There are very few public policy levers for handling the impending slowdown. By and large, India has neither the fiscal space nor the operational capability to undertake large public works programmes so as to prop up demand to reverse any downturn in good measure. Hence, it is quite likely that GDP growth in 2009 will be slower than that seen in 2008. When adverse shocks affect firms, a key factor which influences the outcome is the capability of the financial system. A sophisticated financial sector is required, which will rationally evaluate the prospects of firms, and support the functioning of the better firms with infusions of debt and equity capital. The financial sector will also play a key role in mergers and acquisitions, so that productive assets fall into the best hands, even if this involves setbacks to big-name firms that are visible in India today.
For finance to be able to perform these complex roles in an atmosphere of calm confidence, two things are required. The first is that there needs to be ample rupee liquidity and ample dollar liquidity, so that managers of financial firms are not running from pillar to post dealing with crises. In recent days, many banks in India have raised interest rates on deposits. They are, doubtless, hoarding liquidity, given fears that the money market might choke up. The RBI governor needs to address the insecurities of banks by coming out with a major speech where he makes clear his analytical framework and sketches policy responses to future events. If banks are more confident about the RBI’s operating procedures of monetary policy, deposit rates and hence lending rates will go down and not up.
The second front that needs to be opened is an urgent de-bottlenecking of financial regulation. The R.H. Patil, Percy Mistry and Raghuram Rajan reports have sketched a well-thought-out programme for financial sector reforms. The delays in implementation of these reports have cost us dear. As an example, the problems of the money market, non-banking financial companies and mutual funds were critically about the lack of implementation of bond market reforms detailed in these three reports. There is now no time to lose. A well-functioning financial system must be urgently obtained.
Wednesday, November 12, 2008
Sunday, September 7, 2008
For the sake of NANO
With the Tatas Nano factory in Singur under siege for the past several days, things are looking bad for the West Bengal government. A non-democratic society might well have precipitated a new version of Tiananmen Square. But ours cannot afford that option, though the violent incidents at Nandigram last year didn't fulfil some of the basic requirements of a democracy. The Singur crisis has reached a tipping point with the Tatas threatening to leave and the West Bengal governor being forced to intervene. Is there a credible way to defuse the crisis? Clearly, the return of the 400 acres in Singur — that is at the heart of the current dispute — will not help the farmers since the land is no longer cultivable. There is no reason to believe, therefore, that the opposition is engaged in preserving the bucolic charm of rural West Bengal. What it clearly wants is more money to be shared between the party bosses and cadre. Besides, they are well aware that under the present legal arrangement, the land acquired by the government under the 1894 Act cannot be returned in any case, though a higher price can surely be offered. Land prices in and around Singur have been continuously rising ever since the Nano plant began coming up. There is no way the government can afford to pay the prevailing price. However, if the Tatas leave, the price will fall to negligible levels. The agitators are aware of this. So, there is a price — higher than what the government had paid but lower than what rules in the market — which will be acceptable to the unwilling land losers. The only problem is that one cannot offer this price to the disgruntled farmers alone. The willing ones will need to be paid too, or else there will be other kinds of problems to be tackled simultaneously. All this calls for a large budget, which the state government does not have in its coffers. But can it locate a potential source for the money? A possible solution to the problem might lie in rethinking the price of the Nano itself. Clearly, Ratan Tata is a contender for the “Henry Ford of 21st century” title. Ford had changed the comparison, Tata will offer it for a price of around $2,500. The whole world is waiting for this miracle to happen. Is there a risk that Tata will lose his title by compromising on the price tag if, at the same time, he earns the designation of a person who caused the economic revival of West Bengal? Let us consider an alternative scenario. Suppose that the ex-factory price of Nano were to be raised to Rs 1.1 lakh. Given the expected production of 3.5 lakh cars, this would generate an extra flow of Rs 350 crore into the Tata coffers. The revenue, if distributed evenly over 1,000 acres of land, would bring up the price per acre to Rs 35 lakh plus Rs 9-12 lakh that the government had originally offered. The total sum could be approximately Rs 47 lakh per acre, which is below the market price but incomparably higher than the price of land in Singur were the Tatas to leave. This down payment will work wonders, compared to vague as well as uncertain pension schemes. A rise in the ex-factory price by Rs 10,000 will not affect consumer demand. The market can undoubtedly afford to pay more. The advantage of this proposal is that the Tatas do not need to cough up the money themselves since the consumers are paying it. The disadvantage is that the Tatas cannot offer the money directly to the farmers since the government owns the land. Hence, the funds need to be handed over to the West Bengal government as a loan. This would be a one-time loan and could be offered at a low rate, like the government's soft loan of Rs 200 crore to Tata at 1 per cent interest for 20 years. Another subsidy the Tatas were offered was the low rent of Rs 1 crore for the next five years. This too could be modified. Will the Nano price be brought down to Rs 1 lakh after a year or so i.e. after the farmers have been paid off? The price need not be brought down. In return for the higher price, the Tatas would be less dependent on subsidies which, in any case, would have been borne out of taxes collected from the middle class. Also, with the current annual rate of inflation hovering around 12 per cent, it is almost certain that the Nano's price will rise soon enough. By leaving Singur, the Tatas would have to bear the extra cost and trouble of relocation. By following the suggested policy, they can avoid this as well as ensure steady profits. Indeed, a price revision for the Nano could well have its merits.
Saturday, August 2, 2008
123 AGREEMENT - New format of NPT
The Indo-US nuclear deal is essentially a diluted version of the Nuclear Non-Proliferation Treaty which India, under both Congress and BJP governments, has refused to sign since the 1970s. Why? Because the NPT is deeply biased in favour of the five original nuclear "proliferators" -- the US, Russia, Britain, France and China. It unjustly ties the hands of a responsible nuclear power like India which uses nuclear technology to run its civil reactors as well as maintain a minimum credible nuclear deterrent.
The Bush administration, recognising that 30 years of coercing different Indian governments on non-proliferation had failed, adopted a new strategy after 2005. The 123 Agreement is the culmination of that strategy. The basic tenet of the Bush anti-proliferation strategy (fully backed by both John McCain and Barack Obama) remains unchanged. Usable nuclear weapons must remain the exclusive preserve of the five old proliferators led by the US. That leaves five other countries with nuclear weapons capability: Israel, India, Pakistan, North Korea and Iran. The US has structured a nuanced policy to deal with each.
Israel is a US proxy state and its (undeclared) nuclear arsenal is directly under Washington's control. Pakistan is a US client-state. Control over its nuclear weapons too lies in Washington. North Korea has over the past year been successfully "persuaded" with a combination of coercion and cash to abandon its nuclear weapons programme. That leaves Iran and India. Iran has been threatened with invasion. Sanctions against it have been enhanced. The Islamist state remains unmoved. It is Washington's biggest proliferation worry and could yet be the target of a pre-emptive US-Israeli missile attack.
And India? This country is unique. We are a parliamentary democracy, the world's fourth largest economy, a big financial and consumer market, liberal, secular, English-speaking with Anglo-Saxon laws, judiciary and accounting, a professional bureaucracy and a strong, independent media. Recognising belatedly that India was an "honourable exception" among the five new nuclear states (four of them proxy, fundamentalist or rogue), the US in 2005 crafted a customised nuclear agreement to cap India's nuclear weapons capability.
This is the genesis of the 123 Agreement. The 123 does not explicitly bar India from conducting nuclear tests -- which are vital to maintain a minimum credible nuclear deterrent. But if India does test, consequences follow. The principal consequence? The 123 Agreement will be terminated by the US President.
Immediately following this, the US and the NSG (a cartel created specifically by the US to punish India for its Pokharan nuclear test) will ask India to return the uranium fuel supplied by them for the country's nuclear reactors. That will effectively end India's civil nuclear power programme, despite assurances of India-specific fuel safeguards from the IAEA and the NSG. To get back to an indigenous uranium fuel supply chain will be extremely difficult for India. The Americans are counting on this to make it virtually impossible for any future Indian government to conduct a nuclear test since the consequences are so unpalatable.
The result: an effective abandonment of India's independent minimum credible nuclear deterrent -- the cornerstone of every Indian government's policy for nearly four decades. Meanwhile, the original five nuclear proliferators (the US, Russia, Britain, France and China) have between them over 25,000 nuclear bombs (India has less than 12) and are unwilling to dismantle even a fraction of this arsenal.
The choice is stark. By signing the 123 Agreement, India is effectively giving up it 34-year-old nuclear deterrent at a time when China is enhancing its own nuclear capability. (So is Pakistan; both China and Pakistan are, unsurprisingly, delighted with the 123 Agreement). In return, we will be "allowed" to give Western and Russian civil nuclear infrastructure companies business (from Indian taxpayers' money) worth over $120 billion.
But what about India's energy security? Nuclear power currently accounts for 3.10% of our total energy output. If the 123 Agreement is signed, that figure will crawl up to 6% (around 16,000 mw) by 2020. (Remember: over 25% of India's power output is lost in transmission and distribution). In return for the miniscule accretion of 2.9% to India's total energy output over 12 years, the country will surrender its independent nuclear deterrent.
The Indo-US nuclear deal serves America's and the NSG's non-proliferation interest. It certainly does not serve India's national interest or secure its energy needs as (untruthfully) claimed by the government.
Now consider this:
1. The Additional Protocols governing the "guarantee" of uninterrupted supply of uranium fuel to India's civil nuclear reactors in the event of termination of the 123 Agreement have not yet been revealed. These are certain to be far more invasive and intrusive than the draft IAEA Safeguards agreement.
2. In the preamble of the IAEA Safeguards draft agreement, there is a clause that states: 'An essential basis of India's concurrence to accept Agency safeguards under an India-specific safeguards agreement is the conclusion of international cooperation arrangements creating the necessary conditions for India to obtain access to the international fuel market, including reliable, uninterrupted and continuous access to fuel supplies from companies in several nations, as well as support for an Indian effort to develop a strategic reserve of nuclear fuel to guard against any disruption of supply over the lifetime of India's reactors.'
In the absence of these 'international cooperation arrangements', the India-specific IAEA Safeguards agreement is itself legally invalid. For members of Parliament to vote on a nuclear deal without the above two crucial documents (the Additional Protocol and international cooperation agreements with key NSG members) is therefore a charade.
In sum: the 123 finally gives the US-led non-proliferation lobby what it has wanted -- but not got -- for 34 years: an India without usable nuclear weapons. In return India gets a trickle of additional nuclear power and invasive inspections in perpetuity of 70% of its civil nuclear reactors (compared to only 1% of China's nuclear reactors under the US-China 123 Agreement). A good bargain? For the original five nuclear proliferators, led by the US, yes. For India, no.
The prime minister has in the past stated categorically that the Indo-US nuclear deal must have a "broad national consensus" to be seen as legitimate. With Parliament split down the middle on the deal, the definition of a broad national consensus is not met.
The honourable course of action in these circumstances is to wait for the newly elected governments in the US and India next year to seek that consensus and only then proceed with the deal.
The Bush administration, recognising that 30 years of coercing different Indian governments on non-proliferation had failed, adopted a new strategy after 2005. The 123 Agreement is the culmination of that strategy. The basic tenet of the Bush anti-proliferation strategy (fully backed by both John McCain and Barack Obama) remains unchanged. Usable nuclear weapons must remain the exclusive preserve of the five old proliferators led by the US. That leaves five other countries with nuclear weapons capability: Israel, India, Pakistan, North Korea and Iran. The US has structured a nuanced policy to deal with each.
Israel is a US proxy state and its (undeclared) nuclear arsenal is directly under Washington's control. Pakistan is a US client-state. Control over its nuclear weapons too lies in Washington. North Korea has over the past year been successfully "persuaded" with a combination of coercion and cash to abandon its nuclear weapons programme. That leaves Iran and India. Iran has been threatened with invasion. Sanctions against it have been enhanced. The Islamist state remains unmoved. It is Washington's biggest proliferation worry and could yet be the target of a pre-emptive US-Israeli missile attack.
And India? This country is unique. We are a parliamentary democracy, the world's fourth largest economy, a big financial and consumer market, liberal, secular, English-speaking with Anglo-Saxon laws, judiciary and accounting, a professional bureaucracy and a strong, independent media. Recognising belatedly that India was an "honourable exception" among the five new nuclear states (four of them proxy, fundamentalist or rogue), the US in 2005 crafted a customised nuclear agreement to cap India's nuclear weapons capability.
This is the genesis of the 123 Agreement. The 123 does not explicitly bar India from conducting nuclear tests -- which are vital to maintain a minimum credible nuclear deterrent. But if India does test, consequences follow. The principal consequence? The 123 Agreement will be terminated by the US President.
Immediately following this, the US and the NSG (a cartel created specifically by the US to punish India for its Pokharan nuclear test) will ask India to return the uranium fuel supplied by them for the country's nuclear reactors. That will effectively end India's civil nuclear power programme, despite assurances of India-specific fuel safeguards from the IAEA and the NSG. To get back to an indigenous uranium fuel supply chain will be extremely difficult for India. The Americans are counting on this to make it virtually impossible for any future Indian government to conduct a nuclear test since the consequences are so unpalatable.
The result: an effective abandonment of India's independent minimum credible nuclear deterrent -- the cornerstone of every Indian government's policy for nearly four decades. Meanwhile, the original five nuclear proliferators (the US, Russia, Britain, France and China) have between them over 25,000 nuclear bombs (India has less than 12) and are unwilling to dismantle even a fraction of this arsenal.
The choice is stark. By signing the 123 Agreement, India is effectively giving up it 34-year-old nuclear deterrent at a time when China is enhancing its own nuclear capability. (So is Pakistan; both China and Pakistan are, unsurprisingly, delighted with the 123 Agreement). In return, we will be "allowed" to give Western and Russian civil nuclear infrastructure companies business (from Indian taxpayers' money) worth over $120 billion.
But what about India's energy security? Nuclear power currently accounts for 3.10% of our total energy output. If the 123 Agreement is signed, that figure will crawl up to 6% (around 16,000 mw) by 2020. (Remember: over 25% of India's power output is lost in transmission and distribution). In return for the miniscule accretion of 2.9% to India's total energy output over 12 years, the country will surrender its independent nuclear deterrent.
The Indo-US nuclear deal serves America's and the NSG's non-proliferation interest. It certainly does not serve India's national interest or secure its energy needs as (untruthfully) claimed by the government.
Now consider this:
1. The Additional Protocols governing the "guarantee" of uninterrupted supply of uranium fuel to India's civil nuclear reactors in the event of termination of the 123 Agreement have not yet been revealed. These are certain to be far more invasive and intrusive than the draft IAEA Safeguards agreement.
2. In the preamble of the IAEA Safeguards draft agreement, there is a clause that states: 'An essential basis of India's concurrence to accept Agency safeguards under an India-specific safeguards agreement is the conclusion of international cooperation arrangements creating the necessary conditions for India to obtain access to the international fuel market, including reliable, uninterrupted and continuous access to fuel supplies from companies in several nations, as well as support for an Indian effort to develop a strategic reserve of nuclear fuel to guard against any disruption of supply over the lifetime of India's reactors.'
In the absence of these 'international cooperation arrangements', the India-specific IAEA Safeguards agreement is itself legally invalid. For members of Parliament to vote on a nuclear deal without the above two crucial documents (the Additional Protocol and international cooperation agreements with key NSG members) is therefore a charade.
In sum: the 123 finally gives the US-led non-proliferation lobby what it has wanted -- but not got -- for 34 years: an India without usable nuclear weapons. In return India gets a trickle of additional nuclear power and invasive inspections in perpetuity of 70% of its civil nuclear reactors (compared to only 1% of China's nuclear reactors under the US-China 123 Agreement). A good bargain? For the original five nuclear proliferators, led by the US, yes. For India, no.
The prime minister has in the past stated categorically that the Indo-US nuclear deal must have a "broad national consensus" to be seen as legitimate. With Parliament split down the middle on the deal, the definition of a broad national consensus is not met.
The honourable course of action in these circumstances is to wait for the newly elected governments in the US and India next year to seek that consensus and only then proceed with the deal.
Tuesday, July 22, 2008
INDIAN PARLIAMENT BLOTTED
A incident shocked Lok Sabha witnessed unprecedented drama when a BJP member (Ashok Argal) walked in the middle of the House flashing wads of currency notes which he claimed was given by a Samajwadi Party leader (Amar Singh) as bribe for absenting himself from the trust vote.
Opening a black leather bag in the midst of the debate on the confidence motion, Ashok Argal, BJP MP from Morena (madhya pradesh), surrounded by his party colleagues, displayed bundles of currency notes saying Rs one crore was given to him by an SP leader as "advance" for abstaining from today's trust vote.
As the members raised the issue, the House was surcharged with members from both sides trading charges and crowding in the well. The opposition members shouted "shame, shame" and "chor hai, chor hai" (thieves, thieves) against the government accusing it of indulging in horse trading.
In the midst of the flutter, Deputy Speaker Charanjit Atwal adjourned proceedings hurriedly. The Speaker entered he chamber later to adjourn again while the Deputy Speaker deferred proceedings for a third time for an hour till 6 PM.
Even after the adjournment, there was palpable tension in the House with members from rival sides shouting at each others.
Besides Argal, two more BJP members -- Mahavir Bhagora and Fagan Singh Kulste-- alleged that money was offered to them.
The BJP members alleged that an SP leader promised three of them Rs three crore each, of which Rs one crore was paid in advance.
Meanwhile, Congress charged that the BJP came up with the allegation that a Samajwadi Party leader tried to bribe three of their MPs because it wanted to disrupt the proceedings of Lok Sabha.
This incident took place today and i wasn't able to resist myself on writing this. This is the saddest day in Indian Political History. Now the bigger question is not that whether goverment will survive or not, whether BJP or SP is speaking the truth or whether who is right or who is wrong? Now , the question is whether these kind of people who do politics at such a low level should be allowed to rule our country? Whether this is moment for which our elders had sacrificed there lives for making our country Independent? Whether power and money has became so important for our parliamentarians that they can even go to this extent? Whether our polticians ethics had so degraded that they made a blot on the face on indian people and had made ashamed us infront of whole world? People who were in yesterday's paliament discussion were talking about nation's pride and integrity had did this shameful act of murdering indian democracy which was considered to be the biggest democratic country of world and we were (its very pathetic using "were" in place of "are") proud of, What punishment can be given to these people who today liked this proud of more than one billion indians? and many more.....
Today's incident may be whomsoever will be guilty but it had hurted the temple of indian democaracy very badly and this will always remain as an ugly wound on every indian and indian democracy's face.
We people are somewhere as much responsible for this as much our so called representatives are. Why we are not ready for taking our burdens of country on our shoulders? Why we had let our country bleeding like this? Why we young indians are not able to think beyond our placements, packages, money, fun and lifestyle? Why we now don't care for our motherland? Whether we don't love our motherland as our ancestors did? Whether we don't even have 552 true indians in between us with a population of more than a billion, who are reasy to serve this country? Why we are not ready for holding reins of country and drive it to pinnacle?
I know very few will be going through this blog and in between those very few a handful people will be letting it to reach there heart, mind and soul to them its my sincere request to wake up and lets together save our nation. We can't let our motherland in so much pain.
lets bring back the proud of our nation and make it the "Vishva Guru".
roar like a lion - "JAI HIND"
Opening a black leather bag in the midst of the debate on the confidence motion, Ashok Argal, BJP MP from Morena (madhya pradesh), surrounded by his party colleagues, displayed bundles of currency notes saying Rs one crore was given to him by an SP leader as "advance" for abstaining from today's trust vote.
As the members raised the issue, the House was surcharged with members from both sides trading charges and crowding in the well. The opposition members shouted "shame, shame" and "chor hai, chor hai" (thieves, thieves) against the government accusing it of indulging in horse trading.
In the midst of the flutter, Deputy Speaker Charanjit Atwal adjourned proceedings hurriedly. The Speaker entered he chamber later to adjourn again while the Deputy Speaker deferred proceedings for a third time for an hour till 6 PM.
Even after the adjournment, there was palpable tension in the House with members from rival sides shouting at each others.
Besides Argal, two more BJP members -- Mahavir Bhagora and Fagan Singh Kulste-- alleged that money was offered to them.
The BJP members alleged that an SP leader promised three of them Rs three crore each, of which Rs one crore was paid in advance.
Meanwhile, Congress charged that the BJP came up with the allegation that a Samajwadi Party leader tried to bribe three of their MPs because it wanted to disrupt the proceedings of Lok Sabha.
This incident took place today and i wasn't able to resist myself on writing this. This is the saddest day in Indian Political History. Now the bigger question is not that whether goverment will survive or not, whether BJP or SP is speaking the truth or whether who is right or who is wrong? Now , the question is whether these kind of people who do politics at such a low level should be allowed to rule our country? Whether this is moment for which our elders had sacrificed there lives for making our country Independent? Whether power and money has became so important for our parliamentarians that they can even go to this extent? Whether our polticians ethics had so degraded that they made a blot on the face on indian people and had made ashamed us infront of whole world? People who were in yesterday's paliament discussion were talking about nation's pride and integrity had did this shameful act of murdering indian democracy which was considered to be the biggest democratic country of world and we were (its very pathetic using "were" in place of "are") proud of, What punishment can be given to these people who today liked this proud of more than one billion indians? and many more.....
Today's incident may be whomsoever will be guilty but it had hurted the temple of indian democaracy very badly and this will always remain as an ugly wound on every indian and indian democracy's face.
We people are somewhere as much responsible for this as much our so called representatives are. Why we are not ready for taking our burdens of country on our shoulders? Why we had let our country bleeding like this? Why we young indians are not able to think beyond our placements, packages, money, fun and lifestyle? Why we now don't care for our motherland? Whether we don't love our motherland as our ancestors did? Whether we don't even have 552 true indians in between us with a population of more than a billion, who are reasy to serve this country? Why we are not ready for holding reins of country and drive it to pinnacle?
I know very few will be going through this blog and in between those very few a handful people will be letting it to reach there heart, mind and soul to them its my sincere request to wake up and lets together save our nation. We can't let our motherland in so much pain.
lets bring back the proud of our nation and make it the "Vishva Guru".
roar like a lion - "JAI HIND"
Saturday, July 5, 2008
INFLATION AT 11.63% - BUT WHY ONLY WE???
Yes, we have a global inflation problem because world demand, especially for commodities, is running ahead of world capacity. The phenomenon is global but policy responses will be national.
So, which countries are going to act decisively to curtail demand? Of the three economically significant global players -- the US, EU, and China -- it is only the EU that has kept demand in check through relatively tight monetary policy. The US and China have not. The US, in order to preserve its financial system and avoid a slow-down, has followed expansionary monetary and fiscal policies, aggravating global price pressures, and while China has tightened, it has been small in magnitude and done with reluctance because any serious slow down to the Chinese growth juggernaut is anathema to the Party.
What does this imply for India? While it is convenient, but no less accurate for that reason, to ascribe the origins of recent problem to external forces, Indian policy-makers have to move on. First, these external inflationary impulses are not going to be corrected externally: for reasons described above, neither the US nor China is going to act forcefully and quickly enough to provide relief for the average Indian consumer. Moreover, we have moved to the second round, where the initial external supply shock has started affecting domestic prices across the board. In other words, we now have a domestic inflation problem which requires domestic policy action.
And yet, what have we seen? Leave aside the obligatory and unhelpful tampering (trade and price controls) at the microeconomic level. On the macro front, apart from the relatively modest hike in petroleum prices, the Indian policy response has been, well, somewhere between poor and awful, meriting a grade of about 2 out of 10.
Consider how fiscal, monetary and exchange rate policies have not just been inadequate, they have gone in the wrong direction.
The fiscal position is deteriorating, and substantially, at a time of accelerating inflation. One estimate is that the true central government fiscal deficit could deteriorate this year by a whopping 2.5-3 (at a minimum) percentage points of GDP thanks to a combination of the loan waivers, pay hikes, fertilizer subsidies, and above all, our automatic destabilisers. By fixing retail prices for petroleum, government spending and the deficit automatically increase when oil prices rise, aggravating inflationary pressures. How sensible is that?
A lot has been written about petroleum pricing policy. Three points, however, bear repetition. Our petroleum pricing, like that of China, and the US, acts to maintain high world oil prices, and to turn the terms-of-trade against us. This is self-inflicted harm, made worse by the fact that the beneficiaries of our policy are countries whose direct and indirect influence on us is far from benign. Second, fixed retail prices are implemented in the name of equity and end up being bad not just for efficiency but also equity: petroleum consumers are richer than the average Indian, who pays for the consumption of the rich through a combination of higher taxes and/or inflation caused by oil subsidies. But a third, and possibly important point as we look ahead relates to climate change. India, like other developing countries, justifiably rails against the rich world for having caused global warming. But we will simply not be a credible or cooperative global partner in the fight against this problem, and our legitimate complaints against the rich risk being dismissed as hypocrisy, if our policy contribution is to encourage rather than discourage fuel consumption. Monetary and exchange rate policies in these last few months have both been mystifyingly inadequate. In late February, a chorus of respected voices in India unanimously rounded upon the RBI for not lowering interest rates when the golden opportunity of US rate-cutting presented itself. The RBI added considerably to its sheen by presciently citing the threat of inflationary pressures as the reason for its inaction. It was right and the commentators wrong. Having displayed its anti-inflationary mettle then, it came as a surprise when in the period since mid-April, the RBI countenanced an exchange rate depreciation at a time of imported inflationary pressures. To be fair, there has been some tightening of the CRR and repo rates, especially in the last few days. But: (i) these have been small and delayed; (ii) the key reverse repo rate, which is arguably the real lever for the RBI to manipulate monetary conditions under conditions of excess liquidity, has remained unchanged at 6 per cent compared to current inflation of 11 per cent; and (iii) above all, combining the tepid monetary actions with the sizable rupee depreciation yields the conclusion that overall monetary conditions far from having tightened may actually be looser at a time of accelerating inflationary pressures.
See how prices and monetary policies have diverged in the recent past, and how even the most recent rate hikes are inadequate to counter price pressures.
Thus, from an inflation perspective, we have destabilising rather than stabilising fiscal and monetary policies. There is a real mystery here because electoral populism cannot easily explain these policies; after all, high, especially double-digit, inflation is considered electorally fatal for incumbent politicians, and RBI policy-making has always reflected that political reality.
It is true that tightening will slow growth, but at 11 per cent inflation and 9 per cent growth, the politically expedient trade-off would have been to sacrifice some growth for lower inflation, especially since there is a plausible case that at 9 per cent growth we are testing the limits of the economy's capacity. Why aren't politicians behaving like politicians? Why is the RBI not being true to its inflation hawk credentials?
In India, political opportunism is ritually invoked to exonerate bad policies. In the current circumstances, even this cynical explanation seems inadequate. Its time for us to wake up before we are killed sleeping silently!!!!
So, which countries are going to act decisively to curtail demand? Of the three economically significant global players -- the US, EU, and China -- it is only the EU that has kept demand in check through relatively tight monetary policy. The US and China have not. The US, in order to preserve its financial system and avoid a slow-down, has followed expansionary monetary and fiscal policies, aggravating global price pressures, and while China has tightened, it has been small in magnitude and done with reluctance because any serious slow down to the Chinese growth juggernaut is anathema to the Party.
What does this imply for India? While it is convenient, but no less accurate for that reason, to ascribe the origins of recent problem to external forces, Indian policy-makers have to move on. First, these external inflationary impulses are not going to be corrected externally: for reasons described above, neither the US nor China is going to act forcefully and quickly enough to provide relief for the average Indian consumer. Moreover, we have moved to the second round, where the initial external supply shock has started affecting domestic prices across the board. In other words, we now have a domestic inflation problem which requires domestic policy action.
And yet, what have we seen? Leave aside the obligatory and unhelpful tampering (trade and price controls) at the microeconomic level. On the macro front, apart from the relatively modest hike in petroleum prices, the Indian policy response has been, well, somewhere between poor and awful, meriting a grade of about 2 out of 10.
Consider how fiscal, monetary and exchange rate policies have not just been inadequate, they have gone in the wrong direction.
The fiscal position is deteriorating, and substantially, at a time of accelerating inflation. One estimate is that the true central government fiscal deficit could deteriorate this year by a whopping 2.5-3 (at a minimum) percentage points of GDP thanks to a combination of the loan waivers, pay hikes, fertilizer subsidies, and above all, our automatic destabilisers. By fixing retail prices for petroleum, government spending and the deficit automatically increase when oil prices rise, aggravating inflationary pressures. How sensible is that?
A lot has been written about petroleum pricing policy. Three points, however, bear repetition. Our petroleum pricing, like that of China, and the US, acts to maintain high world oil prices, and to turn the terms-of-trade against us. This is self-inflicted harm, made worse by the fact that the beneficiaries of our policy are countries whose direct and indirect influence on us is far from benign. Second, fixed retail prices are implemented in the name of equity and end up being bad not just for efficiency but also equity: petroleum consumers are richer than the average Indian, who pays for the consumption of the rich through a combination of higher taxes and/or inflation caused by oil subsidies. But a third, and possibly important point as we look ahead relates to climate change. India, like other developing countries, justifiably rails against the rich world for having caused global warming. But we will simply not be a credible or cooperative global partner in the fight against this problem, and our legitimate complaints against the rich risk being dismissed as hypocrisy, if our policy contribution is to encourage rather than discourage fuel consumption. Monetary and exchange rate policies in these last few months have both been mystifyingly inadequate. In late February, a chorus of respected voices in India unanimously rounded upon the RBI for not lowering interest rates when the golden opportunity of US rate-cutting presented itself. The RBI added considerably to its sheen by presciently citing the threat of inflationary pressures as the reason for its inaction. It was right and the commentators wrong. Having displayed its anti-inflationary mettle then, it came as a surprise when in the period since mid-April, the RBI countenanced an exchange rate depreciation at a time of imported inflationary pressures. To be fair, there has been some tightening of the CRR and repo rates, especially in the last few days. But: (i) these have been small and delayed; (ii) the key reverse repo rate, which is arguably the real lever for the RBI to manipulate monetary conditions under conditions of excess liquidity, has remained unchanged at 6 per cent compared to current inflation of 11 per cent; and (iii) above all, combining the tepid monetary actions with the sizable rupee depreciation yields the conclusion that overall monetary conditions far from having tightened may actually be looser at a time of accelerating inflationary pressures.
See how prices and monetary policies have diverged in the recent past, and how even the most recent rate hikes are inadequate to counter price pressures.
Thus, from an inflation perspective, we have destabilising rather than stabilising fiscal and monetary policies. There is a real mystery here because electoral populism cannot easily explain these policies; after all, high, especially double-digit, inflation is considered electorally fatal for incumbent politicians, and RBI policy-making has always reflected that political reality.
It is true that tightening will slow growth, but at 11 per cent inflation and 9 per cent growth, the politically expedient trade-off would have been to sacrifice some growth for lower inflation, especially since there is a plausible case that at 9 per cent growth we are testing the limits of the economy's capacity. Why aren't politicians behaving like politicians? Why is the RBI not being true to its inflation hawk credentials?
In India, political opportunism is ritually invoked to exonerate bad policies. In the current circumstances, even this cynical explanation seems inadequate. Its time for us to wake up before we are killed sleeping silently!!!!
Sunday, June 15, 2008
INFLATION PRICE
Food has become more expensive than before. One doesn’t have to eat out to realise that. Kitchen managers can vouch that the cost of preparing home-cooked food has become much higher. And this higher cost doesn’t arise entirely from higher prices of cooking gas. The stuff being cooked itself has become much dearer. This includes common pulses like arhar, moong, and masoor, not to mention fruits & vegetables, spices and fish. With eating at home more expensive, inflation is no longer a distant enemy.
As the wholesale price index (WPI) inches closer to 6%, familiar fears have started surfacing. With elections round the corner, there’s hardly anything more sensitive than prices that’s likely to figure prominently in the consideration set of voters. Beginning with the “onion” elections in Delhi about a decade ago, several polls have been decided by prices of essentials. As Parliamentary elections get closer, as well as those in some key states, the firmly north-bound prices contain serious scope for discomfort for the country’s political classes.
But why are prices rising? Is it because of oil? With spot prices of global crude oil crossing $100 per barrel, oil is definitely one of the drivers. But why should high oil prices increase the cost of pulses, or fruits, which are grown at home? After the recent revision of retail prices of petrol and diesel, which has more closely aligned domestic and international prices, there haven’t been any more changes in domestic petroleum prices. Then is it because people have suddenly started eating more pulses and fish? Well, pulses are not really close substitutes of rice and wheat. Irrespective of regions and incomes, they have been staple fodder for Indian households—rich or poor—down the ages. As far as fish is concerned, the outbreak of bird flu and panic culling of chickens might have seen a spurt in fish prices in West Bengal and some neighbouring states. But again, that’s not a convincing explanation for increases in fruit and vegetable prices.
Rise in food prices in India is essentially a result of supply shortfalls. With demand unchanged, lower supply leads to lower availability and concomitant price increases. In times when supplies are fine, food prices do not contribute to inflation. Other than food prices, inflation can pick up due to higher prices of oil as well as manufactured items. However, from a common man’s perspective higher food prices make him most conscious about inflation since he starts feeling the pinch on almost a daily basis. This is precisely where the current bout of inflation has acquired a damaging dimension.
The euphoria over 9% GDP growth has made many overlook the fact that most of North India didn’t get usual rainfall this winter. This might affect the rabi output. There are already reports of oilseeds production taking a hit and forcing customs duty cuts on a variety of edible oils for increasing imports. There will probably be more supply concerns for other crops also, if the overall rabi crop is much smaller this time around. On the oil front, global crude prices show no signs of relenting. Though with elections drawing closer, further pass-throughs are unlikely, the ‘imported’ pressure on domestic prices will continue to remain.
This brings us to manufacturing. Normally, policymakers do not tend to lose their sleep over some escalation in manufacturing prices. Good demand for manufacturing usually results harder prices. However, this time the situation is somewhat different. Domestic manufacturing is facing difficulties on account of high prices of imported raw materials, particularly metals. Sustained high input prices will, sooner or later, force producers to increase finished product prices. This is likely to unleash a chain effect of price rises throughout the economy as users of manufactured inputs also start raising their prices. Higher prices of auto parts leading to higher prices of passenger cars are a typical example. The worst-affected will be the average consumer. With high food prices hitting hard at home, the situation won’t much better outside with purchasables also becoming dearer.
In India, growth and prices usually tend to move together. Either they rise in tandem, or remain moderate. There is no doubt that high growth with low prices continues to remain the foremost objective of macroeconomic management. However, in a country where supply isn’t very fast in responding to changes in demand, flare-ups in prices are unavoidable. Thus high growth with moderate prices are hard to achieve on a sustained basis. Unless supply-side constraints are taken care of. How? The spread of organised retail, particularly food retail, can help by ensuring quick delivery of agri-produce to consumers. That might involve a greater participation of foreign retailers. Is that politically worse than high prices?
As the wholesale price index (WPI) inches closer to 6%, familiar fears have started surfacing. With elections round the corner, there’s hardly anything more sensitive than prices that’s likely to figure prominently in the consideration set of voters. Beginning with the “onion” elections in Delhi about a decade ago, several polls have been decided by prices of essentials. As Parliamentary elections get closer, as well as those in some key states, the firmly north-bound prices contain serious scope for discomfort for the country’s political classes.
But why are prices rising? Is it because of oil? With spot prices of global crude oil crossing $100 per barrel, oil is definitely one of the drivers. But why should high oil prices increase the cost of pulses, or fruits, which are grown at home? After the recent revision of retail prices of petrol and diesel, which has more closely aligned domestic and international prices, there haven’t been any more changes in domestic petroleum prices. Then is it because people have suddenly started eating more pulses and fish? Well, pulses are not really close substitutes of rice and wheat. Irrespective of regions and incomes, they have been staple fodder for Indian households—rich or poor—down the ages. As far as fish is concerned, the outbreak of bird flu and panic culling of chickens might have seen a spurt in fish prices in West Bengal and some neighbouring states. But again, that’s not a convincing explanation for increases in fruit and vegetable prices.
Rise in food prices in India is essentially a result of supply shortfalls. With demand unchanged, lower supply leads to lower availability and concomitant price increases. In times when supplies are fine, food prices do not contribute to inflation. Other than food prices, inflation can pick up due to higher prices of oil as well as manufactured items. However, from a common man’s perspective higher food prices make him most conscious about inflation since he starts feeling the pinch on almost a daily basis. This is precisely where the current bout of inflation has acquired a damaging dimension.
The euphoria over 9% GDP growth has made many overlook the fact that most of North India didn’t get usual rainfall this winter. This might affect the rabi output. There are already reports of oilseeds production taking a hit and forcing customs duty cuts on a variety of edible oils for increasing imports. There will probably be more supply concerns for other crops also, if the overall rabi crop is much smaller this time around. On the oil front, global crude prices show no signs of relenting. Though with elections drawing closer, further pass-throughs are unlikely, the ‘imported’ pressure on domestic prices will continue to remain.
This brings us to manufacturing. Normally, policymakers do not tend to lose their sleep over some escalation in manufacturing prices. Good demand for manufacturing usually results harder prices. However, this time the situation is somewhat different. Domestic manufacturing is facing difficulties on account of high prices of imported raw materials, particularly metals. Sustained high input prices will, sooner or later, force producers to increase finished product prices. This is likely to unleash a chain effect of price rises throughout the economy as users of manufactured inputs also start raising their prices. Higher prices of auto parts leading to higher prices of passenger cars are a typical example. The worst-affected will be the average consumer. With high food prices hitting hard at home, the situation won’t much better outside with purchasables also becoming dearer.
In India, growth and prices usually tend to move together. Either they rise in tandem, or remain moderate. There is no doubt that high growth with low prices continues to remain the foremost objective of macroeconomic management. However, in a country where supply isn’t very fast in responding to changes in demand, flare-ups in prices are unavoidable. Thus high growth with moderate prices are hard to achieve on a sustained basis. Unless supply-side constraints are taken care of. How? The spread of organised retail, particularly food retail, can help by ensuring quick delivery of agri-produce to consumers. That might involve a greater participation of foreign retailers. Is that politically worse than high prices?
Saturday, June 14, 2008
SCARY SCAM
No wonder, on the April 28, 2008, the Apex Chamber of Commerce & Industry (Punjab) inserted an advertisement in a leading national business daily seeking intervention of the finance minister and the Reserve Bank Governor in order to 'save SME/business from currency derivatives.'
The advertisement alleged that some private sector banks devised special currency derivative products which were then sold to their clients as hedging instruments. Further, the ad alleged that these transactions were speculative in nature and against the RBI guidelines and policy.
It did not stop there. It went on further to add that any dealing with a bank fundamentally rests on faith and trust. It alleged that some of these banks had sold these exotic derivative products to their clients, leveraging this relationship between bankers and their clients. Later on, businesses realised that these derivatives, instead of hedging the gyrations in the forex markets, actually enhanced their risks and increased their losses substantially.
In the process, this faith of Indian business on the Indian banking industry has been tremendously shaken. Trust, so very vital to the banking system and mechanism and assiduously built over decades by our bankers, seems to have evaporated within months because of the reckless actions of a few bankers. From now on not many relationships with bankers will be anchored on trust.
Indian exporters devastated by derivatives
But members of the Apex Chamber of Commerce & Industry (Punjab) are not the sole victims of these products across the country. In fact, Tiruppur and Karur are two prominent centres in Tamil Nadu that seem to have been hit by the derivative tsunami.
In fact, press reports suggest that such dubious transactions have been replicated in many other such export centres across the country. And in all these places, the estimated losses run into several hundred crores (billions). The original estimate of the loss on derivatives -- Rs 20,000 crore (Rs 200 billion) -- for India as a whole, does not seem to be too conservative.
Naturally, the business in all these places is devastated. Remember, as centre after centre falls to the devastation of these financial instruments, no one talks of price discovery or increased liquidity. Just as businesses are kicking themselves for falling victims to these instruments because of their own greed, the role of bankers in this saga too is increasingly coming under scrutiny.
Importantly, no one is able to explain as to how the mechanism of de-risking -- the end objective of the derivatives game -- can become a risk in itself.
Is managing risk a risky business? Or is it unmanageable? If that were so then why this pretence of managing risk? Surely, someone needs to answer these questions.
The genesis of the problem
Readers may recall that since 2006 the US dollar has been depreciating against most global currencies. In April 2007 the rupee, keeping in line with its global peers, too began to appreciate significantly against the dollar. And as the rupee appreciated, these exporters began to lose both their top-line and bottom-line.
It is in this situation, banks (mostly private and foreign, but also some nationalised ones) took advantage of the situation to sell both exotic derivative products as well as naked hedge products to exporters. Without understanding the law that regulates these products or without understanding the financial implications of the same, thousands of firms entered into these contracts.
This is where the entire issue of the role of banks needs to be examined in greater detail. According to experts, the Reserve Bank of India does not allow naked hedge transactions as it does not have the necessary underlying requirement for the hedge. Put pithily, any hedge instrument, not based on any valid import or export transaction, is not allowed under the extant RBI guidelines as it is merely speculative.What was observed (by me) in the case relating to one exporter in Tiruppur, was that he had hedged the purchase of approximately 5 million pounds (Rs 40 crore) against various currencies. What I understand from this particular exporter is that banks did not insist on any document that would suggest import of machinery to the equivalent value. Nor did this firm care to provide the bank with any detail.
Similarly, banks allowed bets to be placed by exporters without any underlying exposure on the dollar against the Euro, Euro against the Yen, Yen against the Canadian dollar, the Canadian dollar against the Australian dollar and Australian dollar against the US dollar. All these require detailed knowledge of global finance, economics and intricate knowledge of currency movements, which most exporters never had.
And in most cases, the rupee was never hedged! Now if this is not gambling, what is?
Apart from these naked hedges, exotic and complex options were sold by banks as customised products by staffs who were marketing motor finance till the other day. The net consequence is that bankers never explained the risks in totality to the exporters.
No wonder exporters are sitting on significant losses and run the risk of closure. And the banks are now after the exporter to recover an amount that can never be recovered, even if the firm or company -- as the case may be -- is liquidated and all its assets sold.
But what is lost in the entire debate is that banks have been acting as (sole) advisor to these transactions with their clients. Naturally, this raises serious questions over the role of banks, corporate governance, and ethical and conflict issues. How could banks advice clients and yet be counterparty to such transactions? Crucially, how could they expect their clients to bear the losses on such transactions without any demur, especially if the banks are the beneficiaries of such losses.
Decisive intervention required
Due to extreme competition in the banking sector, it is understood that that this idea of selling exotic derivative products emanated first with private sector banks and then flowed to foreign banks. Now even nationalised banks, always known for their ultra cautious approach, are neck deep into this. The only plausible explanation for this is Gresham's law: when good circulates with bad, bad drives out good.
Another pattern that emerges from this is that these banks have taken a position 'against' the dollar and thrust a 'for' dollar position to their clients. As already explained, the US dollar was facing a fall since 2006. As positions were squared, people realised that they were holding a currency that was falling and banks had currencies that were appreciating. That explains the loss to the business and industry.
Is this a simple case of bets going bad? Or did the banks take a wholesale position against the dollar in international currency markets? And when they found that the dollar position they held was fast turning negative due to the falling US currency, did they retail their own risk and bad dollar positions and pass it on to exporters?
Whatever be it, the situation at the ground level is alarming. It is not the quantum of losses that makes it one. Rather it is the conduct of banks that is creating enormous consternation amongst the business community.
As authorised dealers under the FEMA (Foreing Exchange Management Act), banks are virtually disregarding the RBI for the purposes of dealing with other currencies.
To me, these are all characteristics of a scam. It is time that the derivative issue is christened as one. Given this scenario, it is time the RBI interfered in this matter. In the alternative a Joint Parliamentary Committee probe into the entire issue may well be in order.
The advertisement alleged that some private sector banks devised special currency derivative products which were then sold to their clients as hedging instruments. Further, the ad alleged that these transactions were speculative in nature and against the RBI guidelines and policy.
It did not stop there. It went on further to add that any dealing with a bank fundamentally rests on faith and trust. It alleged that some of these banks had sold these exotic derivative products to their clients, leveraging this relationship between bankers and their clients. Later on, businesses realised that these derivatives, instead of hedging the gyrations in the forex markets, actually enhanced their risks and increased their losses substantially.
In the process, this faith of Indian business on the Indian banking industry has been tremendously shaken. Trust, so very vital to the banking system and mechanism and assiduously built over decades by our bankers, seems to have evaporated within months because of the reckless actions of a few bankers. From now on not many relationships with bankers will be anchored on trust.
Indian exporters devastated by derivatives
But members of the Apex Chamber of Commerce & Industry (Punjab) are not the sole victims of these products across the country. In fact, Tiruppur and Karur are two prominent centres in Tamil Nadu that seem to have been hit by the derivative tsunami.
In fact, press reports suggest that such dubious transactions have been replicated in many other such export centres across the country. And in all these places, the estimated losses run into several hundred crores (billions). The original estimate of the loss on derivatives -- Rs 20,000 crore (Rs 200 billion) -- for India as a whole, does not seem to be too conservative.
Naturally, the business in all these places is devastated. Remember, as centre after centre falls to the devastation of these financial instruments, no one talks of price discovery or increased liquidity. Just as businesses are kicking themselves for falling victims to these instruments because of their own greed, the role of bankers in this saga too is increasingly coming under scrutiny.
Importantly, no one is able to explain as to how the mechanism of de-risking -- the end objective of the derivatives game -- can become a risk in itself.
Is managing risk a risky business? Or is it unmanageable? If that were so then why this pretence of managing risk? Surely, someone needs to answer these questions.
The genesis of the problem
Readers may recall that since 2006 the US dollar has been depreciating against most global currencies. In April 2007 the rupee, keeping in line with its global peers, too began to appreciate significantly against the dollar. And as the rupee appreciated, these exporters began to lose both their top-line and bottom-line.
It is in this situation, banks (mostly private and foreign, but also some nationalised ones) took advantage of the situation to sell both exotic derivative products as well as naked hedge products to exporters. Without understanding the law that regulates these products or without understanding the financial implications of the same, thousands of firms entered into these contracts.
This is where the entire issue of the role of banks needs to be examined in greater detail. According to experts, the Reserve Bank of India does not allow naked hedge transactions as it does not have the necessary underlying requirement for the hedge. Put pithily, any hedge instrument, not based on any valid import or export transaction, is not allowed under the extant RBI guidelines as it is merely speculative.What was observed (by me) in the case relating to one exporter in Tiruppur, was that he had hedged the purchase of approximately 5 million pounds (Rs 40 crore) against various currencies. What I understand from this particular exporter is that banks did not insist on any document that would suggest import of machinery to the equivalent value. Nor did this firm care to provide the bank with any detail.
Similarly, banks allowed bets to be placed by exporters without any underlying exposure on the dollar against the Euro, Euro against the Yen, Yen against the Canadian dollar, the Canadian dollar against the Australian dollar and Australian dollar against the US dollar. All these require detailed knowledge of global finance, economics and intricate knowledge of currency movements, which most exporters never had.
And in most cases, the rupee was never hedged! Now if this is not gambling, what is?
Apart from these naked hedges, exotic and complex options were sold by banks as customised products by staffs who were marketing motor finance till the other day. The net consequence is that bankers never explained the risks in totality to the exporters.
No wonder exporters are sitting on significant losses and run the risk of closure. And the banks are now after the exporter to recover an amount that can never be recovered, even if the firm or company -- as the case may be -- is liquidated and all its assets sold.
But what is lost in the entire debate is that banks have been acting as (sole) advisor to these transactions with their clients. Naturally, this raises serious questions over the role of banks, corporate governance, and ethical and conflict issues. How could banks advice clients and yet be counterparty to such transactions? Crucially, how could they expect their clients to bear the losses on such transactions without any demur, especially if the banks are the beneficiaries of such losses.
Decisive intervention required
Due to extreme competition in the banking sector, it is understood that that this idea of selling exotic derivative products emanated first with private sector banks and then flowed to foreign banks. Now even nationalised banks, always known for their ultra cautious approach, are neck deep into this. The only plausible explanation for this is Gresham's law: when good circulates with bad, bad drives out good.
Another pattern that emerges from this is that these banks have taken a position 'against' the dollar and thrust a 'for' dollar position to their clients. As already explained, the US dollar was facing a fall since 2006. As positions were squared, people realised that they were holding a currency that was falling and banks had currencies that were appreciating. That explains the loss to the business and industry.
Is this a simple case of bets going bad? Or did the banks take a wholesale position against the dollar in international currency markets? And when they found that the dollar position they held was fast turning negative due to the falling US currency, did they retail their own risk and bad dollar positions and pass it on to exporters?
Whatever be it, the situation at the ground level is alarming. It is not the quantum of losses that makes it one. Rather it is the conduct of banks that is creating enormous consternation amongst the business community.
As authorised dealers under the FEMA (Foreing Exchange Management Act), banks are virtually disregarding the RBI for the purposes of dealing with other currencies.
To me, these are all characteristics of a scam. It is time that the derivative issue is christened as one. Given this scenario, it is time the RBI interfered in this matter. In the alternative a Joint Parliamentary Committee probe into the entire issue may well be in order.
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