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 !

 

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.

The Iran Driver for the Rupee

Teheran Market

India wants its businessmen to sell more to Iran. No big deal, you may say in these days of global slowdown. But here’s the caveat – North Block wants Indian business to sell in rupees and not in the dollars they are used to and has this December, sent out trade delegations to Teheran to explore rupee trade deals.

India had agreed to buy about 45 per cent of the $ 11  billion in oil it purchases from Iran in rupees, to be liquidated by that country in buying Indian goods, early this year, after US and EU imposed sanctions ended the earlier preferred routes of paying through Turkish and Gulf based banks. The money was to be parked in Uco Bank to facilitate Iranian purchases from India. Not much happened after that.

Strangely, instead of the Indians getting worried about the $ 5 billion lying idle in Uco Bank, it was the Iranians who started fretting. Iranian ministers and diplomats complained that Indians lacked business acumen and pointedly compared them with the Chinese, who in their words “were flooding the markets of Iran with Chinese-made goods” traded in Renminbi, which Iran had accrued by selling some 25-30 million tons of crude a year, to the Middle Kingdom.

To push Indian business to try liquidate the huge rupee positions Iran is building up, the Indian government has started encouraging Indian trade delegations to make their way to Teheran.  From December 17-19, a trade delegation of pharmaceutical  firms were sent out to explore rupee deals to sell bulk drugs to Iran.

This followed a letter from the Commerce Ministry which informed drug makers that “ECGC has agreed to provide guarantee cover up to Rs.300 crores ($600 million) to UCO Bank and also to waive the restrictive clause of “insufficient funds” for negotiation of L/C  (letter of credit) by the banks. “ Incidentally, the December trip was the second one organised for pharmaceutical firms, in 2012 to Iran which has a $ 3 billion market for medicines.

The pharmaceutical firms are not the only ones, being encouraged to fly down to Teheran. Engineering firms were sent on trips  to Teheran to explore similar rupee based deals. India wants to rachet up two-way trade from a current $ 14 billion to $ 25 billion over the next four years, with trade evenly balanced between the two countries, instead of the current situation where Iranian sales of oil and gas outweigh Indian sales of food, medicines, chemicals and engineered goods by 11:3.

Iran is already the largest importer of rice from India, with India exporting around 1 million tonnes of basmati rice to Iran. Iran is also one of the biggest buyers of Indian orthodox quality tea, consuming about 15 million kg every year. India has also sealed deals to export 176,000 tons of sugar to Iran so far this year .“The chances of selling more food to Iran are consequently limited. India needs to sell manufactures to Iran, if it wants to take on China … its brands have to be present in Taheran markets more prominently,” said Commerce Ministry officials.

But there are problems in doing business with Iran too. In theory,  Uco Bank will pay Indian exporters out of the account maintained by it on behalf of Bank Markazi, the Iranian central bank, when any of four Iranian Banks  — Bank Parsian, Saman Bank, Pasargad bank and EN Bank — issue valid letters of credit.

However, in reality, LCs take a long time in coming as importers and exporters are put on bureaucratic queue by the Iranian banks. The quick-fluctuating price of Rials makes pricing a tough job too. Even when Indian exports have reached Iran, payments against LCs take a huge time, with Iranian banks taking their own sweet time.

However, the good thing about the Indo-Iranian rupee trade, officials in Finance Ministry say is that this is “encouraging the idea that the rupee can become a currency for international trade … yes there are glitches, but if resolved, India could start exporting more in rupees and cutting out the risk of global forex fluctuations.”

Both the Indian rupee and the Chinese currency are convertible on the current account but not on the capital account, but the Indian rupee’s value is market determined while the Chinese currency’s value is fixed by its central bankers. However, it’s the Renminbi which is talked about in international banking circles, whenever debates occur over new hard currencies which would join the Dollar,  Euro, Pound and Yen in global trade.

Currently, the rupee is officially used for international transactions only with Bhutan and Nepal. Though unofficially, traders in UAE, Singapore, Malaysia, Afghanistan and other neighbouring Asian nations deal in rupees.

According to reports, the Sri Lankan Central Bank’s Monetary Board which earlier this year decided to include Renminbi in the list of designated currencies permitted for international transactions through banks in Sri Lanka, is considering placing the Indian currency too on its list of designated currencies.

To Do List for the Indian Economy

New Delhi's Corridors of Power

As finance minister Pranab Mukherjee gets ready to leave the North Block later this week, his successor will be confronted with five critical tasks initiated by him — cut Subsidies to reduce expenditure; fast-track FDI reform to bring in hard currencies; insurance and pension reforms; get infrastructure spending to deliver the goods; and kickstart tax reforms through goods and service tax (GST) and the direct taxes code (DTC). Regardless of whether the job is taken up by Prime Minister Manmohan Singh, aided by his two trusted lieutenants — C. Rangarajan, the former RBI governor, and Montek Singh Ahluwalia, plan panel deputy chairman — or by a politician such as home minister P. Chidambaram or commerce minister Anand Sharma, these five jobs are crucial to India’s future economic course. 1.    Subsidies: Mukherjee has been working with states to make them give tax concessions on petrol and diesel and match the reliefs with similar cuts in central taxes, thereby reducing the government’s fuel subsidy burden. State levies on petrol and diesel range from 15 per cent in Puducherry to 33 per cent in Andhra Pradesh. Karnataka, Maharashtra, Tamil Nadu and Bengal also have high fuel taxes. Besides, the taxes are ad valorem, meaning the amount goes up with the prices. Mukherjee wanted states to cut taxes by up to 25 per cent. The bold measure obviously requires adroit political manoeuvring to get off the ground. Urea subsidy is another area the new Czar at North Block will have to train his guns on. Increasing urea prices every year for the next three years and eventually introducing free pricing in fertilisers will help the government to check its huge subsidy bill and also save farms from being turned into wastelands by the overuse of heavily-subsidised urea. 2.    FDI Reforms : The depreciation of the rupee, which has lost around 24 per cent of its value in a year, is snowballing into a major area of concern. Though India has one of the largest forex reserves, it needs to shore up its investment as a large part of the foreign exchange is in the form of debt.  To bring in a fresh wave of investment, the government wants to not only open up FDI in retail, defence and aviation but also revive stalled insurance sector reforms. 3.    Pension and Insurance reforms : Even if the FDI cap on insurance can’t be raised because of political compulsions, Mukherjee’s other proposals reforming the insurance sector, can lift market sentiments and rake in hard currency. Chief among the reforms is to allow Lloyd’s to open a trading floor in Mumbai, permit foreign reinsurance firms such as Swiss Re and Munich Re to enter India and give a green signal to public non-life insurance companies to raise capital by selling minority stakes. 4.    Spending : Earlier this month, the Prime Minister had held a meeting of infrastructure ministries to try and push them into meeting their spending commitments. But in truth, this job is done best by two people – the finance minister, who holds the purse strings and sits in on all meetings on permission for projects, and by the Planning Commission deputy chairman, who appraises the projects. To rev up growth it is just as important to spend money on infrastructure projects which can pep up the economy as it is to stop spending on wasteful subsidies. 5. Tax Reforms: Implementation of the goods and services tax will be on the top of any finance minister’s priorities. This tax reform measure, which will help to unify India’s markets and increase its GDP by 1-1.5 per cent, has been held up because of opposition from BJP-ruled states and to an extent by Bengal. The direct taxes code, will, however, be a simpler task as most of the hard work has already been put in by Mukherjee’s team and now just requires some fine tuning.

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.

Postscript:

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 % !

Yen, Rupee and Risk Swaps

Worried by the rate at which the rupee has been falling against the dollar with currency speculators beating down the Indian currency, the government has reacted with alacrity to a Japanese offer to renew a currency swap agreement which had lapsed June, this year.
Japan of course wants to do more than just swap financial risks. Lurking behind the two nation's economic enagagement, are serious strategic considerations which could shape Asia in the future.

The last forex swap deal between the two nations, was for $ 3 billion and provided for either side pitching in with $ 1.5 billion to help shore up the other’s currency. This time round the war chest will be larger at $ 15 billion, with both sides committing $ 7.5 billion which the other side can use.

Japanese Prime Minister Yoshihiko Noda who arrived on Tuesday, December 27, is expected to finalise the deal. Japan’s forex reserves are at a high of $ 1.3 trillion, the second highest forex reserves globally but it has still signed up for currency swap deals with a number of key countries.

The arrangement will allow the Reserve Bank of India to borrow dollars from the Bank of Japan to sell in the forex market to stabilise the rupee. BoJ will have similar rights in case the Yen is under attack.

India’s currency has been under attack in recent weeks. Partly, because foreign institutional investors who play in the bourses of this country  have been selling stocks, converting their earnings into dollars and taking it out to invest in other markets. The rupee's value has fallen by some 20 per cent since June, 2010.

In part, the rupee is falling as it is also under attack from currency speculators who are betting against the currency. India, despite having one of the largest forex reserves, globally, holds much of this reserve in the form of debt inflows. Of India’s $ 302 billion reserves, net foreign liabilities which include Non Resident Indian (NRI) deposits, FII investments, foreign borrowing by Indian corporates, stand at $230 billion or so. This high proportion of debt in India's forex assets makes the rupee vulnerable to speculative runs on it, especially near dates when large portions of this debt come up for redemption.
Large bits of the NRI deposits and some of the corporate debt mature in the coming year, which perhaps explains why currency speculators have started pulling down the rupee and also why India is in a hurry to sign up on swap deals.
Japan, has a stake in the rupee's well being. India, an important trade partner for the island nation, whose auto parts and capital goods sales to the South Asian nation, has been impacted by the rising price of the Dollar/Yen. Japan probably feels if it can help check the erosion of the value of the rupee, it can protect its market share here. A stronger rupee could enthuse Indians to import more Japanese goods as the Japanese prices would then look more affordable .
Japan’s competitors in the Indian market are China and Korea and China has already started floating Renminbi loans so that India can purchase  power and telecom equipment from it at attractive rates bypassing the strengthening Dollar.

But underlining all this economic bonmhomie are strategic considerations. Japan is also wary of a militarily rising China, which has been making territorial demands on it, and has been consequently looking to balance China by engaging with India both strategically as well as economically.

The Japanese government is alarmed by aggressive Chinese naval moves in the East China Sea, where it disputes Japanese control over the Senkaku islands as well as by anti-Japanese demonstrations in China, and has been quietly advising its firms to look westwards towards Vietnam in the Asean region and towards India.
The Japanese currency swap deal should be seen in this broader strategic and economic context.
Luckily, Japanese businessmen too feel India is a better business bet in the long run. A survey conducted some time back, by the Japan Bank for International Cooperation for the island nation’s Ministry for Economy, Trade and Industry, shows some 75 per cent of Japanese businessmen considered India as “the most promising country” ahead of China, Brazil, Vietnam and the US.
More than 1,200 Japanese firms have already invested in India including Suzuki, Honda, Nissan, Toyo, Mitsubishi, Panasonic, Daikin, Toyota, Komatsu, Sanyo, Nissin and Shimadzu. While a second wave of investment by small and medium Japanese enterprises as well as major players expanding their business has started earlier this year.
The two main political parties in the island nation - the Liberal Democratic party which ruled Japan  for more than 40 years since 1955 and Democratic Party which currently rules it - are both agreed on the need for closer strategic and economic ties with India.
Takeshi Iwaya, LDP’s shadow defence minister and member of the Japanese Diet had told this writer when he visited Japan, in Autmn this year, : “threats surrounding Japan are increasing, China is expanding its military technology and  capacity at a ferocious speed …  Japanese alliance with US will remain our cornerstone  …(but) we have to work out common strategic objectives and economic agenda with India.”
A case of double risk swaps both ways?

Postscript:
Hours before Prime Minister Noda left for India on Tuesday, Japan's security council relaxed a four decades-old arms exports ban. Though India was the world's top weapons importer last year, the lifting of the ban is seen as a move which could be used by firms like Mitsubishi to cooperate with Indian shipyards and factories in building defence vessels and  missile defence systems, rather than India buying off the shelf hardware from the East Asian powerhouse.

Mitsubishi has a deal with India’s L and T Shipyards and defence analysts say that the two could use the opportunity to co-produce a wide range of Naval vesels. As it is the two countries are working in the words of  former Prime Minister Shinzo Abe, so that "sooner rather than later, Japan's navy and the Indian navy are seamlessly interconnected."

India has cooperated with Israel in missile design, while Japan has deals with the US on missile development. Well known Indian defence analyst Brahma Chellaney in an article in Japan Times on December 28, mooted a deal between the two Asian powers – India and Japan - in this sphere.    


Related Reading:
To read a very US-centric take on the US-Japan-India trilateral in mid December, readers maybe interested in Josh Rogin's blog at the Cable : http://thecable.foreignpolicy.com/blog/11505 .

Shrinking growth, weakening Rupee and RBI's plans

 

Indian industry contracted 5.1 per cent in the month of October, the first time industry contracted since June 2009, with rain-hit mines reporting production losses and a sharp over 25 per cent contraction in capital goods production.
October figures however, could well have been an aberration partly because capital goods had grown by a high of 21.1 per cent last October against which the figures are being calculated, and partly because October is a month with many holidays, which firms often use to produce less to bring down inventories.
Production of all kinds of goods – basic, intermediate (which go into making other goods), consumer durables like cars and television sets and consumer non durables like soap and tomato ketchup – contracted slightly varying from 0.1 per cent to 1.3 per cent. Mining which remained hit by heavy rains which held up production in August through October, also reported a 7.2 per cent contraction. 
However, as a number of economists with whom I spoke today pointed out, “the rate of moderation may be explained as an aberration but the fact that there is a moderation in the rate of growth of Indian industry cannot be denied.”
The seven month period from April to October 2011 told a story of marked slowdown – compared to a 8.7 per cent growth in industrial output last year, this year’s first half posted a 3.5 per cent growth in industry.  Consumer goods grew just 0.6 per cent during this period compared to a 8.6 per cent growth during the same period last year. Durables like TV and cars had grown 15.7 per cent April-October, last year, but this year  growth was a mere 4.5 per cent. 
To make things worse, the poor industry data, sparked off heavy sales on the Mumbai stock market. The Bombay Stock Exchange's Sensitive Index fell 343.11 points in one single day when the data was announced- December 12, 2011. A fall of some 2.1% .
This in turn saw the Indian rupee falling to a record low against the U.S. dollar as foreign institutional investors who were the biggest sellers on the stock market, converted their rupees into dollars to take out of the country.
India Inc., naturally hit panic buttons with a flurry of statements about `The Crisis' (no more looming crisis). The Congress-led government of course kept trying to cool down nerves by pointing out that the India growth story still remained valid, but few seemed to buy it.
ICICI Securities in a note said : “Industrial sector has suffered a series of supply side issues this year, which has seen the output decline sequentially in six out of the first seven months of the financial year. Over and above the supply factors, demand moderation which was sporadic at the beginning of the financial year has gathered momentum as the months passed.”
What that means in plain-speak is that industry has slowed down and that demand too is slowing down. The reason, many especially business leaders, say is the Reserve Bank of India policy of ratcheting up interest rates which has made it tough for buyers of cars, homes, other big ticket items like plasma TVs, refrigerators, air contioning etc., to borrow and buy. Just as it has made it tough for businessmen to borrow to set up factories or expand existing ones.
RBI has increased interest rates some 13 times since  March 2010 by the Reserve Bank of India in a bid to batter down rising prices. This in turn translated to actual lending rates to consumers and businesses of between 12-18 per cent.
However, the government does not seem for the time being inclined to reduce interest rates as its worried that speculators in the food market could borrow cheap and use the money to raise food prices, a politically sensitive issue ahead of key polls to states which include Uttar Pradesh. One way out could be for the RBI to cut Cash Reserve Ratio or the amount of money banks have to compulsorily keep with the central banker,  in order to release fresh money into the economy.
Despite the tight money policy followed by the RBI, the headline inflation stood at 9.73 percent in October, remaining above 9 percent for nearly one year. So many reason, that while interest rates can be kept high to sap up inflationary tendencies, at the same time more money can be released to industry which seems to be demanding finance or refinance. However, how wise this would be is something only time will tell. Much of that demand is coming from sick firms like Kingfisher who may or may not be able to pay back banks the money borrowed plus the accumulated interests.