#298 Roadblocks and Friction
The Terrorist Attack in Kashmir, Caste Census, and China's Response to American Tariffs
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India Policy Watch: Fasten Your Seatbelts
Insights on current policy issues in India
—RSJ
Once again, the news cycle went into overdrive during the short break this newsletter took. We expected Trump to take a breather after all the chaos he set in motion, and things to slow down in India as the mercury rose and IPL took centre stage. Things didn’t turn out that way.
On April 22, in a deadly terror attack, 26 tourists were killed at the popular tourist destination of Pahalgam in Kashmir. Tourism is the mainstay of Kashmir's economy, and targeting tourists in such a specific manner isn’t usual. That it happened right at the start of the tourist season and during J.D. Vance’s visit to India to strike a trade deal indicates the intent behind the attack. The idea is to revive the old fears of India being an unsafe destination for investments because of its volatile neighbourhood and test the resolve of this government to strike back at Pakistan-based terror groups after a tragedy like this. The rhetoric after the attack from the Indian government has been quite strident, with imminent threats of attack and an official statement that a ‘free hand’ has been given to the armed forces to retaliate at a time and place of their choosing. At the heart of the retaliation conundrum, however, is the nuclear deterrent available to both India and Pakistan. What is the optimum level of retaliation that will satisfy three conditions: a) hurt the terror groups and their sympathisers in Pakistan in a meaningful way that will force them to reconsider any future strike; b) address both the elements of domestic demand for a response - one, that’s borne out of understandable anger about innocent lives lost and two, the anger stoked by the usual media and keyboard warriors of the establishment to gain a political edge domestically; and c) not raise the stakes so much that it breaches the nuclear threshold of Pakistan and forces it to act.
This is a difficult needle to thread. The last time the Indian government responded was to a suicide bomber attack that killed 46 CRPF personnel in Pulwama in 2019. This was a series of air strikes on specific targets across the line of control in Balakot, Pakistan. While there weren’t any confirmed obliterations of terrorists, the air strikes across the border were seen as a significant escalation in the nature of the response to a terror attack. Will that kind of strike or a ‘hot pursuit’ be sufficient this time to match the strong and resolute self-image of this government and the expectations that have been built up in public? I’m not sure. Some visible enhancement in the nature of response will have to be undertaken while staying within the nuclear threshold. This is a very difficult needle to thread, and it will be useful to wait a bit so as to bring down the domestic expectations that have been raised to a full-blown war. Regardless of the nature of the response, this is going to remain an overhang on the political economy for the rest of the year.
Then, on April 30, the cabinet committee of political affairs (CCPA) decided that a caste-based enumeration would be part of the upcoming census. In the run-up to the 2024 elections and thereafter, this has been a primary demand from the Congress-led UPA to put the NDA coalition on the back foot on the issue of social justice. The views emerging from various NDA constituents and their political ideologues over the past two years suggested some degree of discomfort in doing this. With this announcement, the NDA has gone on the offensive, claiming this is what they had in mind all along and blaming Congress and Nehru for scuttling this for over 70 years. The Congress, meanwhile, is claiming credit for forcing the government’s hand on this. In any case, now that everyone agrees to this, the census by itself won’t be a political issue of salience anymore. What comes out of the census and its repercussions will, however, be a political hot potato that will bring caste and social justice to the forefront of the political battlefield, like we had in the 1990s.
We discussed the caste-census in September 2024 (edition #271), where we had written about the inevitability of the government agreeing to do this after the RSS came out to support it following their Samanvay Baithak at Palakkad. So, this announcement came as no surprise to us. As we wrote:
“As you can see, it is going to be a tough balancing act but by giving its (RSS) broad assent to such an exercise, it has yielded to the agenda set by the opposition. It didn’t have a choice because the electoral risks of being against it were high. So, how will they play it from here? I can foresee a planned set of op-eds and public statements by ideologues and loose canons aligned to RSS-BJP to oppose the caste census so that the core base, largely upper caste, isn’t alienated. This two-track strategy will continue for some time to allow the core to vent for a while. But in some ways, the die is now cast. There will be a caste-based census. It is only a matter of time.”
That’s exactly how it turned out. Pranay and I agree that the demand for all kinds of reservations based on a proportionate population share will emerge once we have the data from this census. This is already seen in the states where similar surveys have been done, namely, Bihar, Telangana and Karnataka. Where Pranay and I disagree is whether there will be any good that will come out of getting such data. Pranay thinks the second and third-order effects of such an exercise will only be terrible, including the strengthening of caste identities and caste politics instead of their annihilation. I’m more sanguine about the positives of what can be done with the data, and that by itself, one shouldn’t assume such an enumeration will only be used for political ends by demanding more quotas.
The political implications of this will be huge. There will be further fragmentation of the electorate and more caste based parties that will emerge seeking their ‘fair’ share. This trend is already visible in the past decade, where a better visibility of the numerical strength and ease of mobilisation has meant the likes of Apna Dal (Kurmis), RLSP (Kushwahas), etc. have created a niche for themselves. This trend will accelerate because once the idea of proportionate share of resources gets entrenched (jitni aabadi, utni bhaagedari, utna haq), then any minor deviation from that proportion in allocation or ownership of any resource can be taken up as a political grievance. Such a patterned distribution of resources and wealth is impossible to achieve, especially in a large and diverse country like India. My optimistic take on this is that the data will lead to so many different claimants with their so-called legitimate grievances that, after a few years of jostling for a fair share all around, we will reach a general political equilibrium that won’t be too different from where we are today. Hopefully, the data can then be used for the cause of sound policymaking. The other expectation of the opposition is that such data in all its splendour will unravel the consolidation of the Hindu votes that the BJP has successfully managed in the past decade. This is quite possible, and it is a calculated risk taken by the party. My expectation is that there will be another round of big ideas to consolidate the Hindu vote to counter the inevitable centrifugal force of caste fragmentation that will emerge. A surprise announcement of the Uniform Civil Code is possibly a few quarters away.
Lastly, the Trump shenanigans on tariffs and global trade have continued, but the madness has abated a bit. I was looking at the lead indicators of the impact of the ‘liberation day’ announcement on global trade. So far, nothing much to report. Clearly, there was some front-loading of imports to the US in January and February in anticipation of tariffs, which means there hasn’t been any impact on inflation yet in the US. Shipping data suggests a 20-30 per cent fall in volumes to the US from China in April, but there seems to be some rerouting taking place because Southeast Asia to US numbers are a bit higher. The US economic data for April also held up, with job additions exceeding expectations and unemployment steady at 4.2 per cent. Much of the stock market losses after the April 2 announcement have been recouped. I sense that the underlying US economy was in good shape and resilient enough to take the initial impact of tariff madness, and much of it was down to the previous administration. Trump is, of course, taking the wrong lessons from this, as seen by his posts on Truth Social and his hounding of Jay Powell to cut rates. I expect a sharper trade slowdown in the coming weeks, with the US economy numbers getting weaker sooner than people expect. The USD continues to weaken against developed market currencies, and consequently, with the INR. This will remain a trend for the next year, putting further pressure on Indian exports. The full impact of tariffs and slowdown in global trade, dollar weakening, and the slowdown seen in the domestic economy will weigh on India’s growth next year. If you add the Pahalgam response, that’s inevitable and some sabre-rattling that will follow on both sides, it looks like India will have to navigate a few turbulent quarters ahead.
India Policy Watch: Making Sense of India’s Response Since April 22
Insights on current policy issues in India
—Pranay Kotasthane
It’s been nearly eleven days since the targeted killings of Hindu tourists in Pahalgam. The 2016 attack in Uri was met with a kinetic response after ten days, while the Balakot airstrikes happened twelve days after the Pulwama terrorist attack. Any kinetic response now would be predictable, and will have to confront an adversary anticipating it. Hence, the government signalled that the armed forces have complete operational freedom to decide on the “mode, targets, and timing” of India’s response. It means a kinetic response is likely but not imminent.
Incidentally, some of us at the Takshashila Institution had analysed India’s response to the Uri attacks in 2016. We labelled India’s surgical strikes as Operational Conventional Retaliation (OCR), distinct from two other possible responses: strategic restraint and engaging in sub-conventional warfare through proxies, just like Pakistan.
Back then, we analysed that to make an OCR effective, it should possess these characteristics:
It will be interesting to observe if an Indian response follows any of these characteristics. As of now, the delay suggests that the government has another strategy in mind.
In the meantime, India has used several non-kinetic responses over the last few days, the most significant of which was the decision to put the Indus Water Treaty in abeyance. By choosing this path, the Indian side signalled two things.
One, India would no longer entertain Pakistan’s favourite strategy of plausible deniability, which follows this trajectory: Pakistan seeks proof → India sends dossier → Pakistan demands a joint investigation → Key terrorists aren’t found → Matter is closed. Here on, finding the proof is Pakistan’s problem, not India’s. The Indian position is clear—all terrorism in Kashmir emanates and gets support from Pakistan.
The second signal India sent out is that an attack against Indian citizens would be met with a long-drawn, multi-domain response against Pakistani citizens, not just kinetic action against Pakistani terrorists and armed forces. The signalling will not have immediate material effects as India cannot divert water from the three west-flowing rivers without taking domestic considerations into account. Instead, the effect operates at a psychological level, given Pakistan’s chronic water stress, sub-national hydropolitics, and a near-complete dependence on the Indus water system. As RSJ says, fasten your seatbelts; there will be other developments on this front.
A final point: India’s implicit strategy over the last few years has been to ignore Pakistan. The External Affairs Minister made it a point not even to mention Pakistan by name in most public engagements. This strategy has largely been beneficial as it has provided the mind space for the Indian diplomatic corps to think about other areas: technology, the US, trade, and, of course, China.
But these terrorist attacks remind us that Pakistan’s trouble-making potential is immense. Unless the Pakistani military-jihadi complex is dismantled or degraded, it will continue to wreak havoc even as it self-destructs Pakistan further.
PS: The movie Lakshya got it right, when Sergeant Pritam Singh (played by Om Puri) cautions the main protagonist with these words: अगर पाकिस्तानी हारे, तो एक बार फिर लौट कर आता है। अगर जीत जाओ तो फ़ौरन लापरवाह ना हो जाना (If the Pakistani loses, he comes back again. Don’t drop your guard after winning). We must remain on guard.
Global Policy Watch: Understanding China’s Response to American Tariffs
Insights on global issues relevant to India
—Pranay Kotasthane
(A version of this post was published first on the NDTV website under the headline China’s Real Problem is at Home.)
On April 10, China’s National Film Administration declared imports of American films would be “moderately reduced” in response to the US government’s “abuse of tariffs”. This curious retaliation is just one of the several responses that China has unleashed since Trump’s April 2 tariffs. Not only did China raise tariffs on American goods, but it expanded the scope of the trade war. This post analyses China’s multi-domain, escalatory measures and assesses their impact.
China’s responses fall into four categories: a retaliatory tariff rate hike, restrictions on some exports to the US, coercing American companies, and rhetoric to garner external support.
First, consider the headline response on tariffs. In response to Trump’s tariffs in February and March, China began with a calibrated response, increasing tariffs on agricultural and energy products imported from the US. Then came the tit-for-tat increases in response to the April 2 tariffs. Beginning with a 34% tariff on all US goods announced on April 4, the tariff rate had reached 125% as of this writing.
Once the US increased tariffs on Chinese goods thrice in two months, taking the total to 54%, the Chinese leadership calculated that it had to escalate to de-escalate. But at each escalation stage, China kept its highest tariff rate lower than the US tariff rate, keeping the door open for negotiations.
However, the key point is that American goods exported to China in 2024 are almost one-third of China’s goods exported to the US. Thus, the impact of similar tariff rates will be higher on China’s producers than on American producers. Moreover, the Chinese economy is production-centric and not consumption-centric. For this reason, China opted to move the conflict to other domains where it believes it holds the aces.
Its second response was to apply export controls on alloys and ores of several rare-earth metals. These restrictions aren’t new; they merely expand the list of controlled metals. In December 2024, before Trump took office, China responded to Biden-era export controls on its semiconductor industry by strengthening export controls on gallium, germanium, antimony, and superhard materials.
While rare earth metal restrictions make a lot of news, they are unlikely to deter the US. Though critical for varied applications—from vacuum cleaners to fighter jets—these metals are required in minute quantities. The total value of rare-earth compounds and metals imported by the US last year was a meagre $170 million, meaning that even a fivefold increase in prices due to China’s restrictions can be absorbed by American firms. The US government also maintains a stockpile of some rare earth concentrates to manage short-term risks. In the long run, China’s consistent weaponisation of its rare-earth dominance will increase prices, making extraction and processing economically feasible elsewhere. Much like the US weaponisation of the financial system will likely undermine the dollar’s “exorbitant privilege”, China’s export restrictions will reduce its rare-earth dominance. Some cards lose their value permanently once they are played.
The third response involves targeting several American firms for varied reasons. The commerce ministry banned 11 companies from foreign investment and trade in China, because they provided military technical support to Taiwan. Another 16 US companies were put on the export control list, preventing the sale of dual-use items to them, because they had engaged in ‘activities that may endanger China's national security and interests’. Anti-dumping investigations on American Medical CT X-ray tubes, import suspensions from some American suppliers of poultry and sorghum, an anti-monopoly investigation on DuPont, and orders to airlines not to take further deliveries of Boeing jets comprise the wide range of actions that have been announced thus far.
The origin of this response precedes the tariff war. Some of these actions were likely considered in response to the Biden-era restrictions on China. Different state agencies eventually approved them once the green signal to escalate came through in response to the ‘Liberation Day’ tariffs. Among all the actions China has taken, this appears to be most damaging as US firms—including Tesla—heavily depend on their China plants. At the same time, these measures would belie the promise of policy consistency that pulls foreign companies towards China, accelerating the China+1 trend.
The final response is the rhetoric of China as the champion of free trade and the prime defender of the World Trade Organisation (WTO). China’s narrative is that other countries should recognise how China is fighting not for itself, but for the entire world. Since April 2, China has initiated dialogue with the EU, Vietnam, and Malaysia. In these talks, it has positioned itself as the rule follower in global trade. China also launched a social media propaganda campaign with lines such as “China won’t back down so the voices of the weak will be heard”.
Despite the charm offensive, few countries have joined China in raising tariffs, illustrating that countries are as circumspect of Chinese intentions as they are of Trump’s mercurial nature. Most developing countries are wary of Chinese goods flooding their domestic markets, and are unlikely to budge unless China allows firms from other countries greater access to its market.
These four responses suggest that China has several options, but each has drawbacks. That’s why China released a white paper on April 9, which strikes a conciliatory tone and makes the case for “equal-footed dialogue” to resolve differences between the US and China. While many memes have been made about Trump eagerly awaiting Xi’s phone call, de-escalating the trade war is vital for China’s economy. The ability to absorb pain due to trade wars is ultimately a function of the country’s GDP per capita. And because the US is five times richer than China, it can play this game longer.
The root cause of China’s problems is its anaemic domestic consumption. Until that improves, it will remain dependent on exporting its overcapacity, harming other countries' industrial capacity. However, governments are unwilling to give China’s overcapacity a free pass anymore. Thus, higher tariffs against China will stay even if this round of the US-China trade war is settled. Without an economic pivot, China’s troubles won’t go away.
HomeWork
Reading and listening recommendations on public policy matters
[Podcast] Listen to this Puliyabaazi with diplomat-historian TCA Raghavan on a fascinating slice of freedom struggle history. Lots of #TILs.
[Article] An article (with Tannmay Baid) in the Times of India arguing that China’s rare-earth export controls are a strategic folly, not a geopolitical masterstroke.
[Book] If you’re interested in Indian military history, War Elephants by Nossov and Dennis is perfect.
[Book] The Sovereign Lives of India and Pakistan by Atul Mishra has become all the more relevant.
[Paper] Water Politics in Pakistan: Internal and External Dynamics, by Rahul Lad and Ravindra Jaybhaye.
why is the Dollar weakening against all major currencies? I would expect that when you put up tariff barriers, your currency should become stronger rather than weaker. I might be wrong, but I think that's what happened when the US tariffed China in Trump's 1st term.