Wednesday, May 12, 2010

Soaring Chinese Imports and Twin Deficits Worry India

India is continuing to run large current account and trade deficits. India's trade deficit was an estimated $86.6 billion in April- January 2009-2010, according to media reports. The Reserve Bank of India said the nation's current account deficit widened to $29.8 billion in fiscal 2009, compared with a deficit of $17 billion in prior year.

The nation’s capital account continued to be negative for the second quarter in a row. The gauge of investment flows into and out of the country showed a shortfall of $4.44 billion in the three months to 31 March, compared with a net inflow of $26.5 billion a year earlier, RBI said.

India's government has sent letters to the country's telecom companies ordering them not to buy equipment from Huawei, ZTE, and several other Chinese companies due to security risks, according to a report in Businessweek. A few weeks ago, the Wall Street Journal reported that there was a similar move by Delhi to limit China's growing role in building India's power sector.

Growing Chinese Imports:
India's imports from China expanded 19 per cent and stood at US$ 32.49 billion in 2008-09, while exports were at US$ 9.35 billion. India's trade deficit with China is expected to grow larger this year, a trend India considers alarming given the nature of imports that go into India's essential infrastructure of power generation and telecommunications networks.

Power Sector:

Chinese are now supplying equipment for about 25% of the new generating capacity India is adding to its national grid, up from almost nothing a few years ago. There are thousands of skilled Chinese expatriates at Indian plant sites, along with Chinese chefs, Chinese television and ping pong.

Telecom Sector:
India is already the biggest export market for China's two leading telecom equipment manufacturers, Huawei Technologies and ZTE, as both companies have focused on India in recent years. As India has grown to the world's No. 2 mobile phone market in recent years, its imports of Chinese handsets have soared.



Unlike China, India lacks the necessary industrial and manufacturing base for greater self reliance in infrastructure equipment and defense armaments. India also runs large current account deficits while China is enjoying large surpluses strengthening its economic position in the world.

Defense Equipment:
India is overwhelmingly dependent on foreign imports, mainly Russian and Israeli, for about 70 per cent of its defense requirement, especially for critical military products and high-end defense technology, according to an Indian defense analyst Dinesh Kumar. Kumar adds that "India’s defense ministry officially admits to attaining only 30 to 35 per cent self-reliance capability for its defense requirement. But even this figure is suspect given that India’s self-reliance mostly accrues from transfer of technology, license production and foreign consultancy despite considerable investment in time and money".


On the same theme, Russian newspaper Kommersant reported that "India has had little success with military equipment production, and has had problems producing Russian Su-30MKI fighter jets and T-90S tanks, English Hawk training jets and French Scorpene submarines."

On India's perennial dependence on imports, here's how blogger Vijainder Thakur sees India's loose meaning of "indigenous" Smerch and other imports:

"The Russians will come here set up the plant for us and supply the critical manufacturing machinery. Indian labor and technical management will run the plant which will simply assemble the system. Critical components and the solid propellant rocket motor fuel will still come from Perm Powder Mill. However, bureaucrats in New Delhi and the nation as a whole will be happy. The Smerch system will be proudly paraded on Rajpath every republic day as an indigenous weapon system.

A decade or so down the line, Smerch will get outdated and India will negotiate a new deal with Russia for the license production of a new multiple rocket system for the Indian Army.

China will by then have developed its own follow up system besides having used the solid propellant motors to develop other weapon systems and assist its space research program."


India does export some armaments but its modest record of producing and exporting weapon systems is evident from the fact that India’s defense annual exports averaged only US$ 88 million between 2006-07 and 2008-09. By contrast, Pakistan exported $300 million worth of military hardware and munitions last year.

Alternatives:

India is looking for alternative sources for critical imports to reduce its dependence on the Chinese and Russians. But it faces an uphill task with Chinese imports in particular. China has become the biggest and the most efficient factory for the world's largest American, European and Japanese companies. Even if it does manage to find non-Chinese sources, India will have to pay much higher prices for such imports. And these imports may still contain crucial Chinese components which dominate the international supply chain for most non-Chinese companies, continuing its dependence on the Chinese.

On the defense side, India has begun to diversify away from Russia. Israelis have become major suppliers to India, and the US and Europeans are now bidding to sell military hardware to India. Both Israeli and Western equipment carries significantly higher price tags than imports from Russia.

Summary:

In spite of Gandhi's Swadeshi movement and Indian policy of developing self-reliance, the nation remains heavily dependent on imports from China for its critical infrastructure, and its growing appetite for weapons systems on Russia and Israel. These growing imports are fueling India's current account deficits, and adding to its paranoia with regard to the rise of China. In response, Indian government is acting to reduce dependence on Chinese imports, a move that will likely to add further to its trade imbalance because of the higher costs of imports from non-Chinese and non-Russian sources.

Related Links:

India-Israel Military Relations

Pakistan's Military Production

BRIC, Chindia, and the "Indian Miracle"

India's "Indigenous" Weapons

Pakistan's Telecom Boom

India's Growing Defense Budget

58 comments:

Anonymous said...

Hi,

Companies wants to prove that they are indian and they want to sell their product in india.

They are ready to be open for inspection and audit by india. However minister jairam was asked to shut his mouth when he express that china is not a threat to india.

No country is self reliant and need not be self reliant. Why reinvent the wheel if it is available easily.

Democracy of india is its curse and boon. Everything takes its sweet own time. for example china could bring the population growth rate from 2.5 to 0.5 but india is it around 1.5.

Mayraj said...

Not to mention other items like Saris!
India, like many countries has a trade imbalance with China. China has imbalance with only those countries whose raw materials it uses it seems..

Riaz Haq said...

Here's an interesting commentary by Sudha Ramachandra about India's future prospects:

The populations of Europe and Japan are already graying, and the working-age populations of the United States and China are projected to shrink too in the next two decades. By 2020 the US will be short 17 million people of working age, China 10 million, Japan 9 million and Russia 6 million. However, India will have a surplus of 47 million people, giving the country a competitive edge in labor costs, which will be sustainable up to 2050, according to a study by Goldman Sachs.

Economists say India will catch up with the Chinese economy beginning in 2030, when the latter could cool off as the result of an aging population. "The window of opportunity offered by a population bulge has clearly opened for India," points out noted economist C P Chandrasekhar of Jawaharlal Nehru University in New Delhi. After decades of evoking despair, India's demographic profile is finally beginning to stir hope.

But not everyone views the population bulge with such optimism. Some analysts say it is not enough to have a young population. The working-age population needs to be healthy and literate.

India's score on this, while improving, is certainly not inspiring. About 50% of all Indian children are undernourished, a large percentage of them born with protein deficiency (which affects brain development and learning capacity, among other things). This is hardly the ideal foundation for a productive workforce, as the likelihood of a malnourished child growing up to be an able adult is rather dim.

There is also the question of whether the population has the skills and knowledge to take on India's future work. Literacy has improved dramatically over the years - just 14% of the population was literate in 1947 versus about 64.8% today - but many who are classified as literate can barely read or write. And 40% of those who enroll in primary schools drop out by age 10. The curriculum in the schools, especially the government-run ones, does not prepare the child for the domestic job market, let alone the global one. The huge "workforce" might not be qualified to do the work.

Moreover, India's rich and educated classes are preferring to have small families, so the additions to the population are coming largely from the poor, illiterate sections in society. Nicholas Eberstadt, who researches demographics at the Washington-based American Enterprise Institute, points out that while India's overall population profile will remain relatively youthful, "this is an arithmetic expression averaging diverse components of a vast nation. Closer examination reveals two demographically distinct Indias: the north that stays remarkably young over the next 20 years, and a south already graying rapidly due to low fertility."

Anonymous said...

Haq saab why do you write more on India than Pakistan?

power equipment:
By 2012 we intend to have 30,000 MW per annum equipment production in India.BHEL itself will have 15000MW PER ANNUM capacity by the end of this year.

The reason we banned chinese equipment is because we wanna support our own power equipment industry because the Chinese have a GLUT of power equipment which they sell at firesale prices i.e dumping.

Defence:
Navy will be self sufficient in the 2020 timeframe we already build all our surface ships on our territory right upto aircraft carriers so no more orders to foreign shipyards.The gorshkov will probably be the last foreign built surface ship.

Submarines should be indeginous by 2015 we are building scorpene and arihant class subs on our territory with French Russian assistance and will launch own designs by 2015.

Airforce:
Self sufficient in helicopters ALH,LCH,LOH...

Licence produce Su 30mki from raw materials on Indian territory.

Plans for MTA,PAK FA,NGFA etc etc in full swing.

This is in contrast to screw driver assembly of JF-17 with avionics from China and engine from Russia.

....need i continue?

Riaz Haq said...

Anon: "By 2012 we intend to have 30,000 MW per annum equipment ....
...
Navy will be self sufficient in the 2020 timeframe we already build all our surface ships on our territory right upto aircraft carriers /...Submarines should be indeginous by 2015 we are building scorpene and arihant class subs on our territory with French Russian assistance and will launch own designs by 2015."

What you offer is all about future hope, not current reality.

I think the Russian Kommerant has it right when it says: "India has had little success with military equipment production, and has had problems producing Russian Su-30MKI fighter jets and T-90S tanks, English Hawk training jets and French Scorpene submarines."

And here's how blogger Vijainder Thakur sees India's loose meaning of "indigenous" Smerch and other imports:

The Russians will come here set up the plant for us and supply the critical manufacturing machinery. Indian labor and technical management will run the plant which will simply assemble the system. Critical components and the solid propellant rocket motor fuel will still come from Perm Powder Mill. However, bureaucrats in New Delhi and the nation as a whole will be happy. The Smerch system will be proudly paraded on Rajpath every republic day as an indigenous weapon system.

A decade or so down the line, Smerch will get outdated and India will negotiate a new deal with Russia for the license production of a new multiple rocket system for the Indian Army.

China will by then have developed its own follow up system besides having used the solid propellant motors to develop other weapon systems and assist its space research program.

Anonymous said...

Sir Middle class - does not simply sit on income - it consumes as well. Shall we discuss consumption statistics?? Since these are ratios, total volume does not make a difference.

Television per thousand People - India has 3 times compared to Pakistan.
Cars per Capita - India has twice as compared to Pakistan.
Education: India has more than 3 times people going for higher education than Pakistan.

And Pakistan has half the saving rate compared to India. So all these commodities are purchased and still Indians on an average save twice of what Pakistanis do.... What does your common sense say to this??

As for your only argument, why dont we look at a country like South Africa with per capita Income of over $10,000(PPP), still about 50% of the population lives below $2 per day. Or for Brazil - Again PCI over 10,000 and 35% of population lives below $2 per day.

Your line of reasoning does not appeal to common sense. If we were to determine number of people over $3650 per year, we need not the average but median atleast to determine the clustering.

Riaz Haq said...

Here's an excerpt from a BBC story about India's worries over "string of pearls" which describes ports China is building in Bangladesh and the Indian Ocean:

The various forms of Chinese assistance to Bangladesh have caused jitters in India - the huge country next door which some Bangladeshis still call "Big Brother."

India is concerned because a similar story is unfolding in Pakistan, Sri Lanka and in Burma - where China is also building roads and deep sea ports.

Indian defence experts fear that China is surrounding India with ports. They call it China's "string of pearls".

"This is not a fear, this is a fact," says Professor Shrikant Kondapalli of Jawaharlal Nehru University in Delhi.

He believes China is "setting up shop" in smaller countries around the Indian Ocean because of oil. An estimated 80% of oil for China's resource-hungry economy comes from the Middle East and Africa, via the Indian Ocean.

Rapidly-growing India also needs oil, and it stands directly in the middle of China's supply route.

The Indians fear that although these deep sea ports will be for trade, China could call them in for military or strategic purposes if oil becomes scarce.

"When you put together all these jigsaw puzzles it becomes clear that Chinese focus in Indian Ocean is not just for trade," says Professor Kondapalli. "It is a grand design for the 21st Century."

'Indian paranoia'

In Beijing, India's fears are given short shrift. "During peace time, these kinds of facilities are only for commercial purposes," says Hu Sisheng, head of South Asia policy at the China Institute for Contemporary International Relations.

“ About 20 years ago, China was also a very poor country - but now it is developing ”
Chinese engineer Shar Wei

It's a tightly guarded government-run facility in Beijing which analyses foreign affairs and directly advises China's leaders.

China is keen to reassure the world that it has no hostile intent. Mr Hu says the Indians are being paranoid when they talk of a "string of pearls".

"It was minted by a young Pentagon guy," he points out.

The phrase "string of pearls" to describe China's strategy for building ports was originally used by analysts working for the US Department of Defense.

Mr Hu believes Washington is playing games and trying to cosy up to India, as it becomes increasingly concerned about China's rise.

Bangladesh is also adamant that there is nothing in its plans to concern India. "I don't believe if China helps us build this sea port, that China will be able to use it for other purposes," I'm told by Dr Dipu Moni, Bangladesh's foreign minister.

Bangladesh wants to be seen as a "bridge" from China to India, and is careful not to offend either of its giant neighbours.

"Bangladesh will never let any part of its territory be used for any kind of attacks or anything like that," she says.

Impoverished Bangladesh is hoping to capitalise on its location between China and India to develop its economy. I see the remarkable impact for myself on the outskirts of Chittagong.

I am stunned when a single track road surrounded by slums suddenly turns into a four-lane motorway. It then crosses a suspension bridge built of gleaming white concrete.

The funds for this bridge came from a Gulf country, and a Chinese firm has done the work.

Riaz Haq said...

Here's an excerpt from an Op Ed by ex Indian diplomat Bhadrakumar:

Clearly, relations with the US are of the highest priority for India, as they are for Russia or China. But the similarity ends there. For the foreseeable future, despite the heart-warming prognosis by the world community hailing India as a potentially emerging global player, the hard reality is that such a prospect remains distant in the scheme of things. When it comes to issues such as the situation around Iran, India lacks the wherewithal of Russia or China.
---
On the other hand, India is almost similarly placed vis-a-vis the US as Brazil or Turkey are. The fact that these two countries, which are close partners of the US, have not drawn Washington's ire shouldn't go unnoticed. New Delhi's apprehensions that any independent line on the Iran nuclear issue might upset the rhythm of US-India relations seems, in introspect, to have been entirely unwarranted. Countries that have taken an independent line on the Iran nuclear issue during crucial IAEA votes - Pakistan, Afghanistan, Malaysia, Egypt - have not exactly come to grief. On the contrary, India's traditional ties with Iran grievously suffered when it began blindly toeing the American line.

Worse still, Tehran harbors a suspicion that New Delhi might have used its ''Iran card'' to ingratiate itself with the George W Bush administration. The signs are that Tehran has made a cool analysis about damage control and has decided to more or less relegate its ties with New Delhi to a place on the backburner, even while going through the occasional motions of friendship and exchange of views that the two neighbors cannot do without.

New Delhi needs to take stock that Obama is an extraordinarily gifted politician endowed with intellectuality and it is conceivable he may come up with new thinking and a new approach to the problem. Monday's swap deal underscored indisputably that US policy on Iran is in a cul-de-sac. A reversal becomes inevitable. To be sure, Obama has taken note that Turkey and Brazil highlighted the existence of a whole world beyond the secretive, cloistered framework of the "Iran Six".

New Delhi has of late been attempting to follow in the footsteps of Russian and Chinese policies. Here too, a rethink is in order. India needs to factor in gains accruing to Russia and China from a continuing US-Iran standoff. The Western embargo against Tehran is keeping Iranian energy exports out of the European energy market that might otherwise have competed with Russian supplies. Energy exports constitute the single-biggest trump card of Russian foreign policy to modulate Western policies toward Moscow.

As for China, it is indeed having quite a field day as an exporter of goods and services to Iran as well as for advancing plans to evacuate Iranian gas and oil through pipelines across Central Asia that are nearing completion. In sum, Beijing has done splendidly well.

--------
India's diplomatic ingenuity lies in working on the US thinking to persuade it to become a partner in the Iran pipeline project. The prospect offers a "win-win" situation. Iran doesn't hide its panache for Big Oil. The US has stakes in India-Pakistan normalization. India and Pakistan's energy markets offer massive business for American oil companies. The US involvement acts as a guarantee for the pipeline. Least of all, Washington too wishes to make Tehran a stakeholder in regional stability.

Riaz Haq said...

Diplomat Bharakumar Op Ed on Iran-India contd:

Russia and China, therefore, have complementary interests in shepherding Iranian energy exports to the Asian market. How is India placed in the energy equations? On balance, India in no way benefits out of the US-Iran standoff and, in fact, has a great deal to lose as regional tensions prevail in a region which forms its extended neighborhood. The Iran nuclear issue potentially can complicate the US-India strategic partnership as New Delhi will be firmly opposed to any use of force in the resolution of the problem.
Equally, the bottom line is that Iran is a major source of energy supplies for the expanding Indian economy. In geopolitical terms, a leap of faith uncluttered by the debris in the India-Pakistan relationship will dictate that the Iran gas pipeline project offers a rare opportunity for New Delhi to make its western neighbor a stakeholder in regional cooperation. Even at the height of the Cold War with nuclear armies preparing for Armageddon, pipelines criss-crossed the Iron Curtain. Alas, the Indian strategic community has a closed mind, as things stand, when it comes to developing a matrix of regional cooperation that even remotely includes Pakistan.

India's diplomatic ingenuity lies in working on the US thinking to persuade it to become a partner in the Iran pipeline project. The prospect offers a "win-win" situation. Iran doesn't hide its panache for Big Oil. The US has stakes in India-Pakistan normalization. India and Pakistan's energy markets offer massive business for American oil companies. The US involvement acts as a guarantee for the pipeline. Least of all, Washington too wishes to make Tehran a stakeholder in regional stability.

New Delhi should closely study Turkey's motivations on the Iran nuclear issue. Turkey has interests almost similar to India's and its supple diplomacy enables it to astutely position itself for the day when the US-Iran standoff dissipates. Turkey estimates that Iran is a neighbor (although they have had a troubled relationship) while the US is a key North Atlantic Treaty Organization ally and any midwifery in the inevitable US-Iran rapprochement becomes a strategic asset for Ankara's growing stature as a regional power.

Indian diplomacy has lately made some interesting moves toward Iran, beginning with Foreign Secretary Nirupama Rao's visit to Tehran in February. The desire to craft a fresh approach is also evident in External Affairs Minister S M Krishna's consultations this week in Tehran. The path is strewn with thorns, as the Iranians harbor a deep sense of hurt about India's stance at the IAEA votes. Therefore, as the US's tug-of-war with Iran intensifies, New Delhi faces the challenge of not treading on Tehran's sensitivities all over again.

On the whole, Indian policy is principled, especially its line that the IAEA ought to be in the driving seat rather than a cabal of states with dubious intentions. But New Delhi is lurking in the shadows in a blissful state of masterly inactivity.

India should openly join hands with Turkey and Brazil in opposing the need for a continued push for UN sanctions against Iran. No doubt, the diplomatic initiative by Turkey and Brazil creates an altogether new situation and Indian diplomacy should grasp its importance and seize its potentials.

Riaz Haq said...

India is continuing to run large fiscal and trade deficits. India's trade deficit was an estimated $86.6 billion in April- January 2009-2010, according to media reports. The Reserve Bank of India said the nation's current account deficit widened to $29.8 billion in fiscal 2009, compared with a deficit of $17 billion in prior year.

Riaz Haq said...

A recent ilog on Chowk titled "Some code coolies!!!" boasts of India being ranked second in global manufacturing competence in a survey by Deloitte Touche Tohmatsu and the US Council on Competitiveness.

In reality, though, India remains heavily dependent on foreign manufactured imports of basic infrastructure equipment needed in telecom, power, defense sectors etc.

India is continuing to run large current account and trade deficits. India's trade deficit was an estimated $86.6 billion in April- January 2009-2010, according to media reports. The Reserve Bank of India said the nation's current account deficit widened to $29.8 billion in fiscal 2009, compared with a deficit of $17 billion in prior year.

The nation’s capital account continued to be negative for the second quarter in a row. The gauge of investment flows into and out of the country showed a shortfall of $4.44 billion in the three months to 31 March, compared with a net inflow of $26.5 billion a year earlier, RBI said.

Riaz Haq said...

$200 billion is the target for India's exports in 2011, according to ADB, about 20% of it in engineered goods, about the same or slightly more than India's textile exports.

Overall, India imports most of its infrastructure machinery (power, telecom, construction equipment, etc) and defense armament and runs huge trade deficits. An example is a recent $10 billion contract by Reliance Power to import power plants from China.

India’s current account deficit tripled in the June quarter as imports soared, raising the spectre of volatile currency when the tide of overseas fund flows turns, according to Times of India.

Interest rate differentials between the domestic market and the developed nations raised the external debt too as companies found it beneficial to borrow in dollars. Widening deficit may make the central bank’s job of ensuring stability in the foreign exchange market, inflation and interest rates tough, economists say.

Current account deficit in the June quarter widened to $13.7 billion, from $4.5 billion in the year earlier, a data released by RBI showed. Current account in the balance of payments measures the net position of a country’s exports and imports of goods and services.

Riaz Haq said...

Here are a few excerpts from a Wall Street Journal story today on China's defense industry advances and exports:

Today, Russia's military bonanza is over, and China's is just beginning.

After decades of importing and reverse-engineering Russian arms, China has reached a tipping point: It now can produce many of its own advanced weapons—including high-tech fighter jets like the Su-27—and is on the verge of building an aircraft carrier.

Not only have Chinese engineers cloned the prized Su-27's avionics and radar but they are fitting it with the last piece in the technological puzzle, a Chinese jet engine.

In the past two years, Beijing hasn't placed a major order from Moscow.

Now, China is starting to export much of this weaponry, undercutting Russia in the developing world, and potentially altering the military balance in several of the world's flash points....

This epochal turnaround was palpable in the Russian pavilion at November's Airshow China in the southern city of Zhuhai. Russia used to be the star of this show, wowing visitors with its "Russian Knights" aerobatic team, showing off fighters, helicopters and cargo planes, and sealing multibillion dollar deals on the sidelines.

This year, it didn't bring a single real aircraft—only a handful of plastic miniatures, tended by a few dozen bored sales staff.

China, by contrast, laid on its biggest commercial display of military technology—almost all based on Russian know-how.

The star guests were the "Sherdils," a Pakistani aerobatic team flying fighter jets that are Russian in origin but are now being produced by Pakistan and China....

That has compounded Russian fears that China has reverse engineered an Su-33 prototype it acquired in 2001 from Ukraine, according to Russian defense experts.

At last year's Dubai Air Show, China demonstrated its L-15 trainer jet for the first time. In June, China made its debut at the Eurosatory arms fair in France.

In July, China demonstrated the JF-17—the fighter developed with Pakistan—for the first time overseas at the Farnborough Airshow in Britain.

China also had one of the biggest pavilions at an arms fair in Capetown in September.

"They're showing up at arms fairs they've never been to before," said Siemon T. Wezeman, an arms trade expert at SIPRI. "Whereas 15 years ago they had nothing really, now they're offering reasonable technology at a reasonable price."

China is generating particular interest among developing countries, especially with the relatively cheap JF-17 fighter with a Russian engine.

The Kremlin has approved the re-export of the engine to Pakistan, as it has no arms business there.

But it was enraged last year when Azerbaijan, an ex-Soviet republic, began talks on buying JF-17s, according to people familiar with the situation...

China's arms exports could have repercussions on regions in conflict around the world. Pakistan inducted its first squadron of Chinese-made fighter jets in February, potentially altering the military balance with India.

Other potential buyers of China's JF-17 fighter jet include Sri Lanka, Bangladesh, Venezuela, Nigeria, Morocco and Turkey. In the past, China has also sold fighters to Sudan.

The potential customer of greatest concern to the U.S. is Iran, which purchased about $260 million of weapons from China between 2002-2009, according to Russia's Centre for Analysis of the Global Arms Trade.

In June, China backed U.N. sanctions on Iran, including an expanded arms embargo, but Tehran continues to seek Chinese fighters and other weaponry.

Riaz Haq said...

Here are excerpts from a Wall Street Journal report on Chinese Premier Wen Jiabao's visit to New Delhi:

Mr. Wen sought during the visit to strengthen commercial ties with big-ticket investment proposals and a promise to further open China's markets to India.

On Wednesday, Indian and Chinese companies signed more than 40 deals in the power, commodities and telecoms sectors for a combined $16 billion. Many of the deals were Chinese bank financing agreements for large Indian orders of Chinese exports of telecom and power-producing equipment.

During the first 10 months of 2010, China exported goods valued at $32.87 billion to India, but its imports totaled only $17 billion.Mr. Wen reiterated that Beijing will heed New Delhi's request to broaden access of Indian exports such as pharmaceuticals, information technology and agricultural products to shrink India's trade deficit.Mr. Wen also said in his speech to the diplomats that China understands and supports India's desire to play a bigger role at the United Nations, including the Security Council. China has long opposed a permanent seat for India on the council, and Mr. Wen's comments Thursday didn't appear to represent a change to that position. President Barack Obama during a visit to India in November for the first time publicly backed India's inclusion as a permanent member of the Security Council.

India, concerned over its trade deficit of $19 billion last fiscal year, wants better market access for its exports. For now, India's main export to China is iron ore, while it imports large amounts of high-value manufactured goods.

"The two sides agreed to take measures to promote greater Indian exports to China with a view to reduce India's trade deficit," the two countries said in a joint statement.

India-China trade ties have often been rocky, as India continues to impose antidumping duties—the highest by any country at the World Trade Organization last year—against Chinese products, alleging that the prices of some goods are set artificially low.

China has also raised objections to India's stringent regulations in sourcing power and telecommunications equipment, calling them discriminatory.

China and India have shared interests in reform of the council, with both supporting expanded representation of developing countries, Mr. Wen said Thursday.

Riaz Haq said...

Here are some excerpts from a piece by Dost Mittar on Chowk.com comparing China and India:

India’s foreign exchange reserves at $300 Billion are only a fraction of China’s and those, too, are not based on export earnings but due to inward remittances and fickle inflows of institutional investments in its stock markets.

Some analysts, especially Indians, have recently become much more aggressive in their economic forecasts for India and started comparing their country to Tortoise in a race with the Chinese Hare. They have suggested that China has peaked in its growth whereas India is just starting. They claim that India has strong legal and financial institutions which the Chinese lack. They foresee bottlenecks in the growth of China just as India’s potential is beginning to be realized. How far is this a valid hypothesis?

India is expected to invest a trillion dollars in its infrastructure and many countries are vying with each other to get a slice of this large pie. This is the reason why leaders of almost all major countries have visited or due to visit India this year. These investments are likely to generate large employment opportunities directly and many more indirectly, in addition to improving economic prospects of regions which are currently not well served by infrastructure.

India’s economic growth has been largely based on the domestic market. India’s middle class is booming and is now gradually expanding to smaller towns and even rural areas. The telecom revolution has been real and now covers most villages. Television has reached into the hinterland and raised aspirations of rural masses for the kinds of goods and services that they see being enjoyed by the urban middle class. India largely escaped the recent global recession in part due to the strength displayed by consumers in small towns and villages which were not dependent upon IT and other sectors which are closely tied to the global economy. The rural sector now accounts for half of the two-wheelers sold in India and an increasing number even of small cars. However, a relative lack of growth has led to a serious trade deficit for India, which has so far been filled through capital inflows which cannot be relied upon on a long-term basis. High and rising costs of oil imports of petrol, large infrastructure projects and large-scale defense purchases indicate that these imbalances are likely to worsen rather than improve in the coming years.

Riaz Haq said...

Here are some trade figures from India's commerce ministry:

A. EXPORTS (including re-exports)

Exports during August, 2010 were valued at US $ 16644 million (Rs. 77509 crore) which was 22.5 per cent higher in Dollar terms (18.0 per cent higher in Rupee terms) than the level of US $ 13586 million (Rs.65670 crore) during August, 2009. Cumulative value of exports for the period April-August 2010 was US $ 85273 million (Rs 392811 crore) as against US $ 66326 million (Rs. 322424 crore) registering a growth of 28.6 per cent in Dollar terms and 21.8 per cent in Rupee terms over the same period last year.

B. IMPORTS

Imports during August, 2010 were valued at US $ 29679 million (Rs.138211 crore) representing a growth of 32.2 per cent in Dollar terms (27.4 per cent in Rupee terms) over the level of imports valued at US $ 22449 million ( Rs. 108506 crore) in August, 2009. Cumulative value of imports for the period April-August, 2010 was US $ 141894 million (Rs. 653828 crore) as against US $ 106605 million (Rs. 518024 crore) registering a growth of 33.1 per cent in Dollar terms and 26.2 per cent in Rupee terms over the same period last year.





C. CRUDE OIL AND NON-OIL IMPORTS:





Oil imports during August, 2010 were valued at US $ 7795 million which was 12.4 per cent higher than oil imports valued at US $ 6936 million in the corresponding period last year. Oil imports during April-August, 2010 were valued at US$ 40736 million which was 31.7 per cent higher than the oil imports of US $ 30929 million in the corresponding period last year.





Non-oil imports during August, 2010 were estimated at US $ 21884 million which was 41.1 per cent higher than non-oil imports of US $ 15513 million in August, 2009. Non-oil imports during April - August, 2010 were valued at US$ 101157 million which was 33.7 per cent higher than the level of such imports valued at US$ 75676 million in April - August, 2009.

D. TRADE BALANCE

The trade deficit for April - August, 2010 was estimated at US $ 56620 million which was higher than the deficit of US $ 40279 million during April -August, 2009.

Riaz Haq said...

Here is a recent Goldman Sachs warning about India's growing current acount deficits being funded by short-term capital inflows:

MUMBAI: India's current account deficit is being increasingly funded by short-term capital inflows rather than more durable foreign direct investment (FDI), posing a risk to external balance and funding of gap, Goldman Sachs said.

"While we remain constructive on India's medium-term growth outlook, the deterioration in external balances represents the biggest risk, in our view, to the Indian growth story, and one that investors should follow very closely," Goldman Sachs wrote in a note on Tuesday.

Goldman estimates the current account deficit to widen to 4 per cent of GDP in the current fiscal year, from 2.9 per cent in the previous year, and further to 4.3 per cent in 2011/12, its highest-ever level.

"Nearly 80 per cent of the capital inflows are non- FDI related. Given the excess spare capacity globally, FDI may remain weak going forward," the note said.

Rising imports due to strong domestic demand and concerns that exports growth may be slow could add to the widening current account gap problem, it said.

India's current account deficit widened sharply to $13.7 billion in the June-quarter, which was around 3.7 per cent of GDP. The deficit was $4.5 billion in the same period year ago.

India's Planning Commission Deputy Chairman Montek Singh Ahluwalia said last month that the government expects the current account deficit for 2010/11 to be above 3 per cent and the economy can manage a deficit of 3.0-3.5 per cent of GDP.

Goldman, however, said India's foreign exchange reserves were adequate to counter temporary reversals of capital.

"Yet, the increased reliance on external capital to fund ever-wider current account deficits has increased vulnerability significantly more than before the 2008 crisis," Goldman said.

A reversal of capital inflows, in case of an extended period of risk aversion could lead to a sharp sell-off in currency, bonds, equities and cause a liquidity crunch resulting in a sharp decline in output.

"We flag this more as a risk, than a clear and present danger," the note said.


http://economictimes.indiatimes.com/news/economy/finance/Indias-current-account-deficit-may-widen-to-a-record-Goldman/articleshow/6935527.cms

Riaz Haq said...

Here's Anil Prasad, the global head of Citigroup's forex and local markets. who believes that foreign investors may be selling Indian equities because they're worried about India's twin deficits. In an interview with CNBC-TV18's Latha Venkatesh, he gave his views on what could possibly be giving foreign investors sleepless nights.

Q: What is the FII point of view - are they scared because of Indian valuations, because of possible inflation or because of all the reports of scams? What is the foreign opinion on Indian stocks now?

A: Fundamentally, what foreigners are focusing on are two major issues. One is the Indian twin deficit - you have a budget and a current account deficit. Most Asian countries have a current account surplus. While they may have a budget deficit, the budget deficit tends to be much smaller. So you have that one big thing that’s hung over the market all year.

In addition, inflation is an issue and it is talked about more and more overseas and clearly the central bank has acted to deal with the inflationary fears but there is a question of have they done enough, does it stall at this level or does it continue to rise. Those are the two big factors on the economic front.

On the political front, the scandal sort of makes investors less confident about the transparency and the governance in the system. That, however, is more temporary on the longer term impact. Investors are still cautious. When you give investors real yields of 6-7% and nominal yields of 9% or even in some cases 9.5%, given where developed world yields are that’s very attractive.

Q: This twin deficit is not a new story at all. We had a decent amount of FII interest but somehow the worries perhaps have surfaced in the more recent past. Is there anything that’s currently niggling and can probably turn the tide in the last couple of weeks?

A: From our analysis, it would appear that for now at least inflation will sort of tapper off as the base case impact starts rolling through. But what really got the market was that we put the sovereign fears in Europe to one side. We said - its okay, things are under control, Greece has been bailed out at least till 2013. Then all of a sudden Ireland happens and when that happened we went back to our old fears.

Then you go back and say - but India does have a twin deficit, doesn’t it and while clearly the budget deficit is improving the current account isn’t. The question is, is it funded by the FDI which as you know is less than it was before. Then you are focusing on portfolio inflows. If you are looking at portfolio inflows and the stock market starts coming down then that’s worrisome.

Riaz Haq said...

FIIs' sell-off plunged Sensex by 454 pts as recently as Dec 9, according to Financial Express:

The BSE benchmark Sensex today recorded second biggest fall in a month by losing over 454 points today on year-end selling by foreign funds in banking and realty sectors, amid rise in food inflation that could signal a possibility of interest rate hike.

The Bombay Stock Exchange benchmark Sensex, which had lost 285 points in last two trading sessions, tumbled by 454.12 points to 19,242.36, after dipping to 19,160.87 as financial and realty stocks continued to be battered. On November 16 the index fell 444 points.

The National Stock Exchange index Nifty fell by 137.20 points to 5,766.50, after touching the day's low of 5,742.30.

Major market players pressed 'panic' button on reports of the deepening crisis over the 2G spectrum allocation scam and food inflation rising to 8.69 per cent from 8.60 per cent for the week ended November 27.

Already battered banking and realty segments on hike in deposit rate concerns, fell further as investors felt that food inflation might fuel overall inflation and could lead banking regulator RBI to raise interest rate for the seventh time since March.

The reports of Employees Provident Fund suspending further investment in LIC Housing Finance, further fuelled the down-trend in last one-hour trading. The LIC Housing stock tumbled by 7.26 per cent to Rs 894.10.

Besides, foreign funds were off-loading on approaching year-ending in the absence of any positive trigger from domestic front and uncertainty in the global economies, especially European.

In the 30-BSE index components, 27 stocks declined while three others ended with gains. The consumer durable index was the biggest loser followed by realty, metal and banking.

The banking index suffered further losses by falling 3.24 per cent to 12,645.15. State Bank of India, the largest lender, slid for a sixth day to its lowest level in almost four months. HDFC, a mortgage lender, fell 1.85 per cent.

Another interest-linked Realty sector index was lower by 4.76 per cent to 2,704.95, on fears that the RBI's policy rate changes might impact the sale of houses and developments.

Riaz Haq said...

Here's a Times of India report on Tejas operaional clearance today:

BANGALORE: After a tortuous journey of 27 years, with over 1,500 flight-tests and almost 3,000% jump in overall developmental costs, the much-touted but long-delayed Tejas Light Combat Aircraft has finally taken the first step towards induction as a supersonic fighter into IAF.

Amid much fanfare and back-slapping, defence minister A K Antony handed over the Tejas initial operational clearance (IOC) certificate to IAF chief Air Chief Marshal P V Naik at a ceremony here on Monday.

The IOC basically means that the largely homegrown fighter is now fully airworthy, in its initial configuration, to be flown by IAF pilots but not all weapon and other systems have been fully integrated into the platform. That will happen only by December 2012 when the single-engine, multi-role fighter gets the final operational clearance (FOC).

"Today is a historic day...A state-of-the-art indigenous combat aircraft will go a long way in enhancing national security,'' said Antony, showering praise on the entire LCA team led by Aeronautical Development Agency, Defence Research and Development Organisation and Hindustan Aeronautics Ltd.

The euphoria was somewhat justified, given that the supersonic fighter has been built from scratch in a country with an extremely poor defence-industrial base and in the face of international sanctions for several years.

But there has to be a reality check, even if it seems harsh. Even Antony admitted that Tejas had reached just "the semi-final stage'' at this point. As was first reported by TOI earlier, the overall developmental cost of the Tejas project, including the naval variant and trainer, has zoomed up to Rs 17,269 crore from the initial Rs 560 crore earmarked for it in 1983. With each Tejas to cost around Rs 200 crore over and above this, India will end up spending well over Rs 25,000 crore on the programme.

Moreover, the real induction of the first 40 Tejas jets will begin only towards end-2013, with the first two squadrons becoming fully operational at the Sulur airbase (Tamil Nadu) by 2015 or so, a full three decades after the LCA project was first sanctioned to replace the ageing MiG-21s.

That's not all. The first test-flight of the Tejas Mark-II version, with more powerful American GE F-414 engines, will be possible only by December 2014, with its production beginning in June 2016. And even then, the Tejas will just be a medium to low-end fighter, not a high-end air dominance one.

ACM Naik, in fact, described Tejas as a "MiG-21 plus-plus'', and made it clear that it was not even a fourth-generation fighter at present but would be in the future, indicating it will primarily be used to plug the gap in numbers.

Consequently, India's frontline combat fighters will the 270 Russian-origin Sukhoi-30MKIs already being inducted for around $12 billion, the 126 new medium multi-role combat aircraft to be acquired in the $10.4 billion MMRCA project and the 250 to 300 fifth-generation fighter aircraft to be built with Russia in the gigantic $35 billion project.

Yes, there is no getting away from the critical fact that India has to be self-reliant in military hardware and software if it wants to emerge as a superpower on the global stage. But the Tejas saga puts serious question marks on the defence indigenisation model being followed.

The fighter, for instance, is still only around 60% indigenous despite being 27 years in the making. It, for example, is powered by American GE engines, with the indigenous Kaveri engine failing to pass muster despite Rs 2,839 crore being spent on it since 1989.

Riaz Haq said...

India tops arms imports in the world, according to Bloomberg News:

India replaced China as the world’s top weapons importer, according to a study by the Stockholm International Peace Research Institute, as it aims to modernize its armed forces and project power through the region.

India received 9 percent of the volume of international arms transfers from 2006 to 2010, with 82 percent of that coming from Russia, Sipri said in a report released today. That topped China, South Korea and Pakistan, it said.

“The increases are substantial, and if you look at the Indian plans for the near future, they are massive,” Siemon Wezeman, a Sipri researcher who helped write the report, said in a telephone interview. “It’s worrying from the fact you are bringing a lot of weapons into an area that isn’t particularly stable, where you’ve got countries that have been at each other’s throats.”

India’s internal security threats and rivalries with Pakistan and China, the nuclear-armed neighbors with which it has border disputes, have driven the increase in expenditures, Wezeman said. The country’s plans to boost defense spending in the next decade to modernize the military have attracted U.S. and European firms banned from selling weapons to China.

The average volume of worldwide arms transfers in 2006-2010 was 24 percent higher than in 2001-2005, the report said. The Asia-Pacific region led the world, accounting for 43 percent of arms imports. It was followed by Europe at 21 percent, the Middle East at 17 percent and the Americas at 12 percent.
Economic Growth

India’s $1.3 trillion economy may expand by as much as 9.25 percent in the next financial year, the fastest pace since 2008, according to a Finance Ministry survey released last month. The World Bank estimates that more than three-quarters of India’s 1.2 billion people live on less than $2 a day.

Purchases by India of submarines, aircraft carriers and transport airplanes “can only be seen in the framework of regional ambitions,” Wezeman said.

India is seeking to buy 126 warplanes in the world’s biggest fighter-jet purchase in 15 years, according to the Indian Defense Ministry. Paris-based Dassault Aviation SA (AM), Chicago-based Boeing Co. (BA), Bethesda, Maryland-based Lockheed Martin Corp. (LMT), Sweden’s Saab AB (SAABB), Russia’s United Aircraft Corp. and European Aeronautic, Defense & Space Co., based in Paris and Munich, are competing for the contract.

The outlays on weapons have allowed India to demand technology transfers as part of purchases, Sipri said. The U.S. and Europe have banned weapons sales to China since the 1989 Tiananmen Square crackdown. U.S. military officials have questioned China’s motives in developing ballistic anti-ship missiles and radar-evading fighter jets.
‘Huge Market’

India is “in a position where they have this huge market at a time when exporters are in desperate need to find export markets,” Wezeman said.

The U.S. remains the world’s largest exporter of military equipment, accounting for 30 percent of arms deliveries between 2006 and 2010, the report said. The Defense Department is requesting $671 billion for the 2012 fiscal year starting Oct. 1, $37 billion less than this year’s request.

Stockholm-based Sipri, founded in 1966, conducts research into conflict, armaments, arms control and disarmament, according to its website. A substantial part of its funding comes from the Swedish government, it said.

Pavan said...

Indian strategic thinkers seem to have a blinkered view of the overall state of the economy as also human development indicators which put India at 132 out of 170 odd countries. India is a poor and indebted nation with a mounting internal and external debt. The largest single item of the federal budget is interest payment which has risen to an all time high of Rs 2,67,986 crores which is well over 3% of the expanded GDP. The next largest item is defence expenditure which is Rs 2,02,571 crores and not 1,65,000 crores as mentioned in the article as the allocation made for Defence (Civil Estimates) amounting to Rs 38,156 crores has been excluded by the writer. Civil Estimates pertain to military pensions, Jammu and Kasmir Light Infantry, Coast Guard and the cost of the Ministry of Defence. This amounts to 2.3% of the GDP which has been calculated using varied deflators for 2011-12. It would be pertinent to note that India spends a mere 1% of GDP on health which is one of the lowest public spends in the world. It is on account of the inability of the government to raise this expenditure that millions of people continue to reamain in poverty. Human security must also form a part of national security. It is a question of either increasing the fiscal deficit or reducing social sector spending . There is in fact a need to review the efficacy of defence spending. The Indian defence budget exceeds the entire budget of Pakistan with an army half the strength of the Indian army.

Riaz Haq said...

India's Prime Minister Manmohan Singh is travelling to China, as the two countries look to boost economic ties, according to the BBC:

In December, the two countries agreed to increase bilateral trade to $100bn (£66bn) by 2015, up from $60bn in 2010.

Mr Singh will also attend a summit in China that will include Brazil, Russia, India, China and South Africa.

China is India's largest trading partner. However, the two countries still share a very unbalanced trade relationship.

"India's import dependence on China has gone up significantly on critical items," said Samiran Chakraborty, regional head of research for India at Standard Chartered Bank.

"Whereas if you look at exports, India's primary export to China is only iron ore."

Mr Chakraborty says this issue could come up during the visit.

"One of the demands is to open up the Chinese markets to India. Otherwise the trade balance is very much in favour of China and working against India," he adds.
'Complimentary relationship'

When China's Prime Minister Wen Jiabao visited India in December, the two sides agreed to take measures to promote Indian exports in China, in an effort to reduce India's trade deficit.

About 400 business leaders came with Mr Wen to India and business deals worth $16bn were signed.

The two countries also agreed to expand co-operation in infrastructure, environment, information technology, telecommunications, and investment and finance.

Mr Chakraborty says it is in each sides interest to continue to deepen ties.

"If these two have to stay side by side sharing borders and trying to grow at high growth rates it has to be a complimentary relationship rather then a tense relationship," Mr Chakraborty said.

"Otherwise it will impact the investment climate in both countries".

Riaz Haq said...

Pakistan's July 2010-March 2011 current account surplus at $99 mln, according to Reuters:

Pakistan's current account surplus for July-March period was a provisional $99 million, compared with a deficit of $3.106 billion in the same period last year, the central bank said on Monday.

In March, the current account was a provisional surplus of $347 million, compared with a deficit of $2 million in February.

The current account deficit for the fiscal year 2009/10 was $3.946 billion, compared with $9.261 billion in fiscal year 2008/09.

Riaz Haq said...

Pakistan posts over $700 million current account surplus in forst ten months of fiscal 2010-11, thanks to rising remittances and record exports, according to The Nation:

KARACHI - Pakistan’s current account has recorded a surplus of $784 million in the first ten months of current fiscal year 2010-11 against deficit of $3.456 billion in the same period of last year due to rising remittances from overseas Pakistanis and steady exports, the SBP reported on Tuesday.
The current account deficit lowered to 0.5 per cent of GDP when compared to the growth of 2.4 per cent of GDP during the same period last year.
The reduction in the growth of current account deficit was caused by increase in exports and record inflow of current transfers especially workers’ remittances. The current transfer increased to $12.907 billion in Jul-Apr FY11 from $10.458 billion during the same period of previous fiscal year.
According to balance of payments statistics released by the State Bank of Pakistan yesterday, as on April 30, 2011 current account balance without off transfers amounted to $271 million against $3.866 billion over the equivalent period of FY10.
Trade account, which is the largest component of the current account, declined to $8.285 billion compared to $9.292 billion. Balance of goods and services stood at $9.677 billion during the first ten months of current financial year against $11.229 billion in the past year. Total goods exports rose to $21 billion during Jul-Apr FY11 from $17 billion of the reported period of the previous year while imports also up $29 billion from $26 billion.
From July 01 to April 30, 2011, capital account dropped to $86 million against $154 million while financial account declined to $412 million against $3.533 million due to delay in IMF funding and below than expected financing from the other international financial institutions.

Riaz Haq said...

Here's an excerpt from an Indian analyst Rohit Bangani's comments:

As we know that is India is world 2nd largest populous country with over 1.2 billion people, just behind China. India’s economy is relatively small in terms of U.S. dollar compared to China which is 4 times larger and U.S. which is 10 times larger than India. India’s GDP is around $1.2 trillion which is less than asset under management of big fund like BlackRock having $3.6 trillion under its belt. India is having current account deficit of 3.5% which makes the country more susceptible to volatility in foreign capital flows than its Asian neighbors, as well as in commodity prices, because the country imports much of its raw material requirements.

Riaz Haq said...

Here's a Counterpunch Op Ed by Yasmin Qureshi on "Militarization of India":

India is today the world's largest importer of arms. These include fighter jet planes, missiles and radar systems for strategic partnerships and geo-political power. India is also investing in security and surveillance to combat foreign threats and resistance from its own people in places like the Kashmir valley, and the North East and tribal regions of Central India. This provides tremendous opportunity for multi-national corporations to sell and invest in India, a country marching ahead as an economic and military power.

A report from the Stockholm International Peace Research Institute's (SIPRI) March 14, 2011 revealed that India received 9 per cent of the volume of international arms transfers during 2006–10. The international consultancy firm KPMG estimates that India will sign military contracts worth $112 billion by 2016.

This year India increased annual defense spending by about 11.6 percent to $36 billion in order to modernize the armed forces to counter the military inflation and strategic threats posed by China's rapidly expanding military capabilities..

In sharp contrast, allocation for agri culture and allied activities was reduced by 2 percent and allocation of non-plan expenditures on all social services declined by 14 percent from approximately $7.8 billion in 2009-10 to $6.6 billion for 2010-11. The World Bank estimates that 80% of India's population lives on less than $2 a day, comparable to sub-Saharan Africa.

Corporate Diplomacy to Secure Arms Deals

With assistance from their governments, arms corporations in countries such as Russia, US, France, Britain, Sweden and Israel are competing to procure million and billion dollar deals with India.

Last year India saw an unprecedented series of diplomatic visits from head of states of nuclear and defense powers. Notably chief executives of major nuclear and defense corporations had escorted the head of states on their visits. British Prime Minister David Cameron's visit to India in July was followed by US President Obama's in November and by French President Nicolas Sarkozy's in December.

A $779 million contract was signed for 57 BAE Systems Hawk advanced jet trainers for the Indian military during Cameron's visit. Engine maker Rolls-Royce clinched a $280 million deal to supply engines for the jet trainers for the Indian air force and navy. Seven agreements in key areas such as defense, space and nuclear energy were signed during Sarkozy's visit.

US President Obama and Secretary of State Hilary Clinton's visits in 2010 were also about strengthening economic and strategic partnerships. Twenty deals totaling nearly $10 billion dollars in U.S. exports were signed during the President's visit. Following that visit, the US reformed its export control regime and removed key Indian defense and civil space entities from U.S. restricted lists to help boost high technology exports and allow for enhanced defense and space cooperation with India.

The close nexus of corporations and governments is evident from the resignation of Timothy J. Roemer as US Ambassador to India on April 28, 2011, soon after the announcement that two US corporations, Boeing and Lockheed Martin had lost the race for procuring a $10 billion contract to supply 126 fighter jets to the Indian Air Force. The US is still hopeful a four billion dollar sale of C17 aircraft will be finalized soon. French company Dassault's Rafale and the Typhoon from the Eurofighter consortium (representing Germany and Spain, Britain's BAE Systems and Italy's Finmeccanica) have been shortlisted.

Riaz Haq said...

India depends heavily on foreign inflows to survive, given its huge and perennial trade, budget and current account deficits.

India is the biggest borrower from multi-lateral lending institutions.

According to the statistics of World Bank, India has become the largest borrower from the International Development Association (IDA), a component of World Bank Group which helps the poorest countries of the world.

Among the bank’s FY10 Top Ten IDA borrowing countries, India tops the table with $ 2,578 million, followed by Vietnam ($ 1,429 million), Tanzania ($ 943 million), Ethiopia and Nigeria with $ 890 million each, Bangladesh ($ 828 million), Kenya ($ 614 million), Uganda ($ 480 million), Democratic Republic of Congo ($ 460 million) and Ghana (433 million).

IDA, termed as ‘Soft Loan Window’ of the World Bank, was established in 1960 with the aim to reduce poverty by lending money (known as credits) on concessional terms. IDA credits have no interest charge and the repayment period ranges between 35 to 40 years. IDA is the largest sources of assistance for the world’s 79 poorest countries, 39 of which come from Africa. Not only with IDA, India is also the third largest borrower of the International Bank for Reconstruction and Development (IBRD), a part of World Bank group with a total loan of $ 21.9 billion which have financed 77 projects in the country.

Among various states in India, Tamil Nadu hold the maximum assistance of $ 2.1 billion from the World Bank to support its six on-going projects.

http://www.gscurrentaffairs.com/india-becomes-largest-borrower-of-ida/

Riaz Haq said...

Here are some excerpts from an Indian Financial Express story headlined "More FII money to Pak than to India":

Mumbai: Whether Dalal Street likes it or not, India is now the worst-performing market in the world as dark clouds have started cluttering the economic, investment and political horizons. Worried foreign institutional investors (FIIs), who came to India in droves last year, have been pulling out funds with such alacrity this year that even a much smaller — and significantly more volatile and unstable — market like Pakistan has got more foreign inflows in the last six months.
----
As per figures of the Securities and Exchange Board of India, FIIs have already pulled out $497 million (including GDRs, primary market, stock markets etc) from India from January to June 22 this year. This has come as a big blow to the market which witnessed an inflow of $29.36 billion in the whole of calendar 2010. FIIs took out Rs 14,387 crore (around $3.2 billion) from the secondary market in 2011, bringing the Sensex down from 21,108 on November 5, 2010 to 17,727.49 on June 23, 2011.

Across the border, Pakistan received a portfolio investment of around $230 million in the last six months. That, too, when the Karachi Stock Exchange, its largest, has a market cap of only $35 billion whereas the Bombay Stock Exchange has a market cap of $1,500 billion.
----------
The latest worry of FIIs is the possibility of tightening in rules governing the tax treaty with Mauritius. If both the governments tighten the regulations governing the treaty, the fund flow through this route will come down drastically. “Funds using this route will go elsewhere. India has got minuscule funds FIIs this year,” said a fund manager with a foreign investment firm.

A large chunk of FII investment in the stock market comes through Mauritius as companies registered there are exempted from tax in India under the treaty. The government had recently indicated about reviewing this tax treaty to tighten registration norms and making the fund flows more transparent.


http://www.financialexpress.com/news/more-fii-money-to-pak-than-to-india/807995/0

Riaz Haq said...

India runs huge trade and budget deficits and therefore heavily dependent on foreign inflows of loans, FDI and FII to drive its economic growth and to meet its debt obligations....not very different from Greece and other nations depending on foreign inflows. And we all know how quickly Greek economy went from being healthy to being very sick....and how many Western economies in the twin-deficit club are also suffering now.
------------
Since 2007–08, the fiscal deficit has increased to around 6.5 to 7 per cent of India’s GDP, subsequently leading to a combined federal and state deficit of over 10 per cent of GDP in 2009–10. The actual numbers are higher, by at least 1 per cent, as some items were kept off the balance sheet.

http://www.eastasiaforum.org/2011/02/24/indias-twin-deficits-jeopardise-national-growth/

Riaz Haq said...

Brazil, India current account deficits leads to ‘inevitable’ crisis warns a Chinese economist:

Li Daokui told a forum that emerging economies such as Brazil and India face fiscal and current account deficits and a crisis was “inevitable,” Caijing Magazine reported on its website www.caijing.com.cn. “China will play a very important role during the financial consolidation”.

But there will be no such crisis in China because it is quite different from most other developing and developed countries,” he said. In February, the Indian government raised “serious concern” about a trade deficit that could more than double to 278.5 billion USD in three years and may cause an unquestionable current account deficit.

Brazil's current account deficit ballooned to a record for the month of March as foreign companies in Brazil sent more profits home and Brazilians spent more on travel and goods overseas. In January, the International Monetary Fund warned fiscal balances in Brazil, China and India were weaker than it had earlier projected.

Li Daokui also expects the US dollar, Euro and Yen to face downward pressure over the medium and long term.

The IMF had projected Brazil's debt-to-GDP ratio at 66.8% and India's at 71.8% while for China it had projected a debt-to-GDP ratio of 19.1%, warning of deterioration in the fiscal accounts of India and Brazil.

The Brazilian government had since announced budget cuts, but the country still need to do more to earn an upgrade on its sovereign debt rating, according to analysts.
For India, however, it could easily bridge the deficit if its government manages to bring at least part of the black money stashed away by Indian citizens in overseas tax havens.


http://en.mercopress.com/2011/05/16/brazil-india-current-account-deficits-leads-to-inevitable-crisis-warns-china

Riaz Haq said...

Here are some excerpts from an opinion piece about India's talk of setting up a sovereign wealth fund (SWF):

Unlike China and other East Asian countries, which have established such funds on sustained current account surpluses, India has been running persistent current account deficits. Its current account deficit touched $ 29.8 billion in fiscal 2009 as against $ 15.7 billion in fiscal 2007. Unlike West Asia, India does not have any dominant exportable commodity (such as oil or gas) so as to generate significant surpluses. It continues to be a huge net importer of oil and gas. The country’s current account deficit is widening despite steady growth in software services exports and a rise in workers’ remittances from overseas Indians.

Its persistent current account deficits have been financed by large capital inflows in the form of portfolio investments and other volatile capital flows that are subject to capital flight. Given the overriding presence of volatile capital flows in India’s forex reserves, coupled with vulnerability to external shocks, it would be erroneous to consider its foreign exchange reserves ($ 280 billion) as a position of strength.

India’s external debt has been rising steadily for the past few years on account of higher borrowings by the Indian companies and short-term credit. Besides, India also runs a perennial fiscal deficit which means that raising substantial money for sovereign fund from budgetary allocation would be extremely difficult.

Santiago Principles

AS far as the proposed fund’s objectives to invest directly in strategic cross-border assets are concerned, the Indian policy-makers need to recognise that the overwhelming majority of sovereign funds are passive investors. In the rare cases where SWFs have made direct investments, they have not sought controlling interests or active roles in the management of invested companies, as private investors do. Even the large-scale direct investments made by SWFs in US and European banks during 2007-08 were minor in terms of bank ownership and did not come with any special rights or board representation.

Any direct investment in strategic assets by a sovereign fund will invite severe criticism for its alleged political and non-commercial objectives. Not long ago, the Western world had characterised SWFs as "villains" and introduced new policy measures, popularly known as the Santiago Principles, to regulate the investments of SWFs globally. Thus, acquisition of strategic cross-border assets (including natural resources) will not be a cakewalk. Also $ 10 billion is not enough to acquire strategic assets abroad-unless they become very cheap.

Furthermore, there is no guarantee that investments made by the Indian fund will be profitable. As witnessed during the global financial crisis, SWFs from West Asia, China, Singapore and Norway suffered huge losses for their investments in Western banks and private equity funds.

Paradoxical as it may sound, extreme poverty and hunger still pervades India. For New Delhi, the first priority should be to free the nation from hunger, malnutrition and illiteracy rather than financing the acquisition of strategic assets or rivals abroad.

In this regard, a portion of the country’s forex reserves could be prudently used in the improvement of physical infrastructure, education, health and financial services, particularly in rural India.


http://www.mainstreamweekly.net/article2285.html

Riaz Haq said...

Indian rupee hit record low amidst high inflation and high twin deficits, according to Wall Street Journal:

The Indian rupee fell to a record low against the U.S. dollar Tuesday as high inflation and a gaping current-account deficit weighed on demand for the local unit, before a recovery in global risk appetite helped trim the greenback's gains.

The dollar was at INR52.30 late Tuesday, up from INR52.16 late Monday, after rising to as much as INR52.725 during the session, its highest ever. The dollar's previous high was INR52.1950 on March 3, 2009.

The pace of the rupee's fall caught most market watchers off guard, forcing firms with unhedged overseas debt to rush for cover, accelerating the fall.

Adding to this, exporters have been wary of locking into a dollar rate for their future revenue, when the dollar's rally may well have more steam.

"The rupee is being swept by a self-fulfilling squeeze--capital is being pulled from hot money markets in Asia, and the rupee is just far more vulnerable than other Asians with its trade deficit," said Sean Callow, a Sydney-based currency strategist at Westpac Bank.

But some argue that the rupee's slide could be on its last legs. UBS, for example, argues that the rupee's fall has less to do with local factors such as inflation and slowing economic growth in India, and more to do with re-rating the rupee to a basket of currencies that's more sensitive to the global economy. The Swiss house advises buying the rupee at this point, as a bet on a global cyclical rebound.

Rupee bulls got a boost when a federal government official told Dow Jones Newswires that the central bank was planning to offer a dollar liquidity window to oil importers. Under the planned window, oil importers would be able to pay for their greenback purchases by selling the central bank the so-called oil bonds, which are issued to them by the government in exchange for selling fuel products at below-market prices.

If this window comes into effect, it would take a key source of greenback demand out of the currency market, helping to ease the rush for the dollar, said the treasury head of a foreign bank.

In the sovereign debt market, Indian government bonds were under pressure on the growing view that the federal government would struggle to stick to its fiscal deficit target.

The benchmark 8.79% 2021 bond ended at INR99.64, from Monday's INR99.76.

Royal Bank of Scotland reckons India's fiscal deficit will overshoot its target of 4.6% of gross domestic product by at least one percentage point because of rising subsidies on food and fuel and dwindling tax revenue.

Traders say an overshoot of the fiscal deficit of that magnitude could push the benchmark bond yield beyond 9%.


http://online.wsj.com/article/BT-CO-20111122-706954.html

Riaz Haq said...

Here's an FT report on India's widening trade deficit:

India’s trade deficit widened to a 17 year high of $19.6bn in October, according to Rahul Khullar, the country’s commerce secretary.

The record number highlights the underlying problems in India’s economy and represents a dilemma for the Indian central bank, already struggling with inflation, that might force it into another rate hike in the future.

According to Khullar, and reported by Bloomberg, India’s deficit was caused by slowing export growth, driven to a two-year low by shrivelling demand in Europe and the impact of higher oil prices on the cost of imports.

The balance of trade for the first seven months of the year that started April 1 was $93.7bn and “that is clearly something to be worried about, because at this rate you’re clearly going to breach the $150 billion mark for the fiscal year”, said Khullar.

Khullar told reporters in Delhi that although merchandise exports rose 10.8 per cent to $19.9bn in October, compared to a year earlier, imports gained 21.7 per cent to $39.5bn, leaving a gap of $19.6 billion, the highest recorded since at least 1994.

But as Andrew Kenningham of Capital Economics told beyondbrics: “India’s trade numbers are not usually a source of real interest as they are normally quite good. The current account deficit was only 2.5 per cent a year ago but the number for October is quite nasty and reverses the previous positive trend. However, it isn’t a complete picture of the current account as it does not include services figures or remittances – the current account deficit is always lower than the trade deficit.”

And Kenningham thinks October’s import figures may be a one-off anyway. India’s trade deficit is particularly vulnerable to fluctuations in world oil prices as it imports almost three-quarters of its oil requirements and Kenningham argues that “it is probable that this month’s import figure will be an outlier – the oil price has not moved dramatically and slowing internal demand should push down overall imports.”

Kenningham sees these figures as more of a problem for the Indian central bank “which considers a 3 per cent current account deficit to be the maximum sustainable level. A weaker rupee will but further upward pressure on inflation. Investors may have been expecting a downward rate move next rate year but this raises a few question marks over that.”

And the rupee has continued to weaken as the eurozone crisis drives demand away from EM currencies and weakens demand for India’s exports.

India’s currency has now depreciated more than 11 per cent against the dollar this year but Kenningham told beyondbrics India’s exports shouldn’t count on any major boost from the weakening rupee: “The rupee is only about 10 per cent below its average level for the last five years so I wouldn’t think India’s exports would get too much of a boost from there.”

Thus, although Kenningham is not particularly concerned about India’s balance of payments as “it has $310bn of foreign reserves, low external debt and low levels of portfolio investment in the fixed income market,” he does see it as “a sign of stress in the economy and a further complication for the central bank.”


http://blogs.ft.com/beyond-brics/2011/11/08/indias-widening-trade-deficit/#axzz1eSmmeDzP

Riaz Haq said...

Here's a Bloomberg report on Indian equities' performance:

Nov. 29 (Bloomberg) -- India’s benchmark stock index, the third-worst performer in Asia this year, may be hurt the most among emerging-markets equities from global risk aversion because of a slowing economy and a weak rupee, according to Tata Asset Management Ltd.

“India’s in a difficult spot,” Venugopal Manghat, the Mumbai-based co-head of equities at the money manager, said in an interview yesterday. “Our macros are probably the worst or are worsening at a more worrying pace than any other economy in the emerging-markets space.” His Tata Balanced Fund has beaten 91 percent of its peers in the past three years, data compiled by Bloomberg show.
------------
In India, overseas investors pulled out $842 million from equities last week, the biggest weekly outflow in six months, data from the regulator show. That sent the rupee to a record low of 52.73 on Nov. 22. The currency gained 0.6 percent to 51.965 yesterday, paring this year’s drop to 14 percent, the worst performance among Asian currencies.

“We could have further pressure from the global end, which means risk aversion could go up and currencies could depreciate further,” Manghat, 40, said.

The Reserve Bank of India, which has lifted interest rates 13 times since March 2010 to curb inflation that has exceeded 9 percent since December, last month cut its growth forecast to 7.6 percent from 8 percent. Morgan Stanley reduced its growth estimate for India to 7 percent for the year ending March 31 from 7.2 percent, according to an e-mailed report yesterday.\---------------
Shares of Indian consumer-goods producers, automakers and private lenders may fare better than the overall market in the next six months, said Manghat. The Tata Balanced Fund had 13.2 percent of its assets in consumer non-durable companies, 10.6 percent in banks and 6.8 percent in automakers at the end of October, the fund’s fact sheet shows.

“Consumption is a secular story and will be a big driver for the Indian economy,” he said. “India is significantly under-banked, significantly low in terms of penetration and private banks are more nimble, faster at decision-making, and are better structured to make good use of this opportunity.”

The fund has returned 26 percent annually for the past three years, data compiled by Bloomberg show.


http://www.businessweek.com/news/2011-11-29/india-stocks-may-be-hit-most-in-emerging-markets-tata-fund-says.html

Riaz Haq said...

Goldman Sachs' Jim O'Neill, who coined BRIC, says India's performance most disappointing, according to Economic Times:

LONDON: Growth in all four BRIC economies has surpassed expectations in the decade since the term came into existence but India's record on productivity, FDI and reform has been the most disappointing, the chairman of Goldman Sachs Asset Management Jim O'Neill said on Tuesday.

O'Neill, who coined the term, BRIC, in December 2001 to jointly describe the four biggest developing economies, Brazil, Russia, India and China, was speaking at the London leg of the Reuters 2012 Investment Outlook Summit.

"All four countries have become bigger (economies) than I said they were going to be, even Russia. However there are important structural issues about all four and as we go into the 10-year anniversary, in some ways India is the most disappointing," said O'Neill who oversees almost a trillion dollars in assets at Goldman.

Just this week, India's government caved in to opposition pressure and put on hold a landmark reform of the retail sector that was seen opening the doors to billions of dollars in foreign direct investment in the supermarket sector.

The long-awaited measure, passed earlier this month, had been hailed as ending the government's economic reform paralysis that is widely seen as the root cause of high inflation, shrinking capital inflows and a wider current account deficit.

"India has the risk of ... if they're not careful, a balance of payments crisis. They shouldn't raise people's hopes of FDI and then in a week say, 'we're only joking'," O'Neill said. "India's inability to raise its share of global FDI is very disappointing," he said.

United Nations data shows that India received less than $20 billion in FDI in the first six months of 2011, compared to more than $60 billion in China while Brazil and Russia took in $23 billion and $33 billion respectively.

The glacial reform pace has hit India's hopes for double-digit economic growth, O'Neill said, adding: "India is as bad as Russia is on governance and corruption and, in terms of use of technology, Russia is in fact much higher than India."

On the other BRICs, O'Neill said Brazil's main problem was an overvalued currency which puts the country in danger of "Dutch disease" - a term first used to describe how North Sea oil discoveries in the 1960s triggered a surge in Dutch energy exports but also in the Dutch currency, pummelling much of the country's manufacturing. China's challenge was to effectively manage a transition to a higher-consumption economy with slower growth, he said.

O'Neill remains positive on Russia but said much depends on what Prime Minister Vladimir Putin can deliver in terms of reform following an election at the weekend that left his ruling party with a much reduced parliamentary majority.


http://m.economictimes.com/news/economy/foreign-trade/india-most-disappointing-among-bric-nations-goldmans-oneill/articleshow/11008228.cms

Riaz Haq said...

Here's Hindustan Times on Mukherjee's anxiety over Indian economy:

"The economy is in a difficult situation but that does not mean that we
shall have to start eating lizards,” Mukherjee said in the Lok Sabha, the lower house of Parliament.

India's economic growth slumped to 6.9% in the July-September quarter against the budgetary target of 9% growth for 2011-12. During the first half of the fiscal, the economy grew by 7.3%.

Mukherjee said the projection of 9% growth during the budget was not a pipe dream, but the unexpected high prices of oil and other commodities coupled with a slowdown in global economies, notably in Europe and the US, had hit the Indian economy hard.

"The hard fact is there are certain situation on which you do not have a control but you have to face the consequences,” he said.

The finance minister said because of the high oil and other commodities prices in the international market, expenditure on oil, fertiliser and food subsidies has increased exponentially, widening the fiscal deficit. He said fertiliser subsidies were likely to increase to Rs 90,000 crore against the budgetary target of Rs 40,000 crore.

"During the budget in February, average oil price of Indian basket I assumed $90 per barrel. However, oil price has been consistently at around $110 per barrel,” he said.

However, Mukherjee emphasised that the basic fundamentals of the Indian economy were strong. “Basic fundamentals of the Indian economy are still strong. Rate of savings is high. Yes, it is not as high as 35-36% but it is around 33-33.5%. Rate of Investment is around 34-35% despite depression.”

He said the proposed reforms could help improve the situation.

“I do believe that things can improve if the institutions strengthened, if Parliament functions, if this house debates, discusses and decides for which it is meant, you will see the atmosphere will change,” he said.

Mukherjee said the slowdown in growth was a cause of anxiety.

“From 2004-05 to 2007-08, we grew at 9%. Therefore we placed our standards high and from there we have come down. That's why it is my anxiety,” he said.

Indian economy grew 8.5% in 2010-11. In the union budget, Mukherjee said growth target was 9%, plus minus 0.25% for 2011-12. However, the growth declined to 7.7% in first quarter and it slumped further to 6.9% in the second.

"There was a time when these%age could have been an object of celebration when we place it in perspective on the economic development and growth of this country. From 1951 to 1979 we grew at a rate of 3.5%, whole of 1980s we grew at 5%, whole of 1990s we grew at 5.6%, even in the first half of the last decade we grew at around 6%,” he said.


http://www.hindustantimes.com/business-news/WorldEconomy/Indian-economy-in-a-difficult-situation-Pranab/Article1-779105.aspx

Riaz Haq said...

India faces serious financial crisis, reports Economic Times:

--------------
Unlike most of its Asian peers, India has recently been running large current account and fiscal deficits. That means it must attract sufficient foreign money -- namely U.S. dollars -- to close the gap, and a weaker home currency makes that costlier.

This is a perennial problem for India. The current situation is so worrisome because India is grappling with big internal and external economic threats simultaneously. Growth is slowing. Inflation remains high. Political paralysis has stymied domestic reforms.

The RBI, the last line of defence against a currency meltdown, has cautiously begun to support the rupee, but its firepower may be more limited than its $300 billion in reserves would suggest.

Beyond India's borders, Europe is the biggest worry. As its banks deleverage, investment money has flooded out of India's markets. If Europe's debt troubles deteriorate, India could be hit with a balance of payments crisis as severe as the one that forced a sharp devaluation in 1991.

The rupee, which has dropped 16 percent in the past four months, got a reprieve last week after the world's big six central banks banded together to try to ease dollar funding strains, helping it to snap a four-week losing trend.

But analysts widely expect the rupee, trading on Monday at 51.26 per dollar, to resume its slide.

"The Indian currency will be the first casualty of a deterioration in the euro zone crisis," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

If Europe's crisis deepens, India's trade deficit would widen even more rapidly, and it would have even more trouble attracting foreign capital.

"Risk appetite will obviously collapse and gradually the currency crisis is likely to take the shape of a balance of payments crisis," Nitsure said.

Worries about India have spiked in tandem with concern over Europe. UBS hosted a client conference call about India on November 29, which it announced with an email headlined "India explodes." Deutsche Bank sent out a report on November 24 entitled, "India's time of reckoning."

"Suddenly everything seems to be coming to a head in India," UBS wrote. "Growth is disappearing, the rupee is in disarray, and inflation is stuck at near-record levels. Investor sentiment has gone from cautious to outright scared."

India's current account deficit swelled to $14.1 billion in its fiscal first quarter, nearly triple the previous quarter's tally. The full-year gap is expected to be around $54 billion.

Its fiscal deficit hit $58.7 billion in the April-to-October period. The government in February projected a deficit equal to 4.6 percent of gross domestic product for the fiscal year ending in March 2012, although the finance minister said on Friday that it would be difficult to hit that target.

India relies heavily on portfolio inflows -- foreign purchases of shares and bonds -- as a means of covering its current account gap. Those flows are fickle.

Foreign portfolio investors have sold a net $50 million worth of equities so far in 2011 , in sharp contrast to the $29 billion they invested in 2010, data from the Securities and Exchange Board of India's website showed. In November alone, foreign funds pulled $661 million out of Indian stocks.

"The Indian economy is one of the most vulnerable to liquidity shocks in the region, not helped the least by deficits in its key balances," said Radhika Rao, an economist with Forecast PTE in Singapore.--------..

Riaz Haq said...

Here's a Bloomberg report on India exaggerating its exports:

India’s commerce ministry said it overstated merchandise exports by $9 billion in the eight months through November because of “misclassification and errors” in computing overseas sales.

“Notwithstanding the misclassification, there were errors in double counting and all sorts of things which inflated exports by about $9 billion,” Commerce Secretary Rahul Khullar told reporters in New Delhi yesterday. Overseas sales in the April-to-November period now stands at $192.7 billion, Khullar said.

India’s monthly export growth has averaged about 44 percent since April even as Europe’s debt crisis and a faltering U.S. recovery reduced global consumer demand, prompting economists to question the quality of the data. Today’s revision explains “in part the weakening of the rupee,” Asia’s worst-performing currency this year, said Jay Shankar, Mumbai-based economist at Religare Capital Markets Ltd.

“The global economy isn’t doing well, so it was hard to understand how India was posting such fantastic export numbers,” said Biswajit Dhar, director of New Delhi-based Research and Information System for Developing Countries. “There were reasons to believe something was going wrong.”

The rupee weakened 0.6 percent to 52.04 per dollar in Mumbai yesterday, extending its decline this year to 14.1 percent. The BSE India Sensitive Index (SENSEX), which has lost a fifth of its value in 2011, dropped 1.7 percent. The yield on the 8.79 percent bonds due November 2021 rose two basis points, or 0.02 percentage point, to 8.54 percent.
Waning Demand

India’s exports in November were $22.3 billion, Khullar said, without elaborating. Bloomberg calculations based on previously announced data show exports grew 3.7 percent last month from a year earlier, the slowest pace in more than two years.

The South Asian nation’s imports in November were $35.9 billion, he said. Imports in the eight months through November were $309.5 billion, causing a trade deficit of $116.8 billion in the period, Khullar said.

India will get “close to, but not quite $300 billion in exports” in the year ending March 31, he said.

The South Asian nation’s export growth has vacillated this year, surging 82 percent in July before slowing to an 11 percent gain in October, according to previously reported data by the commerce ministry.

A report by Mumbai-based Kotak Institutional Equities Research in October showed “wide gaps” in engineering export numbers released by the government and data culled from annual reports of the top 500 companies on India’s exchanges for the year ended March 31.

While official announcement showed engineering exports jumped 79 percent to $68 billion in the year through March, data collected by Kotak from company reports indicated only an 11 percent increase to 638 billion rupees ($12.3 billion) during the period, according to the report written by Sanjeev Prasad, Sunita Baldawa and Amit Kumar.


http://www.bloomberg.com/news/2011-12-09/india-overstated-exports-by-9-billion-this-year-ministry-says.html

Riaz Haq said...

Here's investment strategist Stephen Roach (Morgan Stanley) on why India is riskier than China:

India is more problematic. As the only economy in Asia with a current-account deficit, its external funding problems can hardly be taken lightly. Like China, India’s economic-growth momentum is ebbing. But unlike China, the downshift is more pronounced – GDP growth fell through the 7% threshold in the third calendar-year quarter of 2011, and annual industrial output actually fell by 5.1% in October.

But the real problem is that, in contrast to China, Indian authorities have far less policy leeway. For starters, the rupee is in near free-fall. That means that the Reserve Bank of India – which has hiked its benchmark policy rate 13 times since the start of 2010 to deal with a still-serious inflation problem – can ill afford to ease monetary policy. Moreover, an outsize consolidated government budget deficit of around 9% of GDP limits India’s fiscal-policy discretion.

While China is in better shape than India, neither economy is likely to implode on its own. It would take another shock to trigger a hard landing in Asia.

One obvious possibility today would be a disruptive breakup of the European Monetary Union. In that case, both China and India, like most of the world’s economies, could find themselves in serious difficulty – with an outright contraction of Chinese exports, as in late 2008 and early 2009, and heightened external funding pressures for India.

While I remain a euro-skeptic, I believe that the political will to advance European integration will prevail. Consequently, I attach a low probability to the currency union’s disintegration. Barring such a worst-case outcome for Europe, the odds of a hard landing in either India or China should remain low.

Seduced by the political economy of false prosperity, the West has squandered its might. Driven by strategy and stability, Asia has built on its newfound strength. But now it must reinvent itself. Japanese-like stagnation in the developed world is challenging externally dependent Asia to shift its focus to internal demand. Downside pressures currently squeezing China and India underscore that challenge. Asia’s defining moment could be hand.


http://www.project-syndicate.org/commentary/roach12/English

Riaz Haq said...

Chinese banks bailing out Indian company, according to the Wall Street Journal:

Reliance Communications Ltd. opened a window this week. India's second-largest mobile phone carrier by number of subscribers was under pressure to refinance $1.18 billion of foreign-currency convertible bonds. In the current market, that looked like a stiff challenge, as lenders in the U.S. and Europe struggle with their deteriorating economies.

Enter a consortium of Chinese banks to bail out the Indian company with a loan paying just 5%. The deal gives the banks the sort of exposure to India's fast-growing communications space that Chinese companies couldn't get otherwise. New Delhi routinely blocks Chinese business seeking a piece of India's strategic industries such as telecommunications, technology or energy. The government typically cites quality-control issues or national security, though political posturing is perhaps a more likely cause.

Yet the Reliance loan deal puts the Chinese banks in a strong position over a prominent Indian business. It might also help China Inc. get more leverage in the Indian economy.

Still, politics shouldn't cloud the positives for India. The deal is a savior for Reliance, whose share price is nearly 87% below the conversion price set on the bonds four years ago. Moreover, the loan means China, through its state-owned banks, now has a significant stake in the success of an Indian telecommunications giant.

Beyond Reliance, a host of Indian companies are in need of capital this year to fulfill expansion plans or repay debt. But traditional funding channels are drying up, local markets are jittery and interest rates are by no means cheap. Under those circumstances, more Chinese money may find a warm welcome in India.


http://online.wsj.com/article/SB10001424052970204468004577168443270938430.html?mod=topix

Riaz Haq said...

India’s total external debt has risen to $326 billion while forex reserves have dipped to $293 billion, according to a report in the Indian Express:

...The composition of capital inflows shifted in favour of debt, with a rise in the proportion of short-term flows. If the pace of FDI inflows does not pick up once again and FII equity inflows revert to the decelerating trend, CAD may have to be largely financed through debt creating flows in the coming quarters. Recent pick up in FII flows has been mainly on account of investment in debt instruments.
-------------
On the capital account, recent policy measures have stimulated debt capital flows in the form of investments by FIIs in debt instruments and NRI deposits. Going forward, however, it would be necessary to reduce dependence on debt inflows and accelerate the reform process in order to ensure revival of equity flows as investors look for strong growth opportunities in an otherwise gloomy global environment, the RBI says.

Widening current account deficit (CAD), diminishing capital flows and moderately deteriorating vulnerability indicators, notwithstanding improved net international investment position, warrant acceleration of the domestic reform process. The RBI feels this will encourage renewed equity flows.

Subbarao made it clear that close monitoring of the short-term external debt will be required in 2012-13. Given that both global and domestic scenario remains bleak, investors would generally tend to prefer shorter-dated government securities.

Capital flows

* In 2011, out of $8.65 billion foreign debt inflows, as much as $4.18 billion came in December while there was an outflow of $357 million from equity

* India’s total external debt has risen to $326 billion while forex reserves have dipped to $293 billion

* If the pace of FDI inflows does not pick up and FII equity inflows decelerate, CAD may have to be largely financed through debt creating flows in the coming quarters.


http://www.indianexpress.com/news/rbi-not-comfortable-with-rise-in-debt-inflows/905389/2

Riaz Haq said...

India's budget deficit threatens to explode, according to Bloomberg:

Mumbai: India's budget deficit reached 92.3 per cent of the fiscal-year target in the nine months through December, imperilling the government's aim of reining in the gap.

The deficit was Rs3.8 trillion (Dh282 billion) in the period, the Controller General of Accounts said on its website yesterday. The shortfall was 44.9 per cent of the annual objective in the same period a year earlier.

Finance Minister Pranab Mukherjee has said cutting the deficit is a "serious challenge" and Standard Chartered Plc has predicted India will miss its target of lowering the gap to 4.6 per cent of gross domestic product by March. Slowing growth threatens to hurt tax receipts even as subsidies spur spending and the government struggles to sell stakes in companies it owns.

"The fiscal slippage this year will be substantial," Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd, said before the release. "As the economy slows, revenue collections are also getting hit."

The yield on the 8.79 per cent bonds due in Nov-ember 2021 fell two basis points, or 0.02 percentage point, to 8.26 per cent in Mumbai yesterday. The rupee strengthened 0.6 per cent to 49.3675 per dollar, while the BSE India Sensitive Index of stocks, which lost about a quarter of its value in 2011, climbed 1.2 per cent.

Bonds rose after Subir Gokarn, deputy governor of the Reserve Bank of India, said in New Delhi that the central bank may consider more government debt purchases if a cash squeeze fails to ease.

Reserve ratio

The Reserve Bank on January 24 lowered the amount of deposits lenders need to set aside as reserves for the first time since 2009 and signalled future interest-rate cuts, moving to shield growth from the impact of Eur-ope's debt crisis. The reserve-ratio reduction was effective January 28.

Overnight interest rates remain elevated even after the reduction in the cash reserve ratio, indicating liquidity pressures are persisting, Gokarn said.

"Based on that, obviously, we will consider" open-market operations, he said, referring to bond purchases. The possibility of another reserve-ratio cut at the mid-quarter monetary policy review also remains on the table, he said. The Reserve Bank also said last week that inflationary threats make it "premature" to start lowering its repurchase rate, adding that without "credible fiscal consolidation" its scope to cut rates will be constrained.

It left the benchmark at 8.5 per cent for a second month at the January review. Indian inflation was 7.47 per cent in December, a two-year low, while remaining the fastest among the Bric (Brazil, Russia, India and China) nations.


http://gulfnews.com/business/economy/india-39-s-deficit-threatens-to-explode-1.974039

Riaz Haq said...

Here's Russian analyst Anatol Karlin on India's prospects and its comparison with China:

It is not a secret to longtime readers of this blog that I rate India’s prospects far more pessimistically than I do China’s. My main reason is I do not share the delusion that democracy is a panacea and that whatever advantage in this sphere India has is more than outweighed by China’s lead in any number of other areas ranging from infrastructure and fiscal sustainability to child malnutrition and corruption. However, one of the biggest and certainly most critical gaps is in educational attainment, which is the most important component of human capital – the key factor underlying all productivity increases and longterm economic growth. China’s literacy rate is 96%, whereas Indian literacy is still far from universal at just 74%.
-----------
The big problem, until recently, was that there was no internationalized student testing data for either China or India. (There was data for cities like Hong Kong and Shanghai, but it was not very useful because they are hardly representative of China). An alternative approach was to compare national IQ’s, in which China usually scored 100-105 and India scored in the low 80′s. But this method has methodological flaws because the IQ tests aren’t consistent across countries. (This, incidentally, also makes this approach a punching bag for PC enforcers who can’t bear to entertain the possibility of differing IQ’s across national and ethnic groups).
--------------
Many Indians like to see themselves as equal competitors to China, and are encouraged in their endeavour by gushing Western editorials and Tom Friedman drones who praise their few islands of programming prowess – in reality, much of which is actually pretty low-level stuff – and widespread knowledge of the English language (which makes India a good destination for call centers but not much else), while ignoring the various aspects of Indian life – the caste system, malnutrition, stupendously bad schools – that are holding them back. The low quality of Indians human capital reveals the “demographic dividend” that India is supposed to enjoy in the coming decades as the wild fantasies of what Sailer rightly calls ”Davos Man craziness at its craziest.” A large cohort of young people is worse than useless when most of them are functionally illiterate and innumerate; instead of fostering well-compensated jobs that drive productivity forwards, they will form reservoirs of poverty and potential instability.

Instead of buying into their own rhetoric of a “India shining”, Indians would be better served by focusing on the nitty gritty of bringing childhood malnutrition DOWN to Sub-Saharan African levels, achieving the life expectancy of late Maoist China, and moving up at least to the level of a Mexico or Moldova in numeracy and science skills. Because as long as India’s human capital remains at the bottom of the global league tables so will the prosperity of its citizens....


http://www.sublimeoblivion.com/2012/02/04/china-superior-to-india/

Riaz Haq said...

Here's Hindustan Times story titled "Assembled in India":

The ministry of defence should rename itself the ministry of imports. India earned the undesirable honorific of being the world's largest buyer of foreign arms in the latest 'Trends in International Arms Transfers' report. The ultimate oxymoron in New Delhi today is 'defence self-reliance'. This state of affairs will continue so long as the ministry continues to believe in the State-owned defence sector.

India's imports of defence equipment surged 38% to $12.7 billion from 2007-11, say the authors of the report, the Stockholm International Peace Research Institute (SIPRI). The only better defence growth figures? Number of speeches by defence minister AK Antony declaring self-reliance to be his goal.

At the time the report was released, Antony spoke at the Defence Research and Development Organisation (DRDO). He complained that DRDO had "many deficiencies", that it was "slow" in implementing recommended reforms. A few days earlier he called for change at Hindustan Aeronautics, another stalwart of India's government defence industry whose core competence is assembling imported airplane kits.

SIPRI's report underlines the true trend in India's defence industry. Namely, that the louder the mantra 'self-reliance' is chanted by defence officialdom, the further the goal moves away from India.

It's not just that the Indian defence sector can't build simple trainer airplanes or armoured vehicles. It even struggles to design usable rifles or make good boots. "Indian soldiers", says Commodore Uday Bhaskar of the National Maritime Foundation, "prefer to buy their uniforms from private tailors rather than wear free government issue".

Antony's criticisms should mean that his office at least understands the problem. But the reforms the ministry advocates are, ultimately, about preserving the defence sector's commanding heights for the State-owned firms. And it's this "tweak the status quo" mindset that ensures India's security increasingly depends on how fast it can import.

Rising Indian arms purchases and stiff offset requirements - roughly half the cost of foreign purchases must be outsourced to Indian firms - means billions of dollars' worth of contracts will float out of the windows of South Block. Antony is asking DRDO and company to get their act together so they can cash in on this bonanza.

The ministry's hope is that these State-owned firms will absorb some imported technologies, recycle them and preserve the myth of indigenous defence production for another decade. The subtext to Antonyspeak should be: you need to change so you can keep pulling the wool over India's eyes.

The defence ministry loves the term 'technology transfer'. These are weasel words. Every study shows this to be a way to temporarily get obsolete knowhow. Transfers are like cheat-sheets. They keep you from doing the hard work of really learning something. The State-owned defence firms are like students who mug enough to get past each exam and graduate with blank minds.

In 2005, DRDO spoke of making 70% of Indian defence equipment at home. But the figures haven't change in all these years, says Air Vice-Marshal Kapil Kak of the Centre for Air Power Studies. "Government stonewalling has meant there has been no energising of the defence sector." Officially, India is at 30% indigenisation. So much of this is screwdriver work, says Brigadier Gurmeet Kanwal of the Centre for Land Warfare Studies, "That the actual figure is 20% or less."

The Tatra truck, left-hand drive after 25 years, is only a more glaring example of this import-and-assemble game.--------------


http://www.hindustantimes.com/News-Feed/ColumnsOthers/Assembled-in-India/Article1-834008.aspx

Riaz Haq said...

Here's Bloomberg on worsening imbalances in India:

Indian Finance Minister Pranab Mukherjee missed his budget-deficit target by the most in three years and announced a 12 percent increase in debt sales, sending bond yields to a two-month high.

The shortfall in finances in the year ending March will be 5.9 percent of gross domestic product, 1.3 percentage points more than the goal, Mukherjee said in a March 16 speech in parliament. That was the biggest margin of failure since falling short of the aim by 3.5 percentage points in the 12 months through March 2009, the height of the global financial crisis.

Goldman Sachs Asset Management Ltd. and FIM Asset Management Ltd. said the budget didn’t do enough to restore the credibility of Mukherjee, who pledged to cut the deficit to 5.1 percent of GDP in the 12 months starting April. The yield on 10- year bonds had the biggest weekly increase since January to 8.43 percent last week, compared with 3.55 percent in China, where the 2012 deficit was 1.5 percent of GDP.
----------
The finance ministry plans to sell a record 5.69 trillion rupees of debt the next fiscal year, compared with 5.1 trillion rupees in the 12 months ending March 31. Underwriters had to buy unsold bonds at nine auctions this fiscal year, central bank data show, signaling demand didn’t match supply of notes. The government will set the first-half borrowing target on March 23, Shaktikanta Das, additional secretary in the ministry, said on March 16.

Yields on 10-year (GIND10YR) sovereign debt jumped 14 basis points, 0.14 percentage point, last week after data on the website of the Controller General of Accounts showed India’s budget gap widened to 4.35 trillion rupees in the 10 months through January, exceeding the full-year target of 4.13 trillion rupees. A year earlier, the shortfall was 58.3 percent of the annual goal.
------------
The shortfall will reach 5.8 percent of GDP in the year starting April, he predicts. The finance ministry has exceeded its budgeted spending target in eight of the last 10 years, according to government data.

The yield on the 8.79 percent note due November 2021 fell one basis point today after climbing seven basis points on March 16. The extra yield investors seek to hold the notes instead of U.S. Treasuries has rebounded 11 basis points from an eight- month low of 601 reached on March 14, data compiled by Bloomberg show.
Spectrum Sale

Rupee-denominated bonds handed investors a loss of 0.3 percent in March, compared with a 0.2 percent return on yuan notes, according to indexes compiled by HSBC Holdings Plc. India’s revenue collection was 69.5 percent of the full-year target in the 10 months through January, compared with 92.2 percent a year earlier, official data showed this month. The rupee advanced 0.2 percent today to 50.0885 per dollar after declining 0.7 percent last week, according to data compiled by Bloomberg.
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Still, global investors have cut holdings of Indian debt by $634 million since Feb. 29, pulling money out of the local market for the first time in six months, exchange data show.

The cost of protecting the debt of State Bank of India, seen as a proxy for the sovereign, against non-payment climbed this month. Five-year credit-default swaps on the lender now cost 305 basis points, compared with 300 at the end of February, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value in exchange for the underlying debt should a company fail to adhere to its agreements.
--------


http://mobile.bloomberg.com/news/2012-03-19/biggest-budget-miss-since-2009-hurts-confidence-india-credit

Riaz Haq said...

Here's Times of India on declining capital inflows:

Southeast Asian nations are swallowing an outflow of money from India, as foreign investors lose patience with its policy paralysis and slowing growth and aim instead for more promising emerging markets such as Indonesia.

Corruption scandals and high inflation have added to India's woes, which have seen growth slow to a three-year low while the fiscal deficit widened to 5.9 per cent of GDP in the last financial year.

"India was sold on the promise of high growth which simply hasn't panned out over the past four years," said Gautam Prakash, founder of US based hedge fund Monsoon Capital.

Foreign investors pulled a net $540 million out from India in March and April, compared with $13 billion in inflows in January-February.

Foreign portfolio flows into Indian stocks have dropped 99 percent to just 5.17 billion rupees since a March budget that largely disappointed investors, compared with 427.36 billion rupees in 2012 before the budget.

Among the most significant developments from the shift has been the direction in which money is headed - with a big chunk flowing to Jakarta and other Southeast Asian capitals.

Two provisions put forward in the budget to tax indirect investments and combat tax evasion were the last straw for some global mutual funds, prompting an acceleration of money leaving India.

While the provisions were later put on ice, the prospect that such a tax could be proposed in India was enough for some investors to send their Asia-allocated money further east.

"You're seeing a situation where the 'I' in BRIC is being replaced by Indonesia," said Tim Condon, head of research and strategy for Asia at ING.

Left out

An emerging market brochure distributed by Franklin Templeton last month had data on India missing from a world map. From a global leader in emerging market investing, led by omnipresent guru Mark Mobius, that omission was telling.

India exposure in Asia's biggest equity fund, the $18 billion Templeton Asian Growth fund, dropped to 16 percent of its assets at the end of March from nearly 20 percent a year ago, while exposure to Association of Southeast Asian Nations countries rose to 35 percent from 31 percent during the period.

An ASEAN-focused equity fund launched by Daiwa Asset Management started with about $366 million in February and has since grown to manage about $430 million, while Fidelity Funds-ASEAN has seen a net inflow of nearly $250 million in the last year.

The bigger ASEAN markets do not necessarily offer a compelling case on valuation grounds.

"Generally we are more negative on India than we are positive on the alternatives, such as Indonesia and the Philippines where we feel the markets have perhaps run ahead of themselves," said David Baran, co-founder of Tokyo-based hedge fund Symphony Financial Partners.

"However, the ASEAN alternatives do have more positives and less negatives than India and we think that foreign investment outflows from India into the ASEAN alternatives are highly likely to increase if anything."

Indian shares trade at price to book value of 1.9 times, higher than 1.4 times for Asia Pacific shares as a whole but less than 3.1 times for Indonesia, 2.2 times for Thailand and 2.5 times for Philippines, according to data from Thomson Reuters StarMine.

The trend, nonetheless, is clear as money managers shift away from India, at least for the short-term, towards markets that offer the same favourable demographics and growth potential that had previously drawn investors to Delhi and Mumbai..


http://timesofindia.indiatimes.com/business/international-business/As-funds-flee-Indias-pain-is-Southeast-Asias-gain/articleshow/13317960.cms

Riaz Haq said...

Here's World Bank economist's assessment of Pak competitiveness, according to The News:

Pakistan needs to improve its competitiveness for rapid industrialisation, which offers it a range of potential benefits, including more jobs creation, tax revenues and economic growth, said Dan Biller, World Bank’s lead economist on South Asia Region for Sustainable Development.



Addressing businessmen in Lahore, he said that the GDP growth of Pakistan in 2011 was only 24 percent, while China grew at 9.2 percent, India 7.8 percent, Sri Lanka at eight percent, Indonesia 6.4 percent and Malaysia 5.2 percent.



Among all these countries, Pakistan has the largest agricultural share of GDP and smallest industrial share, he said.



Biller said that lower industrialisation in Pakistan against other regional countries is due to its lower competitiveness, adding that Pakistan ranks poorly on the Global Competitive Index of the World Economic Forum. Pakistan’s institutions are weak, scoring 3.4 points out of 10, he said, adding that Malaysia score 5.2 points, China 4.3 points, India 3.8 points, Indonesia 3.8 points and Sri Lanka scored 4.2 points on quality of institutions.



Biller said that Pakistan’s score in infrastructure was dismal 2.8 points, while Malaysia scored 5.5, China 4.3, India 3.6, Indonesia 3.8 and Sri Lanka scored 4.1 points.



Similarly, he said, Pakistan’s score was the lowest among these countries in macroeconomic stability, health and primary education, higher education and training, goods market efficiency and labour market efficiency. Only in the market size, Pakistan had a better score than Sri Lanka, he added.



He also said that Pakistan has the most expensive and least-efficient port systems in the region, adding that the handling charges at the Karachi Port Trust are $110 per ton. India charges $80 per ton, Sri Lanka $150 per ton and Hong Kong charged $140 per ton. Ship charges of 2,800 tons are $30,000 at KPT, $5,500 in Sri Lanka, $6,000 in Hong Kong and $25,000 in the Indian port.



He said Pakistan handles 55 containers per hour, Sri Lanka 70 per hour, Hong Kong 100 per hour and India 65 per hour. The Customs authorities in Pakistan examine 10 percent containers physically; Sri Lanka and Hong Kong less than five percent, while physical examination of containers in India is also high, but less than 100 percent, he said, adding that Pakistani ports lack water depth, which is 10.5 feet at KPT, 13 feet in Sri Lanka, 14 feet in Hong Kong and 12 feet in Indian ports.



The World Bank economist said that Pakistan provides relatively low access to services that impeded foreign investment. Pakistan has two fixed telephone lines per 100 people against 22 in China, 2.9 in India, 17.2 in Sri Lanka, 15.8 in Indonesia and 16.1 in Malaysia.



Around 99.4 percent of the population in China has access to electricity; it is 66.3 percent in India, 76.6 percent in Sri Lanka, 62.4 percent in Pakistan, 64.5 percent in Indonesia and 99.4 percent in Malaysia, he added.



The roads and power generation are number one infrastructure concern for the businesses worldwide, Biller said, and advised Pakistan to reduce the transport cost that is critical to competitiveness.



In addition, the state should ensure safe mobility and enhance regional connectivity. Pakistan’s foreign market access potential is at least 4.5 times higher than the United States, he said, adding that its current market access is only 4-9 percent of the United States.



Pakistan’s market share in total global exports is less than half percent and remained stagnant since 2000. India, on the other hand, increased its global export share from 0.6 percent in 2000 to 1.5 percent in 2010, he added.


http://www.thenews.com.pk/Todays-News-3-114426-Pakistan-needs-to-improve-competitiveness-for-rapid-industrialisation

Riaz Haq said...

Here's a Defense News piece on India abandoning domestic jet engine program:

India has abandoned its efforts to build its own engine to power the Light Combat Aircraft (LCA) Mark-2, according to Indian Defence Ministry sources.

The Kaveri engine, which Indian defense scientists are trying to build, has failed to meet Indian Air Force requirements two decades after the project began, the MoD sources said.

This means the LCA Mark-2 will be powered only by U.S. company General Electric’s GE-414 engine, which was short-listed earlier over Germany’s Eurojet to power the LCA Mark-2. The aircraft, under development at Bangalore’s Aeronautical Development Agency, is expected to be ready around 2017.

While an MoD official would not say that the engine project has been abandoned for the aircraft, he did say that the Kaveri engine does not fully meet the Air Force’s thrust requirements. The MoD has now decided to use the Kaveri engine to power only UAVs, the official added.

India’s Defence Research and Development Organization (DRDO), the agency that is building the Kaveri, had been in consultation with French company Snecma for the past three years to help complete the engine.

DRDO and Snecma had been negotiating to co-develop and co-produce the engine, but they have yet to sign an agreement, the MoD official said.

While the official would not say why the negotiations failed, an Indian Air Force source said the Kaveri project to power the LCA has been all but abandoned. Beyond powering UAVs, the engine also will be a technology demonstration project.

The Air Force source added that besides the failure to meet the thrust level, the Kaveri also has technical problems with its compressor, turbine and engine control system.

Meanwhile, the LCA Mark-1 is readying for induction by 2014, nearly 15 years behind schedule. It will be powered by the GE-404 engine, also from General Electric.

For the LCA Mark-2 program, ADA will order 99 GE-414 engines and the rest will be manufactured in India under technology transfer arrangements.


http://www.defensenews.com/apps/pbcs.dll/article?AID=2012306170005

Riaz Haq said...

Here's a Wall Street Journal story on falling Indian rupee:

For almost a year, India's central bank has spent billions of dollars to support the beleaguered rupee. And yet the currency is Asia's worst-performing against the U.S. dollar over the past year.

The fruitless efforts by the Reserve Bank of India shows how central banks, especially in emerging markets, often are powerless to manage pressures on their currencies if international market forces are ranged against them.

The rupee has been declining partly because of flight of capital from emerging markets, but also because of concerns over India's deteriorating financial health. The country's current-account deficit recently hit its highest level ever, and the federal government's heavy spending has widened its budget deficit.
------------
Things worsened for the rupee after March, when the Indian government introduced tax rules in the federal budget that could potentially hurt foreign investors. Spooked, foreign funds pulled money out of the economy.

Between April and June, for instance, foreign institutional investors pulled out $350 million from Indian stocks versus net inflows of $1.15 billion in the same period a year earlier.

Meanwhile, the bank came under intense pressure from the government to cut rates. Growth in India fell to 5.3% in the first three months of 2012, its slowest rate in almost a decade.

In April, the central bank cut rates for the first time in three years. But it hasn't followed with additional cuts, citing inflation and currency risks.

In May, the bank stepped up its actions, ordering exporters to convert half their foreign-currency earnings held onshore into rupees within two weeks. The move failed to lift the rupee as exporters were able to keep their earnings overseas.

At other times, the government has raised hopes of enacting strong measures to boost the rupee, or foreign inflows, but failed to deliver.

"There have been a lot of dashed expectations," said Killol Pandya, head of fixed income at Daiwa Asset Management in Mumbai.

http://online.wsj.com/article/SB10001424052702303933404577504792500177750.html

HopeWins Junior said...


SOURCE: http://data.worldbank.org/

-----------------------------

Current Account Deficits:

Pakistan India
1990 -4.2% -2.2%
1991 -2.8% -1.6%
1992 -3.9% -1.5%
1993 -5.6% -0.7%
1994 -3.5% -0.5%
1995 -5.5% -1.5%
1996 -7.0% -1.5%
1997 -2.7% -0.7%
1998 -3.6% -1.6%
1999 -1.5% -0.7%
2000 -0.1% -1.0%
2001 2.6% 0.3%
2002 5.3% 1.4%
2003 4.3% 1.4%
2004 -0.8% 0.1%
2005 -3.3% -1.2%
2006 -5.3% -1.0%
2007 -5.8% -0.7%
2008 -9.6% -2.5%
2009 -2.5% -1.9%
2010 -0.8% -3.1%

-----------------------------

Government Fiscal Deficits:

Pakistan India
1990 -2.5% -3.4%
1991 -5.5% -2.3%
1992 -5.8% -2.3%
1993 -6.6% -4.0%
1994 -5.4% -2.4%
1995 -5.3% -2.2%
1996 -6.6% -2.0%
1997 -6.7% -2.8%
1998 -5.6% -3.3%
1999 -5.5% -3.3%
2000 -4.1% -3.9%
2001 -3.7% -4.4%
2002 -2.9% -4.7%
2003 -2.9% -3.5%
2004 -2.0% -3.2%
2005 -3.2% -3.2%
2006 -4.2% -2.2%
2007 -4.2% -0.5%
2008 -7.4% -4.9%
2009 -4.8% -5.2%
2010 -5.0% -3.7%

Riaz Haq said...

India on verge of financial crisis, says The Guardian:

The Reserve Bank of India (RBI) in Mumbai. The country is facing its own financial crisis. Photograph: Vivek Prakash/REUTERS
India's financial woes are rapidly approaching the critical stage. The rupee has depreciated by 44% in the past two years and hit a record low against the US dollar on Monday. The stock market is plunging, bond yields are nudging 10% and capital is flooding out of the country.

In a sense, this is a classic case of deja vu, a revisiting of the Asian crisis of 1997-98 that acted as an unheeded warning sign of what was in store for the global economy a decade later. An emerging economy exhibiting strong growth attracts the attention of foreign investors. Inward investment comes in together with hot money flows that circumvent capital controls. Capital inflows push up the exchange rate, making imports cheaper and exports dearer. The trade deficit balloons, growth slows, deep-seated structural flaws become more prominent and the hot money leaves.

The trigger for the run on the rupee has been the news from Washington that the Federal Reserve is considering scaling back - "tapering" - its bond-buying stimulus programme from next month. This has consequences for all emerging market economies: firstly, there is the fear that a reduced stimulus will mean weaker growth in the US, with a knock-on impact on exports from the developing world. Secondly, high-yielding currencies such as the rupee have benefited from a search for yield on the part of global investors. If policy is going to be tightened in the US, then the dollar becomes more attractive and the rupee less so.

But while the Indonesian rupee and the South African rand are also feeling the heat, it is India – with its large trade and budget deficits – that looks like the accident most likely to happen. On past form, emerging market crises go through three stages: in stage one, policymakers do nothing in the hope that the problem goes away. In stage two, they cobble together some panic measures, normally involving half-baked capital controls and selling of dollars in an attempt to underpin their currencies. In stage three, they either come up with a workable plan themselves or call in the IMF. India is on the cusp of stage three.

http://www.theguardian.com/business/economics-blog/2013/aug/19/india-financial-crisis-rupee-stock-markets

Riaz Haq said...

Here's The Economist on India's reckoning:

.... They were there to launch an official economic history of 1981-97, a period which included the balance-of-payments crisis of 1991. The mood was tense. India, said Manmohan Singh, the prime minister, faced “very difficult circumstances”. “Does history repeat itself?” asked Duvvuri Subbarao, the outgoing head of the Reserve Bank of India (RBI). “As if we learn nothing from one crisis to another?”

The day before Indian financial markets had had their rockiest session for many years. The rupee sank and stockmarkets tumbled. Money-market rates rose. The shares of banks thought to be either full of bad debts or short of deposit funding fell sharply. The sell-off had been made worse by new capital controls introduced on August 14th in response to incipient signs of capital flight. They reduce the amount Indian residents and firms can take out of the country. Foreign investors took fright, fearful that India might freeze their funds too, much as Malaysia did during its crisis in 1998.

India’s authorities have since ruled that out. But markets keep sliding. On August 20th the RBI said it would intervene to try to calm bond yields. The rupee has dropped to over 64 to the dollar, an all-time low and 13% below its level three months ago. It is widely agreed the country is in its worst economic bind since 1991.

India is not being singled out. Since May, when the Federal Reserve first said it might slow the pace of its asset purchases, investors have begun adjusting to a world without ultra-cheap money. There has been a great withdrawal of funds from emerging markets, where most currencies have fallen by 5-15% against the dollar in the past three months. Bond yields have risen from Brazil to Thailand. Some governments have intervened. On July 11th Indonesia raised its benchmark interest rate to bolster its currency. On August 21st its president said he would soon announce further measures to ensure stability.

India, Asia’s third-biggest economy, is more vulnerable than most, however. Economic news has disappointed for two years, with growth falling to 4-5%, half the rate seen during the 2003-08 boom. It may fall further. Consumer-price inflation remains stubborn at 10%. A drive by Palaniappan Chidambaram, the finance minister, to push through a package of reforms and free big industrial projects from red tape has not worked. An election is due by May 2014, adding to uncertainty.

India’s dependence on foreign capital is also high and has risen sharply. The current-account deficit soared to almost 7% of GDP at the end of 2012, although it is expected to be 4-5% this year. External borrowing has not risen by much relative to GDP—the ratio stands at 21% today—but debt has become more short-term, and therefore riskier. Total financing needs (defined as the current-account deficit plus debt that needs rolling over) are $250 billion over the next year. India’s reserves are $279 billion, giving a coverage ratio of 1.1 times. That has fallen sharply from over three times in 2007-08 (see chart 1) and leaves India looking weaker than many of its peers (see chart 2)...
---------
India’s position could still get worse. But assuming things stabilise, when the official histories come to be written about 2013, what might they say? Most likely that the rupee’s slump caused a severe shock to the economy that made a recovery in growth rates even harder. But perhaps, also, that it prompted a more serious debate about the policies that India needs to become less vulnerable to the whims of an unforgiving world.


http://www.economist.com/news/finance-and-economics/21584010-why-india-particularly-vulnerable-turbulence-rattling-emerging

Riaz Haq said...

Here's Wall Street Journal quoting BRIC coiner Jim O'Neill as saying “If I were to change it, I would just leave the ‘C’:


SAO PAULO–Former Goldman Sachs Asset Management Chairman Jim O’Neill, who coined the BRIC acronym describing four burgeoning emerging market countries, stands by the term he invented more than a decade ago, but admits that three of the countries have disappointed him in recent years.

The acronym created in 2001 groups Brazil, Russia, India and China, and has become a reference for a perceived shift in economic power toward developing economies.

“If I were to change it, I would just leave the ‘C,’” Mr. O’Neill said in an interview. “But then, I don’t think it would be much of an acronym.”

Economic growth in other BRIC countries has been disappointing, and the economic outlook for developing economies in general has changed in the last few years amid the end of a commodities boom and a slowdown in Chinese growth–which nevertheless remains high compared with that of its counterparts.

Meanwhile, signs of a recovery in the U.S and expectations the Federal Reserve will soon reduce its bond-buying program have helped strengthen the U.S. dollar, sucking money out of emerging markets and putting even more pressure on their less developed economies.

It has become “fashionable” to say the developed world is recovering while emerging markets are all slowing down, Mr. O’Neill said. “But what people don’t understand is the size of China,” he added.

The economist said that if China’s economy grows 7.5% this year, as he expects, that would create an additional $1 trillion in wealth, in U.S. dollar terms. “For the U.S. to contribute at the same level, it would have to grow around 3.75%,” Mr. O’Neill said.

Economists currently expect the U.S. economy to expand 1.5% in 2013, down from 2% projected in May, according to a recent survey by the Federal Reserve Bank of Philadelphia.

From 2011 to 2020, Mr. O’Neill said he has assumed average growth for the BRIC countries of 6.6% a year, less than the 8.5% average in the previous decade. Most of it up to now has come from China.

India has been the biggest disappointment among the BRIC countries, while Brazil has been the most volatile in terms of investor perceptions, the economist said.

“Between 2001 and 2004, many people told me I should never have included Brazil. Then, from 2008 to 2010, people told me I was a genius for including Brazil and now, again, people say Brazil doesn’t deserve to be there,” he said.

Brazil’s economic growth, which reached 7.5% in 2010, has been weak since then in spite of multiple government stimulus measures. The country seems doomed to growth of 2% or so in both 2013 and 2014, according to economists’ forecasts.

Brazil’s rapid growth in 2010 raised expectations, but many people forgot that the country is vulnerable to big moves in commodities prices, Mr. O’Neill said.

Another problem, he said, is that private investment remains a small share of the country’s gross domestic product. Brazil’s investment rate has been stuck at around 18% of GDP, the lowest level of any BRIC country, for a decade.

---

“They should only worry if there’s a pickup in inflation expectations; otherwise, they should relax,” he said, before the central bank late Thursday unveiled a massive intervention program to provide relief for the currency.

Brazilian inflation is currently 6.15%, close to the 6.5% ceiling of the central bank’s target range for 2013.

Even in the face of weak growth, Mr. O’Neill says he doesn’t plan to add or subtract letters from his famous acronym.

“If, by the end of 2015, there is persistent weak growth in Brazil, India or Russia, then I might,” he said, noting, however, that he expects Brazil to surprise positively in 2015, possibly even in 2014.

http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/

Riaz Haq said...

Here's a Haaretz story on an Israeli's impressions of India:

...From the perspective of a metropolis of 17 million people, Israel looks like a small, distant country with peculiar, almost trivial problems. When reasonably decent drinking water for the masses and clean air to breathe are goals beyond reach, the right of return or Hezbollah’s arsenal of rockets seem to be almost theoretical issues. It’s also a question of one’s angle of observation: For the Indians there is no Middle East, only “western Asia.”

----

Since full diplomatic relations between Israel and India were established in 1992, the two have gradually but significantly moved closer together – primarily on the basis of growing economic trade, centering around sales by Israel’s defense industry to India.
-------------
India is now the No. 1 export target of Israel’s defense industries. The two countries. Both India and Israel avoid revealing details about the scale and nature of their security trade. However, in 2012 Israel’s Defense Ministry announced that the country’s total defense exports stood at $7 billion annually. India’s share of that is probably between $1 billion and $1.5 billion. And the potential for growth exists.
--------------
A partial list of the munitions that India has purchased from Israel in the past decade includes radar for the Arrow missile-intercept system, manufactured by Israel Aircraft Industries; sea-to-sea missiles manufactured by IAI and Rafael Advanced Weapons Systems; IAI warning planes, communications systems made by Elbit and ammunition manufactured by Israel Military Industries.

However, the potential of the transactions that have been discussed more recently is of a far greater scale. The projects include the upgrading of tanks and other combat vehicles, the supply of Barak-8 advanced missiles for protection of seagoing vessels and maritime facilities, and observation systems. India has expressed an interest in the technological progress embodied in the operational success of the Iron Dome system, manufactured by Rafael, in intercepting rockets fired from the Gaza Strip, though it’s doubtful that Iron Dome is appropriate for India’s needs.
-------------

In the face of the missile arsenal – and the nuclear capability – of Pakistan, India’s hostile neighbor, India must maintain commensurate strategic deterrence. The Indian authorities might thus be interested in systems, now under development, for interception of longer-range missiles.

----

At the moment, a huge deal is in the works. India wants to purchase advanced antitank missiles. The two suitors competing for the contract, which has an estimated worth of $1 billion, are Rafael’s Spike anti-tank guided missile and the Americans’ Javelin system.
-----------
In my short visit, I found a preponderance of pessimism and gloom, tempered somewhat by expectation of change. The fate of 1.2 billion people hangs in the balance. The change might come from the general election in May, in which, according to forecasts, the BJP, the Hindi nationalist party, will defeat the ruling National Congress Party.

Even on a lightning visit, Delhi is a surprising mix for someone encountering the city for the first time. Opposite the office building housing the research institute, people are scavenging in garbage cans. The impression made by the beauty of the grand monuments is erased within minutes by a depressing encounter with the girls who knock on the windows of the car and beg at every major intersection, with infants in tow who look groggy, as though they are under the influence of anesthetics...
------
On Sunday morning, a group of wild monkeys tranquilly crosses the road in the quarter where the foreign embassies are situated. The hotels look like fortified luxurious bastions from the period of the British Empire, and every foreigner is surrounded by a waiters and other staff members..
.


http://www.haaretz.com/news/diplomacy-defense/.premium-1.575486

Riaz Haq said...

India replaced China as the world's biggest arms buyer in 2010. With its domestic defence industry struggling to manufacture high-tech arms, India is in the midst of a defence spending binge as it struggles to keep up with better-equipped Chinese forces and a range of military challenges in its volatile neighbourhood.


India's traditional rival Pakistan increased its weapons acquisitions by 119 percent, growing from 2 percent of the global total to 5 percent during that period.

The five largest arms suppliers worldwide between 2009 and 2013 were the United States (29 percent of global exports), Russia (27 percent), Germany (7 percent), China (6 percent) and France (5 percent).

They collectively accounted for 74 percent of total arms exports, SIPRI said.

The world's top five arms importers were now India, China, Pakistan, the United Arab Emirates and Saudi Arabia.

http://news.yahoo.com/indian-arms-imports-almost-triple-china-pakistan-study-012812816.html

Riaz Haq said...

Analysts said the new ranking (4th largest exporter) shows China's military industry has gained momentum, but that the main advantage of arms produced by China is the low price rather than core technology.

Chinese exports of major weapons increased by 212 percent during 2009-2013, compared with the previous five-year period, and China's share of global arms exports increased from 2 to 6 percent, said a report released by the Stockholm International Peace Research Institute (SIPRI) on Monday.

The three biggest exporters of arms were the US, Russia and Germany.

China supplied major weapons to 35 states in the past five years, mainly low and middle-income countries. Almost three-quarters of Chinese exports went to just three clients: Pakistan, Bangladesh and Myanmar, the report said.

China's rapidly developing military technology partly explains its expansion as an arms supplier, in direct competition with Russia, the US and European states, said the report.

"The progress in the military industry has been made due to the nation's increase in investments in the field," Shan Xiufa, a research fellow at the Academy of Military Sciences of the People's Liberation Army (PLA), told the Global Times.

However, he noted that China mostly exports regular weapons. China's military industry can only be considered at the global second-tier level, distant from the first-tier countries such as the US, due to its lack of weapons with independent intellectual property rights.

"Weapons produced by China are price competitive and the country is skillful in combining others' technology," Shan said, noting that it is a reflection of the country's relatively low innovative capability in general industry.

The US delivered more weapons than any other supplier in the past five years, to at least 90 recipients. Asia and Oceania were the biggest recipient regions for US weapons, accounting for 47 per cent of US deliveries, said the report.

"Chinese, Russian and US arms supplies to South Asia are driven by both economic and political considerations," said Siemon Wezeman, senior researcher with the SIPRI Arms Transfers Program, noting that China and the US are using arms deliveries to Asia to strengthen their influence in the region, reported Press Trust of India.

However, Liu Weidong, an expert on the US with the Chinese Academy of Social Sciences, said that China is not comparable with world powers in increasing political influence through arms sales.

"China will consider raising its political influence in the countries that import its arms, for example, it sells weapons to allies such as Pakistan or Myanmar, but the US is more assertive in maintaining its political influence through arms exports," he said. He noted that China holds an inclusive attitude as it is not at the same level with the US on expanding political influence by selling arms due to China's less competitive technology.

Turkey, a member of the North Atlantic Treaty Organization (NATO), has come under strong pressure from its NATO allies since it announced in September last year it would purchase China's HQ-9 long range surface-to-air missile system in preference to European, Russian and US alternatives. Ankara may yet rethink the potential $3.44 billion deal with China, Istanbul-based Hurriyet Daily News reported on March 11.

The five biggest importers were India, China, Pakistan, the United Arab Emirates and Saudi Arabia, said the report. Arms imports by states in Asia and Oceania increased by 34 percent between 2004-2008 and 2009-2013.

"China's lack of independent research and development in arms demands more imports of weapons, especially those with information-based technology, to realize the modernization of the army," Shan said, noted that it partly accounts for China's increasing defense expenditure.

http://www.globaltimes.cn/content/849186.shtml

Riaz Haq said...

India's continuing abject failure to build a robust defence industrial base (DIB) has come to into focus once again, with an international thinktank holding its arms imports are now almost three times as high as those of the second and third largest arms importers, China and Pakistan.

As per the latest data on international arms transfers released by Stockholm International Peace Research Institute (SIPRI), the volume of Indian imports of major weapons rose by 111% between 2004-08 and 2009-13, and its share of the volume of international arms imports increased from 7% to 14%.

The major suppliers of arms to India in 2009-13 were Russia (accounting for 75% of imports) and the US (7%), which for the first time became the second largest arms supplier to India, said SIPRI. As earlier reported by TOI, the US has already bagged defence deals close to $10 billion over the last decade in the lucrative Indian defence market, with the latest being the $1.01 billion one for six additional C-130J "Super Hercules" aircraft.

The other deals on the anvil are the ones for 22 Apache attack helicopters, 15 Chinook heavy-lift helicopters, four P-8I maritime patrol aircraft and 145 M-777 ultra-light howitzers, together worth another $4 billion or so.

SIPRI, on its part, said the USA's share of Pakistani imports in the same period was 27%. China was also a major supplier in the region, accounting for 54% of Pakistani arms imports and 82% of Bangladeshi imports.

"Chinese, Russian and US arms supplies to South Asia are driven by both economic and political considerations," said Siemon Wezeman of SIPRI. In particular, China and the US appear to be using arms deliveries to Asia to strengthen their influence in the region, he added.

The five largest suppliers of major weapons during the five-year period 2009-13 were the United States (29% of global arms exports), Russia (27%), Germany (7%), China (6%) and France (5%).

Despite India's emergence as the world's largest arms importer over the last decade, the modernisation of its armed forces continues to take place in a haphazard manner due to the lack of concrete strategic planning in tune with the country's long-term geopolitical objectives, as reported by TOI earlier.

The Indian armed forces are still grappling with critical shortages in fighter jets, submarines, helicopters, howitzers, night-fighting capabilities and the like. The IAF, for instance, is down to just 34 fighter squadrons when it requires at least 44 to be "comfortable" against the twin-challenge posed by Pakistan and China.

A K Antony, who has been India's longest-serving defence minister, may have often chanted the mantra of "indigenisation" during his seven-and-a-half year tenure, especially after defence scams erupted one after the other, but failed to deliver meaningful systemic reforms on the ground.

There was, for instance, no concrete revamping of the DRDO and its 50 establishments as well as the five defence PSUs, four shipyards and 39 ordnance factories to ensure they deliver weapon systems without huge cost and time overruns.

http://timesofindia.indiatimes.com/india/Indias-arms-imports-almost-three-times-of-China-Pak-SIPRI-report/articleshow/32190097.cms