Global Thoughts

Does Aid = Business?

2012-02-08T23:57:00.002-05:00

India recently finalized on the French made Rafale fighter aircraft for her Air Force on the deal to procure 126 Medium Multi Role Combat Aircraft that is worth initially around $11 billion - and with other related on-board procurement, maintenance and warranty the price tag is expected to almost double. After many contenders were dropped one by one – that includes US made F-16 and FA/18, Swedish Gripen, Russia’s MiG-35 – in the bidding process, Eurofighter Typhoon and Dassault’s Rafale were short-listed for the final selection. And in that, Rafale got the deal. Now this has clearly upset the British who form a part of the consortium of companies that make the Eurofighter Typhoon (the other nations involved in the design and manufacture of the Typhoon are – Germany, Italy and Spain). I am not going to go into what made India select the Rafale fighter aircraft as I am not an expert on that area (one can only hope that this was a decision taken with pure technical reasons and other compatibility factors in mind, without any corruption involved in it. So far, all reviews seem positive on this). But what’s been astonishing is the anger and the showcase of “feeling betrayed” expressed by some British politicians and the members of the British parliament.

As this article in one of India’s most famous newspaper notes - http://www.thehindu.com/opinion/op-ed/article2866369.ece many British politicians have made this a political issue and have directly questioned the need to provide India with aid worth nearly one billion pounds every year. This aid, as noted in their international development department, is considered an aid purely for economic development efforts to help the poor. Right or wrong, India still has the largest number of poor people in the world and international aid money keeps coming into the country for various development efforts concerning the poor, even though India itself is an aid donor to many poorer countries. While it is a genuine argument from the British public to question the aid in terms of priority when Britain itself is not doing well economically, the sad part is that some politicians in Britain have directly branded this action of India to buy French aircraft for its Air force as an insult thrown upon the British and have noted that France gives less aid than them. The article also states that last year, the British Secretary of State for International Development linked the aid program to selling Typhoon to India on this mega deal. Inferring from the article, I see that India had been unwilling to receive the aid for quite sometime due to the negative publicity that this aid program has caused among the British public. But it is the British who insist on continuing the program (I am not trying to question their intention here without any proof, but the arguments linking any kind of aid to business deals is tempting one to question their intentions on any such programs).

In fact, Britain has been one of the top arms exporters to India over the years. In recent years, India has bought advanced trainer jets, helicopters for VVIP travel and underwater surveillance systems from British firms. Reading from a news source, I also understand that as per the data from the Stockholm International Peace Research Institute, Britain has exported arms worth $15.4 billion from 1950 to 2010 and Britain stands as India’s third largest arms exporter after Russia and US. So why all this fuss in this deal? Well, one reason is this is the single largest defence deal that is in making at the current moment in the entire world. And the other reason is that this deal has pitched various defence firms against each other, directly getting them into competition that is watched all over the world. There could be other strategic reasons which I don’t want to go into. But then any business will have competition, some win and some lose. It’s part of the game.

Coming back to the aid program, I think it’s the responsibility of the British government to make clear to the public on why they would want to give aid to poorer countries. If it is for assuring business deals in the recipient countries, then No! Sorry, we don’t need your money. If it is purely for economic development efforts that would help lift thousands out of poverty, then it is up to the British government and its people to decide on the priority, when and how much to give. The recipient country cannot be blamed for decisions that are taken that do not favor the British, especially when the decision is made purely from a technical perspective.

References:

1. http://www.thehindu.com/todays-paper/tp-national/tp-newdelhi/article2873536.ece

2. http://www.thehindu.com/todays-paper/tp-national/article2873679.ece

3. http://www.thehindu.com/opinion/op-ed/article2866369.ece

4. http://www.youtube.com/watch?v=GF-67ShsSZ0

Inertia or Hangover!?

2011-09-16T22:19:00.000-04:00

Anyone who has been following the Indian economy would have noted the growth momentum slowing and high inflation having adverse affects on the lives of the poor. There are two main reasons for this slowing growth momentum:

External factors – US unemployment, Europe’s sovereign debt crisis and high oil prices.
Internal factor – incomplete or stalled economic policies within the country.

While there isn’t much that could be done to the external factors affecting the economy, definitely a lot could be done on the internal policy making. In fact, on the external front, I would say, India has managed pretty well. Due to its high savings rate and a booming middle class, India was able to sustain the domestic demand to a considerable level during the last two years of tough economic climate. Indian exports rightly diversified and penetrated deeper into the South American, African and East Asian markets, which helped offset demand sluggishness from traditional western markets. But even exports to the sluggish western markets weren’t that adversely affected – thanks to supportive policies from the government and the entrepreneurial strategy of the Indian businesses to acquire, learn, consolidate and expand (and of course, the cost saving methodology of the western companies played a role here).

But on the internal front, very much expected (and needed) reforms were not done. This has caused not just the inequality to grow during the years, but has also resulted in the stalling of the growth in the quality of living standards for many Indians – and that includes the middle class. A reason to worry is the decline or lack-of-growth in the foreign direct investment (FDI) in the country. With western markets facing a sluggish demand, India could have attracted a lot more growth-oriented FDI from western businesses who seek to tap into the booming eastern markets. But for some reason, these concerns, though well known, weren’t addressed. And if the slowdown in FDI was rightly looked into and addressed appropriately, India could have used the world’s cash resources at the right time to seek its own growth through the attractions it has in today’s world economy.

One of the cases I would like to make on this is in allowing FDI in the multi-brand retail sector. It is true that millions of Indians all over the country are in the informal retail sector, called mom-and-pop stores. But it is also true that there are even more millions who have been very adversely affected with inflation that has remained at uncomfortable levels for more than two years. And not to mention the food inflation that has remained dangerously in double digits for the last two years. Initially, the food price inflation was attributed to poor monsoon in the year 2009. But subsequent monsoon seasons in 2010 and 2011 have been successful - yet, there has been no success in bringing down food inflation that affects the poorest of the poor much. Some would now argue that this proves that it is a genuine supply-demand mismatch. While that is true, what is also true is that this mismatch is not caused just due to natural factors. Yes, undoubtedly, I sense, hoarding is taking place, where a huge industry of “middle-men” are getting benefited. Food prices have gone up by unimaginable levels, yet farmers remain poor, to the level of committing suicide sometimes, and non-farming related poor too suffer unimaginable consequences due to these high food prices.

By not allowing a 51% FDI in the multibrand retail sector, government is not helping the mom-and pop store owners, but rather, either knowingly or unknowingly, is helping domestic big shots and corporations, where their entry into virtually every field, without prior experience, is seen these days. This has only further increased inequality, apart from affecting the standard of living for the Indian consumers – since the new entrants, who were not experienced in this sector before, offer poor training to its employees, poor services to the consumers, poor quality and incompletely provide the benefits that one would expect from such big corporations jumping into businesses. Having concerns for those mom-and-pop store owners in towns and villages across the country, I would suggest starting a pilot program by allowing foreign multi-brand retailers to setup stores in tier-I and select tier-II cities across the country (and yes, the allowable limit can be 51% - with rules and regulations favoring backend and long term investments, and the 49% is for the domestic companies to learn, adopt and further invest). After all, I think its time to concentrate on improving the quality of lifestyle for many middle-class and poor Indians. And I believe foreign investment (initially in tier-I and select tier-II cities) in this sector would help India achieve this.

My personal belief is - this will also help in addressing the deficiencies India has in the farm-to-fork structure. Food processing and cold storage can be expected to come up, that would reduce the amount of grains and vegetables from getting rotten - which will help in bringing down food inflation, more income to farmers, meeting demand, more foreign technology and training to domestic youth – all of which should improve the standard of living and reduce inequality. And this will also force public investments in roads and other vital infrastructure. While I am not finger-pointing the retails sector alone here, it is also becoming true for many other sectors.

And almost the same applies for the Infrastructure sector, where more than $1 trillion is needed in the next 5 – 10 years to meet the demand. When it comes to infrastructure, the FDI limit in the insurance sector being just 26% is preventing many foreign corporations to step up investments.

It is important that India stops calling itself poor for the sake of adopting polices, which in the name of “helping the poor”, isn’t really helping. While it is a fact that India has the world’s largest number of poor people, it is also true that some Indians (or Indian corporations) have extra-ordinary amount of money, with no experience in certain sectors. With lack of FDI, and thereby the lack of foreign competition and technology, these Indian corporations are tempted to jump into sectors where the demand is enormous from the booming Indian middle class – thereby reducing quality and increasing inequality. This sometimes makes me think that, though the night-out with “License Raj” is over, its hangover remains, in form or the other.

Inter(Euro)National Monetary Fund

2011-06-02T22:36:00.002-04:00

As soon as it became clear that the International Monetary Fund (IMF) requires a new chief, Germany and other European council members jumped in to say, or rather assert strongly that the next IMF head should be a European (as always been). But such a public announcement of preference (or requirement) has rekindled the question of credibility and correct international representation in the IMF. With the amount of voting shares the European nations have in the IMF, it was unnecessary to go public in asking a European to be the next IMF managing director. All that they required was to talk to themselves and bring in US and few other countries on their side to select a European as the next IMF chief. And the reason that the European nations say for this - that with the amount of debt problems faced by the Euro zone countries it is only appropriate for a European to head the IMF, is inappropriate at best. No one recalls an Asian heading the IMF during the Asian financial crisis in 1990s.

IMF is an international institution with 187 member countries that is meant to be transparent to its member countries in its operations. And a single person at the top of the IMF cannot take decisions solely based on his thoughts. So why does Germany or any other European country think that only a European would fit in that post? How are the non-European countries supposed to interpret this? - 1. That non-Europeans are not capable to handle this post? Non-Europeans are not trustworthy to discharge duties without any bias? Europeans are using this institution in their favor in a biased way? Tradition should not be changed? The answer that the European nations give is that they need someone politically savvy to understand Europe's debt problems. But what happens after Europe's debt problems are brought under control?

Rather than controlling their fiscal problems within their own region (Euro) by forming strong Euro-institutions, the Euro zone countries are trying to leverage the power they have in an international institution. But anyways, all that one can say is - We knew this and we don't care for now. Now don't be surprised (or angered) if an Asian Monetary Fund (or talks of it) props up sometime in the future.

Food Security - It's Time to Act!

2011-01-18T23:05:00.000-05:00

When I wrote my first blog article in August 2009, I touched upon the topic "food-inflation" in India. And at that time, food-inflation was expected to arrive due to poor monsoons in India that year. And as expected, food-inflation kicked in. It went up all the way to around 20% (with some vegetables hitting triple digits), held steady around that rate for quite sometime and started coming down through the year-2010. But in the last month, due to enormous rise in onion prices (and many other food-prices such as those of vegetables, milk etc that never came down in reality), food-inflation started shooting up again and now stands at around 18% in India.

In South Korea and Thailand, food-inflation is felt. In Russia, due to heat-wave and drought that destroyed wheat crops last year, food-inflation is felt. In Pakistan, due to floods that damaged wheat crops, food-inflation is felt. In United States, even when everyone speaks about the fear of deflation, corn-prices have risen. In Australia, tomato prices are expected to go up due to the recent floods. The food of the poor - "rice" is in great shortage all over the world and its prices have risen.

And to beat this food-inflation, monetary policy is tightened in many countries for the fear that this food-inflation might slip into the broader inflation. But I should say that this is like taking cover under a tree when it's raining. These monetary policy solutions are very much temporary. To beat this food-inflation, a much broader thinking and a much greater investment model is needed.

What does a monetary tightening do? - Cool down a heated economy by slowing down the business activities in an economy. So, what happens when business activities slow down in an economy? People buy less and probably save more. As a result of this, a weakening in demand takes place that bring down the prices of many commodities. And with the general prices cooling down, it is expected, that a farmer or a retail food store would sell the food produce/products at a cheaper rate. But this kind of policy action will bode well for all goods except food. I don't understand what the governments are trying to do if they keep relying just on monetary policy tools to combat food-inflation. Do they expect people to consume less food through these monetary policy actions? Sigh..sick!

Policy makers need to understand (actually they do but are just dormant) that the food-inflation felt all over the world is not due to increased liquidity in the financial system but due to global shortages of food. And the weather has been increasingly non-supportive for food-production in the past two years in many key agricultural countries, though population and prosperity (and income inequality) keeps rising in the world. Let's assume (just assume) for our analysis sake, that an entire economy comes to a halt due to maximum monetary tightening (again, just for the sake of assumption). But food, being the most essential item, will still have to be bought even if that money has to come from a savings account. And food-inflation would still be felt if there are shortages in food-supply. It is as simple as that - this is a supply-side constraint and not a demand-side pull. And remember, it is the most basic food items such as rice, onions, wheat and tomatoes that are in shortage.

To combat food-inflation on a longer term, in a world of rising population, we need investments in food-production at a global level supported by global financial institutions like World Bank to increase productivity in food-production in poor and developing nations (Admission: I see this happening to a certain extent though the pace remains slow). It is also important that agricultural markets are opened more in developed countries to encourage investments and production in agriculture in poor and developing nations - for it is in that part of the world where there are a large number of farmers producing food at a cheaper rate. And to increase efficiency, countries like India must seriously study the benefits of opening retail trade (atleast in food and food-related items) to foreign investment. But I know I am touching on sensitive subjects when I speak about opening agricultural markets further in developed world or opening retail trade in India.

It is important that not just energy-security and financial-security, but also food-security becomes an important topic of discussion in the G-20 forum and beyond. As long as we see distorted patterns in agricultural investments (and subsidies) between the developed and developing world, and as long as monetary policy tools are used to combat food-inflation instead of fiscal policy tools, and as long as agrarian economies don't enact "better" and "efficient" farm-to-fork policies, it would seem, on one side, that we are pulling millions and millions of people out of poverty, but on the other side we will also be pushing millions and millions of people who already are in poverty, further down deeper.

A Challenge for Central Bankers in 2011

2011-01-05T23:14:00.000-05:00

Stock markets are back up! Commodity prices are surging! Retail sales have climbed up impressively in the United States this holiday season! Unemployment claims in US has come down recently to a more than expected level! Hurray! We are back to normal! - is the feeling many are having these days. I hope and wish all these improve further and are sustainable. But when some common people and business persons would start to find some relief from this news, the central bankers, while equally feeling a little relieved, would also be counting in on the hard-work (and for that matter hard-thinking) that they will have to do this year.

Currently, the interest rates are relatively and notably higher in the developing world than the low interest-rate developed world. Capital has been flowing to the developing economies from the developed world throughout last year - only to be fought back by the developing countries to prevent hot money from coming in. But despite this struggle, considerable amount of capital has found its way through to the developing economies, especially into the stock markets. One result of this - a surge in real estate prices (not that foreign money alone was responsible but definitely played a significant part).

When the US economy stabilizes this year, the central bankers in the developing countries would be breaking their head to enact appropriate monetary policies and to prevent any drastic currency volatility since they know that there is a huge possibility for considerable amount of capital, especially from the equity markets, to flow out. At the same time, central bankers in the developed world will be breaking their head to ascertain if the growth that they see in the economy is sustainable. And one of the factors that they will be looking into to assure themselves is the unemployment rate. There has been some kind of fiscal policy support from US government (thanks to some kind of measure done in this regard recently in US - whether what done was right or not is a matter for discussion at some other point in time), that should act favorably for the economy. And moreover, times are different now than what was a decade ago. Even at the setback of the US and European economies, countries like China and India have grown at impressive rates. And as these countries grow, so does the consumption of raw materials by these huge populations. Oil is trading at around $90/barrel, food-inflation is felt all over the world (as per the data released today, UN Food and Agriculture Organization's food price index rose 32% in the second half of year-2010 (not adjusted for inflation), gold prices are surging and so does copper, silver and many other raw materials.

But how much of them are sustainable? Is a commodity bubble in formation? How much inflation and price-rise is attributed to speculators and hoarders? How much is attributed to genuine supply-demand mismatch? With all this and with corruption still having a large presence in the developing world, it is going to be increasingly difficult for central bankers in the developing world to enact monetary policies. And we have to remember that there is always a lag between the time a monetary policy is adopted and when the actual effect is felt in the economy. In the meantime, when deflation was the core concern in US in 2010, 2011's concern is yet to be established - and this will be the concern of US central bankers.

Now what about our European friends?! They will spend time in trying their best to preserve their monetary union and thereby the currency - Euro.With some Euro-zone countries like Germany growing at impressive rates (which will only further grow when US economy stabilizes this year) and some Euro-zone countries adopting fiscal austerity programs due to their heavy indebtedness, it's going to be challenging for Euro-zone central bankers to come up with coordinated policies.

So, with all this, my question of the day - What's going to be the biggest challenge to central bankers in 2011? Answer: Global coordination in adopting policies. If all goes well, we can expect US interest rates to gradually rise around the end of this year, when the developing world around that time might be reducing interest rates to heat up the economy after it finishes cooling as a result of fading of stimulus and monetary tightening during the course of the year. If global macro-economic policies are coordinated, as was done at the wake of the financial crisis, then the policy actions of upward-downward movement of interest rates could be better and smoothly handled without disrupting the growth in the global economy.

The Dragon-Elephant Trade Agreement!

2010-12-22T22:05:00.002-05:00

When Chinese Premier Wen Jiabo visited India last week, he called for a Free Trade Agreement (FTA) between the two Asian economies. And this is not the first time China has called for a FTA with India. But India does not view this FTA as an agreement that would work in its favor. While both China and India have separately concluded or are in discussion on FTAs with multiple countries and trading blocs, why hasn't a FTA gone through between these two nations?

There are various reasons to this - both politic and economic. But it's mostly been economical than political factors. India does not consider that there is a level playing field for this agreement to be done. Now what's the level playing field that India is talking about? - 1. Chinese currency, the renminbi, is undervalued thereby giving an "unfair" advantage to its products; 2. Chinese import tariffs are already very low, the further reduction of which would not really turn into a benefit for Indian products to penetrate deeper into the Chinese market; 3. Chinese govt. indirectly subsidizes many of its industries thereby making it tough for the Indian companies to compete. 4. China's tough rules and regulations favoring procurement from Chinese companies. From China's side, it is also true that the Indians are increasingly wary of investments done by state-run or state-affiliated Chinese companies, thereby making it difficult for Chinese companies to operate freely in the Indian market.

The trade between the two nations has grown sharply in the last decade which now stands at around $60 billion annually. But many experts have long complained that this trade is unbalanced and more in favor towards China. If one looks at the trade basket, it can be seen that most of the Indian exports to China are raw materials (as per 2005 data, iron ore was at the top of the list) and most of the Chinese exports to India are finished or processed goods (as per 2005 data, electronic goods were at the top of the list). There hasn't been much change to the 2005 data even after five years in terms of the goods and their relative weight in the trade basket.

China has used its manufacturing expertise, the supply chains it built to become a global manufacturing hub, coupled with cheap labor, to increasingly source raw materials from India, process them, manufacture and ship the finished product back to India. While there is nothing wrong with that, this pattern of trade has also resulted in a huge trade gap, with deficit largely falling on the Indian side. So, a FTA would just open the flood gates for cheap manufactured products from China that might erase some Indian industries. Well, there is nothing wrong in efficient use of scarce resources - that is, making products where it is cheaply and efficiently produced. But then trade works as a two-way street. One country's strengths and expertise should be used to offset the other country's weaknesses and vice-versa. So, while China efficiently manufactures products, India efficiently provides services. But many times, services are hindered by language and geographic barriers whereas manufacturing is not. This makes it even more difficult for Indian companies to penetrate the Chinese market in addition to all the protection that the Chinese govt. gives to its own services industries.

One way or the other, both China and India, having a large number of poor people, still have lots of protectionist policies in place. Both countries provide some level of protection either in the form of tariffs or incentives to many of their domestic industries. And with China's dominant role in manufacturing and India's worry about the extent to which it's services can be taken to the Chinese market due to various barriers, getting a FTA done is becoming increasingly difficult - and all this is in addition to the complaints of the Chinese renminbi being undervalued.

But when you consider not just economical reasons but also political and strategic reasons (where the two countries still have a lot of mistrust on each other), it's the trade that should bring the two countries closer, which is vital for global peace and security in the twenty-first century. I have always thought that nothing brings two nations closer than people-to-people contacts. And people-to-people contact itself increases when the trade between the two nations increases.

So then, should they go for a FTA? Or is a FTA even possible? Well, the answer is - the situation is still not ripe for a FTA but definitely the two nations should go for a PTA - Preferential Trade Agreement. In a PTA, the two nations can identify each other's strengths and weaknesses by individual sectors and can facilitate trade accordingly through reduction in import-tariffs and greater market access. For example, when China can supply cheap but efficient computer hardware to India, India can provide cheaper but efficient software services to Chinese businesses. Going even deeper, the deficiencies within individual sectors could also be identified and rules worked out for the benefits of both the people. Starting with PTA, we can hope for a FTA sometime in the future.

The re-opening of Silk Road's Nathu La pass in 2006, after 44 years since it had been closed due to a brief China-India border war in 1962, had been beneficial to many poor traders and farmers who live in the border areas of both the countries and so would be a PTA to a greater section of the society in both the countries (together where around 36% of the human population live). It's worrying that trade between the two of the fastest growing economies is so little (compared to the actual size of the total trade in China and India) and it is even more worrying that there hasn't been a trade agreement between the two nations yet. A PTA would go a long way in making roads for achieving a FTA at the right time in the future. Increased trade between China and India would also connect the rest of the Asian community to this trade link and would possibly form a mega Asian trade zone. This is needed not just to bring the millions and millions of people, who live in those regions, out of poverty but also to achieve global prosperity, peace and security in the twenty-first century.

Microscopic watch needed in Microfinance

2010-11-29T23:10:00.002-05:00

It's been really disturbing to see the news around Microfinance Institutions (MFI) in India these days. By definition, these MFIs lend to the poor who cannot get access to bank credit and these are usually termed micro-loans since the amount lent itself is in few thousands of rupees (few hundred dollars).

Now what happened that these MFIs are in news? In an Indian state called Andhra Pradesh, where the largest number of MFI borrowers exist, there have been around 50 suicides and many have blamed that MFIs have used coercive methods to collect interest on these borrowed loans from these borrowers that has resulted in these suicides. MFIs deny it. While it is hard to say if this is true or not, which only an honest investigation can reveal, the thing that's been troubling me is the lack of transparency, not just on activities but on factors leading to policy decisions, in these MFIs. These MFIs charge an average interest rate of around 20%-40% annually. And MFIs say that such high interest rates are due to the high loan servicing costs. Reasons they give for this - the volume becomes more when lent in small portions to many individual borrowers; reaching and collecting money at remote villages and then there is the high risk factor to be calculated on these loans and the interest charged by state-run banks from where these MFIs avail money to lend to the poor.

Alright, the reasons they give seem genuine. But that's only one side of the coin. It's not an easy task for a poor who has had no or very little education and no or very little business-experience to earn an income that would surpass these interest rates. From the news I read, I see that the interest on these loans is generally collected on a bi-weekly or monthly basis. But many of the poor people who live in villages are largely farmers whose income is seasonal rather than monthly. Even if you consider just the non-farming people, there aren't many businesses that could be done in a rural village by such poor people that would give returns surpassing the high interest rates.

So now, these are the questions that linger in my head:

1. How do the MFIs decide on the people to a whom a loan could be given? Many times it is said that the loans are given to Self Help Groups (SHG) but what constitutes a credible SHG and what kind of verification is done?

2. How much percentage of the total loans in a MFI is for people who already have a business and want to expand and how much is going to people who want to start new businesses? Who is validating the claims done by the borrower to check the creditworthiness and how? What kind of requests for loans are trusted, validated and approved?

3. Since MFIs have been recently allowed to access capital markets, why are the interest rates still so high?

4. How does a MFI which has accessed capital markets differentiate the interests of an investor to that of a borrower? During times of conflict, who is given a higher priority - investor or borrower? What policies are adopted in this regard?

5. I know many MFIs share information to prevent a borrower from obtaining too many loans that would hinder his/her ability to replay. But are all MFIs registered in a centralized database?

6. And many more such questions.....

There has been a hue and cry about capping interest rates from the industry since they say that that would hinder growth in the industry and thereby credit to more number of poor people. Alright, let's not cap interest rates with a fixed number but why not set a target range for these interest rates? How about capping interest rates with a range instead of a fixed number? Why not the MFIs be asked to NOT exceed an interest rate of +X% the average of all MFIs' interest rates within a region (state)?

I ask for this because here is the problem - many of the borrowers are very poor and they traditionally depended on local village loans given by relatively richer people of the village to meet their needs. But these relatively richer people sometimes charged/abused the poor with super high interest rates and coercive collection methods. MFIs were considered saviors of these poor people in this regard. But the interest rates are still enormously high. While it maybe much lower than the ones charged by the relatively richer people of the village, it is still high, which will make the poor to reach the relatively richer people of the village to borrow money just to pay interest on these loans borrowed from MFIs. There is no way one could track if the interest that is paid timely is from earned money or if it is just again borrowed money from some other loan-provider. This might not be from another MFI but maybe from the so called relatively richer people who might suck the blood if the loan is not repaid.

These kind of borrowed loans would then spiral up and would cause the poor to reach a stage where he has no one to reach to borrow money to pay interest on these multiple loans and then comes the time when the poor is left alone to make a decision - a decision that sometimes makes him take away his own life.

There are many psyclogical ans cultural factors involved in this - for a poor man of this stage and in a country like this, debt is not just a liability but many times considered a shame. And if he is not able to repay the debt and when there are persons from the loan institutions knocking the house in a "harsher" way, the shame and guilt the poor feels reaches unimaginable stages. And this is where I get the fear about MFIs accessing capital markets. So my question again - How does the MFI differentiate the interests of the investor and the borrower, especially when the quarterly statement is not going to look well for that particular quarter? But I also agree the benefits of these MFIs accessing capital markets - especially this would reduce the dependency on loans accessed from the commercial banks by the MFIs, which should also be a factor that will help in reducing interest rates on loans given to borrowers from MFIs. But again, here is my question and fear - are these funds, accessed through capital markets, used to improve quality (by reducing interest rates) or to improve quantity (reaching more people without reducing the risk factors)? And not to forget the system-wide risk , since the public sector banks are in the link through loans to MFIs (if we look at the data from the Mix Market site, that has data about global MFIs, one can notice that the growth in the gross loan-portfolio of these MFIs is climbing at high-speed).

Now one more thing that needs to be done, as many analysts have been saying, is to allow MFIs to accept deposits. This would help the MFIs to depend less on commercial banks and capital markets and use more money present within their own system. Currently, the hindrance to this is in the Indian policy - MFIs are classified as "NBFC" - "Non-Banking Financial Company", whereas only institutions classified as "Commercial Bank" can accept deposits. I think a waiver needs to be given to MFIs in this, while making them accept to additional supervision by the Reserve Bank of India (RBI) - India's Central Bank. Also, some kind of study needs to be done to see if deposits below a certain amount could be insured, by a combination of the central and state governments' money, to encourage more savings by the poor.

There are two sides of the coin here - MFIs cannot simply sit idle on a loan or interest not repiad timely. After all, it is business and it is a loan, not free money. But since poorest of the poor are involved in this, who many times do not even have a proper, transparent and secured access to the legal system of the country, for any wrong doing by the bigger player in the game (read: MFI) and with increasing link to the system-wide banking, I would like to have a microscopic watch by the RBI on the activities of these MFIs, even if that requires new policies or amendments in policies by the RBI.

Exporting to Aliens!

2010-11-15T23:05:00.001-05:00

In these tough economic times, every country – be it developed or developing - is trying to export their goods and services to markets where there is demand. And this is the way the leaders of the world are looking to find a solution to bring the global-economy to pre-crisis levels and bring back jobs to millions of people unemployed worldwide. And where there is demand for this? Not on planet earth as far as I know.

Rich countries are increasingly trying to increase their share of exports to emerging markets. There is nothing wrong with that. But these rich countries wanted to use this increase in exports to offset their large debt-loads and deficits. There is something wrong in this. Emerging markets and particularly the export-dependent ones are increasingly trying to stick on to their pre-crisis growth patterns, that is, exporting their relatively cheaper goods and services to rich countries. There is nothing wrong with that. But they wanted to do it indefinitely without diversifying their economies that will give more weight to their own people’s consumption rather than the debt-loaded but rich consumers in the west. There is something wrong in this.

There are talks about “currency wars” these days and every sensible person is afraid of the so called “beggar-thy-neighbor” policy – which relies on consumption of one’s goods and services by another person who cannot really afford it, through artificial means. However you call it - “competitive devaluation” or “competitive undervaluation” of a currency, it simply is not right and will not work. And the reason is “un-coordination” or “under-coordination” of global micro-economic policies by governments across the world or should I call it the G-20 countries that constitute around 85% of the global output. Yes, you heard it right – not macro but micro-economic policies and I know many people would laugh at me for saying this – after all, some would ask me, is it not a sovereign issue of a government to decide on what is needed for their populations? And I would laugh back again.

Demand is very weak, but still countries like Britain have gone for a severe fiscal-austerity program. And they claim that this is the time to reduce-deficits. Alright good, but do they have any program to increase consumption through real-money instead of borrowed money? – No. Do they have policies in place that will help sell the goods produced by their companies? – No. Oh well wait, yes they do, not policies but dreams, dreams of selling it to emerging markets where middle-class consumers are growing at enormous rates. Enormous rates! – Yes, anyone who was earning $5 a day yesterday and who earns $10 today has grown at a rate of 100%. Isn’t that “enormous”? And yes, now the rich-world companies can sell their $100 goods to these people - right?

Demand is very weak, but still countries like China and other oil-exporting countries depend just on their exports (and for that matter even Germany). Yes, just on their exports to debt-driven rich world consumers. And when asked how you can depend on selling it to these consumers, they say – they are the ones who would buy our products. And I ask again - Why? Why not your own people? Answer – we are still not ready.

Alright, so it is clear. The global economies and particularly the G-20 countries came together and coordinated macro-economic policies (interest rates and stimulus packages) after the dawn of the financial crisis. But what happened to that effort of co-ordination? Two things happened –

a. Stimulus packages in some countries were not sufficient to address the scope of the problem.
b. Stimulus was spent to “replay” instead of “re-balance”.

It’s difficult to co-ordinate on micro-economic policies. After all, it is up to the individual governments and people to decide on what they want. But at the same time, there is difference between “I don’t want it ever” and “I don’t want it now”. This recession should have been the period where many export-dependent markets should have taken steps to diversify their economies and many over-consuming countries should have taken steps not just to reduce consumption but to re-balance their consumption.

Take this case – statistics say (although varies all the time) that around 60% - 70% of the population in India depend on agriculture or agricultural related activity for their livelihood. Yet, were there any investments in agriculture during this crisis period? – No. Infact, in 2009, poor monsoons made many poor Indians go hungry due to the enormous increase in food prices and which still exists and hovers with a food-inflation rate of around 10%-15%. And take this case, in US and Britain, where educational investments have not taken place during this crisis period but agricultural subsidies have remained. Now can you see where the distortion lies? Countries like India should have imported irrigation-related technologies from rich-countries using their stimulus money and countries like US should have invested in education and technology to make more people produce technology at increasingly cheaper and efficient rates. With this, the agricultural markets of western countries should have been opened more to benefit real growth in poorer countries like India when at the same time this growth in the large sections of the population should increase imports of quality rich-world products.

Now who can advise this to the governments? Aren’t they supposed to know this? Well, after all, every country has its own bright people. But I don’t get then why do we see distorted investment patterns in the global economy today? It’s perplexing to see the underlying reasons for governments to not know what their populations require. Is it the absence of a “long-term” vision or the presence of “short-term” ambitions? I don’t know. But without any domestic investments, if exporting to demand-existing markets is the way governments are going to bring the global-economy back on track, then we should be exporting to new markets – the markets where aliens live!

The $600 billion question in G-20.

2010-11-10T22:33:00.002-05:00

When the G-20 leaders meet in Seoul, South Korea, today, this is how the discussion would start:

US: We need a balanced growth in the world economy. Some countries cannot run massive current account surpluses while some others run massive deficits. That is unstable and so to achieve a balanced growth we need countries to allow more flexibility in their currencies’ exchange rates - exchange rates determined by market forces.

China: Alright, wait. I have a question before you proceed further – Why is your Federal Reserve printing $600 billion more and flooding the world with liquidity? We are affected by this action of your Fed in two ways –

a. The dollar’s value is artificially weakened thereby giving an unfair advantage to your exports in the global market.
b. It is flooding emerging markets like ours with speculative capital thereby fuelling concerns about asset-price bubbles.

Can you please answer how this is helpful to achieve a stable global economic growth?

US: Look who is talking about “unfair advantage” to exports. Anyways, here is the answer – by doing this quantitative easing (QE2), that is, buying treasury notes/bonds for $600 billion more, we would drive down the long-term interest rates. And by that it means, the borrowing rate on loans, from car-loans to home-loans to you name it, becomes cheaper, thereby fuelling consumer demand. And when demand becomes more, supply has to become more. And for supply to become more, companies will be investing in production, hiring new employees and there comes the job-creation and further demand and further production and further job-creation and the cycle goes on. The economy will then be back on track and US getting its economy on track will the best thing that US can do to the global economy.

Before China could question/talk any further, a guy from the audience-floor gets up to clarify things. He first requests China not to question any further but instead to go home and start diversifying the economy that will depend less on exports and more on domestic consumption than what it is now. He then turns to US to ask/clarify certain things. Oh by the way his name is “Common-Man”.

Common-Man: What you said about QE2 is true but I still don’t get how that would get the economy back on track. Aren’t the interest rates already low enough?

US: But demand is very weak and hence we fear deflation in US. Driving down the long-term interest rates would make sure that demand picks up domestically and with the dollar becoming less in value relative to other countries’ currencies this would also increase international consumption of American goods. All this will lead to job creation in US. Also, all these steps will help Federal Reserve achieve expected inflation, which would make companies who are hoarding cash now to invest thereby creating jobs and demand.

Common-Man: US exports will undoubtedly grow. I agree. Some jobs will be created out of that. I agree. Inflation (that is needed to an extent now) might kick in. I agree. Due to inflation, people and companies will invest instead of hoarding cash that will bring down the unemployment rate. Hmmm, this is where I am not able to completely agree with you. Well, we might see investments occurring, but do you think that just export-led job creation and investments by companies and people to withstand inflation alone would be enough to achieve the expected economic growth and to bring down the unemployment rate that is so high – 9.6%. We actually need hundreds of thousands of jobs to be created every month to bring down the unemployment rate quicker.

US: See, when all I said happens, the cycle will kick in. It might be a slow start but eventually the economic cycle will run faster and we could achieve the needed growth.

Common-Man: Ok to sum it, why is the economic growth so slow and weak?

US: The demand is very weak.

Common-Man: And what are you trying to do to address this?

US: Basically, bring down the borrowing costs further and trigger a little inflation that will force companies to invest.

Common-Man: Ok, from the monetary-policy side, I completely agree with what the Federal Reserve is trying to do – looks like there is no other choice, even though the concerns expressed by some emerging markets about liquidity flooding their markets is genuine and very real. But that’s a topic for later discussion. Also, there is another fear about commodity prices sky-rocketing in the future due to this Fed action. But again, I would like to discuss it later. But I also have to tell you that monetary-policy alone will not be sufficient. It is not that the interest rates are not sufficiently low enough now or that the companies are without cash that is hindering investments. Infact, as per a news article I read (article source below), US companies are sitting on cash equivalent to $1 trillion, without investing. We have to think why? The answer is “uncertainty”. And from the government side, all that is expected is to induce “confidence” in the economy. Until this is done, I am not convinced that we will see enough investments that would bring the US economy back on track quickly. And remember, the more the time it takes, the more is the probability for the unemployment to become structural rather than cyclical (and this is very dangerous).

This “uncertainty” about the future of the economy needs to be beaten by inducing “confidence” in the economy through a tool called – “fiscal policy”. Yes, monetary policy is needed but that alone is not going to solve our problem. It is the lack of a clear, long-term fiscal policy that is creating tensions and fears, not just in US but in the entire world about the stability of the future US economy and thereby the dollar. The question behind the fears of the global companies and community is not “Why are you printing money?” but instead it is the anxiety about – “Ok, you have printed money, now what?”. The world in one way or other will accept the difficulties that will come along with the loose monetary policy that the US is following, provided a confidence is built in them by assurances through a long-term credible US fiscal policy. And the responsibility for this lies directly with the US administration and the US Congress. As long as this concern remains unaddressed, there will be questions and anxiety about the future strength of the US economy and the dollar.

News Article Source:

1. http://finance.yahoo.com/news/US-companies-hoarding-almost-rb-2687745036.html?x=0&.v=1

President Obama is going to India!

2010-11-05T00:06:00.004-04:00

Come Saturday, November 6, 2010, the United States President, Barack Obama will be in India - his first official trip to the country. Expectations are running high over his visit and the Indian govt. made it clear not to expect any big bangs or breakthrough deals. I expect that this trip is going to be a consolidation of all gains obtained in the past decade or so in the US-India relationship and finding ways to increase this positive momentum built over the decade and push the relationship forward. Here are a few issues that will possibly come up in discussions and questions asked to the leaders of the two countries:

UNSC Permanent Seat: It has been India's long-held desire to get a permanent seat in the United Nations Security Council (UNSC) and almost all major powers seem to support an extended UNSC, with India as a new permanent member - except two "hesitant" countries - China and the United States. And the Indians ask: Well China, it is expected, but why US? Yesterday when this question of whether US would support India's bid to become a permanent member in the UNSC was asked to President Obama, he said that it is "complicated". During this year's World Economic Forum gathering, a poll conducted by India's TV channel NDTV and Facebook on "What does India expect from the world?" - showed that the majority expected the world to support India's bid to a permanent seat at the UNSC. This issue has been close to Indians' heart for sometime. So this question is definitely going to come up and I hope that President Obama makes it clear that though there are "sensitivities" on the US side on this issue and some unfulfilled expectations on India from a "US perspective" remain, the US would like to see India being an important part of any reformed international institution. But also, such words are uttered almost everyday by someone in the US administration but some kind of credible action would calm India's anxiety about how America envisions a future India - a credible action like that did by former former President George W Bush on the civilian nuclear program that brought the two countries closer than any other time in history.

Civilian Nuclear Deal:

The passage of a Civil Nuclear Liability bill by the Indian Parliament that holds the suppliers of the nuclear equipments liable, in addition to the operators, for any nuclear accident involving a faulty equipment, has become a thorny issue in this matter. US companies say that this is not in sync with international norms. But in a country where one of the world's disastrous industrial accident (Bhopal gas tragedy) happened and where people are still affected by this accident, both mentally and physically, this was the least the people expected from the Indian govt. and which the govt. had to oblige. When US companies say that such an inclusion of supplier-liability is out-of-sync with international norms, I would like to question who influenced the international norms? It's going to be a vain-effort if President Obama tries to push India for an amendment in the bill. While French and Russian nuclear companies are okay with this bill since they have state-backing to support them for any liability claims, amending the law just for US' request will not go favorable among Indian people. India has invited the US Nuclear companies to visit and get all clarifications - including what kind of suppliers would be held liable and under what circumstances. I hope the US companies understand the extreme sensitivity involved in this issue and I hope that all the hard-work done by both US and India on this deal do not go vain.
Economics:

i) Outsourcing: President Obama is sometimes seen as anti-outsourcing and protectionist by the Indian business community. But so be it - I strongly support President Obama on his decision to provide incentives to companies who invest in US (and this has to be done by cutting back incentives to companies who invest outside US or outsource jobs). Few things that we have to note here is - these are tough times in the US economy and it is nothing wrong in US policies to support investments in US. While I strongly denounce any protectionist policy, I also don't believe that all so-called "protectionist" polices are actually protectionist (Admission: Though I also noticed some clear protectionist policies by the US during the course of the last year). Secondly, the Indian IT companies have actually moved up the value-chain and most of them are no more just call centers or business process outsourcing centers, but are actually involved in research and development and other value-added services. Bottom line: Outsourcing is not going to stop and the Indian IT companies are not going to be drastically affected (we only have to look at the profits reported by some of these companies in the recent quarter) but atleast Obama's strict words and real-incentives would encourage investments in US. Infact, if someone had noticed closely, then they can see the investments by the same IT companies in US recently. And currently the private sector in US is not investing and so atleast the public sector can (actually should) invest through any additional resources obtained this way.

ii) Financial Services: US has been pushing India to open up their financial and banking sectors further. But the with the "credibility" of the US banking and finance industry is not-so-good condition, India is wary to oblige to any American request in this matter - especially feared of the thinking of how the "common-man" would view this in a country with a large number of "socialism-influenced" voters.

iii) Retail Industry: Now from the Indian side, opening up of the retail sector is not just a politically sensitive issue but also a confusing one. Retail industry is one of the largest employer in India and with 90% - 95% being in the unorganized sector (mom-and-pop shops), it has really been a tough time to analyse the positive and negative implications on the hundreds of millions of people (and most of them are poor). But India has to make it clear to the visiting US President that it has launched a serious study on this issue and is positive on opening this sector - though the time and pace remains largely undecided. One assurance India can give is to soon relax some FDI rules in the sector for greater foreign participation.

iv) Agricultural Sector: We all know that one of the contentious issue holding back Doha Agreement is developing countries' (read: India) stubborn position to not open this sector fully to foreign produce/commodities while developed countries (read: US) having political problems in cutting back farm-subsidies. I hope the two countries don't waste time in talking about opening this sector - since the answer is going to be a clear "NO" from both sides to any request by the other.
But the two countries should talk on forging closer ties on agricultural-related technologies and research (this also includes co-operation in space programs for activities such as weather-forecasting). India should give clear signs on how its going to formulate the public sector investment policy and the related procurement policy in irrigation related technologies (so far, India doesn't have clear policies in this regard but giving an assurance that it is serious about formulating a long-term agricultural policy involving greater foreign participation in related technology areas will be good.) Such policies will help the hundreds of millions of desperately poor Indian farmers, with increased business opportunity for US.

v) Export Control Restrictions: Any clue that US would ease restrictions on exports of high-tech and dual-use technologies will make Indians happy to the core - for, a message will be derived from such an action - that US sees India as the most important Asian "strategic" partner and not just as a business partner. But again, the sensitivities of US are understood but gradual reduction in restrictions will be a very good signal. There have already been improvements in this area of discussion and it would be great to see more.

vi) Infrastructure: This is an area where great co-operation could be achieved, not just in words but in action. India is in desperate need for foreign capital and technology to build infrastructure such as roads, ports, highways, bridges etc. We have the right demand in one hand and the right supply in the other, its just a matter of time before the two hands could be brought together for a business handshake.

Climate Change:

US and India almost stand on opposite sides on this issue - especially the argument that both sides put forward - one blaming the other of not doing enough. But discussion should instead be on co-operation in climate research and how the scientists could come on a common platform for the better benefit of mankind. India has made clear that for foreseeable future, fossil fuels are going to be the ingredient in the development of its economy. The reasoning behind this - extreme levels of poverty - needs to be recognized by the US, and America can come forward to initiate a consolidation and augmentation of resources by offsetting the weaknesses of one with the strengths of the other.

Geo-Politics:

Sorry this blog stays away from sensitive and complex geo-politics but one thing I can say is that when looked on a longer-term, the aspirations, goals, interests and values of the two countries remain aligned, though the degree of alignment varies currently. But I am very confident that the two countries would become the 21st century best-friends.

I wish President Obama a safe and successful trip. And Happy Deepavali friends! :)

Part 2: My Conversation with Myself - Dollar Dilemma and the China Complaint!

2010-10-07T22:44:00.002-04:00

Alright, alright, too much of Chinese currency talk at the International Monetary Fund (IMF) meetings today. Mirror Image just asked me a question which we missed to discuss the other day. So here it goes -

Mirror Image: The other day, I raised the possibility about the advantage of Chinese people being a greater consumer of American products if China appreciates it currency, which you did not accept, but how about this case - Let's say that a product 'X' is manufactured by American and Chinese manufacturers. Now forget the Chinese consumer, instead, think about American and global consumers. Will it not be advantageous to American manufacturers, if Chinese yuan, also called renminbi, appreciates? Then the American manufactured product 'X' will become cheaper vis-a-vis Chinese manufactured product 'X' (relative to the current levels). Now a higher quality but a relatively cheaper American manufactured product 'X' will be able to compete "fairly" with the Chinese product 'X' in the global market. What's your answer to this?

Me: Very good question. And yes, we should have discussed it the other day. Ok, so here's my explanation - American manufacturers say that the Chinese renminbi is undervalued by about 40%. So, let's assume here that China bows to international pressure and appreciates its currency. Now in reality, even if China appreciates its currency by 40% (which will then become somewhere around $1 = 4.01 renminbi from around 6.69 renminbi now), it would still be cheap to manufacture products in China than in US. Simple reason - US labor costs are too high compared to China's. Apart from this, one point many fail to realize is the supply-chain establishment in that part of the world. China did not become a global manufacturing base in the past 2 to 3 years. It has taken years and years of government planning and investment that resulted in development and establishment of massive supply chains in that part of the world, which subsequently made China a low-cost manufacturing base. Western corporations who manufacture their products in China will simply face an erosion in profit-margins due to the drastic appreciation of the renminbi.

But as I said, the supply chain that exists in that part of the world, from Australia (raw materials) to Japan (R&D, Design and high-end manufacturing) to China (low-cost manufacturing) and not-to-mention the other East/South Asian economies that form a part of this chain, will simply tempt corporations to shift their manufacturing base to nearby low-wage country (possibly India or Indonesia) without affecting the other establishments in the supply chain. And not-to-mention the fact that China will not completely bow to international pressure (so 40% appreciation is a distant dream) and the potential retaliation a communist government may try to do to US companies operating in China.

I understand what many tend to think when they ask for an appreciation in the Chinese currency - their reasoning is that an inflation in the US due to renminbi appreciation is actually good to the US economy, since that would make companies in US, who are hoarding cash now (and the people, to certain extent) to invest, that would spur job-creation and consumer spending in US. But my thoughts are this - just because China appreciates its currency, corporations are not going to shift their entire supply chain and manufacturing base, but instead they would just replace one component in the chain - the new replacement being another low-wage Asian economy.

Estimated Net Private Capital Flows into Emerging Markets

2010-10-05T23:47:00.004-04:00

I read a news article in Reuters.com - this gives us a picture of the amount of money flowing into emerging markets from developed nations. Here are some highlights from the news article -

"The Institute of International Finance estimated that net private capital flows to emerging markets would rise sharply to $825 billion this year from $581 billion last year. Capital flows into these economies will remain strong next year, amounting to about $833 billion".

Now that's almost a 42% increase from last year and these numbers don't include sovereign investments. I still don't see this huge capital inflow into these emerging markets as a big problem but definitely countries that are too much export-dependent need to be careful on this. I hope the central-bankers in these countries are watchful of this huge inflow of money especially I hope they pay attention to this line from the news article -

"The IIF said the biggest share of private capital flows is likely to come from portfolio equity investments by foreigners. This is forecast to be $186 billion in 2010, up from an average of about $62 billion a year in 2005 to 2009, and higher by $94 billion from the IIF's April estimate."

I still don't see a reason to panic or worry, but net portfolio investments into emerging markets are something that needs to watched on a regular basis, due to the volatility that they may bring.

Article Link (Source):

http://www.reuters.com/article/idUSNLL4LE6IP20101004

My conversation with Myself - Dollar Dilemma and the China Complaint!

2010-10-03T00:13:00.009-04:00

The US House of Representatives has passed a "China currency" bill that would authorize the US officials to take economic actions against China, if China was found to manipulate its currency. And we all know that China is indeed keeping its currency artificially low by intervening in foreign-exchange markets and through various capital controls. So, I had a conversation regarding this with the person standing straight against me in the mirror - his name is "Mirror Image".

Me: So, now is the US supposed to take action against China?

Mirror Image: Well, technically looks like that's what US should do as per the rules.

Me: But wait a minute, should the US take actions now? Is this what our priority is now?

Mirror Image: Hey, our priority is to create jobs! And so we need to take action.

Me: But what's trade sanctions against China going to do with creating jobs?

Mirror Image: It will bring the US jobs back.

Me: You mean the capital intensive manufacturing jobs?

Mirror Image: Yes, the capital intensive manufacturing jobs.

Me: Wait a minute, I am confused. So, in other words, if China allows its currency to appreciate then the US will have its manufacturing jobs back?

Mirror Image: Hmmm...I think yes.

Me: Can you explain?

Mirror Image: Well, see, if China allows its currency to appreciate, then the Chinese consumers will have more purchasing power and they can buy more from us. Also, if Chinese currency appreciates, then US consumers will buy less from China while Chinese will buy more from US, thereby reducing US' trade deficit.

Me: Alright, what you said is true but I am still not clear - how will that create jobs in US?

Mirror Image: Well, if Chinese buy more from US, then US will be the producer, creating jobs, and China will be the consumer.

Me: Which Chinese consumer are you talking about - rich, middle-class or poor?

Mirror Image: All

Me: See, consumption by the rich really would not differ much due to the depreciation in the dollar because they are rich and they can afford even at current prices. Now, if you are talking about the middle-class and poor Chinese, you are very misguided. I have told you many times that around 35% - 40% of the Chinese GDP is contributed by exports and any loss in the export sector would lead to innumerable job losses in the middle-class and poor societies of China - then they cannot afford to buy "American" products.

Oh by the way, did you read the news yesterday - Here are some highlights from bloomberg.com -

"The dollar declined 2.2 percent to $1.3790 per euro, the weakest level since March 17" ;
"The U.S. currency weakened to 83.27 yen, from 84.21 yen the previous week";
"The Dollar Index declined 5.4 percent in September, the biggest monthly decline since May 2009 when it fell 6.2 percent";
"South Korea’s won led gains with a 2.2 percent weekly jump to 1,130.45 per dollar";
"The Australian and New Zealand dollars each rose 1.4 this week against the greenback as investors looked for higher interest rates"
"The Bloomberg Correlation-Weighted Currencies Indices show the dollar has declined 2.4 percent this year against a basket of currencies from 10 developed-world nations"
"The Swiss franc gained 1 percent against the greenback finishing the week at 0.0938 per dollar."

What all the above says is that the dollar has weakened against most of the major currencies throughout this year, which tells that the American exporters should have a better export atmosphere. But despite dollar's weakness against all these currencies, is it still the Chinese yuan's weakness against the dollar that is holding up jobs getting created in US?

Mirror Image: You are making me think now.....Hey, but since the Chinese yuan will have better purchasing power if they appreciate their currency, the Chinese govt. can diversify their investments and make the country less export-dependent.

Me: All this you want to happen in a few months from now? Are you dreaming? Did you forget that these are not service jobs to bring it back immediately, these are capital intensive manufacturing jobs and it takes years to build factories and other infra-structure in US, but which China already has and that could be used by other countries to make products cheap in China.

Mirror Image: But then we have to create jobs.

Me: Exactly! That's what I am saying too. We have to concentrate on creating jobs in US rather than complaining about China's currency policy. While undoubtedly, China has to start allowing its currency to float more freely, for which China has to first diversify its economy through investments in "other" areas, we have no time now to fight China over its currency policies - this is just a political distraction.

Mirror Image: But people argue that US is not even facing inflation rather we are facing disinflation and fearing deflation. So, again, its ok if prices go up in US due to China appreciating its currency. IS this because of this "inflation" worry that you don't want to fight China over its currency policy.

Me: No, go and think again what I said. And since you have brought this inflation/deflation topic, I would like to tell you about the other article that I read in businessweek.com. Here is the head line - "Companies Reluctant to Hike Prices Despite Rising Costs" and it further further goes to say - "Commodity prices and other corporate costs are headed higher, but many consumers refuse to pay more for products. The result could be weaker profits and slower hiring".

So, does that make it clear for you that its not deflation of inflation now - its deflation or stagflation - oh yea, we haven't come to the stagflation stage yet and I do not want to, but if jobs are not created through proper investments in right infrastructure, technology and people and if right incentives are not given to the right people then years down the road stagflation might be a topic of discussion.

Mirror Image: We are facing disinflation now!!!!

Me: Yes, agree, but see the data, we won't face deflation either. Its all because, some countries (both developed and developing) countries are growing at enormous and good rates while some are not growing or are growing too slowly. It's a complicated global macro-economic situation which we will talk later.

Mirror Image: Ok, ok. But again, we need jobs and by the way, we need manufacturing jobs!

Me: Good. I agree. But I don't agree that we have to be concentrating on bringing our jobs back from China, infact they are no more "our" jobs, but instead we should concentrate on creating new jobs and preserving those jobs for future generations of people of the US.

Mirror Image: So what you say should we do for that?

Me: The people of US have a great innovative mind. I don't think they need suggestions, they just need support - "quality" support from policy-makers.

Mirror Image: Is that all?

Me: Seems simple right? But hey, I said that the support is needed from policy-makers. So its not that easy.

Mirror Image: Oh yea, I hear you friend!

Me: All right, got to go, nice talking to you buddy.

Mirror Image: Same here man - see you soon when you comb your hair! :)

Sources:

1. http://www.bbc.co.uk/news/business-11437808

2. http://www.bloomberg.com/news/2010-10-02/dollar-falls-to-6-month-low-versus-euro-as-fed-view-dims-u-s-asset-allure.html

3. http://www.businessweek.com/investor/content/sep2010/pi20100924_590869.htm

Rupee Appreciation! - Nothing to worry!

2010-09-30T22:53:00.007-04:00

The Asian Development Bank (ADB) in its recent report has projected a GDP growth of 8.5% for India during the fiscal year 2010-11. This is in line with the Indian government's projections. In the same report, ADB has expressed concerns about the high inflation (currently at 8.5% in August) and appreciation of the "Rupee", the Indian currency.

There is no doubt that there is a surge in capital inflows into India. In general, emerging market shares have been performing at record levels compared to developed economies and there is abundant foreign direct investment (FDI) flow into India. While high inflation is definitely a concern (especially food inflation which remains at record levels - 16.44% for the week ended September 18,2010), I don't see the rupee appreciation, at the current levels, to be a great concern.

While the rupee has appreciated more than 11% in real terms between August 2009 and August 2010, most of the appreciation was due to more-than-normal weakening of the rupee during the early part of the year. This was due to the surge in investments in the US dollar, when investors were fleeing for safety due to uncertain economic conditions. But when we look at it from a multi-year perspective, the nominal appreciation of the rupee should be around 5%-7%, which I see as a positive factor.

Remember, only 15% - 20% of India's GDP is contributed by exports and around 60%-70% is contributed by consumer spending . Now, there is no doubt that some very crucial export areas remain which act as drivers of growth and income for many other non-export sectors of the economy. But I still think that the negative effect on these sectors due to rupee appreciation at current levels is bearable and any short-term negative effects in these sectors could be offset to a certain extent by providing incentives. But when looked from the other angle, a stronger rupee would help to diversify investments in the economy which in the longer run should be able to offset the negative impacts of rupee appreciation in certain export industries.

Also, if a major portion of the capital inflows result in real job creation, thereby fuelling consumer demand, then any resulting inflation could be tackled by standard monetary policy tools.

And if right investments are done, with correct monetary policies in place, then a stronger demand from the Indian consumers is actually a boon to the global economy. From a global macro-economic perspective, we need strong demand from the consumers in the emerging markets during the coming years to fill the vacuum left by the consumers in the developed economies.

All this being said, ADB is concerned about the over-appreciation of the rupee in the coming years. I still do not see any clear signs for that. If foreign investment policies are rightly structured supported by sound monetary and government policies, then a growth in the inflow of foreign money should be balanced by import demands from the Indian consumers in the coming years, apart from an improvement in the quality of exports - all of which I see as a good sign from a global perspective. There are very many global factors involved in this but assuming the current status-quo of global competitiveness of the countries remain, I don't see a reason to worry about the current trends in the appreciation of the rupee.

Source(s):

1. http://www.adb.org/Media/Articles/2010/13337-indian-development-outlooks/

Commonwealth mess! - Nothing Uncommon

2010-09-27T21:38:00.008-04:00

India is hosting the Commonwealth Games (CWG) in less than a week from now but we are not short of criticisms about the preparations for the games. In the past one week, there had been complaints of uncleanliness, security risks, poor quality constructions and an uninhabitable athletes village (and not to mention the allegations of fraud and corruption throughout this preparation).

While all this comes as a shame on the face of every Indian, it does not come as a surprise. On almost every civil program, the Govt. of India has repeatedly failed to deliver or has fallen short of what was promised. And when such a failure occurs, the blame game starts - blame on politicians, blame on bureaucrats, blame on diplomats, blame each other, blame on weather and what not. The bottom line is that no one takes responsibility - and yes it is right that no one could be held accountable because every one acts on their own and the whole structure misses a central governing body which would oversee and take complete responsibility for complex projects like these. Well, the Organizing Committee (OC) of CWG was one such body but when the OC fails to act responsibly and sincerely, someone has to step in to take the OC in hand and keep the ball rolling. But when the "5-years-in-office" politicians are given responsibilities to supervise, everything gets out-of-track from the real objective, as the period (and opportunity) of work is seen in the eyes of "5-years". And in addition to that, India's traditional system of giving power and authority to persons based on influence, connections and seniority rather than skill, performance and merit is completely out of sync with the objective of India - to be an economic super power in the 21st century.

This CWG might have resulted in embarrassment for many Indians but this is a right lesson at the right time for India and Indians. The lessons have to be learnt - the lesson that government is not exempt from the 21st century business principles, the lesson that everyone needs to be accountable to his/her actions, the lesson that government still lacks the skills, resources and experience it needs to do complex projects, the lesson that corruption could not be seen as an everyday expense to the people and an everyday revenue to politicians / bureaucrats / govt.workers (and the list goes on) and the lesson that it is time India acknowledges its shortcomings and lack of experience in certain key sectors.

As an open democratic society, it is time that India acknowledges its weaknesses openly and moves forward with steps to rectify it. Few months back, when I watched an influential Central government minister complain about the outdated laws of the country in a TV channel, I could only laugh - if he complains, what should the people do? If India has to efficiently use its scarce resources, it is time to bring in a new era of work culture in the government and form new independent autonomous bodies, free from political influence, filled with eminent persons, who could oversee complex projects that India is planning to do in the next decade and more and who could be held accountable - accountable to the parliament, judiciary and to the people. Otherwise, there would be an era of wastage of billions and billions of dollars of taxpayers' money through inefficient but complex government programs.

Free Trade or Fair Trade

2010-05-21T23:36:00.004-04:00

Recently, I followed a debate on Free Trade vs. Fair Trade in "Economist" website. And these days, it is very common to see this topic emerge in many international economic discussions. This debate of free trade versus fair trade is largely misunderstood. People who argue in favor of free trade do not say that the trade should not be fair and most people who say that trade should be fair do not say that trade should not be free. Instead the whole debate is always about which comes first - free or fair? Well, the obvious answer should be "fair". But what is the definition of "fair" here? And how much fair is fair? Who would judge this fairness?

Today we have various international institutions - International Monetary Fund (IMF), World Bank, World Trade Organization (WTO) etc. etc. But most of these institutions are structured to represent political power than to truly facilitate economic equality. These institutions, largely dominated by industrialised nations, and voicing their support in favor of views proposed by developed countries, itself is clearly against the "fair" trade that both industrialised and developing countries want. As an example, IMF, for years has been against capital controls in developing countries. This was like telling the developing countries indirectly to open their markets to foreign investors when at the same time it did not propose policies or solutions on ways to increase access to the markets of the developed countries by poor and developing nations. Since in today's world, globalization has integrated the financial markets and economies of the world more closely, fearing that excessive capital flows to emerging markets may result in an unstable global economic situation, IMF has started to advocate for capital controls in emerging markets.

Now what is fair? - yesterday's proposal to be completely open to capital flows or today's proposal to have capital controls? How much capital control is fair? Who will decide what is fair? How? In what time frame? For years, these questions remain unanswered.

The Doha Round of talks on free trade, started in 2001 and still incomplete, co-ordinated by WTO, to achieve a global multilateral free trade agreement is caught in an argument about "fair" trade. One of the major points of disagreement between developed and developing nations is on the agricultural sector. Industrialised nations want the developing nations to fully open their agricultural markets. But at the same time, the industrialised countries do not want to fully cut their agricultural subsidies that the farmers in these countries enjoy. Why? The answer is - Politics!

As of today, the European Union has the largest agricultural subsidy program under its "Common Agricultural Policy". Wikipedia states that agricultural subsidies and programs represent 48% of the EU's budget, which was 49.8 billion Euros (roughly $60 billion) in the year 2006.

The developing countries are also to blame in this economic game where politics take center stage and not economic welfare of the people. When many times, when we have clear evidence that opening up certain markets will benefit the people, the markets still remain closed purely for political reasons. But in the meantime, millions of people, generations after generations are left poor due to flawed economic policies guided by political factors. The United Nations says that at this moment there are around one billion people without access to proper three meals a day (this is one-sixth of the world's population).

These days, when we read newspapers, we see that there are so many bilateral and regional free trade agreements (FTA) signed between nations to promote free trade. Somehow we might even become successful in concluding the multilateral Doha Free Trade agreement but as long as politics stays the guiding factor for economic agreements, we will only be achieving "free" trade agreements and not "fair" trade agreements.

World Bank's capital increase

2010-04-26T23:24:00.004-04:00

So finally some good news today! The World Bank's shareholders have agreed to raise the bank's lending capital by $5.1 billion. This will come in two separate increases of $3.5 billion and $1.6 billion (by developing countries). With this, the voting share of the developing economies have also gone up (47.19% from 44.06%). China has surpassed Germany, France and UK to become the third largest shareholder with 4.42% voting rights from an earlier 2.77% voting rights. This is really some good news since its been long overdue to increase the lending and voting share of some major developing countries like China. This makes an international body like World Bank look more representative of the international economies in the current global economic scenario.

Also, I am glad that the lending capital is increased. There will be a total capital increase of $86.2 billion for the International Bank for Reconstruction and Development (IBRD). The difference of the total capital increase of $86.2 billion and the operating capital of $5.1 billion is called "callable capital" that can be drawn upon when emergency arises, from the member countries. There are too many projects that depend on World Bank funding in developing and poor countries. And with the world bank committing itself to large amount of funds during the recession, this has strained its resources. And now I hope that the projects in poor countries will continue unabated.

All this said, I would still like to see more improvements in the governance architecture of the IMF and World Bank. Though this capital increase is a good news, we still need more capital down the road and I hope that gets done. Also, some poorer countries have lost some of their voting share due to this re-allocation. I hope this is also corrected down the road. Personally, I think that European countries have far more voting rights than what is needed. If we consider Europe as a whole from an economic standpoint, we have far more European countries with larger voting rights than what should be to represent Europe. I hope this correction is also done in the near future so that we can accommodate more poorer countries in the governing architecture with more voting rights for them.

Sources:
http://www.businessweek.com/news/2010-04-26/world-bank-says-nations-agreed-to-boost-lender-s-capital.html

http://blogs.worldbank.org/meetings/node/616

http://www.nytimes.com/2010/04/26/business/26bank.html

Pathetic Poverty

2010-04-19T23:14:00.006-04:00

With tears I write, India's new official poverty estimates were just released by the government panel who worked on this. The poverty rate has gone up from 27.5% in 2004 to 37.2% and this puts almost 100 million more people below the UN estimated poverty line of $1.25 a day. So now, a total of 410 million Indians live in poverty. And the malnutrition rate in children in India still stands at a whopping 46% (in China it has come down to 7% after the start of economic reforms). Just to quote a line from the Reuters article - "A third of the world's poor are believed to be in India, living on less than $2 per day, worse than in many parts of sub-Saharan Africa, experts say." I have no strength to write anything beyond this at the moment other than to say a sarcastic "Thanks!" to the Indian elite political class.

Source: "Reuters" which published the numbers from the poverty estimate report.

http://news.yahoo.com/s/nm/20100420/india_nm/india478257

http://news.yahoo.com/s/nm/20100419/india_nm/india477918

Reform or Bubble? Choose one

2010-03-09T22:16:00.011-05:00

Why is it very important to prevent the banks from speculative trading? Let's consider these facts that are relevant today:

1. America has injected enormous amount of liquidity into the financial system and the interest rates in US are near zero.
2. Asia, especially China and India, seem to be in a comfortable zone (relatively) out of the recession and have started monetary-tightening.

Is there a relationship between American financial system and Asia? Yes there is. With the US interest rates at an all time low near zero and expected to remain low throughout this year, there are huge amounts of capital outflows from US into emerging markets. This capital-outflow is supported by the speculation that emerging markets will do better than the US, atleast in the shorter term. There are good reasons to believe this - economies like China and India have had tremendous growth in recent years, have financially sound banks, have huge foreign reserves and high savings rate. And all these are currently being deployed and will be deployed in their respective economies to promote and support growth.

In both China and India, I expect strong government spending during the coming years. China, I would expect, to spend on factors that would drive consumer-spending. China is already embarking on a $150 billion nation-wide health-care package.

India has plans to spend heavily on its broken infrastructure like roads, ports, bridges, public-transportation etc. India is expected to need $500 billion in the next five years to meet the growing infrastructure demand (and the govt. acknowledges this).

Both China and India have huge savings rate and large amount of foreign reserves that should see the planned investments get implemented. United States is also expected to invest on a large scale in infrastructure related projects to push the economy higher. So all this should ensure a considerable amount of global capital-sector spending.

But the recovery from this recession is very different from the earlier ones. In this recession, the US consumers are hit hard and they are likely to spend less in the coming years. Can this decrease in US private consumption be compensated by an increase in private consumption from Asian economies like China and India? I very much doubt it. In 2007, US consumed $9.7 trillion worth of goods and services which is six times more than the combined consumption of China and India in the same year (source: "The Next Asia" book by Stephen Roach, Morgan Stanley Asia Chairman).

And this time, Asia leads the recovery and US will follow, which means exports are going to be a key for growth in the US in the coming years. Will this mean that America will need a weaker dollar? Well, I am not in favor of this idea. With enormous capital spending expected in the coming years in the world's two most populous nations and other developing countries, a weaker dollar will shoot up the commodity prices to unsustainable levels and that combined with the large liquidity in the US financial system and with low interest rates will make a good recipe for inflation in US.

Now there are two questions that we have to answer here:

1. How are we going to make American exports more competitive?
2. But even before answering the first question, how can we be sure that Asian economies don't get into any kind of economic trouble, which if they, will bring down the world again into recession?

One of the solutions to the second question, which will be a very good first step towards a stable global economy, will be to bring about financial and banking reforms in the US. If the commercial banks are allowed again to get involved in proprietary trading, which is done using the abstract concept called "speculation", then there is high-risk of asset-bubbles forming in Asian economies due to cross-border capital flows. Many Asian economies, especially China and India have some sort of capital-controls but this will not be sufficient to stop the speculative inflows. And this may cause unsustainable shoot-up in real estate and stock prices. At the same time, allowing banks to do proprietary trading will seriously reduce bank-lending in US. This is especially true after the credit-bubble burst. Bank-lending is very much needed now for small businesses and to an extent to consumers in the US. By preventing banks to speculate using depositors' money, we can bring a balance between exports and domestic consumption in US and this will also help reduce the currently unsustainable current account deficit.

Now coming back to question number 1 - how can we make American exports more competitive? The answer to this does not lie in a weaker dollar but instead in increasing productivity. For this to be achieved, US must direct the cheap money available into education, investments to achieve higher energy-efficiency, investments in people, scientific-research and other areas of technology. What the US does NOT want now is the government and Federal Reserve trying to increase the retail-spending of American consumers through cheap money to pre-crisis levels that were already unsustainable, to prop up the economy. Trying to do this may look right now but going back to the old-ways will likely make our economy present us something in the future, which has been presented to us again and again - a "bubble"

"Festival"onomy in China and India

2010-02-22T22:28:00.011-05:00

Recently, I have been trying to analyse the positive impact of festivals in Chinese and Indian economies. I have heard innumerable economists talk about the strong fundamentals of the Indian economy compared to that of China's. I agree that currently, the economic fundamentals remain strong in India than in China but that's not to say that the Chinese cannot get their fundamentals strong. In fact many are wondering how China would rebalance its current model of economy from being export-oriented to an economy driven by domestic factors. But from the response that they have shown to the global economic crisis, especially with the introduction of a $587 billion stimulus package (about 14% of their GDP) last year, it seems to me that the first step taken by China is on the right track to shift their focus considerably from exports to domestic private consumption even though the next big challenges for China would be to control inflation, gradual cooling of the economy that now looks like over-heated and sustaining the private consumption even after the stimulus is withdrawn.

China:

Okay, now coming back to the festival spending - China just celebrated its Lunar New Year and according to the data released by the Chinese commerce ministry that was quoted by Xinhua news agency (and I got this from "AFP Reuters" news), shops across China are estimated to have had a total sales of about 340 billion yuan ($49.8 billion) which is 17.2% up from 2009. During this spring festival, consumer spending on food, travel, tobacco, liquor, communication equipments, jewelry and home-appliances have all shown an increase from 2009. So, what we can infer from this is that there is a considerable amount of retail spending by the Chinese consumers during the months of January-February of every year. Apart from this, we can consider the Buddhist festivals in a year that would see some increase in consumer spending. And then there is Christmas which is celebrated since there are considerable amount of Christians in China. Apart from this, there are more lunar festivals in a year that might see an increase in spending by consumers that might be above average but not on a large scale.

India:

Now let's consider India. India is a very diverse nation in religion and culture. And almost every state speaks a different language and have their own culture, tradition and festivals. Now consider this example of a festival in a very generic scale - In January, south India celebrates one of the most important cultural festivals and some northern and north-western states celebrate festivals around the same time. During this time - there is an enormous increase in spending on - textile and food (particularly sugar). Most of the Hindu festival days during this January month are also considered auspicious for any kind of new purchases and new ventures. So January also clocks a good amount of consumer spending in capital goods in many parts of the country. Likewise, a wide array of Hindu festivals are spread throughout the year and throughout the states in differing formats. And around 70-80% of the population being Hindus, there is a drive in consumer spending especially on the retail side. Again, the point to note here is that most of these festivals dictate new clothing and other new "things" since they are considered sacred, auspicious and the "right thing" to do during festival time. Now India has more than 150 million Muslims. And India celebrates the Muslim festivals in a grand way leading to more retail spending, especially during that part of the year when the Hindu festivals aren't seen much. And then India has more than 50 million Christians who celebrate Christmas in December right after some of the most holiest festivals of Hindus and Muslims. Then there are Buddhist festivals, Jain festivals, Sikh festivals and other regional festivals spread almost evenly that makes sure that there is buoyant retail spending.

Apart from this, there are festivals that bring demand (and thereby supply) to certain commodities. One such festival is the "Gold Rush" festival (named differently in each Indian language, so I preferred to use English :) ) where people think that it is auspicious to buy gold on that day. Every year during this day, a good percentage of the nation's 1.1 billion people buy gold. And there are other examples like this.

One more thing that we have to note is that India has more rural population than urban population and rural Indians tend to spend more during festival seasons when measured as a percentage of their incomes. In any country, urban population spends on luxury goods as they get richer whereas majority of the rural population spend when mandated by their culture or religion. And since both China and India has a high percentage of rural population, my analysis shows that this rural spending makes a difference. Even during the worst economic times, consumer spending has been a major contributor to India's GDP.

Consumer spending contributes around 35% to China's GDP whereas it contributes more than 60% to India's GDP.

I might have missed to stress the importance of spending in some more Chinese festivals but I don't think Chinese festivals are evenly spread in a year and even if they are, I don't think it mandates spending like that on the Indian side. So now we see one of the reasons for buoyant consumer spending in India when compared with China especially in the retail sector. And this is another reason why there are hundreds of millions of Indians in retail businesses (many of them are family-run small shops). And this private consumption by all sections of Indians, especially the rural Indians forms one of the main reasons for growth in small businesses across the country and causes economists to say that India has stronger economic fundamentals than China. But this is not to say that the festivals are the only reason - United States has fewer festivals than India but has a society that tends to spend more. I did this comparison to see the reason of why the two nations, China and India, which have the same tendency to save more than spend, differ in consumer spending by such a large difference when measured as a percentage of their GDP. Rural spending in India definitely makes a difference but this is not to say that festivals are the only reason for this difference in consumer spending. There are other reasons but this is what festivals have to do to each nation's economies.

Economic growth in India is 'exclusively' for?

2010-02-09T22:38:00.013-05:00

Indian economy has been growing at an average of 8% in the past decade. The agricultural sector has clocked an average increase in output from around 2% to 3% in the past decade and agricultural sector contributes about 18% to India's GDP. It is constantly being said that the agricultural output has to grow at 4% per annum to meet the food demand of the country. During a recent panel discussion on the topic "India's Future Agenda" in Davos World Economic Forum, Montek Singh Ahluwalia, the Deputy Chairman of India's Planning Commission, gave a rough calculation as an answer to a question asked by a gentleman from the panel-floor. The question was something like - According to the World Bank, landlessness being the best predictor of poverty in India, what are the steps taken by the government to address poverty? The Deputy Chairman was right to say that giving land to the poor is not the solution and there is not much free land available. Remember, around 70% of India's population of 1.1 billion depend on agriculture for their incomes. Most of them are farmers and most of them live on less than $2 a day. Some farmers might not own land and might actually do farming in the land that is leased. But in any case, the leasing of land should not be the cost-issue that gives them low net-incomes. In fact, most of the land that is leased should be cheaper compared to the output produced by theoretical terms. Okay before I proceed, let me tell you the calculation that the Deputy Chairman gave : With the assumption that the agricultural output is increased to grow at 4% per annum and with the population projected to grow at 1.5% a year while the economy grows at an average of 8%, then the growth per capita will be 6.5%. So now it is essential that people move out of agricultural sector into other sectors (industries) at the rate of 2.5% annually so that the income levels for the people producing 4% agricultural output remains high enough for a good standard of living. Well, when looked from a very generic perspective, I agree with what he is trying to say even though I might have to disagree with the "4%" number because with the Indian middle class growing at a rapid rate and as more number of people move out of poverty due to increasing globalization, more number of people will be willing to consume healthier food in the coming years and in order to meet this demand, agricultural output might have to grow at more than 4% starting from within a decade.

But there are other various points that we have to confront here. First of all, why is the agricultural output so low even when we have so much population working in that sector? And more number of people in agriculture means that more land is cultivated. With so much cultivation, why is the gross national agricultural output growing at such a weak pace? In fact, due to poor monsoon rains, agricultural output is expected to decrease in fiscal 2009-2010. And increasing industrialization is taking away many fertile cultivable lands. The answer to the above questions is a complete lack of investment in the agricultural sector. One poor monsoon season in 2009 and 70% of India's population suffers directly and the rest suffer in the name of food-price inflation. And the policy makers keep thinking of whether this food-inflation would slip into the broader inflation! Huh! While private investments are necessary to achieve higher growth in the agricultural sector, it is the duty of the government to make some essential initial investments in agricultural-infrastructure that will pave way for private investments. It is a national shame that India being an agrarian economy for generations, still depends heavily on monsoon rains every year for desired and needed agricultural output. There is still NO organizational structure put in place to eliminate the middle-men and increase incomes for the farmers. And there is - very low, if not none, investments in agricultural universities and research; very poor transportation-infrastructure in rural India for the farmers to transport their goods; NO cold-storage facilities available to store excess farm-goods; no proper water management techniques to store rain water and inadequate supply of electricity to rural India to carry out irrigation activities. I feel that we could have more output even at present conditions by just facilitating some kind of cold-storage for farm-goods. Almost one-third, if not more, of the farm goods get spoiled before it reaches the market and poor transportation infrastructure is another reason to be blamed here. Speaking in the same forum, Venu Srinivasan, President of CII (Confederation of Indian Industry), spoke about how the poor quality government subsidies like providing urea is actually spoiling the land and affecting the farmers in the longer term even though it might look all good in the short term. (I am not very sure about how correct Mr. Srinivasan's point is). Also, the Public Distribution System (PDS) is enormously flawed. Well, with the expected introduction of national identity card that is due in a few years, I expect the efficiency of the PDS to improve to a certain extent.

It is expected, whether desired or not, that a good chunk of the population will continuously keep moving out of agriculture due to increasing industrialization and low-incomes in agriculture. But if high grade investments are not done in agricultural sector, then we will see a decrease in agricultural output every year while the population keeps growing and this will result in a direct threat to the country's food security. While India keeps moving up the economic ladder it is important that everyone is taken along. What India needs now is not just "growth" but "inclusive growth". Everyone knows that India is a very diverse nation but we do not need a new kind of wide ranging diversity now - in the living standards of the people.

Not a good "job"!

2010-01-11T22:24:00.015-05:00

The unemployment report released by US Bureau of Labor Statistics(BLS) is so depressing and worrisome. The unemployment rate was unchanged at 10% in December from a month earlier. Non-farm employment dropped by 85,000 in December. I have been hearing many economists and government officials saying that the recession is over and the US economy would grow in the coming quarters. It is true that the recession in the US is technically over and the economy would grow in the coming quarters. But my question is how sustainable is that growth? When we look at the BLS report, we have some very clear indications. First of all, 10% unemployment rate is very very high (total number of persons unemployed currently = 15.3 million and this is without taking into account the persons who are unemployed but have given up searching for work). There was a decrease in unemployment rate from 10.2% to 10% in November from October and it remains unchanged in December. But when you look at the individual sectors, I find this marginal decline in unemployment rate with zero-significance. Infact the 10% unemployment rate worries me to the same extent as I was worried during the peak of the recession.

I looked at the past 5 months trend (from August to December) and I can see that the core sectors that include construction, manufacturing, wholesale trade, goods-producing sector (durable and non-durable), leisure and hospitality have all shown steady decline in terms of employment (there are some minor up ticks in these sectors here and there but on the basis of a straight August-December comparison we have had a steady decline in employment and an increase in unemployment). In December alone, construction has shed further 53,000 jobs; manufacturing-27,000 jobs and wholesale trade-18,000 jobs. The increase in employment was seen in temporary help services and health care. But here, as the name suggests it is only temporary and the increase in the number of physicians reported in health-care only adds to the scare. If it is true that more number of people are needed in health-care (read supply) then can we assume here that the demand is high (which means more sick people) and can we further assume that a measurable percentage of the increase in sickness in individuals is due to recession? If my assumption is true then this doesn't look good for the sick individuals and the for the country.

So to put it bluntly, all the stimulus programs introduced by the US government have simply not had the effects that were expected. Yes it decreased the unemployment rate but did NOT create efficient and sustainable jobs. The US government rightly spent $700 billion in rescuing the troubled banks but at the same time committed the biggest mistake of not nationalizing the banks. The government has poured billions of dollars of taxpayers' money and is now begging (should i say literally) the banks to lend to businesses in need. Not just businesses but the country as a whole needs that to. But in the meantime, the banks have gone to the old system of speculative-trading in the secondary markets. And with the global economic system currently being so volatile, so fragile and so awash in liquidity, it only makes it easier for these banks to speculate and earn profits. And this speculation only leads up to higher commodity prices thereby causing a further slack in consumer-demand. At the same time, these banks, saved by taxpayers money, are caught in a fever of suspicion to lend. If only the government had nationalized these bailed-out banks after their rescue, we would have had an efficient lending to businesses that would have then added jobs and created demand. The government stimulus then working in parallel would have helped to boost further demand. Some might argue and actually did argue that nationalization of banks would mean socialism, but pouring hundreds of billions of dollars of taxpayer money into private banks that played with the taxpayer money, on the principle of, as Dr.Paul Krugman would say, heads bankers win, tails taxpayers lose, without nationalizing the banks is the ugly side of capitalism. Some good capitalists would call this "bad capitalism". (Please note: I am NOT a socialist but I would like to be a good capitalist). And I am not talking about permanent nationalization of these banks but I would have preferred a short-term nationalization of these banks till we reached a point of sustainable recovery.

But let's look ahead and see what could/should be done. Currently we face a difficult situation of a shortage in supply of credit and an all-time low aggregate demand. And the current situation looks like demand must be created before supply for which jobs need to be created by the government. Programs like the "short-term work" program introduced by Germany need to be considered. Special loan programs to small and medium enterprises (SME), direct incentives to American export industries etc are some of the other things that need be considered. I might prefer the federal government to borrow from private banks and then set-up something like a federal-loan institution which would lend money directly at subsidized interest rates to businesses and consumers. This might increase the willingness of the banks to lend and at the same time we can have a check on the money supply in the system without printing anymore money or atleast printing less money. I have not looked/studied all the pros and cons of the above suggested programs but the stimulus program that will be inevitably extended should be something on this line and thinking. Some economists keep saying that if the "jobs" part is not taken care of then the economy might face another recession (double-dip). I don't know if I would agree that a double-dip recession is likely but if the jobs part is not taken care of then there might be an inevitable and prolonged slump in the economy.
So far, it's not been a good job by the US government but let's hope they the get the job done, WITH PERFECTION!

India's food crisis (Part-2)

2010-01-04T20:20:00.017-05:00

This post is a continuation of my first article, "India's food crisis", since the situation in terms of food price inflation has evolved further and needs a newer look on the case. The food price inflation has reached 19.83% in the 12 months to the December 19, 2009. We have to remember that the oil prices were down below normal levels this time last year. So the food price inflation of 19.83% looks very high and considering that this is only a WPI measured inflation, the prices of the food products in the retail market will be much higher. In a country where almost half the population live on marginal incomes this situation is totally unacceptable. But nothing could/should be done on the monetary policy side to control this food price inflation. I agree that it is a genuine concern that this increase in food prices might slip into broader inflation. But we have to keep in mind that this food price inflation is due to a shortage in supply and is sector-specific. The only way to reduce price rise is by increasing supply and the way to increase supply is through imports and offloading some food stocks from the storage. I was assuming that a decent proportion of price rise of food products was contributed by speculation. So I was wondering if imports would increase the price of food products in the retail market above what could be achieved by controlling speculation. But the situation looks like the food price inflation is shooting above acceptable levels of real food price inflation minus speculation. I know that the Government of India was in direct talks with other governments to import essential food items but I am not aware of the results of the actions by the government. In any case, it is time to import food items and offload some amount of food stocks in storage. I have been hearing about the success of winter crops harvest. So a small amount of imports of essential food items along with offloading a measured amount of food stocks from the storage should reduce the food price inflation for few months before we come across the next monsoon season. And if the next monsoon season is a success then the government can offload a further measured amount of food stocks from the storage without importing any further to keep a tight lid on the food prices till we reach the next harvest season. Currently if the import costs are very high then the government might be forced to sell the food products at more-than-expected subsidized rates which may increase the government's deficit. But that's fine, the government must go ahead and import food for the sake of preventing this sector specific inflation from falling into the broader inflation. So yes I think it is time for the government to take some of the above mentioned measures (if they have not started already).

Again, no amount of monetary tightening should be done now to control food price inflation or in the fear to control broader inflation. Again, this is sector specific and is due to shortage in supply and is not because of excess demand or excess liquidity in the system. So all the great personalities talking about exiting monetary stimulus, I kindly urge them to think again.

By the way, considering the benefit of the people of India, I am confused as to why some top government officials OTHER than RBI Governor, Deputy Governors, Prime Minister, Finance Minister and Finance Secretary are even talking about monetary policies. Some are not just talking but are hinting and strongly predicting about monetary policies. Those officials will do a great favor by not talking about monetary policies. I hope they are aware that their on-the-run interviews in the media is unnecessarily hurting the financial markets and I also hope that the Indian media will in the future better know about whom to ask what questions.

Update 1:
Update Date : January 13, 2010
Good News - as per the news on January 13, 2010 the Agriculture Minister of India after a cabinet-level meeting today announced the release of 3 million tons of wheat and rice from storage into open markets. But he said that the Govt. has decided not to import rice.
Well, I am atleast glad that the release of wheat and rice is done. This should ease the price to a considerable level. The enormously high cost of sugar in recent weeks was an area of concern during the meeting and some political problems in one of India's state (which has not processed raw sugar that's imported and is sitting idle in its ports due to local political problems)was quoted as a reason and some measures have been taken to address this issue. I am not going into this political issue now but one thing that I can say is the - it is festival time in many parts of South India. And one of the highlights of this festival is consuming more sugarcane and making sweets at home. So this would have shooted up the prices of sugar. Once the festival ends this week, the demand should go down and I am expecting the sugar prices to come down a little. And the other measures taken by the government should reduce the price of sugar further more. So it looks like we are in a good situation. The food price inflation in December was near 20% and I am expecting it to come down a little in the coming weeks. I will keep this case posted.

Update 2:
Update Date : February 11, 2010
Food-inflation was 17.94% during the week that ended January 30, up from 17.56% in the previous week.

Complaints on Chinese mercantilism? Again? Oh No!

2010-01-03T19:30:00.011-05:00

Dr.Paul Krugman, a Nobel prize winning economist and a NYTimes columnist in his recent article (http://www.nytimes.com/2010/01/01/opinion/01krugman.html), talks about how China's policy of not allowing its currency to appreciate is hurting the world markets and the US in particular. He also argues that in any kind of trade confrontation with China there is little to lose for the US. He has some valid arguments that with the interest rates already at an all time low in the US, any kind of slow down in buying American treasury bonds by the Chinese is not going to affect US interest rates in the short term(since the interest rates are already very low and will not be increased at the current economic scenario. Chinese used to do this to keep their currency artificially low against US dollars which benefits Chinese exports). Also, Dr.Krugman argues that the protectionist policies will follow if China doesn't allow its currency to appreciate. Dr. Krugman also says that his back-of-the-envelope calculations show that China's current currency policies will reduce US employment by around 1.4 million jobs in the next couple of years.
I agree with Dr.Krugman that the policy of keeping the Chinese yuan (renminbi) artificially low is affecting many other export markets and I can see that particularly many other developing economies' export markets are severely affected. Say if Chinese yuan appreciated in value, this would facilitate exports from other countries where the currency is naturally low. And when exports from these other markets go up, their currency gains in value (if its floating) and that market will become a market for US exports. Also, with the Chinese yuan's value going up, Chinese consumers will have a better purchasing power and China will be another big US export market. When the exports occur from one market and if that market's purchasing power is kept artificially weak then we are stuck in a one-way road.
But I should also say that I have some disagreements. As I have mentioned in my previous post (China's economy and the Yuan), Chinese economy grows mainly on exports. So, any drastic increase in the value of the Chinese yuan (renminbi) will seriously affect the cycle of money flow in China (refer to my previous post) and will cause huge amount of job loss in China. So we cannot even dream of China appreciating its currency drastically as some in the western counties urge it to.
Also, I disagree with Dr.Krugman's 'don't care' attitude even if China doesn't buy American bonds. America doesn't expect China to buy its bonds just to keep its interest rates low but to fund its budget-deficit every year. If China doesn't buy American treasury bonds then the interest rates in the treasury bonds will surely go up and this will only add up to the budget deficit every year. And if this continues, US government will reach a saturation point and will be forced to cut down on the services that it provides to its people.
And Dr.Krugman's point that he would send a "thank you" note to Chinese if they start selling the dollars is very scary. Did Dr.Krugman forget that the US dollar is the international reserve currency and that major commodities are bought and sold in US dollars in the international markets? The export-oriented manufacturing plants in China will not go anywhere overnight. There will still be a large number of goods that need to be bought from China and this will result in an enormous increase in the input costs for American companies that have setup manufacturing plants in China. This will shoot up the prices (read inflation) of the products bought in US and as a result of this the consumer-demand might become weaker which is already at an all time low. And with the world's economies decoupling itself from the western world more and more day by day, the Chinese manufacturing plants will still be needing enormous amount of oil and other commodities. So, if they sell US dollars then this will result in the value of the US dollar going very low and this in-turn will result in inflation in many parts of the world. With the global economy remaining very fragile, this might even cause stagflation in many countries. The loss that will be incurred through the world economy facing such catastrophic economic scenarios will NOT be offset by a weaker dollar that will help American exports.
Another point to consider is, the US interest rates are near zero and the economy is awash with liquidity. We are already fearing inflation if monetary easing is not cut back at the right time. If dollar falls in value in the international currency markets because of China selling its huge reserves then this might result in inflation in the US economy.
Above all there is already a talk in the global stage about replacing US dollar with some other currency (like Euro) as the international reserve currency in the longer-term( Note: Japan and other East-Asian economies are already talking about a common currency). I agree that US dollar cannot be replaced by any other currency as the international currency now and no country is ready to face the economic disadvantages that this action of replacing US dollar will bring. Particularly this will be very damaging to the US economy. But if the weakness of the US dollar in the international currency markets goes beyond a certain amount then this will result in favor of those who argue to replace the US dollar with some other currency as the international reserve currency (again I am talking in the longer-term). Let's say, for example, if OPEC countries think of selling oil in Euros or other currency then this will be very damaging to US.
So yes China should immediately start to change its economic structure. They have started it well with their response to global economic slowdown. And at some point in time, China has to allow its currency to appreciate in value but we need to wait for some more time till China changes its economic structure. China has already introduced a massive stimulus package and this is driving consumer spending. So we need to give China time to appreciate the value of its currency and this is to the advantage of both China and US. But in the meantime, we must think of how we can assist American exports by introducing some incentives. From China's part, as I mentioned in my previous post (China's economy and the Yuan), investment in vital areas such as rural health and education are needed to move the country from being an export oriented economy to an economy driven by domestic factors.

Climate Chaos

2009-12-07T22:05:00.004-05:00

Representatives of around 200 countries and heads of around 100 states are in Copenhagen today and until December 18 to seal an agreement that would bring the world together in fighting the climate change. We have been hearing about the catastrophic effects of climate change that our and future generations might have to face if we don't take steps now to address this global problem. But the solution to this global problem is now caught up in a fight between developed and developing countries. It is no doubt that the industrialized countries, through their industrialization are primarily responsible for the greenhouse gases in the atmosphere. But the problem of such magnitude deserves global action and this is not the time to blame each other. But instead this is the time to accept responsibilities and the responsibility rests mainly on the shoulders of the developed countries. Let me give you a small statistics about a developing country India. India's population = 1.1 billion ; in this number of people living below the poverty line (less than $2 a day) ~ 200-300 million; number of people living just above the poverty line (less than $10 and more than $2 a day) ~ 200 million. Almost, the same ratio applies to many other developing and under-developed countries. With so much people living in such conditions the only way to improve the standard of living of such people is through industrialization. If any one economist or a global leader can give me a solution of how to eliminate poverty and improve the standard of living of these poor people to basic levels without industrialization, then I am ready to consider that. But everyone knows that there is no such solution to eliminate poverty. At the same time, this is not the time to argue about who is supposed to act and let us have NO doubt that everyone is supposed to act. But I suggest that the level of action should differ between developed and developing countries. Some might argue that the population outburst is a mistake of these countries (read China, India) and that they have to bear that problem. But in countries like China and India, population growth did not happen overnight or even in a decade. The population levels reached saturation even before we clearly understood the effects of climate change. But I am not supporting the population growth here. It's time for countries like India, especially India, to start taking immediate measures for population control not just for climate change effects but also to avoid resource scarcity at any point in time in the future. There is nothing farther from the truth that developing countries do not care about climate change. Most of these developing countries depend heavily on agriculture and will be the worst affected if actions are not taken to reduce their carbon emissions.

But my suggestions are as follows:

1. Classify countries by their economic status as "Developed", "Advanced but Developing", "Developing" and "Under-developed" countries.

2. An international panel must be set, which would review each country's economic status and officially declare such status of countries in a more practical level rather than theoretical. In this case, its important to take population into account since every human being is equal in this planet.

3. Set a flexible range of emission reduction targets for each of the above classified countries. Lets give them a range (for little flexibility) and special credits for doing more. Every country should be bound by international rules to achieve these targets within a given time-frame (say every 10 years). And after every, say 5 years, the international panel should review the status and classification of countries and should upgrade or downgrade their status accordingly.

4. Transfer of technology and finance to poor and developing countries from developed and Advanced but developing countries is a must. If this is not done, developing and poor countries cannot do anything to reduce their carbon emissions.

5. Easier market access for green technology and collaboration of scientists on a global level is a must.

6. More funding, incentives and competition for green-research is a must.

When global environmental scientists keep saying that we need urgent action to mitigate the adverse effects of climate change, it does not mean that the developed countries and developing countries should quarrel with each other on who will take the responsibility and how much BUT it means, according to me, that we should work on the above suggested steps (suggestions are purely mine) immediately.

By the way, I am just wondering how many of the so called global leaders who have gathered in Copenhagen to discuss this climate deal are wearing leather shoes. Will it not be funny if the guys wearing leather shoes discuss global climate deal? :)

Brazil looks "hot"!

2009-12-05T23:01:00.008-05:00

Brazil's economy, Latin America's largest, has been performing well with some strong economic indications and is proving to be an attractive market for investors. But the problem is it looks too attractive. Brazil, one of the strongest emerging markets, has enjoyed some economic successes in recent years. It had a GDP growth of around 5.1% in 2008 and has a strong export sector. When the global financial crisis struck last year, many were wondering what would happen to the emerging markets but most of the emerging markets, particularly China, India and Brazil have emerged strongly from the global recession. Thanks to China, which through its enormous stimulus measures and through its strong trade links with many developing countries, deserves partial credit in helping these developing countries to come out of the economic slump. Brazil's largest trading partner is China. According to my analysis, this strong trade flow between China and Brazil has helped Brazil's export sector. Brazil's GDP (measured at constant prices) grew at 1.91% in the latest reporting quarter of 2009. In this, the household expenditure increased by 2.09%, government expenditure decreased by 0.06%, gross fixed capital formation increased by 0.03%, exports increased by 14.3% and imports increased by 1.54%. Also, unemployment has decreased from 7.7% to 7.5% while the inflation, measured by consumer price index, has increased only by a moderate 0.28%. (Note: All this economic data was collected from IMF's special data dissemination standard to which Brazil is a member). With the economy showing so strong indicators of a robust growth driven not only by exports but also by consumer spending has made many in the world to think Brazil as an attractive investment destination. But this has led to so much speculation and is causing the Brazilian 'Real' to increase in value in the currency markets. So far this year, Brazilian real has gained about 36% relative to the US dollar. With the economic numbers remaining so strong, Brazil had attracted $1.45 billion FDI in Oct 09 (a jump from $945 million reported in the previous month). Even though this would have resulted in an increase in the real's value, its still a good news for Brazil which can use this direct investment to fuel its growth to a more stronger sustainable level. But the thing that worries me is the increase in the value of the total portfolio investments - it has increased from $6.55 billion to $17.6 billion (with the value of foreign investments in Brazilian stocks and bonds increasing from $6.8 billion to $17.1 billion) as of the latest reporting month (Oct 09). When about half of this foreign investment might be real money, i suspect the other half to be speculative money. Brazil has been aware of too much foreign money flowing into it and has taken some measures. It imposed a 2% tax on all capital inflows. But this did not stop the capital inflow. The investors found a loophole and were converting the American Depository Receipts (ADR) into domestic shares and this way it was tax free. The reason why they were doing this - they expect Brazilian real to gain in value and wanted to hold the shares in Brazilian currency rather than in a foreign currency. There's already been so much speculation and appreciation of the real and this is starting to hurt Brazilian exports. In order to curb the currency appreciation, the 2% capital inflow tax was worked out but as I said the investors were using the loophole. So now, Brazil has imposed a 1.5% tax when foreign investors convert ADRs into receipts which can be used to buy domestic shares in Brazil.
But looking at the numbers reported in the last fiscal month (Oct 09) and considering the fact that the interest rates in US and Euro zone are going to remain low for considerable amount of time, I feel that this 1.5% tax will not curb excessive capital inflows into the country on a longer term. This may have a very short term effect but I think hot money will keep coming in for a considerable amount of time. We have to keep looking especially at the portfolio investments that's coming in. If the stock markets rise above normal levels then we have the problem of asset bubbles forming in Brazil. And when US economy stabilizes further in the future, any hike in the interest rates in the US, will cause capital flight from Brazil. This will be very damaging to Brazil since there might be wide swings on the currency at that time. A stock market crash can happen during such moments but we don't want that to happen and this is a little exaggerated situation. So, Brazil should increase portfolio investment tax, if too much hot money keeps coming in and make sure that speculative money is kept out of Brazil. Since very few countries are attracting speculative money, there is generally a large amount of speculative money flowing into any country that's speculated to show strong economic signs. So far, the numbers and indicators are fine but we just have to be very watchful. I hope Brazil's authorities are.

Dubai's Debt

2009-11-29T21:33:00.001-05:00

The global market is rattled by the debt crisis of Dubai. So what happened and what are the consequences? Dubai, a city-state, is one of the emirates of the United Arab Emirates. Dubai does not have oil like that of the other emirates and hence followed on a principle of making Dubai a middle-eastern Las Vegas. The Dubai government followed the idea of making Dubai a financial hub and a high-class tourism center in the oil-rich region. One of the steps followed by the Dubai government to achieve this was to set up an investment firm, "Dubai World", which raised capital through foreign investors who saw the potential of Dubai and its grand ideas in the oil rich region. This idea actually worked out pretty well and the evidence of this is the skyscrapers and the business activities that go into these buildings. Dubai, as it planned, became a famous tourist destination for wealthy westerners and others. And as Dubai World appeared to become successful, it played a key role in many development projects in both developed and developing economies.
But when the credit crisis struck last year, I was expecting Dubai to be one of the first state to get severely hurt. Dubai has always planned its grand ideas through foreign money and I was expecting the foreign money to dry up in a rapid pace than what appears to have actually happened. As of this date, Dubai has an external debt of 103% of GDP. Dubai has around $80 billion in loan and Dubai World which is a government subsidiary has $59 billion in liabilities that it owes to its lenders. And Dubai World has asked the lenders to agree to a standstill agreement which would allow Dubai World, which is in the process of re-structuring itself, to delay its loan payments to its creditors. This has shocked the world market and we are waiting for a more appropriate response from the markets this week which were in a holiday week. I am very confident that Abu Dhabi, which is an oil rich emirate, would bail out Dubai and would keep Dubai running. But the handling of this debt crisis by the Dubai government has made me think if the foreign investors would still think Dubai to be a safer investment place. And this comes at a very bad time for the global economy. There is already a severe credit-crunch in the world and this debt situation only worsens the credit and money flow in the economies.
We still don't have a very clear idea about the exposure of Asian and Western banks to Dubai. I am especially worried about the Asian banks exposure because with credit flow remaining worse in the western economies, its the Asian customers and businesses who are expected to pull the world out of global recession. Especially through exports to the Asian countries, I expect a pick up in credit flow to western businesses by western financial companies since I feel that the western governments have not done everything that they should have done to increase demand and credit flow.
As of now, we have the data of exposure of the following banks to Dubai: RBS - arranged $2.3 billion in loans for the Dubai World. HSBC - has the largest exposure in UAE with around $17 billion of loans in just 2008. Abu Dhabi Commercial bank, PJSC, which is a lender and a book runner, has around $1.9 billion exposure. British banks have a combined $49.5 billions of loan outstanding in UAE. Bank of Baroda, an Indian bank with state support has around $1 billion of exposure in the region.
If more Asian banks reveal their exposure in the coming days, then this would cause a run in Asian investments by foreign investors. This would severely hurt developing economies although the pain might look less severe at the beginning. Asian banks and financial institutions trying to raise capital for a variety of Asian acquisitions of foreign firms, which is very essential for a strong demand and credit flow, will be hurt and this might cause a slump in the already weak global economy and prevent various successful implementations of much needed programs, like the UN food aid program which is already in a worse situation due to the global economic crisis.
I sincerely hope that Abu Dhabi comes with enough money in its pocket to bring a confidence in the minds of global investors on Dubai and this rescue of Dubai should definitely be done in a grand manner, by which i mean that investors get the confidence back on Dubai. This should also be done at a very short time-frame without dragging the rescue process, if one is needed.
Dubai has built sufficient infrastructure for it to continue as same old Dubai if it somehow becomes successful in getting confidence into the global investors' minds and keeps foreign money flowing into it.

China's Economy and the Yuan

2009-10-31T23:44:00.001-04:00

There has been so much talk about China's rising economy and its "yuan" policies. International pressures are building up on China to allow its currency, yuan, to appreciate. But to understand why China is fighting back and not allowing its currency to appreciate, we must look into the fundamentals of the Chinese economy. China is a low-wage country with abundant supply of cheap labor. Due to the opening up of China's economy and availability of cheap labor, there is a huge capital inflow into China. One of the main reasons for this buoyant flow of capital investment in China is because the yuan is pegged to US dollar. It was literally pegged to US dollar until a few years back (1US$ = 7.6yuan). After heavy pressures from international community, particularly the US, China allowed its currency to float although tightly managed against a basket of currencies. And "tightly managed" here means that China interferes heavily in the currency market to keep its currency's exchange rate with US dollar almost constant which stays around 1$ = 6.8 yuan.

It is important to note that during the enormous growth of the Chinese economy in the past decade, the Chinese domestic consumption has decreased from 45% to 35% of the GDP. During the last decade or so, the Chinese economy grew on two major factors - exports and government spending. The Chinese state heavily invests in fixed assets and capital infrastructure thereby providing a conducive atmosphere for export-oriented industries which in-turn combined with its currency pegging policy and cheap labor attract huge amounts of FDI, mostly in the form of capital investment.

The export-oriented manufacturing plants that blossom up due to this heavy capital investment and incentives by the Chinese state act as a major source of job creation. Due to the lack of proper social safety net in China, a major portion of the income earned through these jobs by the Chinese individuals get saved in the state-run banks. It is also important to note that many industries including the ones that require heavy investment and man-power are run by the government. The banks then lend, under the orders of the government, to these state-run industries and export-oriented industries which in-turn create more jobs which in-turn increases the savings rate of the country.

But the point here is - with so many state run enterprises, a major portion of the banks' loans go out to these state run industries thereby crowding out private industries and entrepreneurs. Due to this crowding out of private sector I strongly believe that innovation in and from China will be less than what is needed and what is possible. So, without innovation and competition, no quality jobs will be created. Without quality jobs it will be very difficult to sustain the Chinese economy on the long run. With consumer spending remaining so low, this only adds up to troubles of achieving a sustainable and inclusive growth.

For any innovation/research, a strong yuan will be needed. A strong yuan can help in acquiring high end technology from the international markets to the Chinese business industries and would help keep input costs cheap which will facilitate greater innovation to come out of China. But any increase of Chinese yuan relative to the US dollar or any other major currencies will severely affect the cycle of money flow in the Chinese economy. This is because domestic consumption in China contributes very little to its GDP and exports are the only major driver of growth for which the yuan has to be kept weak. But if yuan remains weak, then there is a question on sustainable high quality growth in the Chinese economy.

So the foremost point for China is to increase domestic consumption through proper social safety net programs and investment in vital areas such as rural health and education . And when the domestic consumption becomes a considerable number in the GDP calculation, China has to allow its currency to appreciate. A stronger yuan will have better purchasing power which will in-turn kick start the cycle of more domestic consumption, better innovation, entrepreneurship, quality jobs and sustainable economy. This can be better achieved if more competition is allowed within Chinese people for which the government has to liberalize its economy further which would mean that the Chinese state loosen its iron-grip on the business activity of the country and transform from a model of state-led capitalism to a more people oriented free market economy. Will this happen? We wish.

Cookie 1 : Telecom companies' tie-up talks collapse

2009-10-02T23:41:00.000-04:00

Cookie 1 : As per the recent news, India's largest cell-phone service provider Bharti Telecom and South Africa's largest telecommunications company MTN failed to reach an agreement that would have resulted in a tie-up and eventually a full-blown merger which would have resulted in around 200 million subscribers coming under the administration and service of a single-entity.

This was a $26 billion cash & stock deal with Bharti taking 49% stake in MTN and MTN getting a 36% economic interest in Bharti. The deal collapsed not because of the companies, which are private and are owned by private shareholders but because of the related Governments. The Govt of South Africa wanted a dual listing - to have MTN listed in Johannesburg even after this deal. But Indian laws prohibit its companies to get dual listed. And to get dual listed, the Indian currency(Rupee) has to be fully convertible. As of now, there is no provision for a capital account convertibility of the Rupee. Potential discrepancies on various other factors like information disclosure rules etc.. were also pointed out by the Indian Govt for not allowing the company to dual list.

BTW, its said, that if this deal had gone through this would have been the biggest FDI in South Africa. But the shareholders of both companies were happy for the collapse of this deal. From Bharti's stand point, the shareholders say that this would have moved away a lot of cash from the company and from MTN point of view, the shareholders say that Bharti's per share offer was very low than the actual market value.

India's food crisis

2009-08-28T23:05:00.002-04:00

Case 1:

Lets take this case for our study. Currently( in year 2009), India faced deficient monsoon rains. India is an agrarian economy with 50-70% of the population depending on farming or agriculture-related work. Agriculture and agriculture related work contribute to about 18% of India's GDP. Most Indian farmers live below the poverty line (earning less than $2 a day). Majority of the Indian farmers largely rely on monsoon rains for farming since there are no adequate irrigation facilities. Only very few states of India have sufficient irrigation facilities. So, with the monsoon rains failing this year (well below the normal level - around 40% less than the normal in certain states and around 26% less than normal in many other states), India has declared many districts as drought-hit districts. It is expected that this failure in monsoons will bring food-scarcity in India (India has a population of around 1.1 billion). Thus the demand for food products is about to go up, which would drive up the food prices, thereby causing inflation. The Indian Govt says that there is adequate food storage available but it has to be wait and seen to know if the storage will be really sufficient.

A special point to note here is the commodity "Sugar". India is the largest consumer of sugar in the world (remember Indian sweets :) ) and I think is the largest producer and exporter of sugar too (not sure though). But this year, with the sugarcane crops failing due to poor monsoon rains, the supply of sugar is going to go down, and hence the price of the sugar is going to shoot up (because the Indian Govt will be buying sugar in the international markets to meets its domestic demand and will hence bid up the prices due to a tight supply in sugar in international markets while the demand remains strong).

Ok, so coming to our case-study, the Reserve Bank of India(RBI) (India's Central bank) has warned the Govt of short-term(due to increase in prices of food products) to mid-term inflation(due to increase in food prices + reduced interest rates and other monetary easing) and has therefore recommended to the the Govt (basically hinted) that it would like to cut back the monetary easing and bring up the interest rates (the interest rates were brought down as a response to the global financial crisis, to increase credit flow and demand) soon before its too late.

So, what do you think about the RBI's recommendation. When I can understand that recommendation to cut back the monetary-easing stance is to reduce inflation, will this not slow down growth in the one of the fastest growing economies of the world? Will this not be counter-productive to the very poor farmers that the Govt is actually trying to help? Will this recommendation, if implemented, not be counter-productive to the growing middle-class in India (whom the world is partially depending upon to pull many economies in the world from recession)? Will this in turn not reduce the FDI flow to India which will worsen the already bad physical-infrastructure in India?

But if you say, that the interest rates should be kept low for a longer period of time, then will this not push up inflation further as the RBI had pointed out (like adding fuel to fire)?

So, what are your suggestions in this scenario that India is currently facing?

Indo-Global Economy

2009-08-10T22:32:00.008-04:00

As a person passionate about business and International Economics (and welfare of the planet as whole), I am writing this blog to put my thoughts on various issues and scenarios concerning the global economy today. But here is a disclaimer: I am not an economist. But here is another disclaimer: I closely follow and interested in knowing and analyzing the various opportunities and challenges that we as humans face today in the world's economy and how we can improve it as an individual, family, society, nation and world's citizens.

2009-08-10T22:32:00.004-04:00