Sunday, February 12, 2012

India, Britain and the Aid Row

Rafale fighter jet
Little noticed, last Thursday, India tried to undo the damage which its order for French made warplanes did to David Cameron’s government in London, with finance minister Pranab Mukerjeree calling UK’s Secretary of State for International Development, Andrew Mitchell to soothe ruffled feathers.
Labour party MPs and London dailies had torn into Cameron’s Conservative party led coalition government attacking it of giving 1.4 billion pounds in aid over 5 years to India while being unable to get an order for fighter aircraft.
What started out as agnst against not getting a lucrative multi-billion dollar aircraft order turned into a media war over why Britain should or should not aid India's impoverished millions. That it has poor millions is of course not in doubt, despite its boast of being the seventh largest economy in the world.
British newspapers pointed out quite appropriately that India has its own aid programme for African and Asian nations which is far larger than what it is recieving from abroad and had on many a occassion made it clear that it did not need aid.
Jingoistic Indian coloumnists also said basically the same thing: "We don't need aid." with many privately and impolitely adding "Britain can stuff its money ...."
Before we review the issue, lets recap for those who came in late on the news as it played out :
  • India had preferred the French Rafale jet fighter over Typhoon, manufactured by a British led European consortium in selections made earlier this month. The French aircraft was preferred as it was cheaper and considered more versatile than Typhoon, whose upgrades have been long delayed.
  • A London based daily had then highlighted how Mukherjee had in answer to a Parliamentary question said foreign aid was not needed to buttress its case that Britain’s development assistance to India should be discontinued. Others editorialised that the money given to India could have built hospitals in the UK.
  • That Mukherjee’s comments in Parliament had been generic and not specifically aimed at British aid was lost in the din of the media battle. What all this did was to make Britain's India engagement politically extremely `hot’ for the Cameron government, which is credited with having brought the two governments closer in economic and strategic terms, after years of bilateral relations being in a state of mild freeze, not improved by Labour's younger Miliband trying to lecture India on Kashmir on one relationship building visit!
  • “We felt a call at this juncture was needed to scotch unnecessary and wrong press reports and to undo any damage to our otherwise close bilateral relations,” said North Block officials, explaining Mukherjee's call.
Britain has been continuing the aid programme by arguing at home that it strengthens its influence in India, a key market while also  helping lift people in poorer parts of the country out of poverty.
The problem for Britain is that besides being unable to get the Typhoon order; last year, India pledged $ 5 billion in development assistance to Africa, besides another $ 1 billion in direct aid - $ 700 million in insitution building and $ 300 million in building the Ethiopia-Djibouti railway. A year bafore, India had announced a $ 1 billion aid package for Bangladesh to help build roads, ports and railways. In war-torn Afghanistan India has already spent some $ 1.5 billion in rebuilding roads, power stations, telecom networks, a new Parliament building and last year added a pledge of another half a billion dollars to top it up.
If a country can go around spreading largese to other poor nations, can it also ask for or recieve aid? Thats what the British tax-payer may well ask.
Related to this is the question - Why do countries give aid to each other - simply on humanitarian grounds?
Humanitarian considerations plays a role. Aid flowed to Haiti when disaster struck it. Even though the West supported Pakistan's brutal regime in 1971, individual contributions flowed to refugees from its Eastern wing living in miserable refugee camps in India.
But aid is also a way of winning friends abroad. Which is why the Cameron government is keen to fund drinking water programmes and more in India. Which is why India wants to build railways, ports abroad, supply rice to neighbours even when its own millions have little to go around.
The benefits for those doling out aid or help, are sometimes immediate - China managed to get contracts to gas fields in Africa almost at the same time as it offered roads there. It was almost like a barter deal. Sometimes it takes time, but far outweighs the help recieved in the first place. India has been saying thank you to Russia for standing by it in 1971 for decades, despite the dissolution of Soviet Union. It continued with an artificial rupee-rouble rate to protect Russian interests, even when the rouble had become worth pennies. There is an element of thank you when India orders none too great Russian fighter jets, grossly over-priced aircraft carriers and outdated nuclear power plants.
Its contracts to France - Mirage, again nuclear power plants and Rafale - have similar elements of thank you for the support France gave to India's quest for nuclear parity with China besides other things.
As one former British MP whom I met soon after the aid row surfaced, said: "If you are in it for the long haul, you disregard short term losses." Britain has in the past drawn much benefit from its `special relationship' with India. It sold helicopters in the 1980s which were described by the then Indian Prime Minister as “white elephants”. Earlier in the 1950s, it sold outdated fighter aircraft, whose parts cost more than the aircraft !
Where does that leave the question of whether India should or should not get aid or even more importantly from the Indian point of view - accept or not accept aid? Soon after Pokhran -II, when many countries came rushing with pious condemnation of nuclear India with added threats of withdrawing aid, the Vajpayee government quite rightly told them to a) shut up and b) to keep their aid to themselves.
The Congress government when it came to power, endorsed Vajpayee's or rather his National security advisor Brijesh Mishra's views and continued the aid ban imposed on minor European powers. Quite a few countries whose aid programme were stopped, still regret the loss of what they now see as a lever with a rising power.
Foreign aid is a miniscule fraction of India's GDP or for that matter even of total government sector spending. India as a nation could do without it. But can those dreadfully poor people who are getting something out of it, do without it? Can they wait till New Delhi or lets say in a specific case – Orissa – wait till Bhubaneshwar, finds time to look their way?
To tell those who are benefitting from what little foreign aid is coming in, that the programme is being stopped because some upper middle class urban Indians feel their ego, inflated by India's rising GDP and nuclear power status, has been punctured by news that Mother India still takes aid, may not exactly be acceptable to those poor people.
In any case, like good baniyas, which Indians have been for centuries, our motto on aid should be "let it flow, if it’s without strings attached." Its for those who are buying a good consience or better relations to decide whether their millions should be spent here or somewhere else.
Baniya  : Merchant

Wednesday, February 8, 2012

Growth, Rupee and dollar incomes

Hit by global recession and costly credit, India’s economy may expand at its slowest pace in three years at just 6.9 per cent during the current financial year (till March 31, 2012) , compared to a more respectable 8.4 per cent in the previous fiscal.

Indians used to 8-9 per cent GDP growth and aspiring to see their economy grow at double digits, weren’t exactly happy with the news. Business leaders were quick to say “I told you so”, pinning blame on high interest costs for slowdown in investment and consumer demand. A tight money policy to combat commodity inflation has seen interest rates for buyers of homes and cars as well as industry hoping to set up new factories rising to 12-16 per cent compared to 8-12 per cent, two years back.

The government admitted slowing industrial growth was a problem but also blamed the   Eurozone crisis and continued slow recovery in the US and Japan, India’s major markets. A  quarter of India’s GDP is accounted for by foreign trade and this has obviously taken a hit.  

The problem for the Congress led government has been that if it does not give the Reserve Bank a free hand to combat inflation, it risks alienating millions of poor people who have voted it to power and whose very daily meals are at threat because of rising food prices.   

On the other hand. Slow growth, shut factories means millions remain unemployed. Not exactly good news for a party which wants to woo 18-25 age group voters.

The problem of course was industrial growth at a mere 3.9 per cent compared to 7.6 per cent last year and double digit growth for most of last decade. Industrialists have long been protesting that 13 rounds of increases in the Reserve Bank’s policy rates which now stands at a high of 8.5 per cent, has made it difficult for them to borrow to set up new plants and factories or to refinance old debt

India Inc.’s top brass including the likes of Wipro’s Azim Premji, truck-maker Keshub Mahindra and banker  Deepak Parekh had also written letters to Prime Minister Manmohan Singh blaming the government for a policy logjam which has seen several key policy initiatives including bringing in foreign investment in retail, pension funds and aviation delayed and mining sector held up by unclear environmental laws.

High interest rates slowed down sales of big ticket consumer items such as housing stock and cars. Auto sales halved from 30 per cent in 2010 to just over 14 per cent in 2011, while housing sales remained sluggish in 2011 and could be in negative figures in 2012 according to credit rating agency Fitch. The latest figures issued by the Central Statistical Organisation placed growth in construction at 4.8 per cent in 2011-12, against 8 per cent in 2010-11.

Mining output shrank by 2.2 per cent. Partly because of policy logjams which saw much of the area earmarked for coal mining declared `No Go’ where mining would not be allowed on environmental considerations and partly because of heavy Monsoon rains which saw many mines shut down in central and eastern India.

Farm output is expected to rise 2.5 per cent, compared with 7 per cent in the year before. However, this is seen as a statistical glitch given that last year farms recovered after a bad farm year in 2009-2010, when agriculture grew by just 0.4 per cent. Only services provided a silver lining. Trade, hotels, transport etc. grew 11.2 per cent while finance, insurance, etc. grew 9.1 per cent.

In its mid-year Economic Review, the government had pegged GDP growth at around 7.5 per cent and at  9 per cent in its pre-Budget survey released early last year. Worryingly, economists do not see much improvement next year despite hopes that the RBI will now relent and allow interest rates to drop in a bid to push growth.

Most economists expect the economy to grow next year by 7.5 per cent or so. Not great news but still music compared to negative or marginal GDP growth rates being posted by the west.

The latest data also showed that per capita income will be above Rs 60,972 per annum during the current fiscal. In terms of rupees this means incomes have gone up 14 per cent in a single year! Not bad at all despite inflation eating into earnings. However,  because the Rupee’s value has fallen it means in Dollar terms Indians on an average now earn $ 1240  a year instead of $ 1177 they used to in February last year, an increase of just over 5 % !

Wednesday, February 1, 2012

Commonwealth Compact

Not the best time to talk about an almost dead horse - the Commonwealth - but that's what I had to do as the CJA - short for Commonwealth Journalists' Association - wanted yours truly to speak on `Commonwealth - the way forward'. Other panelists were Stephen Cutts, deputy secretary general of the Commonwealth and Vijay Krishnarayan, a West Indian diplomat who now heads Commonwealth Foundation.

Instead of saying what a `great' programme it was, I am posting my paper on the subject here (not that there is any hope for the suggestions made here being `sold' to those who run the Commonwealth. The main stumbling block of course is Great Britain as her  terms of accession to the EU prevents her from joining any other economic `club'):

Commonwealth Compact

By Jayanta Roy Chowdhury

Valetta Harbour

"I believe the Commonwealth is uniquely placed to make the case for trade and to catalyse an increase in investment and trade which quite frankly is the single biggest and most important stimulus we can give our economies right now” - David Cameron (writing in the Global in 2010).

Many believe the Commonwealth is dying a slow death. With a multitude of global and regional multilateral organisations spawning every year, the global grouping of former British colonies is increasingly losing relevance.

Except for Conservative commentators like British economist Ruth Lea and some facebookers who have launched several pages demanding Commonwealth Free Trade pacts, few top leaders if any, now talk of forming a Commonwealth trade compact.

Yet two years back faced with a slowing economy, British Prime Minister David Cameron seemed to suggest a greater role for the Commonwealth than we have seen till now, but with huge economic and political investments in the European Union, Great Britain has till now refrained from making any leaps of faith.

Many have forgotten that just six years and two months back, in November 2005, at the Commonwealth Business Summit in Malta, the final communique urged member countries to consider ‘the possibility of establishing a Commonwealth preferential, or free trade area’ should the WTO’s Doha Round prove fruitless. Doha is still stalemated and the world groping around or regional trading arrangements which can help their economies while not placing their sovereignty at risk.

The British Commonwealth was set up in 1926 and in April 1949, at India ’s insistence, the word `British’ was dropped and the Monarch of Great Britain made the "symbol of the free association of its independent member nations and as such the Head of the Commonwealth". This of course led King George VI to famously remark to the then Indian High Commissioner to London, Mr Krishna Menon, “So, I have become As Such”.

Well the King’s ministers possibly agreed to make him “As Such”, as there was an underlying belief that historical trade and investment ties between member states would be strengthened by the body which emerged from the ashes of a colonial empire.

Britain in the aftermath of the Second World War wanted the Commonwealth to stay alive not only as a symbol of its former glory, but also as a guarantee to the economic ties it then had with its former colonies. According to some accounts, Lord Mountbatten of Burma , the last Viceroy of India, was among other things, tasked to wrangle out of India ’s first prime minister Pandit Jawaharlal Nehru, continued membership of the Commonwealth, to protect British capital in and trade with India, which at that time was substantial.

However, as Britain veered towards European Economic Community in the 1970s, which later, transformed into the European Union, its interest in the Commonwealth as a trading and investment forum, diminished. With the founder losing interest, the rest of the Commonwealth started looking for other regional groupings.

Canada and Australia started becoming America-centric in their policies and in terms of trade - Asia-centric. India quite naturally started looking Eastwards, for its economic and political space. African nations looked towards an African Union, Malaysia and Singapore towards Asean.

Things have changed since then. At least some economists in Britain of 2012 are again debating whether that island nation should remain closely linked with the European Union or should have looser ties with it, which allows it to join either NAFTA or set up a Commonwealth Free Trade Pact.

Whatever the results of the ongoing debate, statistics show it may still make sense, for Mr Cameron and other Commonwealth leaders, to think seriously on the issue of some kind of a closer trade compact. The fact is, that despite accusations that it is turning into a nostalgic talking shop, the Commonwealth, does continue to do serious business without really realising it:

- Between them, Commonwealth countries traded around US$4 trillion worth of goods in 2008. (Royal Commonwealth Society, Trading Places)

- Intra-Commonwealth trade accounts for about one-sixth of total Commonwealth members’ trade, with an average for each member of around one-third.

- The share of intra-Commonwealth trade has grown steadily from around 12 per cent in 1990 to around 16 per cent in 2008.

- The Commonwealth dominates trade in some countries; for example more than four-fifths of Botswana’s and Namibia’s imports come from other Commonwealth countries; and more than 90 per cent of the exports from Saint Vincent and Samoa go to other Commonwealth countries.

- In India 's case - Last year India bought some $ 53.15 billion of goods annually from Commonwealth countries and sold some $ 39.65 billion of goods annually. India ’s exports to Commonwealth countries amounts to 21 per cent of its total exports and imports nearly 17 per cent. (Ministry of Commerce, India, statistics)

- Most member countries do about a third to half of its trade with other Commonwealth countries.

- Two continental economies within the Commonwealth – Australia and South Africa - continue to sell about 22 per cent and 24 per cent of their total exports to Commonwealth nations.

- Studies show trade is easier between the member nations because of shared language, legal systems, corporate culture etc.

To buttress what I am saying I will quote another Cameron, a Canadian author whose first name is Brent and who wrote a book – The `Case for Commonwealth Free Trade’ in 2005, “If the Commonwealth today were an economic bloc, it would be equal in size to the United States; it would have thirteen of the world’s fastest growing economies; it would possess most of the world’s leading knowledge economies outside of the US; it would have one third of the world’s population; and would represent forty per cent of the membership of the World Trade Organisation.”

With the Global economy on a slowdown mode, on the back of recession in the developed West, the role of the Commonwealth, a grouping which links the First world with the Third could well turn critical in a Global Economic Recovery.

The three advanced economies - UK , Canada and Australia need the markets of Asia and Africa to survive the coming recession, while the Less developed and developing economies of Asia and Africa need market access in the west to improve their quality of life.

Under these circumstances, perhaps it does make sense to have a trade, investment and even a financial markets compact between Commonwealth nations. The commonwealth already has some of the fastest growing emerging economies - including India , South Africa , Malaysia , Singapore & Bangladesh - in its fold. Energising them by creating an institutional trade arrangement could well act as a catalyst for growth for many member countries.

It may be recalled that at one stage late Indian Prime Minister Rajiv Gandhi had floated the idea of an Indian Ocean Rim pact, this would have more or less encompassed most major commonwealth nations with the exception of the U.K and Canada . The basis of the idea came from India ’s engagement with Australia and South Africa , two major commonwealth powers.

Being spread around the world and not in a geographically contiguous area is possibly the biggest drawback that the Commonwealth has in transforming itself into a trading agreement. However, in the light of giant regional trade bodies being contemplated such as the Asia-Pacific Free Trade Pact, where countries are separated by huge oceans, the distance between the Commonwealth nations could well be of little importance. Current trading arrangement where Ivory Coast sells timber to China for furniture which sells in Europe give lie to the old adage that trade compacts between neighbours are the most economically efficient.

The fact that these Commonwealth nations share linguistic links in the form of English being the language of governance and business, a similar system of law, existing strong trade and diaspora ties and of course a shared history even it be of a colonial nature, helps bind them together.

Indian business for instance has traditionally focussed on English language knowing East Africa rather than on Francophone West African states. Similarly, Indian investors have tended to invest more in the UK despite Spain, Hungary or Croatia offering better incentives and cheaper labour, again mainly because of the ease of doing business in a known language, functioning under a legal system which is known and easily understood, with institutions which are very similar to the one’s inherited by independent India.

According to the British High Commission in New Delhi , India is the 3rd largest investor in UK. In 2011 (till end October) UK exports to India increased by 45 per cent, making India, the UK’s largest non EU market and the High Commission's website says UK aims to double its bilateral trade with India by 2015. India’s Tata group which owns Jaguar Land Rover, Corus Steel and Tetley Tea among other assets in the UK , was described as the largest manufacturing employers in that island nation, by Financial Times.

With Australia, India’s trade and investment ties have similarly deepened, in preference to say non-Commonwealth African mineral rich nations, which could have been India’s alternate trade partners . Today, India is Australia’s 4th largest trading partner. Growth in two-way trade reached $ 22 billion in 2010-11 and is expected to reach $ 40 billion in the next 3 years, when India would replace the US as Australia’s third largest trading partner (Australian Trade Commission). Indian investment in Australia has now reached an estimated $ 10 billion ( though of course it still remains a fraction of Britain’s total investment of over $ 65 billion and USA’s over $ 100 billion, the two largest investors in that country but then that was over a longer period of time. )

All this leads us to the case for a Commonwealth trading and investment compact. Even if a Free Trade Pact between diverse countries who make up the membership of the Commonwealth seem a difficult and daunting proposition, a move to give a Commonwealth preference to trade and investment flows between member countries could well see respective economies gaining in economic terms which in turn could strengthen existing trends where Commonwealth nations seem to prefer doing business with each other.

However, these moves need to start now or else the Commonwealth will be one of the `also ran’ as various multinational trading arrangements come into being. There is the promise of a free trade zone springing from the East Asia Summit which could encompass India, China, Asean, Japan, Korea and Anzus countries, though there are fears and rivalries between China on the one hand and Japan, Korea and Asean on the other which is delaying a deal; there is the US idea of an Asia-Pacific Trade Pact, which may not take off because of Great Power rivalry between the two super powers – US and China; there is Nafta itself and a reformed EU with free trade deals with growing economies like India; there is also the African and Latin American trade blocks coming up.

What can the crystal ball hold if the Commonwealth were to really manage to come up with something akin to a free trade pact?

The Canadian Brent Cameron whom I quoted earlier, in a separate paper also wrote :“If an agreement were achieved (among Commonwealth nations) and (through mutually beneficial trade and investment flows) it could bring per capita incomes up to a level comparable with the developed world, the Commonwealth would have an economy valued at over US$45 trillion - the equivalent of adding the combined GDP’s of the European Union with that of NAFTA - then doubling it.” Maybe that’s food for some thought.


- Trading Places: The `Commonwealth Effect’ Revisited by J Bennett, Paul Chappell, H Reed & D Sriskandarajah ( Royal Commonwealth Society, 2010)

- The Case for Commonwealth Free Trade by Brent Cameron, 2005

- Britain and the EU - The ultimate Eurosceptic fantasy: putting faith in the Commonwealth by Bagehot (The Economist, Oct 30, 2011)

- The Euro Masquerade by Fraser Nelson (The Spectator, Oct 26, 2011)

- As the EU squabbles, the Commonwealth looks even more enticing by Ruth Lea (Conservative Home, Oct 30, 2011)

- Britain Should Aim for a Swiss-style free trade relationship by Ruth Lea (Conservative Home, Jan 8, 2012)

- Annual Report 2011, Department of Commerce, Government of India

- Economic Survey 2010-2011, Ministry of Finance, Government of India