governance, political economy, institutional development and economic regulation

Archive for the ‘Trade’ Category

Jaitley returns as FM

Jaitley returns

Arun Jaitley has returned to take charge as finance minister well before those who care for him would have advised. So what was the haste all about?

The uncharitable view would be that power abhors a vacuum. Politicians and film stars — no wonder the two often overlap — are most vulnerable to the prolonged loss of public face-time. What is most likely, though, is that he returned to his North Block corner office in order to cement his legacy as finance minister through the last and interim budget for 2019-20 of this government.

Chidambaram’s challenge to Jaitley

Chidambram 20142015 interim budget

This is a courageous move, very similar to his taking up Palaniappan Chidambaram’s implicit challenge in his interim and last budget in 2014-15 — a fiscal deficit target of 4.1 per cent of GDP — steeply reduced from 4.6 per cent in the previous year.

Mr Jaitley manfully accepted this unreal target and achieved it, noting in his budget speech: “One fails only when one stops trying”.

Fiscal stability has improved over Mr Jaitley’s tenure. The ambitious target for the current year is 3.3 per cent of GDP. Achieving this is crucially dependent on reduction in subsidies from two per cent of GDP in 2014-15 to 1.4 per cent this year, and a 0.6 per cent of GDP increase in tax collection (7.3 per cent in 2014-15 to 7.9 per cent in 2018-19).

The pressures for fiscal expansion come from the urgency to recapitalise publicly-owned banks; financing infrastructure via public funds in the absence of any appetite for India risk among foreign developers; the narrow base of unimpaired domestic infra developers and finally the compulsions of electoral politics.

Will Jaitley go for an endgame of Fiscal Deficit at 3 % of GDP

Other than achieving this year’s stretch fiscal deficit target, the finance minister needs to ponder on the target for 2018-19. Will he play the “Chidambaram card” and fix it at 3 per cent of GDP? Mr Chidambaram was pretty sure that he would not have to live within his interim budget. The jury is out on whether Mr Jaitley could reasonably assume a similar privilege. But reducing the fiscal deficit by a full percentage point of GDP below what he inherited would be in line with Mr Jaitley’s flair for challenges.

Chasing the UPA I go-go years of high growth

On growth — a sensitive issue for the BJP — Mr Jaitley has thrown a googly. He claimed recently that in trying to copy UPA-1 and chase high growth, both the banks and industry were destabilised through reckless lending and investment. This is a wise move.

It is unlikely that the growth record of UPA-1 (FY 2004-09) at an annual average of eight per cent plus would be achievable till after 2022. The IMF (August 2018 report) expects GDP growth to pick up over the next two years to 7.7 per cent. The “twin balance sheet problem” is likely to take three to five years to resolve, considering that “legal blustering” is a time-honoured mechanism for delaying a decision.

Public Sector Bank accountability and governance reform is key 

The Reserve Bank of India’s Financial Stability Report of June 2018 estimates that Gross Non-Performing Assets will worsen from 11.6 per cent in March 2018 to 12.2 per cent by March 2019. For the 11 worst-performing publicly-owned banks, the GNPAs will worsen from 21 per cent in March 2018 to 22.3 per cent by March 2019. For the six publicly-owned banks which the RBI has barred from fresh lending, the weighted average capital adequacy ratio will fall below the minimum required of nine per cent of loans.

The government has allocated Rs 2.1 trillion for bank recapitalisation, partly by increasing its own borrowings by 0.8 per cent of GDP. Additional borrowing of 0.5 per cent of GDP will be needed in the next fiscal year. Alternative schemes are being implemented like LIC, a publicly-owned insurance company, buying up the bankrupt IDBI Bank and infusing an additional Rs. 90 billion into it. This is mere fire-fighting. Unless bank lending and corporate governance become more market-friendly and transparent, investment levels will hover around the 30 per cent of GDP level — not enough for eight-plus per cent growth.

8 percent plus plus growth needs massive restructuring

Mr Jaitley’s is a nuanced claim. It implies that the growth during UPA-1 was not sustainable. The associated structural reforms to make the banks autonomous of government control; effective oversight of bank lending by the RBI and seeding economic liberalisation into field-level government regulations — labour laws, freedom from “inspector raj”, land regulation and transparent natural resources allocation, were all kicked down the road for successive governments — including the BJP, to manage.

Self goals are expensive

It is good optics to claim the present is hamstrung by the past misdeeds of others. But the BJP also scored some self-goals, most specifically demonetisation and the less than meticulously-planned implementation of Goods and Services Tax (GST)

Demonetisation was effective but cynical politics, which did not pass the “raj dharma” smell test. The GST snafu can be ascribed to the lack of expert skills or a tactical decision to trade off technical rigour against speed of implementation — a perfectly sensible trade-off in India’s fractious democracy.

India’s achilles heel- Twin deficit

India has a long history of carrying a twin deficit. The Fiscal Deficit, because government spends more than it earns annually and borrows, like the rest of us, who borrow to invest. But unlike most of us, it also borrows to fund consumption because we also run a Revenue Deficit. It is “effectively” small  at 0.7 per cent of GDP but typically we should run a revenue surplus to finance at least 20 per cent of our investment.

Our external account (net inflow and outflow of foreign exchange) is in a deficit. We have a Trade Deficit – imports exceed the export of goods and services.  60 per cent of the Trade Deficit is met from the surplus – ie. net inflow of expatriate remittances and foreign income versus outflow of interest on external debt.

What remains uncovered is the Current Account Deficit (CAD). This is met by net inflows of capital – FDI, portfolio investment and loans. The CAD is expected to increase from 1.9 per cent of GDP last year to 2.6 per cent of GDP this year, primarily because of the higher cost of oil imports. But India’s external debt is a moderate 20 per cent of GDP – of this short term external debt is just 9 per  cent, so both refinancing and debt servicing risks are manageable. And the fears of attracting American sanctions by buying oil from Iran have also receded.

The Indian Rupee is freed from its misplaced burden of being an icon of “National Strength”

A gradual rationalisation of the rupee exchange rate since January 2018 have made exports competitive and provide the required protection for domestic production from predatory imports feeding on an overvalued Rupee. The Reserve Bank of India, with its mandate for managing inflation, has kept domestic base interest rates competitive in tandem with trends in “safe havens” to manage the flight of foreign capital. The IMF estimates that the net inflows of foreign investment and portfolio capital increased from $28 billion in 2014-15 to $48 billion last year and anticipate $70 billion this year.

 

Burning his fingers once, while explicitly chasing growth, should not convert the finance minister into a growth wallflower. Rapid economic growth remains fundamental for equity. The trick is to use the lens of sustainable equity while laying our economic foundations. Growth will follow.

Adapted from the authors Opinion Piece in The Asian Age, August 30, 2018 http://www.asianage.com/opinion/columnists/300818/jaitley-returns-as-fm-to-cement-his-legacy.html

Grow up well India

statistic_id254469_median-age-of-the-population-in-india-2015

So, what are we trying to say when we repeatedly stress that 65 per cent of our population is below 35 years of age? It is not as if we are growing any younger. In fact we are ageing. And that is a good thing because it is an outcome of development. India became younger between 1951 and 1970 when the median age (the point at which one half of the population fall below and above) decreased from 21.3 to 19.4 years due to improved healthcare and rising incomes.

Demographic googlies

Since 1970, the median age has increased steadily as people live longer, fewer babies die and fewer babies are born. By 2040, the proportion of the population below 34.5 years will fall to 50 per cent from 65 per cent today. Will that be terrible? Consider that by 2040 we will be in the same demographic boat that Singapore is in today. Age merely indicates we can become like Singapore in two decades if we do the right things.

The point here is that the advantages of a youthful population are exaggerated. There are 84 countries with a more youthful population than us today. None of them is competitive with India. The virtues of youth are likely to fade over time. Advances in artificial intelligence and healthcare will reduce the demand for manual work — which is best done by the young — whilst also prolonging productive life. This means that the definition of the workforce will change to include older folk — possibly up to 75 years — who will continue to earn, pay tax and pay-in rather than draw out from health insurance. Tata Sons and the BJP have already used the magic number of 75 years as a marker for obsolescence.

We are working towards an ageless society. The Pradhan Mantri Jan Arogya Abhiyan being launched on September 25 will provide in-hospital medical insurance to 107 million families (45 per cent of the total number of families) at the bottom of the income and caste pyramid. Public health centres in 150,000 locations are to be upgraded to provide pre-hospitalisation diagnostics and preventive care. State governments have also taken the lead in launching similar schemes for health security. Robotisation is widespread already in our automobile sector. Machines will progressively replace workers in construction, agriculture and sanitation.

Wear those wrinkles with pride – they signal the long road we have travelled

wrinkles

The bottomline is that we should not emulate the paranoia of filmstars about ageing. Our collective shelf life is far longer than the first flush of youth or middle age. We should also not be nudged into having more babies to keep the median age low. China, with a median age of 37.4 years, is reversing its family size restrictions and doing just that. But their demographic transition, like their economic transformation, has been jagged and artificially staged via the heavy hand of State control. Ours has been a natural demographic transition driven by personal choice, higher incomes and better old age and health insurance.

Hone kids to be productive future citizens

What we do need to fear is that we may continue our business-as-usual approach which prioritises near term results over sustainable growth. If India is to grow up with dignity we need to transform our educational system to produce multilingual, multi-skilled and multicultural professionals, as capable of cooking up a meal, singing a song or cleaning their toilets as of designing a complex space mission.

Hai! the plunging Rupee

There is another number which is being bandied about with alarm — the exchange rate of the Indian rupee versus the American dollar breached the 70-rupee mark last week. Our currency has been overvalued since 2013 because of a complex belief in a “strong” currency being a proxy for a “strong” nation.

False pride

strength

This belief is wrong on two counts. First, if our exports are not competitive because our currency is overvalued, relative to our peer exporters, then a strong rupee is merely false pride, not strength. Second, if strength is gauged from the ability of domestic producers to beat back the competition from imports and retain domestic market share, then a strong rupee works at cross purposes to this objective. It subsidises imports at the expense of domestic production. It taxes our exports and benefits our competitors like China.

The only thing a strong (overvalued) rupee achieves is to artificially reduce the landed cost of imported coal, petroleum products and military hardware. It also signals to foreign investors that exchange rate depreciation risks are minimal, thereby reducing the risk premiums they add to the hurdle rate of expected return from their investments. To this extent it reduces the stress on our fiscal position, improves the external balance and also impedes inflation.

However, these advantages of a strong rupee must be evaluated against the numerous downsides. Reduced employment and the loss of revenue from GST for those state governments, where producers have shut shop because of cheap imports. Consider also that a strong rupee actually encourages Indians to go on holidays and shop abroad rather than at home. This impacts retail trade directly. It simultaneously makes India an expensive tourism destination, versus options in East Asia.

Look to the RBI to set a predictable “real” exchange rate for the Rupee

A belief in a “strong” INR is as shallow as male machismo. Neither is a “weak” Rupee the answer. Setting the right “real” level for the rupee (accounting for domestic inflation), to optimise the complex trade-off, is best left to the Reserve Bank of India, which has the expertise and the information to strike this delicate balance. The rest of us must desist from creating false shibboleths of national strength. Our strength is best demonstrated by balancing our trade account without imposing prohibitive import or export tariffs; making our budget revenue surplus so that borrowings only finance investments and by following a need-based strategy for allocating resources for human capital development and social protection. None of these three milestones have been achieved yet.

collaboration

Grow up well India, collaboration is better than conflict; maximalist negotiating positions are self-limiting and the high from winning has diminishing utility unless the agenda ahead is compellingly uplifting.

Adapted from the authors opinion piece in The Asian Age, August 19, 2018 http://www.asianage.com/opinion/columnists/210818/grow-up-india-time-to-set-an-uplifting-agenda.html

Trump’s – “ugly American” redux

Trump

President Donald Trump’s administration is showing its a mean. mercantilist machine. Unsurprisingly, for it, international trade is a one-way street, with exports increasing wealth in America, at the expense of the importing economies and imports stealing American jobs. The psychosis is familiar territory for India and scores of developing countries. What is truly unusual is the conversion of the United States of America to this flawed concept and the abandonment of the open economy model, by the erstwhile foremost exponent of this philosophy.

Nǐ hǎo ma America

In today’s topsy-turvy world, Mr Trump is aping the Great Qing emperors of China during the mid-19th century. At that time China was more than willing to sell Chinese silks, ceramics and art in exchange for silver, but felt no need to import any foreign goods or influences. The result was a burgeoning trade surplus. It took export of cheap opium and gunboat diplomacy by the Western colonial powers to balance the trade.

Emperor Quinlong

Unlike China under the Great Qing, the United States runs a massive trade deficit equal to around three per cent of its GDP. This is normal for many developing countries but unusual for a “great power”. American consumers are accustomed to the “opium” of cheap imported goods. It helps that the appetite of foreigners for AAA-rated US dollar securities finances the deficit. But what matters to Mr. Trump is protecting US jobs. Hence the plan to reduce the deficit, particularly versus China, by $100 billion. Hiking import tariffs on metals significantly is part of that  endeavor. Mr. Trump hopes that metals, being intermediate goods, the resultant rise in price of final goods will not be immediately visible. More bizarre tactics may follow.

Jobs for the boys, at any cost 

But higher tariffs will rob both American consumers via higher prices eventually and jobs in ancillary, user trades, which are sensitive to price rise. All this, just to keep jobs alive on life support, in the metals production business. This is bad politics and worse economics – at best a short-term tactic — to signal the Trump administration’s sympathies for Republican rough-necks. The economy wide negative impact will be diluted over time. Mr. Trump believes in deals. So expect to be able to evade the higher tariffs if you are willing to buy enough of iconic American products – like Harley Davidson motorcycles, stetsons and Boeing aircraft.

The US remains the biggest single country, market. It imports $2.7 trillion of goods and services. But the European Union’s market for imports is much bigger, at $6.7 trillion. Japan alone imports $0.8 trillion and China imports $2 trillion worth of goods and services. So the US is steadily dropping away from being a dominant market for world exports.

India is not the target, but we suffer collateral damage

The new import tariff of 25 per cent on steel and 10 per cent on aluminum are of marginal consequence for India. Our share in world steel exports is just 2.5 per cent. Steel exports to the US, over 2012-16, averaged around 6.5 per cent of our total steel exports. We also export metals to other big markets like the UAE, Europe, East Asia and South Asia. Our share in world aluminum exports, averaged 1.5 per cent over 2013-16. The share of the US in our aluminum exports is significant, at 10 per cent. But our largest importer is South Korea, with significant volumes also exported to Mexico, Malaysia, the UAE and Turkey. Indian exports to the US are not of the scale where they could threaten the economic security of American industries. Also, our special relationship with the US, since the 2005 US-India Civil Nuclear Agreement, the shared commitment against terror and common military logistics arrangements, can facilitate privileged access to the US market.

The US – a willful ally

The elephant in the room is US intransigence, amounting to the “ugly American” behaviour. Starting with the US walking out of the 2015 Paris climate change agreement; and its recent regressive approach to immigration — in sharp contrast to responsive European policies; and its most recent arbitrary protection via high import tariffs of steel and aluminum manufacturing jobs — all these have damaged its “soft power”.

 

Of course, the US has the firepower, bolstered by its $600 billion defence expenditure, to promote “gunboat” diplomacy. But faced with China’s relentlessly expanding economic muscle which makes it an implacable adversary in the superpower sweepstakes, the US will be hard pressed to convince its own allies that it can back its brash words with action.

Indians have indelible memories, from 1971, of the threatening deployment of the US Seventh Fleet in the Bay of Bengal seeking to prevent the liberation of East Pakistan by the Bangladeshi Mukti Bahini from the oppressive, quasi-colonial rule of the Pakistani-Punjabi mafia — a long-time close US ally. It was only the counter deployment of Soviet nuclear submarines and warships, in response to a request for help from India, which rendered the USS Enterprise and the rest of the Seventh Fleet toothless. If the US was not willing, in 1971, to face down the Soviets, to help its ally Pakistan, then how credible is its willingness and ability to come to the help of India in facing down a possible threat from China?

mujib

China, our awesome, prickly neighbour

In a networked world, trade, investment and security are intertwined. The US views China as its primary adversary. Luckily for it, China is several thousand miles removed from the American land mass. But China lurks on our northern borders. It spends $180 billion on its military alone — almost equal to the total budget of the Indian government. Whilst, lining up to seek favourable trade terms from America, it would be foolhardy to provoke a trade war with China. India did well, recently, to dilute the potential use of the Dalai Lama’s April 19, 1959 flight to safety in India, as an irritant for “Emperor Xi”.

Navel gazing better than eye-balling

Modi emerging

Prudence lies in following the Chinese strategy of subordinating muscular diplomacy to economic growth till the time is ripe. It remains in India’s interest to adhere to the open economy model. We have limited capital and governance capacity. We must be frugal in allocating them to first build our domestic infrastructure and facilitate private investment, whilst keeping our markets lightly regulated and open to competition and foreign investment.

Let us not obsess about job creation or force-feeding the formal economy. The US creates two million jobs in a year. Non-farm jobs are scarce everywhere. We should become better at generating fiscal resources to redistribute as income support to the “lost generations” of unskilled, unemployed Indians who are older than 50. This will boost domestic demand and fuel economic growth, far better than resorting to failed economic solutions — such as protectionism, subsidies and publicly financed businesses to chase impossible dreams.

Adapted from the authors opinion piece in The Asian Age, March 17, 2018 http://www.asianage.com/opinion/columnists/170318/ugly-american-is-back-shun-all-the-failed-ideas.html

Tag Cloud

%d bloggers like this: