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."