Time To Grow Up

 

Time To Grow Up

There is a strategic need to increase the size, depth and sophistication of our stock markets. Right now, it is about as poised as a determined little girl tottering about in her mother’s high heels. We may not be able to attract the trillions we need for development, purely through stage-by-stage drawdown of FDI.  The pledged Foreign Direct Investment, by its very nature, may prove to be quite slow coming in, and will, in any case, be consumed in predesignated projects only.

The Indian PSU banks are in a dreadful state, under-capitalised, over-staffed, and burdened with scandalous bad debts.  The remedy may be to privatise them, but it will be both slow and expensive, because of their extensive liabilities.

The stock market then, particularly a buoyant one, is the place to go to raise funds, inexpensively,  and against equity.

But, a lot needs to be done to widen the scope of the Indian bourses so that they can absorb a great deal more of FII.  We cannot afford to be officious, with layers of over-regulation Indian style either.  We must quantum upgrade of our real-time internet linkages, which are amongst the slowest in the world. We need to replicate, create and offer a range of investment products without caps and codicils, to provide liquidity to many of the equities, in the decent midcap and smallcap space, that FIIs presently avoid. And we need to streamline regulations to provide the reciprocity that other, top stock exchanges, around the world are used to.

Having said that, the current Indian stock market valuation has given it entry into the top twenty of global bourses. Still, it is only just at $1 trillion in market capitalisation, a fraction out of the world total of $ 64 trillion, as per 2013 figures.  

In the Asia-Pacific alone, Japan, Hong Kong, Shanghai and Shenzhen are all bigger, with three of the  four bourses from the same country, China. India, both the BSE and NSE, at rank 12 and 13 presently, need to gear up. They need to facilitate the expected doubling in market capitalisation within four years, if we experience the anticipated multi-year bull  run.

The aftermath of the 2008 global financial crash, with safety nets erected everywhere, over the past seven years, has been particularly turbulent for the developed world. And a period of adjustment and renewal is still ongoing.

In the interim, the old front-runners, still massive in market size from years of leadership, have been overtaken in terms of growth, by China and India.

And that is why a proportion of the seemingly endless global stimulus money, obtained at near zero percent interest, is pouring into this country, and will continue to do so. India has been adjudged the brightest prospect in the Emerging Market universe now and going forward. 

Global investment continues to flow into China, even though growth there has slowed from double digits to a little over six percent in GDP terms, because it remains one of the greatest manufacturing and infrastructure building hubs in the world.

In India, with the Modi Government seeking foreign investment vigorously for massive infrastructure and manufacturing  developments of its own; the quantum, flow and requirement of this foreign money is only set to increase year- on-year  throughout the next  decade. Assuming, as does most of the FII money, that Modi will win a second term as well.

But the FII investment coming into the bourses needs to spread out over a wider universe of stocks to reduce volatility and provide much needed stability. Today, the FIIs own 22% of Indian shares, composed mainly of the 15 companies that account for 35% of the market capitalisation. This is top heavy and concentrated over a very narrow band.  But the reason for this is that most of the over 6,000 listed stocks are hard to both buy and sell. So, for example, the FIIs own over 42% of Infosys even as the company is also listed on NYSE, the world’s No.1 bourse.  

The situation is so askew that the FIIs control the Indian stock market almost completely today. If they sell, it plummets, if they buy, it rockets upwards. For their own convenience, the FIIs tend to buy only the most liquid stocks, the ones tracked by the Sensex and Nifty. And the FIIs are the only ones that can invest billions of dollars at present, and with ease.

Yet, the great, about 34% rise in the price of Indian equity this year, has been achieved on the back of just $15 billion in FII investment approximately.  That such a small amount  can call the shots so comprehensively is highly illustrative of the daintiness of the Indian market. The FIIs have pumped in another $15 odd billion into the Debt Market too, but would invest much more if they were permitted.

The SEBI meanwhile, is busy attaching additional restrictions, such as its fresh curbs on participatory notes from less transparent entities from West Asia. The purpose of this is unclear, but the Indian authorities find it difficult to support  rapid growth,  perhaps fearing lurking threats to security or stability with the stock markets at all time highs.

After the FII holding, the only bigger figure is that of the company promoters themselves, at 28%; and this section is mostly static as promoters don’t usually sell their shares.

The other major influence in the Indian market are the mutual funds, financial institutions, insurance companies and investment banks , NBFCs etc., which together are known as Domestic Institutional  Investors (DII), and collectively own about 15% of the shares  today.

The retail investor, pitifully few in proportion to the population, is mostly conspicuous by his absence, except from share-loving Gujarat, and the city of Mumbai. Nevertheless, the punters, day-traders and so on, have no choice but to follow these big players and their doings and hope for the best.

The HNIs, once counted some ‘Big Bulls’ in their midst. Now, even with the growth of the market valuations to a modest $1 trillion, and given far more stringent oversight by SEBI, they cannot ‘make’ the market anymore. Some Indian stock market icons such as Rakesh Jhunjhunwala or Ramesh Damani are respected for their views, but again it is the FII majors that are today’s market opinion-makers.

But all this can be a great boon if the Modi Government makes up its mind to treat the stock markets as the main potential financiers of infrastructure and industry, and do everything possible to reform and grow the reach and heft of the BSE and the NSE.  

(1,094 words)

November 25, 2014
Gautam Mukherjee

Will He Or Won't He Cut Interest Rates?

Will He Or Won’t He Cut Interest Rates?

 The recent Chinese interest rate cut to pump-prime its slowing economy, will also inject more liquidity into the global financial system.  The EU, teetering on the verge of negative growth, is also taking steps to introduce a stimulus. Japan already has. Some pundits feel that instead of raising interest rates in June 2015, the US Federal Reserve, finding domestic  growth too fragile, may instead reintroduce another round of quantitative easing (QE).

The near zero interest money, then, is going to remain plentiful, and be looking for growth opportunities across the globe.

Here in India, it is baffling how one august banker after another expects the RBI Governor Raghuram Rajan to not cut interest rates in December. This despite several well publicised urgings from Finance Minister  Arun Jaitley, the last of which specifically requests a rate cut in December 2014 itself.

If  Mr.Rajan holds out, as most private and public sector banks expect him to, he is ignoring the massive drop in inflation - thanks to the over $ 30 per barrel drop in oil prices.  And petroleum prices are not likely to revive any time soon, not only because global growth is muted temporarily, but also because there is a supply glut.  America, once a 50% consumer of international oil, is now self-sufficient. 

Jaitley meanwhile, has been making frequent announcements on the road to preparing his  second Budget to be presented in February 2015. He has promised ‘Second-generation Reforms’, starting with the Winter Session of Parliament, just commenced.

Of course, the celebrated  Governor Rajan is famous as the economist who foretold the global meltdown of 2008, three years earlier, in 2005. He also held his ground in the face of ridicule and withering criticism at the time. Rajan strongly disapproved of the Alan Greenspan style borrow and spend policies. He made his forecast at one of Greenspan’s retirement functions, when the iconic and long-staying Fed Chief was being feted for having contributed to years of roaring prosperity.

But as RBI Governor in India, Rajan contributed substantially towards stabilising a tanking rupee, and India’s yawning fiscal and current account deficits. This restoration of the value of the rupee has been nationally and internationally praised, and helped to bring in a flood of FII investment, now unafraid of the currency erosion risk.

Rajan, contrary to popular perception, has also been easing liquidity, albeit by agonising degrees. He has done the easing by means other than a straight interest rate cut. So, whatever happens in December 2014, and then in February, and again in April 2015, we can expect some reduction of the tight money pressure.

But, to be sure, the market, and the business community, national and international, want very much more. Some pundits have said that if the RBI refuses to cut interest rates by at least by 25 bps now, and at each two-monthly review; it will have to cut by a higher figure, in one fell swoop later.  Either way, the widely expected rate cuts next year, and in 2016, have been worked into the India calculation by many foreign investment firms.

Indian banks however, are far less gung-ho. This even as some, particularly in the public sector, led by the State Bank of India (SBI), are sitting on massive non-performing  assets (NPAs). They are also  disguising other doubtful loans on their books by rescheduling them.

Some of the remedy surely lies in a resumed investment cycle. Inflation is no longer raging. It is lower than it has been in years. To worry about whether it could rise again, if liquidity is eased, is denying  growth its due. How then, can the Indian investment cycle, dead in the water for several years now, be ignored any longer? 

The international investment community, on which this country’s development plans hinge, have faith that the investment cycle will be kick-started very soon - and start showing results within 18 to 24 months. They are putting their money on it. This is shown by a projected and unprecedented $ 40 billion FII investment expected this fiscal. This may not be big money in Europe or America, but is a great leap forward here.

This money, about $ 30 billion worth has come in already, despite quite severe caps in our Debt Market. India permits FIIs to buy only some 5% of our debt instruments, including Government bonds, compared to around 40% plus, in other countries of the Asian region, including Indonesia.

Of course, our authorities and policy makers fear ‘over exposure’ to global indebtedness, and prefer fiscal circumspection to GDP growth. But the Modi vision is transformational, and the old ways, turned impediments, will surely have to be thrown over.

 (777 words)

November 23^rd, 2014

Gautam Mukherjee

India's Investment Led Engine Of Growth

India’s Investment Led Engine Of Growth

Christopher Wood, Investment Analyst with CLSA, and author of the widely followed and periodic Greed and Fear Report,  reiterated a Sensex target of 40,000 recently, some 5,000 points ahead of other forecasters, for December 2015. 

The Sensex and Nifty,along with the broader midcap, smallcap and sector specific indices, have been consistently outstripping the forecasts in this current bull market. This speed is evident, even though at a level of some 15 times current earnings, most fancied stocks  are   actually trading at a much less precarious level, than they were at the end of 2007.

In late 2007, just before the global crash in 2008, many Indian stocks were valued at a steep 25 times earnings. Today, real corporate earnings, at between 15% to 20% in many of the frequently bought companies, are expected to better themselves to nearer 25% in 2015.

Besides, at present, the FIIs have invested more in  debt  than equity; over $13.4 billion so far this year, particularly in Government Bonds. This is partially because debt investment ceilings for FIIs have been raised, but also reflect renewed  FII confidence in India. The FIIs have invested substantially in Indian Debt for the first time in 2014, and have  earned steady, largely risk-free and non- volatile profits, at over 10%, in the backdrop of a stable rupee. 

CLSA is particularly bullish on India, following on from Goldman Sachs. It has made investments in both equity and debt in a proportion some three times greater than other FIIs.  Christopher Wood is a strong votary for Narendra Modi’s style and substance of governance, and has influenced CLSA policy in this regard from about October 2013, when a Modi win started to look likely.

Wood thinks Modi’s investment led growth strategy is exactly right and appropriate.He  expects the Modi Government  to roll-out, as well as facilitate, a dynamic new investment  cycle, within the next twelve to eighteen months. He thinks the foundations for this are being put in currently. Wood also  predicts that the RBI will make significant cuts in the interest rates in 2015, thereby helping to restart investments in private sector manufacturing and realty sectors as well.

One of the main areas emphasised by the Modi Government  is infrastructure, in addition to manufacturing. Unfortunately, many projects are stuck in partially completed form from the UPA  era, as pointed out by the Planning Commission recently.

A significantly large number of these stalled projects, with profiles in excess of Rs. 1,000 crores each, are in the priority sector of the Indian Railways. Some of these 274 odd projects, have been stuck for as long as 12 years.

The funds necessary to revive them, and others on the list of more than 800, along with the cost escalations, are estimated to be in the region of Rs. 5.7 lakh crores. These projects have already received massive investment, and the present Government is more or less compelled to see them through.

Prime Minister Modi knows India does not have the domestic resources to make investments of this order. This even as improving infrastructure is of vital importance because multiple growth targets in diverse fields are connected to it. Modi is therefore seeking the funds from abroad.

In this, from all indications, he has been extraordinarily successful, and the pledges from various foreign countries and multilateral lending agencies should start materialising on the ground soon. Of course, this in turn, will provide a great fillip to the GDP growth rates over several years, and provide much employment too.

Large and collaborative Manufacturing, under the ‘Make in India’ programme, particularly in the area of Defence Production, is also expected to get  started over the next two years. Every effort is being made to also facilitate smaller ticket private sector cooperation with foreign investors.

All this, as it unfolds, is likely to take the Stock Markets, a major engine of India’s revival, to higher levels, and the bourses themselves are poised to become a primary source of corporate funds.   

Chronic loss-making PSUs will be closed or sold off.  PSU Banks will be partially privatised . The Government will dilute its equity in a number of other PSUs which are doing well, to achieve its early divestment  realisation targets of Rs. 60,000 crores. Subsidies will be much better targeted or trimmed.

The credibility that Prime Minister Modi is steadily earning in the international FII and potential FDI space augurs very well for the future, given that FIIs today are the prime movers of our Stock Market. They own 22% of the stock, second only to the largely static Promoters’ Equity, which accounts for 28% of shareholding. Christopher Wood’s endorsement therefore is most heartening.

(775 words)

November 18^th, 2014

Gautam Mukherjee

Modi In Myanmar

Modi In Myanmar

If you do nothing, you get nothing- Aung Sun Suu Kyi

Prime Minister Narendra Modi  is India’s most attractive economic salesman ever. This, on the back of the BJP’s majority Government. The majority gives his Government a stability, freedom of action and international attractiveness, not seen in the Indian calculus for decades. And his reputation for being articulate, efficient and business-friendly, honed during his years in Gujarat, acts to make the current Indian narrative even more compelling.

India has a hungry market for goods, services, technology, infrastructure, a large and young work- force, highly skilled engineers and managers, natural resources, growth. But it lacks capital, and sophisticated technological expertise in many areas.

Leaders from other countries have never fought shy of promoting their nation’s commercial interests. But in India, this business-like attitude is decidedly a new emphasis.

India has, in the past, generally muted its promotion of commercial concerns. Our former leaders were perhaps abashed by their Socialist notions, combined paradoxically with an upper class hauteur, that deemed commerce as vulgar.

So we didn’t exhort other countries to ‘Come, make in India’ like Modi has. Instead, we took upon ourselves to deliver pronouncements when abroad in a high moral tone. Indian leaders, particularly the long-serving Jawaharlal Nehru and Indira Gandhi , were dreaded for their penchant to lecture  others.  Modi, with his humble origins and self-made determinism, is therefore viewed as a breath of fresh air.  

Modi’s office has received scores of meeting requests from other leaders at ASEAN, the East Asia Summit, both being held in Nay Pyi Taw, the new capital of Myanmar, 320 km north of former capital Yangon or Rangoon; and at the G-20 at Brisbane, thereafter.

Myanmar is a kind of Sleeping Beauty, coming awake after an interminably long rest.  Like Cuba, it has been lost in a time- warp, run by rigid Generals, with scant respect for political freedoms, disengaged from the rest of the world.

China has managed to breach this reclusiveness, and through massive investments made, has coaxed and drawn Myanmar out and back towards acknowledging the 21^st Century.  Myanmar has resumed its place as an important part of South Asia, abutting, as it does, China, Bangladesh, Thailand and India.

Anirban Ganguly recalls that former Education Minister U Win of Burma spoke of the ‘Arch of the Bay of Bengal’ sixty years ago, and Burma’s strategically located place in it. And also of the ‘Circle of South East Asia’, evolving from that notion, that has perhaps led President U Thein Sein and his Government to host the ASEAN and East Asia Summits back-to-back.  

India’s trade with Myanmar stood at a miniscule $2 billion in 2013. But now, there are direct flights between the two countries, and plans to link Imphal with Mandalay by a bus service.

Besides, going to Myanmar is not just bilateral. Modi will meet the leaders of almost all of ASEAN and the East Asia Summits, for the first time in many cases, and the Premier of China, Li Kequiang, in a formal bilateral meeting.

Myanmar has been loosening up of late, and drawing on its early post-colonial past, when legendary UN Secretary General U Thant of Burma, who helmsed the World body for a decade (1961-1971), wanted : ‘To make the world safe for diversity’.

The Indian connection with Burma is long and deep. As part of British-India, it hosted many ethnic Indians who lived and worked there. Burma teak beams and pillars adorn many old Kerala homes. Four-poster beds and other furniture are scattered through the middle class inheritance of many families in Bengal and Bombay, ports one and all. Exquisite lacquered boxes and artefacts sit in glass-fronted showcases. Burmese diamonds and rubies are prized possessions in family jewellery boxes. Intricate cane-work screens draw exclamations of admiration even after a century of adornment. This is the heritage of many Indian families with ancestors who lived in Rangoon, or further up the Irrawady.

Mandalay, Burma’s fabled predecessor of a name, was immortalised  by Rudyard Kipling. And it was to Rangoon, that the Last Moghul, Bahadur Shah Zafar was banished. And it is there he died and is buried.  It was there again, that Bal Gangadhar Tilak, the Lokmanya, was exiled for famously declaring Swaraj was his birth-right.

And Burma’s last Emperor, Thibaw, was, likewise, exiled at Ratnagiri in Maharashtra, living there from 1885, till he died in 1916.

Today, the globally celebrated Aung San Suu Kyi, a long-standing friend of India, is no longer under house arrest. She is a member of parliament as of 2012, and will stand for President in the 2015 general elections.  Narendra Modi has an appointment to meet her too.

Ironically, the Chinese may have brought back democracy along with development to Myanmar in their quest for the ‘New Silk Route’, and their dream of an interlinked, mutually beneficial, and powerful Asia, albeit led by China .

India under Modi, it appears, is willing, at last, to play its multilateral part, not only in relations with Myanmar, but in terms of its ‘Look East’ Policy, in the entire region.

(846 words)

November 12^th, 2014

Gautam Mukherjee

Gradual Economics, Aggressive Politics

Gradual Economics, Aggressive Politics

The Modi Government, almost six months in power, is still robustly mindful of its political and electoral agenda. It is in near perpetual campaign mode, and means to create a ‘Congress Mukt Bharat’. As it sees it, along with over a third of India’s voting public who support the BJP; Congress is the root of many evils, distortions, and hypocrisies that have long bedeviled this country.

The big contrast with NDA 1, which was a massive raft of a coalition, when the Government chose to ignore the Party apparatus, causing its defeat after just one term, could not be starker.  

Perhaps half of Prime Minister Narendra Modi’s strategic attention, in tandem with his gifted alter-ego and Party President Amit Shah, goes towards relentlessly winning State Assembly elections as they are scheduled. There is no resting on laurels, no relaxation into flattered complacence. Theirs is a two-term agenda, and the second term will, if all goes to plan, see a majority in both houses, with all the important states also in the BJP fold.

Of course, this winning of State Assemblies via excellent organisational ground work, popular candidates, and Modi’s inspirational campaigning, must be accompanied by a further surge in vote share. It is already projected at an average of over 35% nationally, with the rural and urban vote showing equally, but it could cross the half way mark, if the BJP has its way.

Delhi, Jharkhand and Kashmir are next on the anvil, and none of them will be lost if the BJP can help it. Even the recent addition of a number of the new ministers is evidently with an eye to winning on its own in Bihar, Punjab and Uttar Pradesh later. And perhaps, also in West Bengal.

This time, not only does BJP have a majority of its own, but those political parties still in actual or tacit alignment with Congress, not exactly numerous, are out in the cold too. The old secular –communal shibboleths are redundant with the voters, and they are fed up with the chronic non-performance. 

Some electorally diminished regional parties, realising that the alternative is the political wilderness, are hastening to offer support to the BJP. This has been seen in Maharashtra, and to some extent, is unfolding in Kashmir too, where the comfortable, if inimical, bipolarity of the NC and the PDP, is suddenly under siege.

The political dexterity of the BJP,  in Government at the Centre and several of the States,  harnessed in tandem with a strong party organisation,  well- coordinated with the RSS and other support groups, is unprecedented, and proving very effective. Even brand extensions, such as Swatchh Bharat have put paid to the AAP, and added endorsements from a host of cricketing ,Bollywood and other celebrities.   

That Shiv Sena, out-dated and out- manouevred, is having trouble digesting its changed fortunes. This is likely to isolate the Sena, not only on the national stage, but in its own backyard  of Maharashtra as well.

The SP, JD(U),RLD, in an opportunistic family-firm Yadav triumvirate, are hoping to stop the BJP in Bihar and Uttar Pradesh. But should they fail, they are likely to fall in line soon enough in order to forge an equation with the Centre.

In the midst of such excellent politics, what is the Modi Government’s preferred pace of economic reform and change?

So far, it seems to be stately and gradual, with only the diesel deregulation qualifying as a big-bang reform. And this too was aided by a substantial  reduction in crude prices. A barrel of oil is $30 lower than its all-time highs.  

But, at the same time, there have been small  liberalisations and administrative changes to economic policy, almost on a weekly, if not daily basis. And other actions that benefit ordinary citizens such as accepting self-attestation on documents  and the recent digitization of proof of life for over one crore pensioners. These moves, in themselves, are most welcome, but put together and cumulatively, do succeed in shifting the narrative substantially. The diplomatic projection work overseas has been spectacular and extremely well received.

The 2015 Budget is under preparation. But neither Finance Minister Jaitley nor Prime Minister Modi are suggesting, lest it provide ammunition to a down and out Congress, that it will contain any Margaret Thatcher style sweeping privatisation, or Reaganomics tax cuts. At least, certainly not all at once.

However, the Airports Authority of India, 51% of NPA ridden public sector bank equity, and Air India, may well be headed for a sell-off, along with other non-performers with assets. These are often large PSUs and lose huge amounts of tax payer money, despite many incompetent  sarkari efforts towards their revival.

But there is not a word about shrinking the size of the unwieldy and expensive Government itself, for example.   

With all this deft nuancing, the nagging question is, how much will actually get done, and by when?  India desperately needs FDI and FII funding, as we simply do not have enough domestic resources to finance our plans. And the foreigners are watching and waiting for a serious acceleration of the ‘red carpet not red tape’ promise made.

So will things happen as part of the next Budget or outside of it? Will it happen in 2015 or later? Will the Insurance Bill find passage, and succeed in raising the permitted FDI quantum to 49%?

The Government, ham-strung because of inadequate numbers in the Rajya Sabha, may need to resort to a joint session, or ordinances, or both. There is the Insurance Bill, and GST , and changes in the Land Acquisition Act, changes in Labour Laws, scrapping of manufacturing taxes demanded by foreign investors such as Japan, etc. etc. as the ‘King of Siam’ might have put it. 

But the tea leaves augury is indeed good. Notable bureaucratic reinforcements in the shape and form of Arvind Subramanian and Rajiv Mehrishi, have been added to the MoF. And most recently, the political bench strength has also been enhanced by inducting Harvard educated Jayant Sinha into the MOS slot at the Ministry of Finance.

There is little on the reforms front that has been made obvious as yet. Inflation may be down, for example, but when will the Government actually cut interest rates?

The formula being followed  seems to be definite and bold about political consolidation. When it comes to economics however, the style is to give nothing away before the action. However, the emphasis on the Railways and Defence, both equipped with brand new can-do Ministers, seems to indicate that a strong surge of investment and modernisation will soon be seen in these sectors.  

(1,101 words)

November 11, 2014

Gautam Mukherjee

A Waltzing Matilda Moment

A Waltzing Matilda Moment

Prime Minister Narendra Modi’s visit to Myanmar for the ASEAN Summit and the East Asia Summits   starting November 11^th will be over-shadowed by China as the dominant presence. This even as Modi  enjoys the newly minted charisma of a hugely successful politician that has entered the Forbes’  Most Powerful List at an impressive No. 15.

But then, President Obama, crisscrossing the region after attending the APEC meet in Beijing, before going on to Myanmar, and then  to Australia, cannot expect to be the main draw either. Particularly after losing control of both the Senate and the House of Representatives to the Republicans in recent mid-term Congressional polls; and heading into the lame-duck tunnel of his final two years on the job. 

As for the bilateral yield from Myanmar for India, it is best to calculate that it will take time to make a dent where China has been munificent. It is also entrenched as a bilateral partner for several years now. China, on its part, wants to marshal and emcee closer links between India and Myanmar too. Except that it needs it to be a three-way split of influence and benefit - with China having a controlling interest. The revival of the old WW II Stilwell Road and other trade routes linking Myanmar, Bangladesh and India with China, is seen by President Xi Jinping, rather poetically, as ‘the new silk route’.

In fora like ASEAN, APEC, East Asia, India is a late entrant and weak investment or grant prospect when compared to the bulging moneybags and military heft of China. So it can only expect small and incremental gains at first.

The most substantial results from Prime Minister Narendra Modi’s forthcoming November visits are definitely expected from Australia.

Both countries are eager to ramp up bilateral economic cooperation.  This even as Modi goes to Australia to attend the 9^th Heads of Government Summit of G-20 on November 15^th. There will, in addition, no doubt be multiple meetings with fellow leaders on the side lines of the multilateral summits in Myanmar and Brisbane. Plus other useful encounters with businessmen, scientists and thought-leaders as is Modi’s wont.

Nothing much happened when former Prime Minister Rajiv Gandhi visited Australia 28 years ago. That, it has taken so long for another Indian Prime Minister to visit, is telling of the vacuum in perceived common interests. But this time it is going to be very different. The axis of the whole world is in process of developing an economic tilt towards India, where major and unprecedented, across-the-board growth, is imminent.

Europe, an economically troubled America and Japan, and a slowing, greying, China, all recognise that the abundant new opportunity is in India. Australia, under Prime Minister Tony Abbot is clearly enthusiastic about it. And India, has much it can learn from the Australia, particularly in the area of modern and ‘green’ mining.

Modi has a red carpet ride in store. He will attend the G-20 Summit at Brisbane, followed by his address to the Australian Parliament in Canberra. He will also visit the legendary Melbourne Cricket Grounds in Prime Minister Abbot’s company, and grace another Madison Garden Style rally at  Sydney’s Olympic Park for the Indian-Australian diaspora.

Abbott came to India himself recently and unequivocally agreed to sell India the strategic resource of uranium on favoured-nation terms. This, after much prevarication by previous Australian regimes,  even while selling vast quantities of the nuclear raw material to China.

Obama may well want to check on the loyalty card held by Australia with regard to President Putin of Russia, an implied obligation under the ANZACS umbrella perhaps, but this is clearly not the main game in the casino for many of the participants from the Asia-Pacific region.   

On the way back, Narendra Modi will stop in Fiji, another island nation with many ethnic Indians, even as it functions practically as a protectorate of Australia. To forge stronger bilateral ties with Fiji also contributes towards anchoring India firmly in a multilateral cooperation with Japan, Australia and Vietnam.

This, even as India simultaneously partners China in another, parallel coalition, and quest to make the 21^st century an undeniable Asian phenomenon.  

What then of the two Koreas, Malaysia, Indonesia, Thailand, Brunei, etc., even the Pitcairn Islands? Like SAARC, and those others close by, such as mineral-rich Afghanistan, and some others in West Asia like Saudi Arabia, Iran, Iraq, Oman, the UAE and Kuwait- a historic realignment of diplomatic and economic cooperation is very much in the offing.

With an economically weakened America and Western Europe, with no quick recovery possible, being part of the Western bloc is losing traction. Under the circumstances, it may even be high-time Pakistan changed tack, taking a cue from the mentoring Chinese; and before it loses all regional relevance, except, of course,  for its nuisance value.

(803 words)

November 6, 2014

Gautam Mukherjee

Gradual Revival

Gradual Revival

 The US Federal Reserve has ended its stimulus programme, with a mind and eye to sustain it. For the moment, the economies of the world are holding up quite well. But what will be the gradual effect of this contraction in global liquidity? Will there be massive volatility as the risk-averse money starts returning from across the globe to the purported safe-haven of the US? Will the Emerging Markets including India, despite its reviving economy and reform initiatives, take a massive hit on its stock markets and its FDI expectations?

Will the US bourses, also pumped up on the near-free money, not necessarily in relation to prudent valuations, head sharply downwards? Will the returning money go back mostly into US Government Bonds?

This indeed is the  majority, if status-quoist view. But, is The US the only safe-haven  for the global trillions of investible funds anymore? Some analysts say that that it is time to simultaneously re-rate global risk and reward perceptions across all the options.

To these eyes, the US Bonds may be thought safe,  but the American Government is in trillions of dollars of debt, much of it being financed by other countries. The Government bonds cannot, in any case, give the kind of returns that global equity and commodity markets can deliver. So is the safe- haven argument all that it seems to be, given that the US Government is struggling to finance even its current account needs with ever higher borrowing limits?

The US stimulus was practically interest free money, $85 billion worth per month, being pumped into the global economy. On its ending, Japan has started a massive stimulus programme of its own, promising to buy 33% more in assets, involving trillions of dollars. This has cushioned the blow for the time being as well.

But the US stimulus money did set off a commodity markets boom, including in the prices of petroleum and gold. Both have reduced sharply of late, partly because the demand -supply dynamics have changed, and because the stimulus money was being tapered before being stopped altogether now.

Today, the biggest single global source of optimism is the price of oil, reduced by over 20% from its peaks and heading lower. The US has, over the last decade, rendered itself self-sufficient and even exports a surplus. This is a big change in the calculus because it once consumed 50% of the global output. This fact is bound to change the face of the petroleum sector permanently and profoundly affect the geopolitics of oil.

Yet, the massive indebtedness of the US and most of the interconnected developed world remains, even after six years of ‘Quantitative Easing’ (QE). Unemployment in the US is still near double-digits, the US economy is growing quarter on quarter, but the situation is still fragile, and the EU is not looking good with France and Germany also limping. Poor demand, stagflation, cries for write-offs of huge debt, persist.   

But now, with a mild attempt to balance the books in the works, it is widely expected that the  US Federal Reserve will start raising interest rates in the middle of 2015. Will this unleash a second stage of insecurity in the global economy?

It is hard to predict the amount of reaction and pessimism about the future that could result, but again, kicking the can endlessly down the road is not prudent. Some analysts even talk of an impending crash that will dwarf 2008 because of the artificiality of long-term stimulus.

But even then, will the Obama Administration, tasked with setting the stage for a Democratic Party re-election in 2016, want to chance leaving a volatile, turbulent economy to its successors?

What could save both sides of the argument and provide clarity, is  Janet Yellen, Chairperson at the Fed’s stance. Yellen maintains that there could arise a case for additional stimulus if things look bad, or interest rate tightening if all parameters look like they are on the mend. The Federal Reserve intends being both cautious and responsive to the realities rather than ideologically doctrinaire. There is no Hawk or Dove ruling the roost. It is going to be a pragmatic response, based on economic ground realities.

But the US knows it cannot decide in isolation. If its own recovery sustains over the next few months, it  will still be buffeted by global problems. There is a slow-down in the EU. And another in China, with Japan struggling to reverse its deflationary trends, and so on.

Yet, on balance, the policy of massive stimulus has worked, staving off a global economic melt-down. And so, in future, even as the direction has been enunciated, the policy action will be tempered by ground realities. The US is going to take the lead, as it must, and do nothing to plunge the economies of the world into an avoidable crisis.

 (807 words)

November 5^th, 2014
Gautam Mukherjee