Monday, April 20, 2015

Can Indian Economy Survive Without Western Money?

India runs massive current account deficits. Its imports far outstrip exports year after year. According to the Reserve Bank (RBI) data, in the April-December 2014 period of last fiscal, India's current account deficit stood at $31.1 billion or 2.3% of GDP.

In spite such large recurring deficits, India has built up over $300 billion in foreign exchange reserves. How does it do it? The simple answer is: Foreign money inflows in the form of debt and investments mainly from the West keep the Indian economy afloat.

Sources of FDI in India Source: Financial Express
These inflows have dramatically increased with western support for India in the post Cold War world. Here's how Indian journalist Pankaj Mishra explains the larger western interest driving this phenomenon:

"Seen through the narrow lens of the West’s security and economic interests, the great internal contradictions and tumult within these two large nation-states (India and Pakistan) disappear. In the Western view, the credit-fueled consumerism among the Indian middle class appears a much bigger phenomenon than the extraordinary Maoist uprising in Central India".  

Here's how the Asian Development Bank (ADB) describes the rising inflows of foreign, mainly western, capital into India:

"Gross capital flows have increased nearly 22 times from $42.7 billion in 1991-92 to over $932.3 billion in 2010-11. As a share of GDP, this amounted to an increase from 15.5% in 1991-92 to 55.2% in 2010-11. Much of the increase in financial integration occurred between 2003-04 and 2007-08. Given the impressive economic performance indicated by close to 9% growth rate, higher domestic interest rates and a strong currency, India's risk perception was quite low during 2003 to 2007. Furthermore, this period was associated with favorable global conditions in the form of ample liquidity and low interest rates in the global markets—the so-called period of Great Moderation."

Many other economies have been growing faster and producing higher investor returns than India. So the returns do not justify the increased capital flows. Such flows are driven much more by the changing geopolitics of South Asia region and the world since the end of the Cold War in early 1990s. Without these inflows, Indian economy would collapse and India would be at IMF's door seeking last resort loans.

Lesson: Geopolitics drive economy. It's the reason for over a trillion dollars of western capital flow into India since the end of the Cold War. It also explains China's massive $46 billion investment commitment in Pakistan agreed during President Xi Jinping's state visit to Islamabad.

Related Links:

Haq's Musings

India's Soaring Twin Deficits

Xi Jinping's Pakistan Visit

How Strategic Are China-Pakistan Ties?

India Pakistan Economic Comparison in 2014

Pakistan's KSE-100 Outperforms India's Sensex

India's IT Exports Highly Exaggerated

Is India Fudging GDP to Show Faster Growth Than China?


Rajput said...

I beg to differ. One major source of inflows for Indian market is remittances, which amount to $80 billions. That effectively nullifies their trade deficit. Before 1991. India was a closed economy, highly regulated and protective. After 1991, with liberalization policies, India start growing at amazing pace. I dont know, how much this is sustainable in future, but right now, its in their favor. With huge market and man power, near future looks good for India and it depends upon how their leadership meets the challenges.

Riaz Haq said...

Rajput: "I beg to differ. One major source of inflows for Indian market is remittances, which amount to $80 billions. That effectively nullifies their trade deficit"

Current account deficit includes worker remittances.

Riaz Haq said...

RBI report excerpt:

India depends upon capital flows to bridge the CAD. Foreign Direct Inflows (FDI) and portfolio investments constitute a major share of the flows. Debt flows, External Commercial Borrowings, in particular, have gone up substantially but, as a share of total capital flows, debt flows have declined from 80 per cent in 1990-91 to about 30 per cent in 2011-12. Total capital flows reached a peak of US$ 107 billion in 2007-08 but collapsed to about US$ 7.2 billion in 2008-09 indicating volatile nature of such capital flows. In the current fiscal year so far, India has witnessed a net inflow of about US$ 25 billion in the form of FDI and about US$ 36 billion as portfolio flows as against about US$ 21 billion and (-) US$ one billion respectively in the corresponding period of the last year. During 2014-15, capital flows would be more than adequate to finance CAD.

Majumdar said...

Prof sb,

Let me share with you a state secret. A good chunk of what you see as FDI and portfolio investment is nothing but round tripping of "black money" (That is why ModiGee is beating around the bush looking for Swiss bank accounts- the money is lying right here). That explains why the trillion dollar investment apparently
produces no return by way of exports and portfolio returns.

However, I guess I am a small fry compared to your heroes like Jim O'Neill and Lord William Dalrymple, whom you love to quote and you wont believe me.


Anonymous said...

Indian CAD for FY 15 is about USD 36 billion.
(Net of Merchandise + Services + Remittances).

India's FX reserves are 320 billion USD and rising.

As a rule of thumb CAD < 2% is safe.

FIIs/FDIs/External Commercial borrowings are over and above this.

And no Western private capital doesn't flow for geopolitical reason else China would not be a massive destination for it.
That its interests are at odds with the West has been known since at least the mid 1990s.

Riaz Haq said...

Anon: " And no Western private capital doesn't flow for geopolitical reason else China would not be a massive destination for it.
That its interests are at odds with the West has been known since at least the mid 1990s."

China's rise has been driven by huge export surpluses since mid 1990s, not by FDI inflows.

In most recent news by BBC, China's export surplus hit a new monthly record of $60.6 billion in Feb 2015.

Student said...

India is not even in top 10 countries of FDI. So bit surprising why Professor Sahib decided to pick India.

No mention of India as one of the countries to be screwed if US increases interest rate.

Riaz Haq said...

Excerpt of Washington Post on Chinese President's visit to Pakistan:

It (China-Pak Corridor) is an impressive proposal, on a scale that we've come to now associate with China's overseas footprint — more usually in corners of Africa. According to the BBC, the Chinese state and its banks would lend to Chinese companies to carry out the work, thereby making it a commercial venture with direct impact on China's slackening economy.

The project is also a key cog in China's own grand-historic vision of itself as a global power and the font of new sea and land "Silk Roads." The China-Pakistan Economic Corridor would link up a major land route in Central Asia to what China imagines will be a key maritime hub at Gwadar.

Sure, there remain real reasons to be skeptical. Much of the new construction would be done in the vast, restive Pakistani province of Baluchistan, where the army is still grappling with an entrenched separatist insurgency. Moreover, as Pakistani journalist and columnist Cyril Almeida points out, the proposed Chinese numbers stretch credulity, especially when set against the meager sums currently being invested from the outside into Pakistan's economy. The proof, in this case, will be in the building.

China, Small suggests, "is finally easing into its role as a great power." And, indeed, it's using Pakistan as a corridor.

Riaz Haq said...

Student: " India is not even in top 10 countries of FDI. So bit surprising why Professor Sahib decided to pick India."

India is not in the top 10 but it's the most dependent on FDI because of its large deficits. And FDI inflows in India have surged by 26% last year in spite of slow growth and uncertainties.

Although economic growth in developing Asia slowed down, FDI inflows remained resilient.
Preliminary estimates demonstrate that combined inflows to 40 economies in the region grew by an
estimated 15% to a historical level of around US$492 billion in 2014. Among the subregions East Asia, South-East Asia and South Asia experienced rapid increases in inflows, while those to West Asia dropped. Inflows to China amounted to an estimated US$128 billion, rising by about 3% from 2013. This was mainly driven by an increase in FDI in the service sector, while FDI to the manufacturing sector fell, particularly
from Japan, and especially in industries that are sensitive to rising labour costs. By contrast, FDI inflows to India surged, increasing by about 26% to an estimated US$35 billion, despite macroeconomic uncertainties
and financial risks.

Mayraj said...

Also remittances.
How Overseas Remittances Are Helping to Drive India’s Economy

Riaz Haq said...

Mayraj: "Also remittances"

India has huge current account deficits even after taking worker remittances into account.

Mayraj said...

True. That is why avan thinks India's heading for a debt trap

Riaz Haq said...

India may be on the verge of falling into a debt trap, Atradius’s Michael Frigo
Frigo says the biggest with India is that the country has failed to recognize is the massive govt borrowing and consequent debt pile-up

Singapore: The biggest issue that India has failed to recognize is the massive government borrowing and consequent debt pile-up, and the country may be on the verge of falling into an internal debt trap, Michael Frigo, country manager, Singapore, Atradius Credit Insurance NV, said in an interview. The National Democratic Alliance (NDA) government’s upcoming budget must tackle the issue and attempt to drastically reduce subsidies, Frigo said. Edited excerpts:
In your recent report, you’ve said that India’s real economic growth is expected reach 6.5% in 2015. What will drive this growth in the medium term?
Positive business sentiment coupled with increased household demand and manufacturing output will drive growth to 6.5% this fiscal year.
Overall, India is expected to increase growth and to experience lower inflation this year. The country is already experiencing this as demonstrated by its performance in 2014, with the real economic growth reaching 6.0%. In the medium term, India is anticipated to rebound against its economic growth deterrent through its growing middle class, high investment, urbanization and improvement of the business environment and more structural reforms.
The demand for consumer goods and opportunities for domestic and foreign investment brought about by India’s growing middle class population of around 70-100 million makes it a market which international companies cannot afford to ignore. If these international companies will consider setting up shop soon and invest in the Indian market, the move will greatly help achieve the expected real economic growth reach of 6.5% in a shorter period.
The decline of public debt is also notably significant. If it continues its momentum of exponentially declining like what it has already achieved over the past couple of years, it brings down with it its contribution to the central budget deficit which stands at 4.5% of India’s GDP (gross domestic product) last year.
The resumption of stalled infrastructure projects will also help boost India’s growth, especially considering how the industry sector continues to be one of India’s most important sectors—contributing 29% of GDP in 2013.

Riaz Haq said...

Sources of FDI in India:

A comparison of the available FDI data to M&A data for India reveals an entirely different picture (figure 2). Countries like the US and the UK together make up 50% of M&A acquisitions into India, and Japan is responsible for another 10%. This triad is effectively responsible for three-fifths of FDI inflows into India (of the M&A variety at least). This provides us a more useful geographic breakdown of who is actually doing the investments in India.
A sectoral analysis of FDI inflows suggests that, on average, between 2000 and 2012, more than 35% of FDI inflows have gone into services, telecom and construction sector, with pharmaceuticals, chemicals and computer sector each receiving about 5% of the country’s total FDI inflows over the corresponding period. However, M&A data at the sectoral level for the same time span suggests telecom and pharmaceuticals (and healthcare) have attracted over one-third of the foreign M&A acquisitions in India. Of late, pharmaceuticals has attracted a greater share of M&As, with the sector taking about 20% of inbound M&A acquisitions between 2010 and 2013 (figure 3).
What does the foregoing discussion imply for policy? Obviously, first and foremost there is a need for better appreciation of the actual sources and destinations of FDI to and from India as well as the sectoral composition of FDI flows. In fact, while not discussed here, as Indian companies invest overseas more aggressively, better quality data on gross inflows and outflows at country and sectoral levels are needed.
Much more attention is also needed with regard to FDI quality at a more disaggregated level (i.e. new FDI versus retained earnings and greenfield versus M&A). While it is important for India to attract FDI, it is pertinent to ask the question whether a policy to attract FDI should be careful in distinguishing between the kind of FDI it wants to attract. All FDI are not the same and are not attracted by the same factors. The prime objective must be to align FDI with national development objectives, consistent with being an open economy.

Sally said...

Such flows are driven much more by the changing geopolitics of South Asia region and the world since the end of the Cold War in early 1990s.

Are you suggesting that the common investor, John Smith of US, is setting money aside in stocks or bonds for retirement driven by "geopolitics of South Asia" and not because of fundamentals?

Riaz Haq said...

Sally: "Are you suggesting that the common investor, John Smith of US, is setting money aside in stocks or bonds for retirement driven by "geopolitics of South Asia" and not because of fundamentals?"

"John Smith of US setting money aside in stocks or bonds for retirement" knows nothing about international investing; his money is invested by professional money managers who are heavily influenced by US policies and advisories on foreign countries. That's probably why professional money mangers underperform broad market indices over 5 to 10 year horizons. In general, the money managers are interested more in the size of their fees than the ROI of their picks.

US corporations are also strongly influenced by US government policies and advisories for international investment destinations.

Majumdar said...

Prof sb,

India may be on the verge of falling into a debt trap

You have been saying that since 2007 when we first crossed swords on Having said that, just because it hasnt happened in the past doesnt mean it wont happen in the future.


Riaz Haq said...

#India Farmer’s suicide at #AAP rall in #Delhi close to #Loksabha #Modi #BJP l via @sharethis

A farmer on Wednesday committed suicide by hanging himself from a tree in Chief Minister Arvind Kejriwal's presence at the Aam Aadmi Party's rally against the land bill.

The man, identified as Gajendra Singh, climbed the tree as top AAP leaders were present at the Jantar Mantar, a stone's throw from Parliament, and hanged himself with a 'gamcha' (towel). As some people climbed up to save him, the branch gave away and he fell.

He was rushed to nearby RML hospital in a police jee ..

Read more at:

Riaz Haq said...

MUMBAI—A large pile of debt on the books of India’s big infrastructure companies is complicating Prime Minister Narendra Modi’s plans to boost the country’s economy and improve its woeful roads, electric grids and other public works.

The companies that build big projects owe more than 3 trillion rupees ($48 billion), the result of a failed effort by the previous government to get businesses to help improve India’s infrastructure. The total amount of debt for Indian infrastructure companies is at its highest in more than a decade, affecting the overall economy because banks, fearing the loans won't be repaid, are reluctant to lend to other companies.

Debt levels have risen across Asia in the past five years and are now higher than they were before the Asian financial crisis in 1997. The borrowing has taken different forms in different countries. In China, giant state-owned companies borrowed the most, in Thailand and Malaysia, consumers took on debt, while in Japan, the government boosted its world-leading borrowing.

High debt levels could limit India’s ability to help drive global growth at a time when China is slowing and many of the world’s economies are weak. Foreign portfolio investors have poured $42 billion into Indian stocks and bonds over the past year, leaving them vulnerable to cracks in the country’s economy.

In India, overall debt levels are relatively low. But the sector struggling the most with its borrowing is also one that Mr. Modi is counting on to juice the economy and boost the country’s productivity. Instead, the companies are now focused on reducing their debt.

“At this point, we are not able to commit more equity to new projects,” said Ankineedu Maganti, managing director of Soma Enterprise Ltd., a south India-based developer of roads and other infrastructure projects. “We’re still trying to recover from the past.”


In 2014, bank credit to infrastructure was 14% of overall credit, and now infrastructure companies account for among the biggest portions of the bad and stressed loans on the books of Indian banks.

The bad debt has made banks less willing to lend, weighing on the overall economy, according to a Finance Ministry report in December. “The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12% of total assets,” the report said. “Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend.”

Banks have been pushing infrastructure companies to sell assets and pay back debt. But India’s insolvency laws make it unattractive for lenders to push companies into liquidation, so the standoff is likely to continue.

Riaz Haq said...

#India Worst performing stock market? This is the end of the Modi bubble for FIIs

Is PM Narendra Modi running out of luck? He had famously boasted being a lucky Prime Minister while seeking votes during the Delhi elections. The context, of course, was international oil prices had less than halved and that seemed to have brought all round uptick in economic sentiment, what with the stock markets soaring to new highs early 2015. Consensus among global FIIs was that they will remain overweight India as compared to other markets like China, Brazil, South Korea, Taiwan and Russia. But everything seems to be reversing over the past month and a half.
Suddenly the FIIs, with a cumulative investment in Indian stocks of about $300 billion at market value, are looking at other emerging stock markets for returns and no longer treat India as the most preferred destination as they did last year, and even the beginning of this year. FII net outflows gave been of the order of Rs 12,500 crore over the past month. The stock market index has seen the biggest correction of 10 percent in a short time. This has caused speculation whether the markets are slipping into a bear phase.

But what is indeed worrisome is India is probably the worst performing stock market among emerging economies this year. This is in sharp contrast to the view taken by the big FIIs that the Modi government reforms could trigger a multi-year bull run in India. Now the same FIIs are shifting the weightage of their global allocation to China where the stock markets have shown 30 percent growth since January. India's Sensex growth remains in negative territory. Even FII inflows, which primarily influence market movement, are flat to negative since January.
Worse, now FIIs also seem to prefer oil exporting markets like Russia and Brazil, both of whom had fallen out of favour after the global oil prices had more than halved, badly affecting their revenues. Now the FIIs believe that oil prices are moderately correcting and returning to oil exporting markets like Russia and Brazil makes sense. This view is buttressed by another major consideration. They feel as the US economy recovers and the prospect of monetary tightening by the Federal Reserve brightens, the dollar would strengthen in the short to medium term.

The Economic Times has just reported a survey of top CEOs and the majority of them suggest that demand is depressed. "The bonhomie and cheer that greeted the arrival of the Modi government is replaced by a sombre mood and a grim acknowledgement of the realities of doing business in India," reports ET, as it captures the sentiment of the CEOs. Little wonder that this is reflecting in the behaviour of the stock market and currency. The largest engineering conglomerate L&T had said some of its plants are lying idle as demand for capital goods is very weak. The Aditya Birla Group had deferred its revenue target of $65 billion by 3 years, to 2018.
These are not good signs for the economy and both the stock market and currency will reflect this in the months ahead.

Anonymous said...

Stupid question! Can China survive without exports? NO! If west goes bust right now, say goodbye to chinese economic boom too and so to CPEC.

Riaz Haq said...

How #China beats #India hollow in trade and dominates #Indian homes, #markets #economy #trade via @economictimes

China seems to be grabbing most of it (solar panels). “The US and Europe are taking measures to protect themselves against Chinese dumping. We (Indians) have instead offered them a direct train to the Indian market. The government must ring fence Indian firms to allow them to grow,” says Chaudhary.

Miles away in Delhi, Rakesh Kumar Yadav shows you another Chinese-flavoured world. He is the president of the Federation of Sadar Bazar Traders Association. The umbrella platform for The umbrella platform for 83 other associations with 35,000 wholesale traders does business worth over Rs 3,000 crore annually and employs at least 100,000 people directly and indirectly.

About a decade back, the traders often used to source products — toys, plastic buckets, idols of Indian gods, among others — from domestic manufacturers. In toys alone, Yadav knows many Indian manufacturers who employed 500-plus people and were their suppliers. “They have all shut down and now import from China. Cheaper and better Chinese imports have wiped out the domestic industry,” says Yadav.

On the border, India is trying to ward off Chinese aggression. In the cold Himalayan plateau, temperatures have shot up as an old political rivalry heats up. India and China are sparring over the Doklam tri-boundary area (the third country being Bhutan), near Chicken’s Neck which connects India’s north-eastern states to the rest of the country. Shrill calls for a boycott of Chinese goods are getting louder, with the Rashtriya Swayamsevak Sangh (RSS) and its affiliate, the Swadeshi Jagran Manch, ..

Read more at:

Riaz Haq said...

#IMF says #India vulnerable for depending on foreign money to finance public #debt, #trade #deficit @economictimes

India needs to remain vigilant as greater reliance on debt financing and portfolio inflows could create significant external financing vulnerabilities, a recent IMF report has said.

The The International Monetary Fund (IMF) in its report titled 'The 2017 External Sector Report' further said other risks to the Indian economy stem from global financial volatility and 'longer-than-expected cash normalization' following the currency exchange initiative.

"Like other EMs, too too great a reliance on debt financing and portfolio inflows would create significant external financing vulnerabilities. Therefore, there is need to remain vigilant to safeguard the Indian economy.

"...India's economic risks stem from intensified global financial volatility including from a faster-than-anticipated normalization of monetary policy in key advanced economies, longer-than-expected cash normalization following the currency exchange initiative, as well as slower global global growth," the report noted.

India's Monetary policy framework has been strengthened, the report said, adding, "but further supply-side reforms and continued fiscal consolidation are key requirements to achieve a low and stable rate of inflation in the medium-term as well as to keep gold imports contained."

Emphasising that continued fiscal consolidation is needed, which includes implementation of the goods and services tax and further subsidy reforms, the report s ..

Read more at:

Riaz Haq said...

Aid wars: U.S.-Soviet competition in India
Dhruva Jaishankar and Shruti GodboleThursday, March 1, 2018

just as development aid had unexpected and significant consequences for India, Engerman argues that the aid policies of the United States and Soviet Union were both primarily defined by the India experience. Essentially both Washington and Moscow learned about the politics and economics of development aid – the potential and the pitfalls – from the process of dealing with India.

This was reflected in the changing nature of U.S. aid to India. U.S. assistance began with community development programs in the early 1950s, when technical assistance trainers were sent to Indian villages.

India was the largest recipient of U.S. community development assistance during this time. But while big on rhetoric and goodwill, it was accompanied by relatively little financial assistance (just 6 cents per beneficiary per year).

In the early 1960s, India asked the Kennedy Administration for funds that were unlinked to projects in order to finance imports, so called “free money.” But instead, as the Cold War heated up, aid became increasingly linked to outcomes and was subject to narrower U.S. conditions, such as on family planning, food aid, and reduced Indian criticism of the Vietnam War.

In other words, project aid initially meant to develop the Indian economy gradually evolved to programme aid whose express purpose was to shape Indian policy. The changing nature of U.S. assistance increased donor leverage and therefore presented new challenges to the Indian policy-making community. Among other consequences, it helped ensure that very little technological transfer took place.

Similarly, the Soviet approach to economic cooperation in the developing world began with India in the 1950s and was largely driven by Indian conditions. Over time, it eventually assumed a very different character from U.S. aid.

During the visit of Soviet leader Nikolai Khrushchev to India, the U.S.S.R. pulled off something of a coup with an agreement to support a steel plant in Bhilai in Madhya Pradesh. This was the first plan of Soviet assistance outside the Communist Bloc, and represented a move away from the relative economic isolationism of the Stalin years.

Ironically, India had sought Japanese and West German assistance before turning to the Soviets, and even the Soviet project at Bhilai benefited from components and services provided by Western companies.

The shock of the Bhilai announcement forced the United States to increase its support for India, but the Soviet Union soon ran into problems as its own economic growth began to slow. Gradually, Moscow discovered that it had an advantage over the United States in being more open to industrial licensing, which meant that military assistance to India came to predominate.

This was accelerated by the U.S. cut-off of military support during the 1965 India-Pakistan War. Yet, over time, as the technological gap between the United States and Soviet Union widened, India found that the over-dependence on Soviet military assistance put it at a disadvantage.

Riaz Haq said...

The great Indian trade-off
Sluggish exports leave India needing to curry favour with investors
Perennial domestic weakness, and America’s recent protectionist turn, make it hard for India to sell more abroad

In the 12 months to March 2018, $303bn of Indian goods ended up overseas. That was up on the previous year, but still short of the $310bn achieved in 2014, when the Indian economy was a quarter smaller. Imports, meanwhile, have increased to $460bn, pushing the merchandise deficit to $157bn last year, up from $109bn in 2016-17 and its highest level in five years. A surplus in services such as IT outsourcing helps reduce the overall trade deficit by around half, but even there imports are growing faster than exports.

The shortfall is swollen by the rising price of oil, lots of which India imports (and some of which is also sold on as refined products). The surge from around $30 per barrel in early 2016 to over $70 now goes a long way to explaining the rise in India’s current-account deficit, which is expected to reach 2% of GDP this fiscal year, triple last year’s reading. Gold imports, used for saving or jewellery, have their own unpredictable rhythms, but also deepen the deficit.

The current trade lull extends beyond gold and oil, however. Exporters across the economy are being squeezed by the poor implementation of a goods-and-services tax that came into force last July. Perhaps 100bn rupees ($1.5bn) of refunds due to exporters once they can prove they have shipped their wares abroad is being held up by sclerotic administration. That is working capital which small-time exporters cannot easily replace.

Worse, a $2bn suspected fraud by a diamond dealer in February has resulted in regulators banning certain types of bank guarantees that exporters use to ensure they get paid promptly, exacerbating their funding problems. These snafus come as many firms are still recovering from the ill-advised “demonetisation” of November 2016, when most banknotes were taken out of circulation overnight. The move snagged local supply chains, giving foreign rivals opportunities to fulfil orders that would have gone to hobbled Indian firms and to gain market share in India itself.

Those woes come on top of perennial frailties. Crippling red tape means most Indian firms are small: the country lacks the mega-factories hosting thousands of workers making T-shirts or mobile phones that are common elsewhere in Asia. All but a few firms lack the heft to participate in global supply chains. A relatively strong rupee in recent years has not helped.

Unwilling to enact labour and land-acquisition reforms that might foster larger firms, the Indian government is instead shielding its industry from foreign competition. In recent months it has imposed tariffs on a dizzying array of goods, from mobile phones to kites. Though those will no doubt help stymie imports, it is just as likely that trade measures imposed by other governments will hobble India’s exports.

For it is India’s misfortune that Donald Trump’s America is its biggest source of trade surpluses. Mr Trump’s administration has multiplied the salvos against India, whether decrying supposed export subsidies, making it harder for Indian IT workers to get visas or accusing India of artificially weakening its currency. Unlike many American allies, India has not been exempted from imminent steel tariffs.

India would be seriously damaged by any further escalation in trade conflicts. It needs hard currency from exports not only to finance imports and economic growth, but also to repay external debts. These have swelled to around $500bn, or roughly a fifth of GDP, more than 40% of which is due in less than a year.

Riaz Haq said...

#India's monthly #trade deficit of $18 billion in July worst in 5 years

The trade deficit -- gap between exports and imports -- was $18 billion in July, fanned by a higher oil import bill, data released by India’s commerce ministry showed on Tuesday. That compares with the $15.7 billion median estimate in a Bloomberg survey of 24 economists and $16.6 billion in June.

While a weaker rupee is positive for exports, it poses an inflation risk for a nation that imports more than 80 percent of its crude-oil needs and adds to the stress on the current-account balance. The rupee dropped to as low as 70.08 per dollar on Tuesday, keeping intact its position as Asia’s worst-performing currency this year.

Every rupee change in the exchange rate against the U.S. dollar impacts India’s crude-oil import bill by 108.8 billion rupees ($1.58 billion), according to the oil ministry.

Inbound shipments of oil in July were at $12.4 billion, up 57.4 percent from a year ago, while gold imports surged 41 percent to $2.96 billion and electronics goods by 26 percent to $5.12 billion. Overall imports rose 29 percent to $43.8 billion, while exports grew at 14 percent to $25.8 billion.

The last time trade deficit was wider was in May 2013 at $19.1 billion, according to data compiled by Bloomberg.

“Broader emerging-market currency movement, dollar strength, and the trend in crude-oil prices will drive the outlook for the rupee in the immediate term, which will have an impact on the landed cost of imports,” said Aditi Nayar, principal economist at ICRA Ltd. in Gurugram, near New Delhi. That will also have a bearing on various commodity prices and transmit into wholesale price inflation, she said.

Gains in wholesale prices eased for the first time in five months, Commerce Ministry data showed on Tuesday. Government data on Monday showed retail inflation quickened 4.17 percent in July from a year earlier, slower than the 4.5 percent median estimate in a Bloomberg survey of economists.

The monetary policy committee led by Governor Urjit Patel has increased interest rates twice since June to curb price pressures, while the central bank used foreign reserves to check currency volatility. The rupee reversed losses to close 0.1 percent higher at 69.8963 on Tuesday in Mumbai, with traders saying state-run banks sold dollars, probably on behalf of the RBI.

The current level of reserves at about $402 billion will provide import cover of less than a year. The nation’s current-account gap has come under pressure and is expected to widen to 2.4 percent of gross domestic product in the financial year to March 2019, from 1.9 percent in the October-December period.

Riaz Haq said...

#India's Current Account #Deficit Grows to $8.1 billion, or 1% of #GDP in Jan-March 2021. Net foreign portfolio #investment was $7.3 billion, compared with a decline of $13.7 billion a year ago, mostly reflecting purchases of #Indian stocks. #economy #Modi

India’s current-account deficit widened more than expected as the trade gap expanded and the country saw lower private transfers from abroad.

The shortfall in the current account, the broadest measure of overseas trade, was $8.1 billion, or 1% of gross domestic product, in January-March, the Reserve Bank of India said in a statement Wednesday. That compares with a median estimate of $7.5 billion in a Bloomberg survey of 15 analysts.

Key Insights
India’s balance of payments surplus last year hit a record, according to data going back almost a decade, as the Covid-19 pandemic decimated trade
Wednesday’s data, which covers a period before India’s second wave of cases, saw net services income rise on the back of higher earnings from computer, transport and business services, the RBI said
The underlying reason for the deficit was “primarily on account of a higher trade deficit and lower net invisible receipts than in the corresponding period of the previous year,” the RBI said
Get More
Imports were higher during the quarter from a year ago while exports lagged
Net foreign portfolio investment was $7.3 billion, compared with a decline of $13.7 billion a year ago, mostly reflecting purchases of Indian stocks

Riaz Haq said...

Russia and India reportedly halt talks over using rupees for trade, with Moscow preferring to be paid in Chinese yuan

Russia and India have suspended negotiations over using rupees for trade, Reuters reported.

Moscow, with a high trade gap in its favor, believes accumulating rupee is "not desirable."

China prefers to be paid in Chinese yuan or other currencies.

Russia and India have suspended negotiations over using rupees for trade between the two countries, with Moscow reluctant to keep the Indian currency on hand, Reuters reported Thursday.

The halt in talks deals a blow to Indian importers of cheap Russian oil and coal who were looking forward to a permanent rupee payment mechanism that would help bring down costs for currency conversion.

Russia, with a high trade gap in its favor, believed it would have an annual rupee surplus of more than $40 billion if a mechanism were enacted. Moscow felt that accumulating rupee is "not desirable," the report said, citing an unnamed official with the Indian government.

India's finance ministry, the Reserve Bank of India and Russian authorities did not immediately respond to requests from Reuters for comment.

Russia wants to be paid in Chinese yuan or other currencies, a second Indian government official involved in the discussions told Reuters. Moscow has increasingly turned to the yuan to move away from the US dollar after Russia was hit with Western sanctions for invading Ukraine in February 2022.

India began exploring a rupee settlement mechanism with Russia soon after Moscow launched war against the former Soviet state. No reported deals have been conducted using rupees, Reuters reported.

A currency dispute between Russia and India left deliveries of Russian weapons to India on hold, Bloomberg reported last month. The stalemate froze more than $2 billion in payments from India.

One factor that contributes to some countries not needing to hold rupees is India's share of global exports of goods, which runs at about 2%, the Reuters report said.

Riaz Haq said...

Geopolitics is shrinking India’s risk premium | Reuters

India is also benefiting from worsening relations between Washington and Beijing. Companies are looking to shift supply chains out of the People’s Republic, while money managers need a place to deploy long-term funds with fewer risks of financial sanctions.

In some cases, the pivot is stark: Apple suppliers Foxconn (2317.TW) and Pegatron (4938.TW), for example, are building factories in Karnataka and Tamil Nadu. JPMorgan analysts reckon India will make one in four iPhones within two years, even though manufacturing costs are higher than in China. Ontario Teachers’ Pension Plan, Canada’s third-largest retirement fund, closed part of its China equity investment team based in Hong Kong in April, seven months after opening an office in Mumbai.


MUMBAI, May 9 (Reuters Breakingviews) - Indian tycoons and financiers are sitting back as global business comes to them for a change. Apple (AAPL.O) CEO Tim Cook, Microsoft (MSFT.O) boss Satya Nadella and Blackstone (BX.N) President Jon Gray have all visited India this year. They are lured by a country whose potential as an alternative investment destination to China increasingly outweighs the local challenges of doing business.

Visitors see many attractions. India’s $3 trillion economy is forecast to grow by 6.5% this fiscal year, continuing to outpace the rest of the world. Plentiful imports of cheap Russian oil are keeping inflation in check. Meanwhile, the workforce of the world’s most populous country offers low costs, high numbers of technology engineers, and hundreds of millions of people who speak English.

Executives and investors also see a business-friendly government that is likely to remain in power for the next half-decade. Opinion polls suggest Prime Minister Narendra Modi will win a third term next year: the biannual Mood of the Nation survey, published in January, found 72% of respondents rated Modi’s performance as good, up from 66% in August. If he wins re-election with an outright majority, businesses would not have to worry about unpredictable coalition politics.

Yet India is also benefiting from worsening relations between Washington and Beijing. Companies are looking to shift supply chains out of the People’s Republic, while money managers need a place to deploy long-term funds with fewer risks of financial sanctions.

In some cases, the pivot is stark: Apple suppliers Foxconn (2317.TW) and Pegatron (4938.TW), for example, are building factories in Karnataka and Tamil Nadu. JPMorgan analysts reckon India will make one in four iPhones within two years, even though manufacturing costs are higher than in China. Ontario Teachers’ Pension Plan, Canada’s third-largest retirement fund, closed part of its China equity investment team based in Hong Kong in April, seven months after opening an office in Mumbai.

India appeals as more than a manufacturing base, though. Its economy also dangles the promise of Chinese-style growth. GDP per capita was $2,379 in 2022, less than one fifth of its eastern neighbour. Over 1.2 billion people have mobile phone connections; half of which are smartphones. Morgan Stanley analysts and strategists expect India to become the world’s third-largest economy and stock market before the end of the decade.

India remains a tricky destination for international companies and investors. New Delhi has a long-standing fondness for import tariffs and is infamous for wrangling over tax with multinationals including Vodafone (VOD.L) and energy group Cairn.

Riaz Haq said...

Last week’s stellar revival in Adani Group stocks has helped India reclaim its position among the world’s five largest stock markets.

India lost its fifth position to France after the US-based Hindenburg Research in January, accused the country’s ports-to-power conglomerate Adani Group of “brazen stock manipulation” and “accounting fraud,” Bloomberg reported today (May 29). The allegations triggered a sell-off in Adani stocks, dragging the indices sharply lower.

However, as of May 26, stock market capitalization stood at $3.3 trillion in India, driven by foreign fund inflows into Indian shares—and a sharp recovery in Adani stocks. 

Foreign investors bought shares worth $4.5 billion in May so far, a little more than a two-fold increase from last month, according to India’s National Securities Depository. Adani’s listed entities added around $15 billion to their market value last week, recovering some of their post-Hindenburg losses.

Now France has been pushed out of the top-five list again after the country’s stock indices lost more than $100 billion in market value last week. This was caused by a sell-off in shares of luxury goods companies such as LVMH Moet Hennessy Louis Vuitton and Vivendi, due to fears of a slowdown in China and the US.

Investors are choosing India over China
India’s prospect as one of the world’s fastest-growing economies is alluring. 

Rival China, on the other hand, seems to have taken a backseat due to a stuttering economy. Beijing’s isolationist Covid-19 policies, turmoil in its real estate industry, and a harsh anti-trust campaign against the country’s valuable tech firms have crushed sentiments for Chinese assets, economists say.

Mark Mobius, founder of Mobius Capital Partners and a market expert, also sees India as a viable alternative. “You’ve got a billion people (Indians), they can do the same thing that the Chinese do. They can do the same kind of manufacturing and so forth,” Mobius told Fox Business in March.

Last week, Christopher Wood, strategist at Jefferies Financial Group, increased the weight of Indian stocks in his Asia Pacific portfolio, excluding Japan, Bloomberg reported. This reflects the dismay among investors when it comes to the Chinese stock market.

Riaz Haq said...

From Google Gen AI

India's current account deficit widened to $13.4 billion in Q4FY22, which is 1.5% of GDP. The capital account deficit was $1.7 billion in Q4FY22, which was the first deficit since the Taper Tantrum episode in September 2013.
The current account tracks the flow of imports and exports.
A current account deficit occurs when the inflow of foreign currency from exports is less than the outflow of foreign currency from imports.
The capital account tracks the flow of assets and liabilities.
A capital account deficit occurs when the debit items are more than the credit items. This indicates a net outflow of capital from the country.
The sum of the current and capital accounts is always zero. This means that when a country has a deficit in its current account, it necessarily has a surplus in its capital account and vice versa.
India generally has a capital account surplus because it attracts a large share of foreign investments.