11th JANUARY 2019

A) Pull-out puzzle: on withdrawal of U.S. troops from Syria

As Turkey Rebuffs Its Plea To Protect Syrian Kurds, The U.S. Must Evaluate Its Next Move

President Donald Trump’s planned withdrawal of American troops from Syria ran into trouble this week as Turkish President Recep Tayyip Erdogan rebuffed National Security Adviser John Bolton’s suggestions for an orderly exit. After Mr. Trump announced the pull-out of about 2,000 troops from northeast Syria, Mr. Bolton had said the troops would leave the war-torn country after the Islamic State is beaten. He also said Kurds, U.S. allies in the fight against the IS, should be protected. This has ostensibly angered Turkey, which considers the Syrian Democratic Forces, the official military wing of Syrian Kurdistan, an offshoot of the Kurdistan Workers’ Party, deemed a terrorist group by Ankara and Washington. Mr. Erdogan, who initially welcomed Mr. Trump’s announcement of troops withdrawal, lashed out at Mr. Bolton for setting conditions for the pull-out. Tensions were so high that Mr. Erdogan refused to meet Mr. Bolton, who was in Turkey. The U.S. is now in a fix. Its President has announced the withdrawal. But it cannot just exit Syria without considering the existing geopolitical equations in the region. Kurds were pivotal in the war against the IS, and it is highly likely that Turkey could attack them as soon as the U.S. troops leave. Ankara sees an autonomous, militarily powerful Kurdistan on the Syrian side of the border as a threat to itsterritorial integrity.

Part of the problem is with the way Mr. Trump announced his decision to withdraw troops. He should have held talks with the stakeholders, including Turkey, Russia and Kurds, before taking a decision. Or he could have used his intent to pull out from Syria as a bargaining chip to extract concessions from other countries involved in the civil war. In the event, the abrupt announcement has become a concession to Turkey, which was hamstrung by U.S. presence in the Kurdish-populated region in pursuing its own military options. In practical terms, the U.S. has three options. One, it could go ahead with the unilateral pull-out irrespective of what Turkey does. This would leave the Kurds at the mercy of Mr. Erdogan and the Turkish troops. Two, Mr. Trump can walk back on his decision and continue to station troops in Syria, influencing, at least partially, the outcome of the civil war. This is unlikely given his aversion to keeping troops indefinitely in Syria (and other West Asian conflict zones). Three, the U.S. can stagger the withdrawal and pursue talks with Turkey, Russia and the Syrian government to reach an agreement to guarantee the protection of the Kurds and the defeat of the IS in Syria. Mr. Bolton’s Ankara trip may have failed to extract anyassurances from Mr. Erdogan, but Washington should continue to keep diplomatic channels open to ensure that the pull-out is done in an orderly fashion.


B) Caution ahead: on economic growth and election spending

Election-Season Temptations For Populist Spending Pose A Challenge To The Economy

The first advance estimate of gross domestic product (GDP) growth for 2018-19 released by the Central Statistics Office on Monday paints a mixed picture of the economy. The GDP growth rate for the full year is projected to be at 7.2%, which is significantly higher than the growth rate of 6.7% achieved last year. Many sectors of the economy are projected to do better than they did last year in the aftermath of the twin shocks of demonetisation and the rollout of the Goods and Services Tax. Sectors such as manufacturing and construction, for instance, are projected to grow at a healthy pace of 8.3% and 8.9%, respectively, both of which are higher than the growth rate of below 6% that each sector witnessed last year. Interestingly, the CSO’s growth estimate for 2018-19 appears conservative and is lower than the estimates made by institutions such as the Reserve Bank of India and the World Bank. A worrying trend in the economic data is the recent sequentialdeceleration in growth over consecutive quarters. According to the CSO, growth is likely to slow down considerably from the average of 7.6% recorded during the first half of the current fiscal year to around 6.8% in the second half. This sequential slowdown is expected to get reflected in the sectoral level data as well with sectors like manufacturing expected to slow down sharply in the second half of the year compared to the first half. On the brighter side, investment spending, which has ailed the economy for long, is expected to pick up finally. Gross fixed capital formation as a percentage of GDP is expected to reach 33%, the highest in three years.

One of the significant near-term risks to the economy is the general election that is expected to be held in May. Regime uncertainty associated with the election may put a halt to the nascent pick-up witnessed in investments as corporations might decide to hold back on big ticket investments until things clear up. A major risk in the medium to long term is the absence of meaningful structural reforms that are necessary to increase economic productivity combined with populist policies that eventually damage the economy. Another perennial risk is the over-dependence on imported oil, which makes growth heavily dependent on external events often beyond the control of the government. The projected slowdown in the second half of the fiscal despite the fall in global oil prices is a worrying sign. Ahead of the general election, the government may wish to help growth by boosting spending, but any such move would be ill-advised. With the fiscal deficit exceeding the Budget estimate by 15% in just the first eight months of the fiscal year, the government cannot crank up spending without severely affecting its finances, along with investor confidence in the economy.