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01 May 2017 Editorial


1 MAY 2017 

Building holistic India-Sri Lanka ties

India must continue to engage Sri Lanka beyond mere transactional deals

Sri Lankan Prime Minister Ranil Wickremesinghe’s meeting with Prime Minister Narendra Modi in New Delhi last week, on his third visit to the capital since January 2015, is in keeping with the refreshed Indo-Lanka ties that followed the regime change in Colombo. Flagging off partnerships in a host of economic and development projects through a Memorandum of Understanding, the two Prime Ministers have set the stage for long-term collaboration in spheres ranging from energy and infrastructure to special economic zones. There are no surprises here, for India’s Sri Lanka policy, following the defeat of strongman Mahinda Rajapaksa, has been centred on economic cooperation and security concerns, and far less on political matters. In fact, the line ministries executing specific projects are playing a prominent role in taking bilateral negotiations forward. Preoccupied with an ever-growing Chinese presence in Sri Lanka, India has been channelling its energies towards countering it, especially focussing on Trincomalee. India and Sri Lanka have agreed to jointly revive a World War II era oil storage facility in the strategically located eastern port town and build infrastructure around it. Enhanced economic and development ties are welcome and crucial for the neighbouring countries, but they should not bypass robust engagement on traditional political concerns in the island nation, where scores of Tamils and Muslims in the north and east are yet to return to normal lives eight years after the civil war ended.

Hundreds of people have been protesting, voicing concern about the mysterious disappearance of their relatives and about their land still under military occupation. Frequently faced with political pressures from their rival parties, President Maithripala Sirisena and Mr. Wickremesinghe are only inching ahead in their promise to deliver a new constitution devolving a greater measure of political rights to all its citizens. As a long-time negotiator in Sri Lanka’s political question, India must continue to closely engage on these fronts and build a holistic relationship that transcends the mere transactional. Even as it has pledged $2.6 billion in development assistance to Sri Lanka, India should explore the potential for generating livelihoods in the war-battered northern economy where agriculture and fisheries, its key drivers, are facing a crisis. Resolving the long-standing Palk Bay conflict between fishermen of both countries is central to this, and New Delhi must address the valid concern of Sri Lankan Tamil fishermen about incursions from Tamil Nadu into Sri Lankan waters. Several factories in the north, destroyed or defunct during the war, await attention and investment. While New Delhi’s anxiety over Chinese presence might be justified, it should avoid using the China lens to view Sri Lanka, respecting the country’s autonomy to engage with any willing partner. The more India treats Sri Lanka as an equal partner, the stronger the relationship is likely to grow.



Mr. Trump’s tax cut 

The success of his plan will depend on its ability to boost American worker incomes

U.S. President Donald Trump’s tax plan, released as a brief one-page document this week, promises some bold reforms to rejuvenate America’s sluggish economy. Weak private investment spending has been at the heart of what is now dubbed the slowest U.S. economic recovery in the post-War era, which has been coupled with a serious slump in productivity. The plan does well in attempting to address basic structural problems that have held back the American private sector. However, its eventual success in reviving growth and productivity will depend on the extent to which its benefits trickle down from the balance sheets of big business to the real economy. The Trump administration has proposed steep cuts to the corporate tax rate (from 35% to just 15%), a significant reduction and simplification of the individual income tax, a doubling of standard tax deductions, and the scrapping of the wealth tax and the alternative minimum tax. Notably, the earlier proposal to impose a protectionist border adjustment tax has also been shelved, hopefully due to the administration’s realisation that trade tariffs don’t come with a zero cost on Americans. It is estimated that U.S. corporations have stacked a cash pile of more than $1.8 trillion overseas to avoid the corporate income tax. Mr. Trump hopes to push them to repatriate some of this cash stock after paying a minimal one-time tax.

Whether the likely inflow of capital will incentivise U.S. corporations to increase investments, or simply distribute the cash to shareholders through buybacks and dividends is an open question. In this context, another relevant issue is the administration’s own spending plans. The cut in the corporate tax alone is estimated to cost over $2 trillion, and overall the plan could lead to anywhere between $3 trillion and $7 trillion in lost revenue over the next 10 years. Whether the Trump administration will walk back on its initial promise to adopt a tax plan that is revenue and deficit neutral or cut down on spending to match lower revenues remains to be seen. Most recently, U.S. Treasury Secretary Steven Mnuchin argued that higher growth will help compensate for the revenue loss from tax cuts, suggesting a spending cut may not be on the cards. Mr. Trump’s bullish stance on infrastructure and military spending also suggests he is unlikely to reduce spending. This means that the real disposable income of Americans won’t receive any significant boost in the near term. Further, productivity improvements in the long run require improvements in general business freedom as well, not just tax cuts. Lastly, of course, Mr. Trump’s tax plan will require the approval of a Republican-dominated Congress that is filled with deficit hawks.

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