Thursday, December 5, 2013

Bali & Feeding The Poor

US Trade Representative Michael Froman famously told his colleagues at Bali  : “Let us not sugar coat reality: Leaving Bali this week without an agreement would deal a debilitating blow to the WTO.”

Mr Froman, is of course right in saying so. The absence of a `deal’ at Bali will hurt global commerce. And who knows that better than third world trade ministers, all of whom are praying for a resurgence in trade and global economic well-being, to help boost their battered currencies and slowing economies.

However, if one were to rephrase what Froman said, in the Indian context, one would have said: “Let us not sugar coat reality: Leaving Bali without guarantees that one sixth of humanity are able to eat two square meals because of some outdated rules that the Western world wants to stick to, would deal a debilitating blow to humanity at large … it will prolong the hunger, malnutrition and suffering of India’s and the developing world’s poor for many, many more years.”

Commerce and Industry Minister Anand Sharma knew that while he may be blamed for being a deal-breaker or a deal-jeopardiser for his stand that food security measures be exempted from WTO interventions, failure to protect the interests of a billions of poor people to have food security would have history judge him far more harshly.

Frankly, I believe it is not only just, but also makes immense business sense to support a food security bill will help bring affordable food to the tables of hundreds of millions of India’s poor.   

First, let us examine what is it that India wants. Then, try and understand how this actually makes good business sense for the whole world.

India wants the right to buy and stock large quantities of foodgrain for distribution at cheap prices to its poor. The amount involved is of course huge – some 62 million tones of foodgrain to be sold to some 820 million people at last reckoning.  

Feeding India's Poor
The subsidy involved could breach the limits set by WTO for governmental subsidy for the farm sector because the global trade body insists on calculating the price of this food at an artificial price based on lower global prices set in the 1986-87 era. Since then, global and Indian food prices have gone up several-fold.

The western powers are willing to allow an exemption to this rule,  but for just four years, even as they funnel far larger sums as subsidy to their own farmers. The US pays about $ 20 billion in subsidies to its farmers annually every year, while the EU mandated a Euro 57 billion subsidy package for its farmers! In contrast Indian food subsidy bill for whole year will come to about a third of what the EU spent in 2010.   

Also worrisome from the Indian point of view is that clauses in the WTO rulebook, leaves even this exemption open to challenges before the body’s arbitration authority, in case any member feels it distorts global trade.


Obviously anything that India does can distort world trade. After all we are talking about food grown and consumed by a sixth of humanity. In years, India stopped rice exports there were famines and riots in Africa. India and the Chinese are the proverbial `Elephants in the room’ and everybody knows that. However, that does not mean India should not be allowed the right to feed its poor.

Now, let’s see why feeding India’s poor could be good for global business. By reducing the cost of food for 820 million people, the government will be increasing disposable consumption expenditure in the hands of these people, most of whom live in India’s villages. That, would surely boost rural demand already on an upswing, hugely.

According to NSSO data, between 2005 and 2010, the number of people living below the poverty line in rural areas has dropped to 21.72 crore from 32.58 crore. According to some studies, rural GDP is growing 16 per cent.

I wonder if any of those trade ministers sitting in Bali have tried to imagine what will happen if India’s rural demand booms. Demand for manufactured goods could again hit double digits, leading to expansion of existing factories, and setting up of new ones to feed that demand. The boom in jobs and services to feed that growth would throw up fresh demand. A virtuous cycle of demand and growth to feed that demand would be created.

Double digit or near double digit growth in an economy which is already valued at near $ 2 trillion, would mean unleashing huge demand for goods and services produced all over the world. In short, allowing India to feed its poor millions could well mean a way out of the economic morass, the world has sunk into.

Monday, August 26, 2013

Rupee, Taka and Why India's Export Story is Floundering

When finance minister P Chidambaram last week pointed out that the rupee was not alone in slipping down a greasy pole, his officials quickly chimed in by pointing out that South Africa’s Rand, Brazil’s Real  and Indonesia’s Rupaiah were in the same boat.
BRICS Currencies Vs Dollar in Mid-August 2013

What they forgot to add was that in one year, while India's rupee fell 15 per cent and foreign exchange reserves depleted by 4 per cent, neigbouring Bangladesh's Taka rose 5 per cent from Tk 81.38 in August 2012 to Tk 77.75 in August this year, while its forex reserves rose a phenomenal 45 per cent from $ 11.32 billion last August to $ 16.21 billion now.
Where did the Indian government script its' story wrong and where did Bangladesh go right? Sheikh Hasina's  government managed to push exports, which when added to remittances from Bangladeshis working abroad, paid for Bangladesh’s import bill, leaving a surplus of $ 2.5 billion in the 2012-2013 financial year gone by.
In the last fiscal, 2012-2013, Bangladesh whose principal export to the world is garments accounting for 80 per cent of its exports, sold goods worth some $ 27  billion to the world,  a rise in earning by 11.32 per cent over the year before.  In contrast, India’s exports in that year, diversified between textiles, gems and jewellery, engineered goods and pharmaceuticals among other things was a mammoth $ 300.68 billion. But the other side of the Indian export story was earnings were 1.76 per cent lower than in the year before.
Despite an extremely poor track record in worker safety and labour standards raising the ire of local and global labour and human rights bodies, cheap labour, low overhead costs and a national commitment to Bangladesh’s sole dollar-earning business has seen the country muscling out rivals like India and China for the lower, mass-manufactured end of the world-wide garments business.
In its bid to be tailors to the world, Bangladesh has turned garments businesses into  privileged corporate citizens. Garments trucks are treated as VIP vehicles and police across the country has orders to clear road-blocks and traffic snarls to ensure trucks reach ports on time. Bankers have orders to make paperwork easy and to finish any banking transaction related to garments business before taking up any other work. Customs officials hassling export consignments have found themselves at the wrong-end of tongue lashings by cabinet ministers, who personally take up issues on behalf of garment-makers. All raw materials meant to feed into the garments sector comes in duty free. 
Unlike India which mainly imports energy, gold, electronics and capital good, Bangladesh imports virtually everything it needs to live – rice, wheat, meat and even eggs besides machinery, cars and petroleum products. Yet it has managed to contain its import in the year gone by at 2010-2011 levels.   
India by sharp contrast, has done precious little to raise its export story. Economic reforms in India have largely relied upon opening up the domestic market for imports to infuse competition, hoping it would help reduce cost and improve quality of domestic manufactures, leading to increased exports. A string of free trade pacts have been signed to help this along from an epoch making one with Asean to the latest with Japan. However, the pacts have seen imports from these economic powerhouses rising at a far faster pace than  Indian exports have managed to clip along at.
India's Trade Deficit

India’s overall exports rose to $300 billion in 2012-13, from $18.5 billion in 1990-91, while its imports rose from $ 24 billion in 1990-1991 to $ 498 billion in 2012-2013. Or to tell the story in a different way, India’s exports rose in these 22 years some 15-fold, while its imports rose 20-fold, widening the trade gap as well as the gap between India’s current account deficit or the foreign exchange earnings and spending and fuelling the fall of the Rupee.
At the sane time, red tape and poor regulation has increased the cost of doing business in India, turning sour the growth story for Indian manufacturing.  Clearances ranging from land acquisitions to shipping of manufactured goods overseas are constrained by cumbersome and expensive regulations.
Indian business has not bothered to go up the value chain or working to compress costs. Tirupur, in Tamil Nadu, a once thriving textile and garments manufacturing town, faces the grim prospect of becoming a ghost town, beaten at its game of supplying cheap garments to European and US labels by rivals in Bangladesh and Vietnam. Factory owners never bothered to try climb up the value chain to create more expensive designer clothes on which Spain, Hong Kong and China thrive. 
Nor did they individually or by banding together try to build the kind of clothing brands like Zara and Mango which have made Spain a by-word in the garments world. Zara’s owners Inditex SA   have increased global revenues four-fold in 5-years to nearly €16 billion ($20.65 billion) in 2012, even as recession in Spain slashed Spaniards' per-capita spending on clothing by 22 per cent between 2007 to 2011.
In fact officials running India Brand Equity Foundation, a not-for-profit organisation floated by the Indian government and Industry, agree that though India is the among the largest exporter of garments, textiles, jewellery and tea, it has not bothered to create any global brands in any of these industries. Tatas have tried to buck the trend by buying out a global tea brand.    
Trade policies are still skewed with inputs often taxed at rates higher than exports, as in the case of many electronic manufactures. No policy of disincentivising finished goods imports and incentivising finished value added exports has been designed. Chinese steel industry has grown from scratch to be the world’s biggest using Indian iron ore, while Indian steel has lagged miserably behind.
No well-thought out national policies of targeting growing markets have been wrought. Belatedly India has started using its diplomatic missions to push Indian business along abroad. However, trade and economics still remain low priority for India’s tiny and over-stretched foreign service, something which can be seen by the way China routinely manages to muscle into every other gas-field, highway or dam project which India bids for in Africa, Asia and Latin America.
The Rupee's fall has sparked a lot of wry humour !

Friday, August 9, 2013

Slain Soldiers and the Afghan-end Game

Four inter-related incidents happened in the course of this eventful week. First, a Pakistan army border commando force ambushed an Indian Army patrol on Indian soil, very near the border in Kashmir  and killed 5 soldiers. Then the government did a flip-flop over pinning responsibility on who exactly did the slayings – the Pakistan Army or irregulars dressed in Pakistan Army uniforms.  A first day statement by defence minister A.K.Antony drafted by the National Security Advisor suggested it was by unknown assailants dressed in Pak Army fatigues. The uproar  that followed forced the government to eat its own words and go back to the original press release issued by the Army which blamed the Pakistan Army’s border action team.

4 Bihar regiment martyrs being brought back
Then came two contrary messages from across the border – terror group Lashkar e Toiba chief Hafeez Saeed in a pre-Eid rally at Karachi threatened more attacks on India and followed it up by tweeting on Eid day : “time is near when those oppressed in Kashmir, Palestine and Burma will celebrate Eid in the air of freedom”. On the other hand, the Pakistan Prime Minister’s special envoy to India, Shahryar Khan in an interview in London blamed Pakistani extremists for the Kashmir killings and said Saeed needs to be checked.

Before Saeed unleashed his terror threat,  India’s hawkish television anchors and former generals had of course unleashed their own verbal `jihad’ demanding a fitting response to Pakistan’s perfidy. While India’s peaceniks launched a counter `love jhad’ going blue in the face reminding everyone of Gandhi’s famous line : `an eye for an eye would  make this world  blind’.  The hawks who were joined by the opposition BJP had a point – Pakistani soldiers had beheaded an Indian soldier ambushed on patrol earlier this year and prime minister Manmohan Singh had then promised a `robust’ response  – no one could see that response on the ground. And then came this killing followed by  a flip-flop.

The argument which came from many in the defence community was - An armyman is mentally readied to die defending his country in war. However, is he expected to become a martyr even when the country is ostensibly at peace? In that case should we accept this `phony’ peace?

In the din of this televised battle no one sought to probe the whys of the story – why did the Pakistan Army chose to do what it did at this stage? Why did the Manmohan Singh government act as it did in the face of strong provocation in an election year, knowing fully well that such a stance could boomerang on its face?

Despite misgivings on our peaceniks part and denials by the Pakistan government who would like to blame `non-state actors’ for the mischief, it should not be doubted that what happened at the border was the doing of the Pakistan Army. For there is no way anything like this can happen without the Pakistan Army sanctioning it. The Kashmir border is one of the most heavily fortified and militarized borders in the world, with concrete bunkers and artillery  batteries abounding. Nearly a lakh Pakistani troop – regular 10 corps as well as the paramilitary Northern Light Infantry are stationed along it or behind it.
Line of Control on the Kashmir front

The `Kashmiri militants’/`terrorists’ (mostly recruited from the Punjab and Multan  by organisations like the Lashkar-e-Toiba) who are regularly pushed through that border, crawl across thickly forested `No-man’s land’ while regular Pakistani troops give them covering fire.  They are never allowed to wear Pakistani Army fatigues as that would defeat the denials Pakistan always trots out when challenged on this unique `cold war’.

Why then did the Pakistan Army which really runs the country’s foreign and defence policy regardless of whoever is the civilian prime minister, do this at this time of the year? Especially when Pakistan’s economy is nearly crippled, it desperately needs electricity and gas from India and is under intense international pressure to be friendlier towards its larger neighbour.

The answer perhaps  lies in the Afghan end-game.  The US, with whom the Pakistanis have reluctantly and unwillingly agreed to be partners in the fight against terror, wants Pakistan to keep its troops focused on the Afghan border and its own tribal areas in the North-West, giving protection to the American lines of communications as they pull out. But if  Pakistan guards these lines, it is also expected to see to it that the Taliban which it has been sponsoring does not snipe at the retreating Yanks and/or walk into the spaces vacated by the Americans in Afghanistan.

It pays Pakistani interests if its’ Army can excuse itself from the second part of the task allotted to it, by being `forced’ to withdraw part of the troops posted on its western border on to the Indian border.  The Taliban can then either battle its way to Kabul or threaten the Karzai regime sufficiently to agree to share effective power with it. Talks being held with Taliban to share power, have as yet from the Taliban point of view, yielded nothing much more than just the respectability which comes when an insurgent group is invited for talks by any ruling power.

If the Americans can be `stampeded’, that is forced to quicken their pull-out from Afghanistan and persuaded by mounting casualties not to leave any forces behind to support the Karzai regime, so much better for Pakistan, which wants to use Afghanistan as its strategic backyard. If in the process of `quicker’ withdrawl, the US forces leave behind heavy artillery and equipment, it could prove a boon for the resource starved Pakistani Army.

India which is USA’s unmentioned `other’ ally in the war against terror,  of course does not want to give Pakistan any excuse to pull troops away from the Afghan border and is also under considerable pressure from its new-found Super-power ally to keep the peace with Pakistan, so that the pull-out goes on undisturbed.

This would explain Dr Singh silence on the issue and the flip-flop by his defence minister, who many have sarcastically dubbed `St Antony'. There was perhaps a conscious attempt to give Pakistan a way out from the embarrassment  and uproar caused by the sneak attack.

However all this leads on to another set of questions  – does helping out USA pull out quietly from Afghanistan help India? What will Pakistan do once the Americans have pulled out, leaving  it in the undisputed position of being the strongest military force in all Pashtun speaking lands (which includes  most of Afghanistan and Pashtun speaking provinces and tribal territories in Pakistan)? Will India’s huge investments in Afghanistan remain safe after the Americans pull-out ? (attacks have been mounting on Indian diplomatic posts in Afghanistan as well on Indian built roadways and other ventures by Pakistani supported terror networks) How will all this impact India’s Kashmir region? Or for that matter the terror attacks that India regularly faces from across the border? Can it really count on the Nawaz Sharief government to have the strength or the real desire to reign in Pakistan’s hawks who demand that it feeds terrorists into Kashmir and even to attack targets in Indian cities using `non state actors’ ?
To be concluded

Tuesday, August 6, 2013

The `Fault Line' Man

Its official now. Chief Economic Advisor Raghuram Rajan will be the next Governor of the Reserve Bank of India after the current Governor D Subbarao retires in September.
Raghuram Rajan

"Prime Minister has approved the appointment of Dr. Raghuram Rajan as the Governor of Reserve Bank of India (RBI) for a term of three years, vice Dr. D. Subba Rao upon completion of his (Dr. Rao's) tenure …" the bland statement said.

However what it left unsaid was the great amount of politiciking which went on behind the scenes before 50-year-old Rajan was given the job of heading India's central bank at a time when GDP has slowed down to 5 per cent from an average of 8-9 per cent through the last decade, inflation remained high at nearly 5 per cent and the Rupee value against the dollar has come down by some 12 per cent in just over a month.

In the last few weeks, Rajan who has earlier served as chief economist with the World Bank and taught at University of Chicago's Booth School of Business, was locked in a race with Arvind Mayaram, secretary in the finance ministry for the job after Subbarao told finance minister P Chidambaram that he was not keen on another term.

Subbarao who may have said otherwise, had little choice but to move on as  signals coming out of New Delhi made it quite clear that he may not be the man the UPA Government wants at this crucial stage.

Finance Ministry insiders say that Rajan, was always the favourite for the slot, with Chidambaram himself backing him for the job. While prime minister Manmohan Singh, who himself had been an RBI Governor, too preferring giving an economist a shot at the job at this crucial juncture.
D Subbarao
The powerful Indian Administrative Service (India's civil service's upper echelon) lobby was however seen backing Mayaram for the job as it was possibly keen that the country’s top money manager’s job remained with it. Subbarao too had been an IAS officer as had been his predecessor Y.V.Reddy.

Rajan does not really have much administrative experience but is considered one of the brighter young economists having earlier forecast the coming global financial crisis in a lecture made to the world's central bankers at their annual retreat in Jackson Hole, Wyoming, USA in August 2005. Not something which the central bankers exactly appreciated at that time.

Writing later in his bestseller `Fault Lines: How Hidden Fractures Still Threaten the World Economy’, Rajan described the situation as :  "I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions."

His colleagues at North Block said that might exactly be how he might feel when he goes to run one of the most complex and powerful central banks of the world from next month on as he has at many times been arguing exactly the opposite of what the RBI has been doing, especially on cutting interest rates.

North Block and Subbarao had not seen eye to eye for quite a long time with Subbarao refusing to toe the finance ministry line that economic growth should be the top priority by arguing that inflation remained his primary concern and delaying cutting high policy interest rates or by reducing interest rates in small driblets of 0.25 per cent.

The problem, officials claimed was that Subbarao who has earlier served as finance secretary felt the finance ministry had no business telling him what to do as he knew both the jobs, while the UPA government felt the RBI Governor did not understand the political imperatives of creating new jobs and raising growth rates in a pre-election year.

While the tension between the Ministry and RBI had remained contained during President Pranab Mukherjee’s tenure as finance minister, it was in the words of one North block top honcho “quite palpable”, after Chidambaram took over.

Both the RBI and the government knew that a foreign exchange cloud was on the horizon as early as the beginning of this calendar year. Indian companies have to pay back $ 170 billion in short term debt by March-end 2014, while its forex reserves are just about $ 280 billion. However both seemed to be crossing out the others’ suggested solutions to the problem. When the government which has always been conservative over sovereign bonds thought about it, the RBI opposed it openly. The RBI on its part delayed taking steps to tighten controls over foreign exchange markets which could have reduced speculation on the rupee.

The Iconic RBI Building at New Delhi
Rajan after getting the news that he was the chosen man for the big job, said he has “no magic wand” to solve the slowdown but advocated close coordination between the government and RBI in handling the ongoing crisis which has seen the rupee slip to below Rs 61 to the dollar levels frequently and Jan-March 2013 GDP growth slipping to 4.8 per cent. This `co-ordinated' approach was something which the Government and markets wanted to hear. The Indian Rupee recovered shortly after his appointment was announced.

At least one thing is assured, say colleagues, Rajan will act. "The cost of doing nothing," the economist had written in his seminal book `Fault Lines’ on the global financial crisis and its causes, "is perhaps worse turmoil than what we have experienced recently" because "unchecked, the fault lines will only deepen."

Thursday, July 4, 2013

Tug of War Over Interest Rates

In what promises to be one of the most crucial politico-economic tugs of war for the Manmohan Singh government, finance minister P. Chidambaram and bankers have locked horns over a rate cut.
Chidambaram who wants to spur a faltering economy, on Wednesday urged hesitant bankers to cut interest rates to borrowers.  “I have impressed upon banks the need to cut base rates. In my view, reduction of the base rate will be a powerful booster, will be a powerful stimulus to the credit growth.”
The Reserve Bank of India has cut repo rates, the key policy rate at which the central bank lends money to banks, by 125 basis points since January last year in a bid to spur growth which has slackened to 5 per cent for the year-gone-by, far lower than the average of 9 per cent which India was posting in the last decade.
In response to the RBI cuts, the country’s largest bank and trend-setter, SBI, has cut its base lending rate by just 30 basis points between August 2011 and February this year to 9.7 per cent. Actual lending rates to most businesses are at least 2 per cent higher and in case of less highly rated firms as high as 6 per cent over the base rate.
Chidambaram's exhortions led to another round of mild rate cuts by a quarter percent by state run banks, though not matched by private bankers.
Rates charged by state run banks either equal SBI rates or are slightly higher. Rates charged by private banks are usually higher, except to blue chip corporate clients for whose business, banks are willing to enter into fierce rate wars.

Though the chief executives of nationalised banks who met Chidambaram promised a review of their base rates, most privately say it would be tough to cut rates.
“Our Non-performing assets have shot up … this means higher provisioning norms, which gives us little room for cutting rates … nor can we show lower profits, we are after all answerable to shareholders,” said the chairman of a listed PSU bank on the sidelines of the meet, which Chidambaram held today. 
Gross non-performing assets of PSU banks have more than doubled from Rs 71,080 crore as on March 2011, to Rs 1.55 lakh crore as on December 2012. To compound the banks problems, economic slowdown has meant that credit grew slowed down from 17.8 per cent to 15.6 per cent, making it tougher to wipe out red blots on their report card with profits from new businesses.
The problem is that many of the big firms whose loans have gone bad have political `connections' and going after them is often extremely difficult. Repeated restructuring of several big loans including one to an airline which hasn't flown for some time, hasn't helped the banks cut down on their bad loan overhang.
On the other hand, India's banks remain flush with funds, as depositors unhappy with a jittery stock market continued to park money with banks, especially with state run ones, which they seem to feel are safer than privately held banks. Deposits with state run or PSU banks have grown by nearly 15 per cent in the last one year. 
Bankers said “North Block owns majority holding in all PSU banks  … we can’t  ignore it … but we have to answer to shareholders, auditors, Parliamentary panels ... don’t expect too much.”
The current Congress-led coalition government is supposed to demit office by early 2014, when fresh election are slated for a new parliament. Many bankers would like to ride out the pressure till then without taking too many tough decisions which affect their balance sheets.
However, for the government pushing the economic growth rate is crucial to poll prospects as an economic turnaround would be a better story to sell during polls. But bankers keen to keep protect balance sheets and stay away from auditors' querries and litigations by agrieved shareholders do not seem to share the same enthusiasm. 

Friday, June 21, 2013

The Rupee Conundrom


On June 5, 1966, the then prime minister, Indira Gandhi, had already taken the decision to go ahead and devalue the rupee by a huge 60 percent the next day. People close to her say she watched Dr Zhivago to get over her nervousness over the momentous decision. It was a big step. she would be devaluing the Indian rupee which stood at about Rs 4.76  to the dollar by to Rs 7.50 to the dollar – everything India bought from the international market would become that much costlier.

In the words of B.G.Verghese, her information advisor “the storm broke the next day.” Till 1966, the Indian currency which was pegged to the British pound, was officially or unofficially acceptable tender over a large part of Asia and Africa, ranging from Beirut to Hong Kong. Aden, Oman, Bahrain, Qatar, Trucial Gulf states ( present day UAE), Tanganikya (former name for Tanzania), Uganda, Seychelles and Mauritius were among nations where the rupee was legal tender.

With the devaluation, Indian rupee suddenly turned global pariah, with few takers anywhere. What prompted Mrs Gandhi to take the step included a huge trade and fiscal deficit, an end to aid from the West ( a punishment for defending itself against an unprovoked attack by Pakistan) and a rising oil bill. The idea was that the devaluation would help India sell more abroad, earn much needed dollars to pay for its imports of oil, food and machinery. 

Mrs Indira Gandhi being sworn in as Prime Minister

Exports did not surge as expected and Indian financial prestige suffered even further. The conservatives within the Congress including K.Kamaraj felt it was a disaster. Import substitution, and austere curbs on import of most goods helped Mrs Gandhi’s government stave off embarrassing foreign exchange flows problem. 

Cut to July 1991, Dr Mammohan Singh managed to persuade his boss, the then prime minister,  P.V Narasimha Rao to agree to devalue the rupee by some 20 per cent in two steps to Rs 25.95 in an operation code-named `Hop-Skip and Jump’. Rao, too was nervous, he remembered the criticism, his former boss Mrs Gandhi had, had to face. Since 1975, the rupee had been pegged to a basket of currencies which included the Dollar, Yen, Pound and Deutsche Mark.

Dr Singh walks the reforms path
That time round, however, the ` jump’ happened. The slew of reforms which followed, including partial decontrol of the rupee, trade and investment liberalisation, unleashed the “caged tiger”, that India had become. Though the trade deficit quickly rose after falling for a few years, a surge in foreign investment inflows saw India’s financial fundamentals strengthening and global prestige rising.

June 2013 is no different. India’s fiscal and trade deficits have risen to unmatched levels. India’s annual fiscal deficit has hit an all time high of Rs 4,90,00 crore, while its trade deficit for 2012-203  stood   at over $ 190 billion. For just the single  month of May, the trade deficit  was $ 20.14 billion.

This time round however, the rupee is not pegged, it was on free float and the market decided what it’s worth was.  One month of aggressive selling by global financial giants in India’s bond market had helped push the price down by 12 per cent, with the currency losing 1.4 per cent in just one single day – Thursday, June 20.

The question uppermost in many people’s minds, is will Dr Singh be able to recreate his 1991 magic and match the fall of the rupee with unleashing a wave of reforms which will take India forward or will it be a 1966 story, a drop in value followed by more economic disasters.

The problem for the good Doctor and his lieutenant, finance minister P.Chidambaram, is that they are hamstrung by two major problems – lack of sufficient support in Parliament to push through significant reforms like raising the foreign investment cap in insurance and paucity of time – general elections are slated for early next year and in a few months from now, the government will have to slip into populist mode and forget about taking hard headed economic steps which may be unpopular.

Some tweaks can be expected – increase in gas prices, raising the cap on foreign investment in defence and telecom industries – decisions which do not require legislative approval. However, the biggest obstacle  to reform remains red tape – a $ 12 billion investment plan by Korean giant Posco remains on paper as departments battle it out over forests which may or not be cut down for mining and steel plants.

Indians' appetite for gold increasing
However, to give credit to Dr Singh and his team, at least some wise decisions have been taken. There is no move to ban gold imports or to raise taxes on it. Despite the fact that a fall in gold prices coupled with debasement of the Indian rupee’s value, can be expected to further whet appetite for bullion among domestic customers, many of whom see gold as a hedge against inflation and financial market turbulence.

However, the Singh’s government seems to have ruled out any quantitative curbs on gold imports or of higher taxes. Gold imports are already being taxed at 8 per cent and this has started telling with increasing reports smuggled gold being intercepted at airports.

Reduction in duty in the 1990s, had virtually killed gold smuggling. However, a recent increase in duty on gold from 6 to 8 per cent is being seen as a cause for increased smuggling.

More common sense decisions could save the day for the Congress-led government.

One simple policy prescription which the government is believed toying with is allowing upto 49 per cent FDI in most sectors which are security non-sensitive without the mandatory clearance by foreign investment boards.

Wednesday, May 29, 2013

Ponzi Vs Direct Marketing: The Amway Case

Amway Boss: William Pinckney

As a high level inter-ministry group set up by the government was mulling its way through India’s legal maze to decide which kind of multi-level marketing schemes were nothing but disguised ponzi schemes and which legal, the Kerala police arrested the heads of the best-known direct selling MNC in India – Amway.
In a classic case of strange policing, Kerala’s Wayanad district police arrested William S Pinckney, managing director of Amway India and two of his Indian directors, Anshu Budhraja and Sanjay Malhotra on a complaint by three former Amway distributors who claimed they had lost some Rs 27,000 by taking up work for the US-based giant’s business in 2002.
Pinckney and his colleagues were arrested for fraud under Section 420 of the Indian penal code as well as violation of the Prize, chits, money circulation scheme (banning) act, which bans any illegal money circulation scheme of the kind which the infamous Calcutta-based Saradha group was running. Funnily, the CEO and his two directors who were released Tuesday evening on bail, had flown down to Kerala to answer police summons on another case for which they had taken anticipatory bail, when they were arrested for an older case in which the Wayanad police had seemed uninterested after initial enquiry.
A high powered committee has been holding a series of meetings to hammer out exactly what is allowed in multi-level marketing schemes and what is not ever since the Speak Asia scam broke last year. Its meetings ended last month and its report as well as a report prepared by Dr Bibek Debroy for Ficci on direct selling which calls for defining direct selling properly to allow firms like Amway to function while tackling frauds, are currently being mulled over by another committee within the department of financial services in the ministry of finance.
Amway says it runs a direct selling business through a chain of distributors. Amway appoints a distributor who sells its products directly to those who want to buy it. The distributor in turn can appoint other distributors with permission and training from Amway who could also sell Amway goods. Any commissions the first distributor makes is his. Out of commissions the next level of distributors make, they have to pass on a small amount to the man who roped them in. Commissions vary according to what is sold and in what quantities but range from 6-21 per cent.
“What the Wayanad  police are contending is that this is a disguised money circulation scheme … which it is not. It’s direct selling through a chain of distributors. Something which is perfectly legal in India as in the rest of the world,” pointed out Sudip Sengupta, spokesperson for Amway India. Ironically, the Indian Direct Selling Association, of which Amway, Avon, Oriflame and Tuuperware along with Hindustan Lever, Max Life Insurance and Modicare are members have been warning that their members may be harassed with such punitive arrests arising from mis-reading of the law, ever since a rash of ponzi schemes were reported by the media.  
The PCMC (banning) act was promulgated to stop firms from running illegal money circulation schemes including `disguised money circulation schemes’ which mis-use marketing of products to run illegal fund flows. The test of whether a pyramid marketing scheme is legal or not, say legal experts are two basic premises – that the scheme should not “rob Paul to pay Peter” and it should not allure people with promises of abnormally high returns. “These principals were established by the Supreme Court  in the Kuriachan Chacko vs State of Kerala case in 2008, and implies to be legal a scheme should not depend on recruiting new members to pay older members but on actual selling of products and that this should not involve promising abnormally high returns which are unsustainable,” said Parijat Sinha, Senior Supreme Court advocate.
Ponzi Wizards !

Saradha and Speak Asia failed on both count – they depended solely on earnings paid by new members to pay older members and they promised extraordinarily high returns of upto 500 per cent. They were in essence scams designed to be scams.
Amway, Tuperware, Avon etc., have for some time been contending that they are not in the same league as Speak Asia or Saradha and demanding that the law differentiate between frauds and real marketers. The IDSA has been particularly anxious that this be done through a proper legislation and by the police cracking down on fraudulent schemes.
Said Chavi Hemanth, Secretary General of the IDSA  “There is a crying need for a proper regulatory framework to facilitate direct selling which will also prevent unscrupulous elements operating under the garb of direct selling business … this would protect public at large.”

Tuesday, May 21, 2013

Chinese Bug-bear in India's Telecom Story

China's Li Keqiang - on a woo India trip

Chinese Premier Li Keqiang may have chosen India as his first foreign destination, but for India, China remains a bug-bear.
Security issues surrounding Chinese telecom equipment remain a major concern even as Beijing signals its intention for closer ties with its neighbour, seeking greater market integration.
India is working on setting up a testing lab in Bangalore in collaboration with the Indian Institute of Science to check imported telecom gear for bugs.
India imports telecom gear worth about $10 billion annually, much of which is from Chinese firms such as ZTE, Huawei, Dongfang and Cosco. Overall, electronics are the third top import item for India.
The idea of the lab, which the department of telecom says is necessary but not enough to check bugs planted in equipment, comes from a note prepared by the National Security Council (NSC) last month. The note raised concerns over the Chinese firms’ links with the People’s Liberation Army and security establishments, and the fact that some of the firms sold the same devices to Pakistan.
New Delhi decided to act after alerts from local intelligence agencies as well as security experts from the US, Australia and the UK about the possibility of malicious bugs or malwares in telecom gear. A few years back, India had virtually banned the import of Chinese gear but relented after some domestic telecom companies contended that China-made equipment reduced costs and that bugs could come with equipment made by rival European manufacturers, too.
However, India would also like to encourage domestic manufacturing. The government has been mooting the idea of developing a “made-in-India” telecom equipment park. The idea has not got off the ground for want of takers. This is being done to stem the huge drain of forex resources every year in buying costly telecom equipment and even basic mobile sets and components from abroad.
Telecom : the new frontier

The NSC note, too, specifically calls upon the government to step up “efforts to set up manufacturing and fabrication facilities” for telecom gear, including micro-chips, through sops, cheap financing and tax breaks.
Chinese companies already have facilities in India. Most of the Chinese telecom gear makers, including Huawei and ZTE, have set up local units where value addition is done.
India’s preferential market access policy for government procurement, which the cabinet cleared in February this year, does not discriminate between local or foreign firms; it only stipulates that at least 25 per cent value addition should be done locally, which should gradually go up to 45 per cent by 2018.
Chinese firms want to take advantage of this policy. In January, the Cellular Operators Association of India forwarded a representation from Huawei Telecommunications (India), which has become a member of the telecom lobbying body, to the government requesting it to recognise Huawei as a domestic telecom manufacturer and include its name in the lists of local firms circulated by the department of telecom.
The Chinese have already shown eagerness to invest in the domestic telecom market, which is one of their largest markets overseas. Premier Li is expected to take up Chinese firms’ desire to set up industrial parks in India to feed the market locally.
However, security experts point out that this does not necessarily preclude the chances of bugs being implanted in equipment. Bugs could be planted in any key component, whether made in China or India, or even while the gear is being put in place.

Monday, May 13, 2013

Pakistan Elections - Ethnic Divide Widens

Pakistan’s successful general elections which has brought the business tycoon and 1990s ousted prime minister Nawaz Sharief, back to power, has also shown up the deep ethnic divide that besets that nation.

Nawaz Sharief's PMLN wins
Sharief’s Pakistan Muslim League(N) will rule over Pakistan on the basis of the overwhelming votes it managed to garner in Punjab. Out of the 126 seats it won in the Pakistan national assembly, 118 came from Punjab.  In all other provinces it managed to get but marginal vote shares - in Sindh it managed a mere 1 seat out of 59 National Assembly constituencies, in Khyber-Pakhtunkhwa 4 out of 39, none in Balochistan and 2 out of  11 in Federally Adminitered Tribal Areas (see table at end of blog ). In the eyes of most Pakistanis, Sharief’s party, it seems, will continue to remain identified as a `Punjabi’ party.

In line with national results, the PMLN gained an overwhelming 212 seats in the Punjab assembly, while most other Pakistani parties found themselves without much luck in the province which accounts for 60 per cent of Pakistan's electorate.

In Sindh, the Bhutto family led Pakistan People’s Party and Karachi based Muttahida Quami Movement (which represents poor Bihari and eastern UP Muslim refugees) have swept in, with PMLN nowhere in sight. But then the PMLN was always derided by its opponents as a Punjabi party and that is its biggest problem. For long, Sindhis, Baloch and Mohajirs (poorer refugees from India) complained that Pakistan is ruled by a combination of Punjabis and Pathans who rule the roost in politics, bureaucracy and the army.

Conversely, the PPP which used to boast of a sizable following in Punjab several decades back, was virtually wiped out there in the national elections. PPP which had started out as a pan-Western Pakistan party, is increasingly turning into a Sindhi party, with the mesmeric hold that the Bhutto dynasty had over voters elsewhere dying out.  

While Zulfikar Bhutto and his daughter were seen as symbols of a new movement which could lead Pakistan to some kind of a Islamic socialist democracy ideal, their inheritor – Benazir’s widow Asif Ali Zardari seems to be viewed by voters as just another Sindhi leader. The son, Bilawal Bhutto who was missing during the polls after a spat with Zardari, is yet to prove himself.

Sindh has had separatist movements in the past but these always took a backseat when the Bhuttos ruled over Pakistan. However, with the Bhutto and allied Sindhi feudal clans denied power, the province may well prove to be a headache for Islamabad.
PPP swept rural Sindh to win the most National Assembly seats from that province as also cross the half-way mark in the coastal province’s own assembly. However, the port megapolis of Karachi went to the MQM, with the party winning 18 of the 20 National Assembly seats in the city, the largest and richest in Pakistan.

In Pakhtunkhwa and Fata wildlands, Imran Khan’s Pakistan Tehrik-I-Insaf has done well but done equally badly in all other provinces. Whether Imran won because his Pathan lineage (Mianwali Pathan or Pathans from Punjab’s Mianwali district) struck a chord with Highlander Pathans or because he advocated a zero tolerance policy towards unpopular drone strikes, the Tsunami of youth power he predicted, never went beyond the Pathan provinces.  

In Balochistan where, voter turnout in Baloch areas was as low as 2-3 per cent and about 40 per cent in Pashtun areas, again the story is one of ethnicity – the biggest chunk of seats having been cornered by a local Pashtun party.

The few Baloch parties which fought elections had little to show for themselves as they were targeted by both Baloch separatists who don’t want polls in the restive province and by the `establishment’ (a term used by Pakistanis for the Army-ISI combine) which did not want them to do too well.

The day the results were announced was marked by Baloch rebels with a suicide attack on a convoy carrying the police chief of that province, spelling troubled days ahead for the gas and mineral rich province which has seen separatist movements rearing their head since 1948, with the most serious being in the 1970s.  

Baloch Rebels Wall Writing Against Elections

The 1970 factor

PML’s rise to power is in ways similar to the 1970 elections in Pakistan when Mujibber Rahman’s Awami League emerged as the undisputed single largest majority party in Pakistan based on its performance in Bengali-speaking East Pakistan. In 1970, Awami League managed to win 160 seats in east Pakistan and nil seats in West Pakistan.

Zulfikar Ali Bhutto and his PPP which in 1970 garnered 62 seats in Punjab, 18 in Sindh and none in Balochistan and East Pakistan, refused to accept Mujib and his `Bengali’ party as rulers of Pakistan, a refusal which contributed to the break-up of Pakistan.

Nothing as drastic or dramatic will happen in 2013. Sharief’s ascent to power will not be challenged, but it may well reinforce existing ethnic divides, unless he is willing to share power with other ethnic parties.

Already the fissures are creating fresh divides. MQM chief Altaf Hussein, reacting to Imran Khan’s calls for re-poll in Karachi which the `Establishment’ seems to be favouring, has threatened to “detach Karachi from Pakistan” if the `Establishment’ does not like the results which favour his party.  The Dawn newspaper quoted Hussein threatening to break the arms of those who are “hatching conspiracies against MQM”. Hussein, was also quoted as stating : “I am about to set free my enraged followers if opposition against our party is not stopped.” While this is certainly much more sound and fury than substance, MQM’s stand on `Pakistaniyat’ (the idea of Pakistan) is not exactly to the liking of the `Establishment’ which is believed to have been backing Imran Khan and his PTI as the best way to keep Pakistan intact for their continued rule through proxy.

MQM's Altaf Hussein - `Ruler' of Karachi


Pakistan National Assembly Results (province-wise)

PML N12611810421
PML Q2200000
JUI F11004610
PML F5050000
PML Z1100000
Result Awaited1

Elections Postponed4

Thursday, May 9, 2013

Chinese Chequers

The Disputed Region
“It’s summer and the Chinese, like us Europeans, probably like camping in your beautiful Himalayas,” quipped a Western diplomat whom I met during the tense few days when a Chinese platoon squatted 19 km deep in Ladakh’s Daulat Beg Oldie sector beyond what both sides tacitly agree as the line of control, raising alarm not only within the country but among a host of nations with which China shares a land or maritime border and has a dispute.

The Chinese eventually walked back but not before wrangling a deal from India that it would do away with observation bunkers (which were later described by Indian foreign ministry officials as sheds) at Chumar which overlooks the strategic Karakoram highway. As one commentator said the Chinese move was an enigma within a mystery.

Intriguingly, the move came weeks before India’s foreign minister Salman Khurshid was to travel to Beijing to be followed by a visit by Chinese Premier Li Keqiang to India. Normally, most nations would try to be on their best behaviour before such high profile visits.

However, the Chinese decided to do just the opposite. Many old China hands say this is typical of the Chinese. They send in probes to test responses ahead of talks, to see how much they can extract from their opponents in any negotiations.

India’s initial response was timid. It planted a platoon of Indo-Tibetan Border Police in front of the Chinese troops and waved flags with Chinese lettering asking them to go back. The Chinese responded by waving their own banners which said in English that Indians have strayed into Chinese territory !

The border between India and China has always been tense ever since a border war in 1962, which saw the Chinese getting the better of India before withdrawing to what is perceived to be the border, though not officially accepted as one by the Chinese. The conflict over the line stems from a border pact negotiated and signed in 1912 by three powers -  British India, Tibet and China which claimed nominal suzerainity over the otherwise independent hermit kingdom. However  Beijing soon rejected the pact as undue British interferencein its affairs. **

Chinese obduracy would not have mattered had not China invaded Tibet in 1949 bringing its troops near India’s and then driven out the Dalai Lama and several tens of thousands of Tibetan into India ten years later. India’s grant of refuge brought the two sides face to face against each other and a series of moves by China nibbling away at the border ended with a full-scale border war in the winter of 1962. Since then there have been many tense face-offs in the Himalayas, some known  to the world, some not so well known.

The recent face off between ITBP border guards and Chinese People’s Liberation Army troopers,  was initially not publicised by either side. However, when Chinese troops simply dug in and attempts through normal diplomatic and military channels did not succeed, someone in India’s Army headquarters quietly broke the story to the Press Trust of India, India’s leading news agency.  The story was quickly picked up by the rest of the media, embarrassing the government of the day into more vigorous attempts to settle the dispute.

Salman Khrshid : Chinese "...acne ..."
Predictably India’s foreign ministry tried to play down the whole affair. Minister Khurshid famously said “One little spot is acne which cannot force you to say that this is not a beautiful face,” while describing the Chinese intrusion into Ladakh, to chagrin of many. However, that stance changed after opposition parties, the Jammu & Kashmir chief minister and even ruling party MPs started demanding the government take some kind of acceptable action.

A deal was eventually hammered through – some claim helped along the way by a prominent Mumbai based industrialist who buys his telecom and power equipment from India’s northern neighbour – which saw both lose some face. The Chinese walked back and Indians agreed to dismantle a couple of strategic bunkers on land which has been de facto Indian for several centuries now.

Which leads to the question – why did it happen at all? What did China gain from it all?

Chinese Take-away !
Some claim the whole brouhaha was a localised affair where a PLA Commander decided to test his Indian counterpart, without letting his masters in Beijing know. Possible,  but difficult given the tight control political commissars exercise over Chinese troops. With the recent change in guard at the top in Beijing, troop commanders would be even more desperate now to prove their loyalty to the new masters, rather than risk their ire with any display of independent thinking.

The Indian bunkers at Chumar, with their spy cameras trained on the Karakorams must have irked the Chinese considerably, but with spy satellites and drones buzzing all over, were a few bunkers and a few cameras enough to endanger the peace in the Himalayas at a time when China is caught up in a raft of border disputes? Partly because of shrewd calculations and partly  fuelled by xenophobia, China is in visible conflict over islands in South China Seas with no less than half-a-dozen nations including military powers Japan, Korea and Vietnam. These islands ranging from tiny islets under Japanese and Korean control to Taiwan and the Spratleys form a girdle around China’s coast and have the potential to be used as bases to choke China’s trade and energy supply lines in wartime.  China wants these islands and the energy rich seas they are in, to be its own.

India wants the seas free to navigate in as it needs to use them to carry on its burgeoning trade with China, Japan and Korea (trade with China alone is slated to go up to $ 100 billion a year within the next two years) and to access its leased oilfields in the Sakhalin in Russian Siberia. This is taken to imply that India supports Japan, Korea and Vietnam in their dispute with China, which it certainly does.  Part of China’s angst is perhaps because of this tacit support that India has been giving to its enemies.

In the Tibetan highlands, China continues to face resistance from a brave and desperate people who refuse to accept their suzerainty excercised through brute military strength. Monks continue to burn themselves and poets continue to write songs dreaming of an independent Tibet. A young prime minister in exile of the Tibetans operating out of Dharmashala,  seems to be slowly filling into the shoes of the Dalai Lama, the God-King and undisputed leader of the Tibetan people till now.

Tibet continues to simmer
Perhaps someone in Beijing (and the new leadership has many minds with experience of running Tibet) shrewdly calculated that a show of strength in the high Himalayas could possibly also help douse some fires in Tibet and squash ideas that India could come to the Tibetans' help, a fond hope that most of China’s oppressed races including Uighurs and Mongols,  nurture.  

For Prime Minister Manmohan Singh, unfortunately, the stand-off could not  have come at a worse time. Except for a resounding win for his party in Karnataka, the news for the PMO and the Congress party has been quite bleak. A Bansal-gate in the railways, Supreme Court’s strictures on the way CBI’s reports were “re-written”, the killing and mutilation of an alleged Indian spy in Pakistan, following beheading of Indian soldiers by Pakistani troops gave people a perception that the  government was perhaps indecisive and worse.

Khurshid's comments on the Daulat Beg Oldie incident did not help either. It showed Singh's cabinet as weak not only before the Indian people, whom the Prime Minister has to face in general elections early next year but also to India’s neighbours who look towards the Asian power for protection from an increasingly aggressive China.  

People contrast his timid response to Indira Gandhi’s handling of China in two incidents – Nathu La in 1967 and Siachen in 1980s. At Nathu La, Indian troops held their ground in the face of Chinese demands that India vacates the pass which leads into Sikkim, then  an Indian protectorate. In the ensuing artillery duel which followed, India extracted a heavy price on the Chinese eventually forcing them to agree to a ceasefire.

In the 1980s, in the face of Pakistani attempts at establishing before the international community, that Siachen, a glacier bounded on three sides by India’s Ladakh, Pakistan-held Kashmir  and Chinese-held Karakoram ranges, was part of its territory, Indian troops quietly moved in. Some in her cabinet at that time had tried to dissuade her by pointing out that China may get involved in the conflict which must ensue. However, those in the know say she did not flinch and stuck to her stand that India should own the high ground.
 ** Note on Ladakh Border

Ladakh was actually conquered by Gen Zorawar Singh in 1835-36, for the Maharaja of Kashmir Gulab Singh from Tsepal Namgyal, the Gyalpo (King) of Ladakh, a tributary of Tibet till then. This was recognised in treaties signed in 1842 and 1853 by the Tibetan government and recognised by the Chinese who had nominal authority over Tibet. The boundaries of the region were well defined at Panghyong lake on the east and Karokaram range in the north-west and remain so till this date.

Aksai Chin, the icy desert north east of Ladakh, which the Chinese surreptiously annexed in the 1950s was however not part of this treaty, its status lay undefined. Though the Maharaja of Kashmir nominally claimed it in the 19th century after W.H.Johnson, a British officer of the survey of India drew a border in 1865 which placed Aksai Chin within the Maharaja's territory