The Next Step!

We have been seeing many major economies around the world struggling to grow – Europe: struggling with the sovereign debt crises of many of its “Euro” countries, United States: struggling to reduce unemployment and create jobs, China: struggling to stop the slowdown in growth, India: struggling to fight high levels of inflation and slow growth, other emerging market economies: struggling to face the fact that they need a stronger developed world and China for themselves to grow.

 
And what is the one common factor that is holding down so many economies? Fiscal climate. Every country has its own fiscal problems, but none have been able to address them efficiently. One common scenario in all major countries that are in trouble is the need to reduce the fiscal deficit. But how? – is the debate! And the debate has been going for so long without any decisive actions on the ground that we are entering a dangerous phase in the global economy. It’s not that the money that was present during the pre-crisis period has disappeared in thin air. The money is still out there, just not at the right place. In fact, all major economies of the world have poured more money (created money) in the last two to four years in the form of monetary stimulus by their central banks. So where is this money? Why don’t we see enough investments? Who is having this money? And what are they doing with this? Atleast during the peak of the crisis in 2008/2009, countries like China, India and Brazil were growing at impressive rates that kept the global demand for goods and services at an acceptable level. But, recently, even these emerging market economies have been slowing. 

 
In an ideal world of free markets, capital would have moved where it is needed and where there could be profits to those moving the capital. But what is that happening now that despite relatively low interest rates, the US government still does not want to use the investors’ money to invest in infrastructure and R&D projects that are direly needed in the world’s largest economy? What about Europe? Have the investors completely lost faith in the European people forever? And China? Do global investors think that China’s growth is unsustainable because they lost faith in European governments and losing faith in the US’? Or that China cannot domestically sustain itself? And India? What happened to the global attraction that India had in the last decade? Faded? Why? Inflation? Fiscal deficit? Current account deficit? Unemployment? Lack of investment sentiments? Well, in economics, one could easily mix and match these words in the same sentence to define the troubles of an economy. But underneath all this, there is one word that holds all the troubles together – Debt!

 
Huge national debts in many countries have caused enormous fear among people around the world (investors, mainly) such that the capital is not moving to places it should and people are holding it back! And when governments rely on such debt-financing to meet their capital needs, then the fear of unsustainable debt only grows further among investors and business people, thereby resulting in a sudden reduction of debt-finance. And if nations haven’t invested their capital at the right places, then this sudden reduction of debt flow to finance the capital needs of the nation causes disruptions in the everyday functioning of the economy – and widening of current account deficits, fall in the value of the currency etc. ensues.  So should nations borrow less from investors to stay out of trouble? Well, the better answer would be if nations invest the capital they get in productive areas rather than populist and ill-advised programs. But we have seen from experience that with a “power-struggle” to remain in power lingering always, and people’s sentiments so volatile and easy to capture, populist and ill-advised programs always pop up from the political spectrum.

So at this moment, all over the world, to get capital flowing again – to the right places – as the free markets dictate, it is extremely important to reduce debt in all major economies that are floating in a river of debt! And, though definitely not a fan of tax increases, I see that as a must – atleast temporarily, to gather cash resources to reduce debt, deficits and above all – to invest, productively! A wise government would do this without affecting the standard of living of its people – and yes, there are ways that could be done if the tax increases and/or tax reforms and removal of inefficient and ill-advised government programs are directed at the right section of the society (read: rich) – who won’t stand affected at the end of the day. After all, the struggle now to reduce debt globally is to provide a better future for all – which requires best investments in various areas of science, technology, education, health, climate and infrastructure. And the immediate challenge now is who is going to take the next step!? – Public sector or private? For one, even in the world of free markets, in my view, public sector is better organized to take the next step – even globally (read: G-20) - and I am sure the private sector will then leap forward! Increased tax revenue to many governments - US, India being the best examples - in the form of appropriate tax reforms, without affecting the long term private  investment climate - is an urgent need for today’s economy and tomorrow’s children.

 
Bottom Line: Government is a key player in free-markets and not an outsider! When it is time for it make the move in the game, it means the situation is ugly, and the move is not going to be perfect, but it still has to make the move for the game to continue – and that would require giving some resource to the government – for otherwise the game is stuck!

Does Aid = Business?

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!?

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:

1. External factors – US unemployment, Europe’s sovereign debt crisis and high oil prices.
2. 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

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!

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

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!

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.