through monetary policy tools such as repo interest rate and cash reserve ratio hikes.

Imported inflation

A major source of the resurgent food inflation has been global prices.

During the Modi 1.0 period, these were low: International agri-commodity prices actually collapsed from around late-2014. The UN Food and Agriculture Organization’s food price index (FPI; base year: 2014-2016=100) averaged 131.9 points in 2011, which was at the height of the previous commodity boom/super cycle. The index fell to 122.8 in 2012, 120.1 in 2013 and 115 in 2014, before plummeting to an average of 93 and 91.9 points in the subsequent two years. The average annual FPI inflation during April 2014 to March 2019 was minus 3.95%, below even the corresponding Indian CFPI rate of 3.52%.

Again, it’s been the other way round in Modi 2.0, where global FPI inflation has averaged 13.42%, higher than the 6.21% retail food inflation in India over the 38 months from April 2019 to May 2022. Simply put, while low international agri-commodity prices helped control domestic food inflation during Modi 1.0 – even translating into depressed crop realizations for farmers – their soaring from around October 2020 has produced the opposite effect. The FPI crashed to a four-year-low of 91.1 points in May 2020 when most countries had severe lockdown restrictions in place. But with the post-Covid demand recovery and easing of lockdowns, the index rose to 135.6 points by January 2022. The Russian invasion of Ukraine on February 24 took it to an all-time-high of 159.7 points in March, from where it has marginally fallen to 157.4 in May.

The transmission of international prices to domestic inflation in India is best illustrated by edible oils. During the Modi 1.0 period, average year-on-year inflation in the global FPI for ‘vegetable oils’ was minus 5.79%, while at 2.89% for the CPI in ‘oils and fats’. But in Modi 2.0, the former has averaged 33.31% and the latter 15.5%. Charts 3(a) and 3(b) plot the month-wise FPI and CPI inflation rates in edible oils for both periods. The correlation coefficient for international and domestic inflation is positive for edible oils: 0.33 in Modi 1.0 and 0.85 in Modi 2.0. Indian consumers benefitted from very low (almost flat) inflation during 2014 to much of 2020, whether in palm, soybean, sunflower, mustard and groundnut oil or vanaspati (hydrogenated vegetable oil). But as global prices of vegetable fats skyrocketed – for reasons we shall detail in the next section – consumers experienced sudden and sharp inflation in this commodity (https://bit.ly/3tBalqX).

There’s no such correlation, though, when it comes to cereals. Average annual inflation was low both for CPI in ‘cereals and products’ and FPI in ‘cereals’ – at 3.38% and minus 3.32%, respectively – during the Modi 1.0 period. In Modi 2.0, India’s CPI cereal inflation averaged even lower, at 2.6%. This was despite the average year-on-year global cereal FPI inflation shooting up to 12.81% during this 38-month period. Unlike with edible oils, the correlation coefficient for international and domestic inflation has been weak and negative in cereals – at minus 0.017 during Modi 1.0 and minus 0.40 during Modi 2.0. The reason for it has to do with government’s minimum support price (MSP)-based procurement and stocking of wheat and rice for channeling through the public distribution system (PDS). Maintaining more than adequate stocks in the Central pool, both for the PDS and open market operations, has effectively insulated Indian cereal prices from the vicissitudes of the world market. The PDS prevented inflation from being imported into India during Modi 2.0, just as MSP procurement ensured no cereal deflation during Modi 1.0.

We have found similar results for sugar and dairy. As the table below shows, average CPI inflation has fallen for both during Modi 2.0 compared to that in Modi 1.0, even while rising significantly for the global sugar and dairy FPIs.

Sugar and Milk inflation: Domestic vs Global
(% average year-on-year) 

Low international sugar prices weighed heavily on realizations for domestic mills and, in turn, their ability to pay cane growers during a greater part of the Modi 1.0 period. But in Modi 2.0, high global prices helped Indian mills to export record quantities. At the same time, production being in excess of
domestic consumption requirements – which was the case for rice and wheat as well – ensured little CPI inflation in sugar. Production self-sufficiency, coupled with established systems of procurement and marketing by cooperatives and organized private dairies, has resulted in no imported inflation for milk and milk products either. The correlation coefficient between international and domestic prices has been negative and weak for sugar, dairy and cereals, while positive and strong in edible oils during Modi 2.0. Inflation from import dependence and the resultant transmission of international prices has been a factor for pulses too. Average CPI inflation in pulses was only 4.29% in Modi 1.0. It has more than doubled to 10.31% during Modi 2.0. Pulses imports peaked during 2015-16 to 2017-18, averaging over 6 million tonnes (mt). In the last three years, imports have more than halved to about 2.7 mt, but they are still significant relative to domestic production of 24-25 mt.

Structural versus idiosyncratic inflation

Food inflation isn’t new to India. Average annual inflation in the wholesale price index for ‘food articles’ was 10.21% during the previous UPA regime from 2005-06 to 2013-14. That inflation, though, was structural and demand-led, driven by growth in incomes, including of poor and lower-middle class households. Rising real incomes, as a previous note in this series has shown (https://bit.ly/3nheUTP), also contributed to significant dietary diversification, with per capita consumption of foods rich in proteins, vitamins and minerals (milk, egg, meat, fruits and vegetables) going up and that of carbohydrates/calories-based foods (cereals and sugar) declining. A byproduct of it was what the former RBI deputy governor Subir Gokarn termed “protein inflation”. In a late-2010 paper (https://bit.ly/3N4vEb0), he wrote how “increasing demand for proteins appears to be an inevitable consequence of rising affluence”, while warning of persistent demand-supply balances that would make pulses, milk, eggs, fish and meat relatively costlier down the line.

The current food inflation, on the other hand, is more idiosyncratic and supply shock-driven, rather than structural. We have already noted that retail inflation in milk and milk products has fallen during the Modi 2.0 period. Annual growth in milk sales by cooperatives, too, has averaged just over 3 per cent from 2014-15 to 2020-21 (National Dairy Development Board annual reports). Low price increase and sales growth in milk – a product with very high income elasticity of demand in India (https://bit.ly/3HyTlHA) – is indicative of no major “structural” drivers and the return of food inflation being attributable mainly to “supply-side” factors.

The last two years and more have witnessed four kinds of supply shocks – from weather, export controls, pandemic and war.

Ukraine, even before the war, had drought in 2020-21 (https://bit.ly/3bfzYaw) that reduced its exports of sunflower oil, corn and wheat to 5.27 mt, 23.86 mt and 16.85 mt, respectively, from the previous year’s levels of 6.69 mt, 28.93 mt and 21.02 mt. Russia also faced dry and hot weather issues, cutting its sunflower oil exports from 3.83 mt in 2019-20 to 3.25 mt in 2020-21 (US Department of Agriculture, Grain and Oilseeds World Markets and Trade reports). Their smaller sunflower harvests started pushing up global vegetable oil prices from around September 2020. This was followed by the Russia government, in December 2020, issuing a series of decrees restricting exports of wheat, corn, sunflower and rape seeds, barley and rye in order to control domestic food inflation (https://bit.ly/3tJ8Uqp).

The pandemic’s impact was felt in Malaysia’s oil palm plantations, which, until April 2020, employed some 337,000 migrant labourers mostly from Indonesia and Bangladesh. Thousands of them flew home, as Malaysia closed its borders and stopped issuing new work permits to prevent the spread of Covid-19. With its plantations operating with about 75,000 fewer workers than needed (https://reut.rs/3n16Aak), Malaysia’s palm oil output fell to 17.85 mt in 2020-21, from 19.26 mt and 20.80 mt in the preceding two years (USDA). The war was the final straw. Supply disruptions from Ukraine and Russia triggered a wave of food export restrictions by countries concerned about inflation faced by their own populations. The most prominent example was Indonesia. The world’s largest palm oil producer and exporter, during February-March 2022, levied price controls, domestic sale obligations on exporters and finally tariffs on shipments (https://bit.ly/3y1SOur). For a brief period, between April 28 and May 23, it even slapped an outright ban on exports. Exacerbating these was drought in South America, with the USDA estimating the combined soybean production of Brazil, Argentina and Paraguay in 2021-22 to have fallen by 11.25% over the previous year.

India is probably one of the few countries that did not face any adverse weather events, at least in 2020-21. Bumper crops – both kharif (harvested mainly over October-December) and rabi (April-June) – led to record government purchases of rice (60.17 mt) and wheat (43.34 mt). Huge carryover stocks, in turn, enabled unprecedented quantities (55.06 mt rice and 50.55 mt wheat) to be sold under various welfare schemes in 2021-22 (financial year from April to March). The PDS turned out to be a savior – indeed, the only effective social safety net – during the pandemic, with the poorest states benefiting the most from the substantially stepped-up offtake of free/near-free grains (https://bit.ly/3n5nfcN). What’s interesting is that India in 2021-22 also exported record quantities of both rice (21.21 mt) and wheat (7.24 mt).

However, 2021-22 (the agricultural year from July to June) has been different. Rainfall during the southwest monsoon season (June-September) was normal on the whole. But the precipitation was irregular. Surplus rains in June, prompting brisk kharif sowings by farmers, were followed by a long dry spell from the second week of July till the third week of August. The period thereafter was marked by excess rainfall extending to all the subsequent five months till January. The kharif crop, thus, suffered first from moisture stress during the vegetative growth stage and, then, inundation at harvesting time. It did not stop there. Excess rains in January also affected yields of the rabi mustard that was in late-flowering stage. The culmination of these black swan (climate change?) events was the sudden spike in temperatures from mid-March, which took a toll of the wheat crop just when was in the final grain-filling stage (https://bit.ly/3tKqSbS). If March was bad for wheat, January was similarly so for mustard.

Conclusion

There are three broad takeaways from our analysis of the return of food inflation in India.

The first is the inflation being partly imported. The same factor – international prices – that kept food inflation low during Modi 1.0 has pushed it up in Modi 2.0. At the same time, this imported inflation has been disproportionately felt in edible oils and pulses. It hasn’t been so much in cereals, sugar and milk – commodities where India is self-sufficient and even in a position to export when global prices are high.

The second is the role of domestic supply shocks. These were, by and large, absent in 2020-21. But that wasn’t the case in 2021-22. While the National Statistical Office’s data shows the agriculture sector’s growth rate at 3%, on top of 3.3% in 2020-21, we have reasons to be skeptical. For, 2021-22 was a story
not only of the heat wave in March, but also of unseasonal rains from September to January. Both the kharif and rabi crops were impacted as a result. The double whammy of unseasonal rains and early summer also hit the production of mangoes and lemons, by causing flower drops and not allowing adequate time for fruit formation and growth. Had the intensity of the damage to wheat yields from the heat wave been properly understood and acknowledged, the government would in all probability have declared a bonus over and above the MSP. By not doing that, it left the field open for private millers and traders. They bought bulk of the wheat from farmers, paying slightly more, sensing both crop shortage and opportunities for exports. As the government’s own procurement plunged from 43.34 mt to under 19 mt in the current marketing season, it ended up doing what Indonesia and Russia had earlier done: Ban exports. This wouldn’t have been necessary if official procurement had even touched 25 mt.

The final point is to re-emphasize that there is nothing “structural” about the current inflation. Supply shocks, by their very nature, are temporary. While they may correct sooner than we would imagine, the more enduring problem of Indian agriculture – stalled dietary and cropping diversification, courtesy of weak income and demand growth – will remain and come to the fore.

This note has been authored by Samridhi Agarwal and Harish Damodaran.

Find all previous notes as part of the series here:

• Can rural play “savior” again? Agricultural seasons and COVID-19 waves by Mekhala Krishnamurthy and Harish Damodaran 
• How ‘food’ has become the real social safety net in pandemic by Harish Damodaran 
• Where is food inflation headed? by Harish Damodaran 
• Has MGNREGS Helped the Rural Economy in 2021? by Yamini Aiyar, Avani Kapur and Harish Damodaran 
• Employment U-turn: Rural India is India’s main employer by Harish Damodaran and Yamini Aiyar 
• Carbohydrates to proteins and back: How dietary and cropping diversification seems to have gone into reverse by Harish Damodaran, Mekhala Krishnamurthy and Samridhi Agarwal
• Agricultural Households and Farming Income: An initial analysis of variations in income from farming and other sources among agricultural households in India by Harish Damodaran, Mekhala Krishnamurthy and Samridhi Agarwal 
• Mapping India’s Livestock Economy by Samridhi Agarwal and Harish Damodaran
• The Future of MSP by Harish Damodaran 
• Unlocking the Potential of Ganna Pradesh by Harish Damodaran

Group yoga at Lodi Gardens (Photo credit: Mukta Naik)

On a recent weekend visit to Lodi Gardens, I was greeted by the delightful sight of a few dozen people engrossed in a collective yoga practice on the large lawn in front of the Bada Gumbad. Instantly, it reminded me of the group dancing I saw in public squares during trips to southeast Asian cities like Hanoi and Shenzhen. The contexts might have been different, but the sheer joie de vivre of being part of that experience, at that place and time, is exactly the same.

As Indians emerge from the loneliness and isolation of the pandemic, public places in our cities are teeming with people seeking to reconnect, in a noisy, messy, happy celebration of communal life. This reconnection with humanity is the very essence of cities, where ideas and aspirations, skills and opportunities serendipitously collide and coalesce to create new ventures, forge partnerships and add value. And while transactional encounters dominate our use of public space, the urban Indian is increasingly seeking spaces of leisure, introspection and even spirituality, right in the midst of the busy city.

Why then is the practice of yoga, increasingly an intrinsic part of the urban Indian’s wellness and self-care routine, confined to the home, the fitness studio and the occasional private garden? Why does the scene that greeted me in Lodi Gardens that Sunday morning not replicate across the city, country, and in every public space?

Perhaps we can re-imagine urban public spaces as opportunities for a shared and inclusive practice of wellness, where yoga is a catalyst to enable meaningful social interactions and spiritual interchange. To achieve the democratized transformation of public spaces at city and neighbourhood scales to trigger a wellness revolution, we might need, not just the critical elements of land and infrastructure, but also an imagination of activities and processes of interaction.

These are questions for urbanists to ponder, this International Yoga Day, at a time when cities are expected to propel the nation towards its ambitions of inclusive and sustainable economic growth. In addition to smart, inclusive and sustainable, a healthy city is just as vital for our collective future.

Marie-Helene Zerah is a Senior Visiting Fellow at CPR’s Initiative on Cities, Economy & Society, where she is focusing on the role of small towns in India in the urbanisation process and urban energy governance. She is a Senior Researcher at the Institute of Research for Development, Paris. In this edition of CPR Faculty Speak, she talks about her work and interests at CPR, why they matter, what impact she hopes to achieve and more.

Tell us about your research work and interests at CPR.

I have been associated with CPR since 2010 when we launched a monthly urban workshop series with my colleague, Partha Mukhopadhyay. From then on, my work has focused on the role of small towns in the urbanisation process. I was the co-coordinator of a research project titled, Subaltern Urbanisation in India, that aimed to make the diversity of urbanisation pathways visible beyond metropolitan cities. This desire to look at smaller urban settlements, including urbanising villages, came from a need to move beyond big towns, in particular Delhi and Mumbai, where I had conducted research for many years. I felt there is much more to the representation of the urban in India.

Why do these issues interest you? 

I started my research looking at water access in Delhi and then moved on to governance issues related to other infrastructure. I have also been interested in the relationship between urban governance, democracy and the right to the city. My reading of urban India has revolved around a range of topics- for instance the role of bureaucrats in urban governance, the emergence of resident welfare associations, the unequal access to basic services in slums etc. In fact, I have published in French (and hope to work on an updated English version) a book titled, How India Urbanizes, in order to bring all these strands of research together. To put it simply, I am trying to develop a comparative approach to understand the complex and diverse nature of Indian development and raise questions about its future possible paths.

How have these issues evolved in the country and globally over the years?

My key focus is to understand why, in the context of sustained economic growth, access to basic services is not generalised to include all urban citizens in India. Changes are not rapid enough and I am trying to make sense of the various factors that prevent faster improvement. I think the priority status given to large metropolitan areas, the emergence of urban regimes favouring real estate speculation as well as megaprojects have overlooked the needs of many poor settlements and far-away urban places. Additionally, the commodification of basic amenities and the push for public modernisation have increased the heterogeneity of socio-spatial arrangements in terms of access to urban services, and thereby access to the city. Finally, the fragmentation of public action reflects the multiple social divisions, which in turn foster the clientelistic dimensions of a vibrant democracy. All these factors combine to create a differentiated citizenship, which makes it difficult to build a shared urban future.

What impact do you aim to achieve through your research?

As an academic, I would like to contribute to the “Southern turn” in urban studies. I think our collective work on Subaltern Urbanisation did achieve this by bringing to the fore the urbanisation of the rural in emerging countries. India will have the highest contribution to future world urbanisation and by 2050 the number of Indian urban citizens is estimated to reach 800 million. The stakes and the challenges are high, be it social, environmental or political. I would like my work to bring a nuanced understanding of these issues within policy circles.

What does a typical day look like for you at CPR? 

I am often one of the first to arrive in the office. I usually start with checking my emails and planning my day. I try to keep my mornings for writing and my afternoon for meetings. However, in the last few years, my responsibilities have increased with the coordination of a team on Smart Cities and institutional tasks at my home institution (the French National Institute for Sustainable Development, IRD).

What are you currently working on and why is it important?

I am currently working on a project on Smart Cities governance in three Indian states (Madhya Pradesh, Punjab and Karnataka). We are trying to analyse how representations around Smart Cities perform shifts in power relationships among scales of government, consultants and private companies. Many people have criticised the smart city rhetoric and, indeed, there is much to say about it. However, I am convinced that once the “100 Indian Smart Cities” programme will end, the changes brought about by digital solutions and the push for data-driven urbanism will remain and strongly impact both the urban fabric and city governance.

To know more about Marie-Helene Zerah’s work, click here.

 

There is no doubt that Russia’s military invasion of Ukraine will have ramifications far beyond their own borders or even Europe’s. Save for immediate economic shocks owing to Western sanctions on Russia, there is little sense of what medium-to-long term consequences President Vladimir Putin’s actions will have on various regional theatres. Yet, some preliminary assessments and forecasts may be made based on pre-existing patterns and networks of interest.

For India, the Russia-Ukraine crisis complicates an already-complex geopolitical environment. Most obviously, it puts New Delhi in an awkward midpoint position between Russia – a longstanding politico-military legacy partner – and the West – a rising partner in an increasingly multipolar context. It has also generated renewed interest in what India’s nonalignment policy, later repackaged as ‘strategic autonomy’, really means.

Beyond the broader normative debates, it is crucial to understand how the crisis can shape specific verticals of Indian foreign policy. Of these, India’s Indo-Pacific strategy is perhaps the most exposed to potential adversities. This is because of the dense convergence of various geopolitical interests in this region, which the crisis will inevitably mould in one way or another. For India, there is both trouble and opportunity in the Indo-Pacific horizon, depending on how agile or remiss its diplomacy is in the years to come.

Complications for India

So far, India’s Indo-Pacific push has been driven by a convergence of a host of favourable factors, including an appetite amongst Southeast and East Asian powers to strengthen relations with India and renewed pivoting by the US and EU into the region to balance a rapidly rising China.

But, as a “nonaligned” middle power that has warm relations with Russia and also an active border dispute with China, it does not have a geopolitical carte blanche in the Asia-Pacific. India’s Indo-Pacific push was always tempered by concerns of a Chinese counter-push; an unpredictable relationship with the West; and to a lesser degree, Russian apprehensions about a growing Western presence in the region. With rising concerns about a democratic backslide under Prime Minister Narendra Modi, India’s commitment to liberal international values – the cornerstone of its partnership with the transatlantic powers and their regional allies – is also coming under growing scrutiny.

The Russia-Ukraine crisis complicates these concerns.

First, Russia’s aggression against Ukraine, driven by a mix of geopolitical realism and political irredentism, could set an actionable precedent for aspirational big powers elsewhere. For instance, China could appropriate it to rationalise its own expansionism in the Indo-Pacific by framing it as a direct response to Western expansionism. This is even more so given that both Putin and Xi Jinping are leaders with strong revanchist-nationalist tendencies who want to leave behind a glowing legacy. Chatter around a possible replication of Russian aggression by the Chinese in Taiwan is already ringing loud in foreign policy and defence circles. Fears about China using the crisis to flex its muscles in the South China Sea (SCS) also loom large over concerned heads. The fact that following Russia’s invasion, Beijing announced an increase in its defence budget by 7.1%, announced military drills in the Gulf of Tonkin, and issued a navigational warning in an area overlapping with Vietnam’s Exclusive Economic Zone (EEZ), haven’t helped.

Earlier in March, the Chinese embassy in Manila dismissed speculations that Beijing would exploit the crisis to “bully smaller countries” in the SCS. However, Xi could definitely use this moment to shift the needle, even if marginally. Recently, Chinese Foreign Minister, Wang Yi, said that the “real goal of the Indo-Pacific strategy is to establish an Indo-Pacific version of NATO.” This wasn’t the first time Yi was comparing the Indo-Pacific initiative with the transatlantic security alliance. However, this time, the narrative is being pushed by Beijing with greater vigour – through both official statements and “unofficial” channels, such as state-controlled media and pro-Party academics.

In a recent interview with Global Times, Zheng Yongnian, Founding Director of the Advanced Institute of Global and Contemporary China Studies at the Chinese University of Hong Kong, Shenzhen, argued that “the prototype of an ‘Asian NATO’ has already taken shape” through the AUKUS, Quad, Five Eyes, and the US’ growing relations with Vietnam and Singapore.

Last year, India’s foreign minister, Dr S Jaishankar, had pushed back against the use of the term “Asian NATO.” But, Beijing has only doubled down on this under the shadow of the Russia-Ukraine crisis. For India, there is a deeper message in this – China may not put its neck out on supporting Russia, but it is closely watching the invasion and the West’s response, picking up critical hints and lessons on the way. These could ultimately help Beijing sharpen its own Asia-Pacific strategy. The Chinese are unlikely to undertake any major military action in the region in the near future – not even against Taiwan, as some scholars have convincingly argued. But, Putin’s Ukraine move sets a cautionary context for India and its Indo-Pacific partners.

Second, the Russia-Ukraine crisis throws up a normative challenge for India over the Indo-Pacific. When Prime Minister Narendra Modi laid out India’s vision for the Indo-Pacific at the Shangri-la Dialogue in 2018, he talked about forging a “free, open, inclusive region” built around a “rules-based order”, which upholds “​​sovereignty and territorial integrity, as well as equality of all nations, irrespective of size and strength.” The Quad has packaged itself on similar terms. However, when India refuses to explicitly condemn a large power unilaterally invading a much smaller neighbour, the irony of India’s liberal, normative persuasion in the Indo-Pacific becomes uncomfortably conspicuous. Add to this the dubious optics of a government that many in the West see as illiberal and authoritarian choosing to stay neutral on Putin’s belligerence.

Third, the raft of fresh Western sanctions on Russia is bound to hit its defence export markets, including in the IPR. As one Australian academic has argued, “with the war dragging on amid mounting human costs, Russia’s regional defence clients [in the Indo-Pacific], perhaps with the exception of Myanmar, may find it difficult to ignore Russia’s aggression — eventually forcing them to rethink their strategic engagement with Moscow.” A shrinking Russian presence as a prime arms supplier will most likely be replaced by a growing Chinese role in this domain, which would in turn strengthen Beijing’s geopolitical influence in the region. As per reports, China is already making its moves. Even in Myanmar’s case, as the recent meeting of the junta foreign minister with his Chinese counterpart in Huangshan shows, China is moving closer to the junta as Russian defence supply timelines hit a rough patch. A stronger China in the IPR, needless to say, isn’t good news for India – especially given that its own defence export capabilities remain in the bottom-tier.

Adapting to new realities

India is likely to weather the headwinds for now. There are two reasons behind this – the deliberate tweaking of its official narrative on the Russia-Ukraine crisis; and its growing weight as an Indo-Pacific power.

First, as Russia’s invasion progressed, New Delhi dropped the phrase “legitimate security interests of all parties” from its UN statements and began reiterating the importance of the UN Charter, sovereignty and territorial integrity. This was designed to anchor its relationship with the West to the shore, and there are early signs that the West and its regional allies are responding positively.

While US President Joe Biden recently talked about India’s “somewhat shaky” position on the crisis, a senior official from his administration, Victoria Nuland, later noted the “evolution” in the Indian position and the US’ willingness to work with New Delhi. This was followed by a highly-publicised 2+2 meeting between both sides, during which they mutually agreed to “promote a resilient, rules-based international order that safeguards sovereignty and territorial integrity, upholds democratic values, and promotes peace and prosperity for all.” Earlier, the Australian High Commissioner to India said, in very clear terms, that “the Quad countries have accepted India’s position.”

Second, the US, EU, Germany, France and Australia have all identified India as an indispensable bilateral and multilateral partner in their official Indo-Pacific strategy documents. For instance, the US strategy identifies India as a “​​like-minded partner and leader in South Asia and the Indian Ocean, active in and connected to Southeast Asia, a driving force of the Quad and other regional fora, and an engine for regional growth and development.” These were strongly reiterated in the recent India-US 2+2 meeting, following which the White House press secretary said that for President Biden, ties with India are “one of the most important in the world”.

The German “policy guidelines” predict that India “could become” the fourth largest economy after the US, Japan and China “in a few years from now”, and thus will continue to be a crucial Indo-Pacific power. The French strategy paper identifies a range of areas to work with India within the Indo-Pacific ambit – including defence, civil nuclear power, blue economy and HA/DR. The EU strategy identifies India as a primary Indo-Pacific partner for collaboration in the domains of trade and digital cooperation on emerging technologies, in addition to defence cooperation – all of which took priority during the recent visit of European Commission President, Ursula van der Leyen, to India.

In short, the West very much needs rising middle powers with direct stakes in the region, like India and Japan, to sustain its Indo-Pacific pivot. For New Delhi, this is an effective insurance against volatility triggered by moments of global crises such as the current one.

Avenues for progress

It would be a mistake to believe that the Russia-Ukraine crisis will have a linear effect on India’s Indo-Pacific push. It could both close and create avenues for India.

Russian actions are bound to stiffen the competition between the US, China and Russia in the Indo-Pacific. As its credibility and capacity to deliver weapons dwindle because of sanctions, Moscow will expand its attempt to earn the goodwill of ASEAN countries. China, as already explained, could posture more aggressively. In response, the US will double down on its outreach to the region, which would, in turn, sharpen the Chinese reaction. The net outcome would be a much fiercer big power jostle in the region. This is a situation that smaller ASEAN powers don’t want to get caught in.

Consequently, middle powers like India could now find greater space to mediate the geopolitical environment in the Indo-Pacific and provide alternative foreign policy pathways. While the return of big power politics might seem inevitable to many, the world is already too deep into its moment of multipolarity for that to happen anytime soon. Even the big powers themselves cannot ignore the importance of geopolitical decentralisation. Further, the recent security pact that China inked with the Solomon Islands, which permits Beijing to deploy boots on the island, shows that the West cannot ignore the diverse interests of small nations in the IPR if it wants to deepen its footprint and balance a rising China.

India needs to capitalise on this moment in a meaningful way. The best way to do that is to strengthen its horizontal partnerships with ASEAN and Pacific island countries in bilateral, minilateral and multilateral formats. For India, there really is no substitute for constructive engagement that is premised on facilitating people-centric, bottom-up development that targets social and economic sectors left out by large-scale Chinese projects. Expanding its existing Quick Impact Projects (QIPs) and High Impact Development Projects (HADPs) in Myanmar and other Mekong region countries into other countries in ASEAN and beyond is a good idea.

Further, deepening collaboration with other regional powers who already share regional complementarities with India, like Japan and Australia, could be a force multiplier in these initiatives. For instance, India needs to restart the Asia-Africa Growth Corridor (AAGC) initiative with Japan and potentially replicate the model in Southeast Asia. India also needs to internally encourage the Quad to expedite its supply chain resilience and COVID-19 vaccine initiatives.

Indian presence in the ASEAN region remains way less controversial and divisive than China’s. But, New Delhi is infamous for its lack of delivery capacity. This needs to change if India wants to position itself as an effective middle power in the region at a time of great geopolitical unpredictability. India, for now, would also need to resist the temptation to join security-centric collectives like the AUKUS. Doing so could strengthen the Chinese argument on the so-called ‘Asian NATO’ and also alienate ASEAN powers who remain wary of extra-regional security formations. That the Quad has slowly veered away from positioning itself as a security to a non-security arrangement is a positive development in this regard.

In all, India needs to keep its ears to the ground, as the Russia-Ukraine crisis unfolds. The Indo-Pacific is a high-stakes region and New Delhi has already made significant commitments to the concept. It cannot allow an invasion thousands of miles away to rock the boat at this crucial hour.