The Glue Without A Clue

The Glue Without A Clue

The bad news on the economic front keeps rolling out like a juggernaut and goes down the drain, as just so much waste. And alongside are some appraisals of Mrs. Sonia Gandhi’s 15 years at the head of the Congress Party, both from home and abroad.

Not one assessment, apart from the hagiographies from Congress courtiers and what the press call “stooges”, have anything particularly nice to say.

They talk of her peculiar exercise of supreme power without responsibility. They plainly say that Mrs. Gandhi is the most powerful person in India, and the prime minister is not.

In the end, the best achievement of the Congress President is that she provides the “glue” that keeps the Congress from splitting up into many self-important pieces. At least this is the consensus of the commentary.

But the fact is, the now 66 year old “High Command” rules both the Party and the Government on a de-facto basis. So much so, that 80 year old Prime Minister Manmohan Singh, divested of any real responsibility for his actions and pronouncements, has indicated he might be up for a third term beyond 2014, if the opportunity presents itself.  

But Mrs. Gandhi has already had quite an innings. From the famed “renunciation” of the prime ministership in 2004, to the recent upliftment of her son to the Vice Presidency of the Party, she has kept the primacy of the Gandhi family intact.

But over the last three years or so, there has been a huge imbalance between emphasis on expenditure and income. The expenditure is designed to procure votes from the poor for the Congress Party, using the machinery and money of the Government. This may not be right ethically, but it has been greatly, and irresponsibly, enhanced.

The cavalier attitude to the income of the Government though is so prominent, that that the entire emphasis of the Finance Ministry and the RBI has been to try and contain inflation rather than promote growth.  

First class economists and strategists have had to suspend judgement and toe the High Command’s line in this regard.

Mrs. Gandhi not only runs the Party in terms of every appointment, every “ticket”, every shuffle and sacking, all without accountability, but also dictates Government policy via the National Advisory Council she chairs.

And this means dictation to the prime minister and the cabinet with ideas developed by a band of ultra-leftists that constitute the NAC on a nominated basis.

And her son, Mr. Rahul Gandhi, an avowed believer  in  “meritocracy”, has recently indicated he will accept both the Prime Minister’s job and that of the Party President, as it is no longer a good idea to have two centres of power. His spokesperson Mr. Digvijay Singh has just played cat’s paw in this regard.

But then, as the outspoken Justice Katju, the maverick Chairman of the Press Council and former Supreme Court judge says, democracy has been imposed on a feudal society here, and has ended up, he implied, a bit of a farce. He says he does not vote personally because others vote their caste etc. just like so many “sheep”.

And hurrah, Rahul Gandhi, a man who has hardly ever addressed a press conference, plans to speak to the business classes at CII shortly. We will, at last, possibly hear his thoughts on business and industry. Let us hope they are serious thoughts though, because Mr. Gandhi does like to keep it  as simple as possible.

The first family of the UPA, including contributions to most songs from sister Priyanka and bro-in-law  Robert Vadra, has nevertheless ruled, in  the complete sense of the word, during the last nine plus years.

The “family” has even micro-managed many Government decisions, but always, like Polonius, from behind the arras, in a manner that subverts the very meaning of transparency and democracy.

It is a style of functioning that  gives illustration to Justice Katju’s meaning of feudal, even imperial, with an army of courtiers ready to jump on any criticism of this insult to the intent of the Indian Constitution.

Meanwhile back in “Dole Raj”, no facts are allowed to interfere with the roll-out. MGNREGA which has consumed Rs. 170,000 crores and counting since inception in 2009, is a mess; with wages paid to poor people accounting for only 20% of this sum. All the rest has gone to leakages, corruption and middle men.

We now  have the Food Bill and the Homestead Act waiting in the wings, with the former already passed by the rubber-stamp of a Cabinet. In Congress circles, it is accepted MGNREGA won the 2009 elections for UPA II, and so, these two new babies are expected to deliver a third consecutive term.

This country is being driven into becoming a bankrupt “banana republic” just as Vadra said; with high-spending welfare policies that refuse to worry about fiscal responsibility. The single minded zeal to achieve re-election is all.

This glue does not brook criticism. And the script says that the economy is about to get better, has bottomed out and will be back up to 8 or 9% per annum in growth within another couple of years.

The idea is to appear to spend plentifully on the poor, those vividly described “mango people”, and pocket the electoral payoff. If this fails to materialise, and things actually go from bad to worse in the next couple of years, then it is due to the incompetence of the successor Government.

There will be a tussle, in the coming days, between this welfare based socialist election campaign, and the development economics of the challenger from Gujarat.

May the good glue stick and the bad one come unstuck.

(945 words)

March 31^st, 2013

Gautam Mukherjee

The Congress Scorched Earth Policy

The Congress Scorched Earth Policy

Watching the reckless way in which the UPA Government is increasing welfare expenditure while income falls like a stone; one has to wonder at the underlying strategy. After all, the Congress Party heading this ruling coalition, prides itself on understanding governance better than all others. It has had cumulative decades in power.

Right-wing economist Mr. Surjit Bhalla, wrote a scathing indictment, calling the UPA’s economic management “disastrous”. This was in a recent Op-Ed piece in the Indian Express, which he ends by saying that Mrs. Sonia Gandhi who runs not only the Party but de-facto, the Government as well, may have ended up killing off the 128 year old Congress with her rampant Welfarism/Socialism.

Meanwhile, the dreadful economic facts pouring out from every survey and analysis seem to bolster Mr. Bhalla’s prognosis. Business and Industry has slowed to a near standstill, inflation including food inflation is shooting up, investment has stopped, the stock market is sinking,  the fiscal deficit has rocketed up to an all-time high, FDI has dried up, domestic demand has fallen drastically, growth has halved, exports are languishing, the rupee has depreciated at least 20%.

More relentless bad news is projected by non-partisan observers both domestic and foreign. Everyone is horrified by the profligacy except the seniors in the Government who continue to assure the public all is well and going to get better.

But is there a method in this madness? The UPA is hoping that the huge populism of the Food Bill and the Homestead Bill on top of all the subsidies and welfare programmes running presently will bring back 2009.

Then, the corruption- ridden MGNREGA caper is supposed to have delivered victory to them. So what if it has cost the nation some Rs. 1,70,000 crores with more than half the amount, Bhalla estimates it to be about $14 billion, siphoned off? Besides, the programme is faltering, only a fifth of the total spent paid out to the recipient poor in wages. It is certainly not a great success on the ground. But did it give Mrs. Gandhi UPA II?

So there is an attempt to pull off an encore.  But if UPA is shown the door in 2014, the Congress led Government may want to ensure the economy will be so ruined, that the successor Government will not last either. This particularly because of the populist compulsions of coalition politics.  The successor Government will inherit empty coffers, huge indebtedness, promises to deliver on, and an all-round fiscal mess.

This is a classic scorched earth policy, generally employed by retreating armies on the march. It says, in electoral terms, if I don’t get back in, whoever does will rue the day!

The BJP led NDA, most likely to form the next Government, is going to face huge economic challenges. Fortunately for the NDA, they are in power in a number of key states.  This will stabilise the aftermath to some extent.

In 2014, the real electoral battle is between Socialism’s non-delivery and disastrous economic performance under the UPA; and Development Economics, with a glorious track record in Gujarat, being promoted by the NDA. If this is polarisation of economic approaches, then so be it, and high time too. The bleating about growth without jobs and inclusiveness is fraudulent beyond the rhetoric.

The current UPA allies are disillusioned by the step-motherly treatment meted out to them by the Congress Party and are looking for alternatives. If the NDA makes them comfortable they may well switch sides.

Some like SP’s Mulayam Singh Yadav are not averse to the BJP while hoping to form another Third Front, but will such a front have the numbers? But who can argue with the benefits that will accrue from big ticket development?

With the advent of Mr. Narendra Modi into the parliamentary board of the BJP, it may be time for the principal Opposition to draw in more allies into the NDA.

The Trinamool Congress may be ripe, and the BJD too. Both SP and BSP could join up in principle, but only one can in practice. Ditto the equation with the DMK and the AIDMK.  Since Mr. Modi enjoys a personal equation with Ms. Jayalalithaa, the AIDMK is more likely to sign on. State by state, Modi must reach out.

Divisive issues such as the Uniform Civil Code, the abolition of Article 370 in Kashmir, Hindutva, Mandir and other majoritarian grandstanding,  needs to be replaced by Mr. Modi’s development plank converted into a battering ram. Development needs to be targeted and applied like a balm in minority heavy areas and elsewhere alike.

The Congress loves to call Mr. Modi a polarising figure. But the fact is, Gujarat’s growth has been most inclusive and more productive than in other places. This is beginning to be acknowledged by key Muslim groups in the state who are coming out in open support of Moditva.

Big, medium and small Business and Industry are solidly behind Mr. Modi. And the BJP have recently won even municipal elections in Muslim majority areas.

There is absolutely no truth in the kind of paranoid scare-mongering being promoted by the Congress in order to cling to yesterday. And Law and Order under the UPA has sunk to an all-time low while terrorism is running riot.

Some people are questioning the basic patriotism and integrity of various senior functionaries of the Congress Party and Government. The open looting that has replaced governance in a procession of scams ranging from the thievery allowed during the CWG, the multiple defence scams, the 2G Scam, the food grains scam, the water scam, the coal scam, etc. make you wonder whom this Government is actually serving? What happens to the High Command when this daylight robbery is going on?

The UPA’s nearly ten years in power finds both the country and the UPA in near ruin. How it came to this pass with supposedly competent and experienced people in the Government is quite a mystery.

The Congress Party speaks proudly of its “glue”, in the form of the inviolate and Peronistic High Command, while sneering at the BJP’s democratic  “infighting”. It only goes to show what happens when the glue itself is clueless.

Put charitably, the Congress Party is practicing the politics of nostalgia. It is hankering after a jingoistic and anachronistic throw- back to its glory days of single party near- dictatorship with appalling Soviet style Socialism.

It is now the job of today’s electorate to wake up to present-day reality, of aspirations, of modernity, of prosperity and growth, and sweep away the tired propagandists of empty promises and routine betrayal.  

(1,099 words)

March 31^st, 2013

Gautam Mukherjee

And The Walls Fall Down

And the Walls Fall Down

The last bastion is under attack. The big white hope of economic resurrection, that phoenix to rise from the ashes, is India’s domestic engine of growth.

It has always been the idea of robust and reliable Demand that is the best thing about the “India Story”. And this demand projection is overwhelmingly domestic.

Till now, domestic demand has grown, generally in double digit percentages year- on- year, varying from sector to sector. It has surged, fuelled by evident and pent up demand, the latter driven by earlier cumulative supply deprivation.

This phenomenon is what has made us attractive to every peddler of goods and services from Tipperary to Timbuktu, hiding at the same time, a thousand embedded and endemic sins of inefficiency and delay in the Indian way.

Demand in the Indian economy has been routinely reckoned to be robust for several decades to come, because we are woefully short of infrastructure and modern amenities. However, goods and services have started meeting expectations. Still, we are far away from the prerequisites of a developed nation.

Exports account for just 25% of GDP in round figures. This includes IT at nearly 8%; while merchandise exports are 17.7% within this mix.

There is only modest market share growth in IT exports, about 9%, and value addition too, but profit is declining from a heady 25% to 30% before 2008 to about 10% to 12% now.

Despite this, the logic is impeccable. India has a billion point two in population. India has a 60% population between the ages of 15 and 35. China is ageing. Europe is both broke and geriatric, and accounts for 300 million souls with a negative birth rate and at least 30 million unemployed.

America can, and by default is, boosting numbers and vitality with Hispanic immigration. Obama used this shrewdly in both his election victories, because the demographics, and with it, the attitudes are changing very substantially.

South America and Africa are, as yet, beautiful works in progress. The Asia-Pacific is largely developed and now coming relentlessly under the shadow of Chinese domination.

But BRICS is faltering too, Brazil, Russia and South Africa have growth rates in the 2% to 3% band, India is between 4% and 5%, and China too is not going to see double digits very soon either.

But things are likely to get worse for us. Home grown ratings agency CRISIL RESEARCH says Indian demand is to slow even more sharply.

India Inc. Revenue growth will decelerate to 7.5% in the fourth quarter of this financial year, from 17.5% for the corresponding g Q4 last year.

CRISIL reviewed 28 sectors of the economy, excluding banks and oil and gas, and this is the projection.  Everything that is investment-linked will decline further. So capital goods, construction, vehicles, tyres, auto components, steel, are all falling.

And this is partly happening because of the shameful mismanagement of the economy. CRISIL says administrative delays, high cost of money, huge inflation are all causatives.

Information Technology is down, but it is better off than manufacturing. So is Telecom, and Entertainment, on the back of greater digitisation and its cost savings. But no one’s balance sheet has much of a wow factor to it today.

Unless the Government revives investor sentiment with rapid developments both in policy and on the ground, this scenario is going to get worse. We need massive investment now. Otherwise, some sectors will descend into negative growth territory.

The choking of growth, after all, was a deliberate policy carried out to contain inflation. The effort has failed in its objective but has strangulated growth alright!

Business confidence going forward is lower than it has been for the last three years according to the NCAER Survey. And shareholder returns have, in any case, been declining ever since 2008-09 according to a Financial Express Survey.

There is very little the Government seems   to be doing to arrest this terminal decline despite the Prime Minister’s wish to revive “animal spirits”. Of course, no sooner does Mr. Manmohan Singh declare something, one of his ministers or the High Command decides to contradict him.

Consistency of policy therefore be damned in the UPA, with its dual centres of power. We are not likely to revive anything in the months left to this weakened Government, and ditto if UPA is returned to power.  

Across the aisle, if Mr. Narendra Modi is brought in to lead, his expressed strong support for business and industry and economic growth will certainly deliver the goods.

Let us hope the BJP, its affiliates and allies, plus the electorate, realises it, and does what it takes to raise him to the Prime Minister’s post.

(773 words)

March 28^th, 2013

Gautam Mukherjee

Messy Business

Messy Business

The Prime Minister, the President, Indian Union Ministers and junior ones, senior bureaucrats, trade body heads, even captains of business and industry who are shanghaied into delegations, go abroad routinely, and expensively, to tout the India story. Brand equity tends to beggar comparison, but advertisements do not a reality make!

So the results are meagre, because there is little done to fix the back- office functioning of a country that is immensely difficult to work in. Not only that, we take delight in taking ideological, bureaucratic, even uncaring anti-business policy positions, eroding the wealth of our companies, while the Government exudes supreme unconcern.

Take for example the fact that mid-cap stocks, that represent the bulk of Indian  business and industry numerically, all clocking in at between $ 2 to 10 billion US in market capitalisation, have lost 90% of their stock value  per a recent news report; with little hope of recovery in a tight bear market.

They have effectively been reduced to small- caps, and our publicly held financial assets economy has therefore shrunk. Is SEBI, the RBI, the Finance Ministry, The Planning Commission, The Ministry of Commerce, any arm or leg of Government, at State or Central level, doing anything about it? Have they even noticed?

Consider also that Large-caps, meaning those with a market capitalisation of between $10 to $200 billion are really not all that numerous in a $1 trillion sized official economy.  So the depth of the market is decimated and sequestered yet again with no policy reaction whatsoever.

Who is responsible for this precipitous decline? Is it their own shabby entrepreneurship? Or is it a very challenging macro environment with high interest rates, difficult liquidity, high commodity prices, inflexible labour laws, massive taxation, utilities both expensive and inadequate, high transportation costs, bad infrastructure, etc. etc.

If Japan took the world by storm once, as did Taiwan, and now as China is, heading towards becoming the No.1 economy according to OECD, they did not do it without tremendous Government support. It was a veritable partnership.

It is not as if we Indians cannot do it. Narendra Modi’s Gujarat is an example of our own ingenuity and entrepreneurship, with the State helping business and industry, including agriculture and agro-industry, to flourish and grow.  

That is why Mr. Modi is lauded by top business and industry leaders all over the country. But oddly, at the Centre, there is a concerted effort to debunk the achievements of the Government of Gujarat and some feeble attempts to claim credit for Modi’s achievements by saying he is harvesting what the earlier Congress Governments had sown, absurd as this sounds.

The fact that such progress has not been replicated anywhere else, is enviously glossed over. There are small gains which are spun out, minute policy adjustments are advertised as further reform, but the net results have been moribund and inadequate.

Recently, the Economic Affairs Secretary,  Mr.  Arvind  Mayaram went to Washington to be told by US investors that doing business in India was “messy”.

This despite India’s attempt to show- case its new found  Reforms zeal. Mr. Mayaram tried hard to convince his audience of the Government’s commitment to spurring growth and investment, cutting subsidies and the deficit, the whole nine yards of intent. But the US investors were not convinced.

It is very difficult for India to be taken seriously by any but the very brave and determined. Mr. Mayaram talked of $ 20 billion in infrastructure investment approvals, but we know as Indians, that this need not mean very much on the ground. At best, a fraction of a fraction of this investment will see the light of day in the projected time framework. 

The lack of consistency in Government policy is probably the most damning macro problem.  And the readiness to mislead and misrepresent is almost dishonest.

In the recent budget the Finance Minister P.Chidambaram probably over- estimated income, under- estimated expenditure, over- optimised the effects of welfare, and left all the whopper stuff, as in The Food Act and the Homestead Act, in the “coming soon” trailer.

Economists that favour market economics, such as Mr. Surjit Bhalla, routinely pour scorn on Government computations, statistics, assumptions, and indeed, the policy.

We will, most probably, have to wait for the outcome of the next general election for any real change.

If the right- of- centre Mr. Narendra Modi leads the next Government, expect progress and real growth.

If not, more of the same but with bells on; because then it will be seen as a vindication of the Leftist doctrine being pushed currently as if the life of the UPA depended on it.

(773 words)

March 23^rd, 2013

Gautam Mukherjee

A Zephyr Of New Ideas For India

 A Zephyr Of New Ideas for India

Mr. Narendra Modi, consciously addressing an audience of sophisticated Indians and the world beyond, demonstrated considerable tech savvy and comfort  with its possibilities today. He was the first Chief Minister invited to speak on Google’s Big Tent Activate Summit 2013 event for India, part of the series being conducted around the globe.

Here was a silver-bearded young man in his sixties, talking technology with Guinness Book Record achieving ease. And this is not hyperbole, because Modi is indeed entered in the book for using 3D holographic technology for the first time, for such an application. He addressed 53 election meetings at the same time, in what he now called “different geographies”, during his winning 2012 campaign to rule Gujarat for the fourth consecutive term.

As Modi’s 18 plus minutes of address covered how he has employed the internet and land surveying technology to improve the water recharging and ground water levels in Gujarat, the revolutionary virtues of two way and interactive communication now made possible via the internet, using GIS technology to fine tune fund allocations to hospitals, and so on, he gave vibrant meaning to Bob Dylan’s enigmatic line that said: “Ah, but I was so much older then, I’m younger than that now”.

Speaking in accented but reasonably fluent English, Mr. Modi,  grown from an RSS Pracharak and a modest OBC background, into Gujarat’s celebrated three terms completed and counting Chief Minister, he began by quoting Alvin Toffler of  futurist  classic Future Shock fame.

 Specifically, Mr. Modi spoke of Toffler’s 21st century definition of literacy which is not just being able to read and write and being educated as such, but having the mental dexterity to “learn, unlearn and relearn”.

Modi quoted former President Bill Clinton also, an ace communicator, who has called the Internet “The new  Town Square”. Modi  Indianised the concept to “Nukkad”, all the while reminding one of the sweeping vision of a historic  game- changer like current President Barack Obama.

There were, inevitably, some clever speech written lines, such as the very quotable “IT plus IT is equal to IT”, but the sentiments it stood for, bore the hallmark of Modi’s progressive vision for the future of India and its people.

Modi has, it is evident, not let up on his campaign for the leadership of India ever since his first nationally broadcast speech at the SRCC in Delhi just over a month ago. 

It is clear he fervently believes that the Gujarat model of development is ideal for the rest of India and he wants an opportunity to implement it.

And increasingly, the warm reception to his ideas is indicative of the fact that larger and larger numbers of Indians are heeding his call. But the subtext seems to say people are beginning to regard Narendra Modi as something of a saviour, a messiah come to rescue India from the mess created by the UPA over almost ten years of corrupt and inept misrule.

Modi spoke of “direct democracy” via the net, and the value of “informed citizens” and said it was time to “perform” and not just “promise”. 

This is a new and accountable zephyr, this unfolding Modinama, developing like a gentle summer wind on the threshold of the festival of colours.  

Narendra Modi fully intends to harness more and more technology towards better governance, but this he has already demonstrated in Gujarat. There is greater connectivity, precision, time- saving, interactivity and efficiency there as a consequence.

The bottom line, in Modi’s own words: “the crux of politics lies in connecting to the people”. Narendra Modi has done so very ably in Gujarat. He is now in the process of doing likewise throughout India and overseas.

(612 words)

March 21^st, 2013

Gautam Mukherjee

The Times They Are A Changing

The Times They Are A Changing

India is now the largest buyer of conventional weapons in the world, practically all of it on an imported basis, routine corruption scams notwithstanding. We are buying to modernise our armed forces, because we face two threats in our theatre, from Pakistan, a perennial problem,  and much more powerful China, a more mysterious  rival for domination of the region, even a counterbalance to the present world order.

Our own arms industry remains at, or near, the starting gate, despite frequent professions of intent from the Government in general and the present Defence Minister AK Anthony in particular. Meanwhile China makes its own nuclear submarines and aircraft carriers.

Union Minister AK Anthony, an abject Gandhi loyalist, whom some say could be considered for the post of PM if UPA forms the Government yet again; is sometimes called, without apparent irony, “Saint Anthony”, for being, it is said, reasonably incorruptible.

But despite his unquestioning loyalty to the Congress High Command, from which he draws his power and stability, he has succeeded in doing absolutely nothing to kick-start our own arms industry in the private sector, let alone bring it up to speed. Possibly because arms deals are amongst the biggest sources of payola for our rulers and their henchmen.

China meanwhile has just displaced the UK as the 5^th biggest arms exporter in the world, and this is principally on the back of its exports to Pakistan, which accounts for a fulsome 55% of all Chinese arms exports.  The shrinking of British stature is not surprising and of a piece with its loss of influence globally, but the sophistication and range of  the Chinese armaments industry is impressive for an essentially home grown programme.

Whether Pakistan pays for these Chinese armaments in hard currency, or even on the nail, is another matter. But China knows how to extract its pound of flesh from its client state and proxy India baiter anyway.

Besides it makes Pakistan hopelessly beholden, particularly with the US in the process of pulling out of Afghanistan.

China’s inroads into Baluchistan and a warm-water port on the Arabian Sea bordering the Gulf, POK, in the upper reaches of the Hindu Kush, and even into Afghanistan, with Pakistani good offices preceding, is a form of payment too.

There is also the diplomatic dividend of a tight alliance with the only Muslim nuclear state at present.

Having said that,  China does have its own future to think of, which calls for thinking on a much bigger scale, and out-of-the box enough to realise what worked in the 20^th century will not suffice in the 21st. In fact, this is evident already even as we are only in the second decade of the new century.

Quantum exports to the EU and the US are not what they used to be for China, and unlikely to pick up anytime soon. There is only feeble current growth, and a massive overhang of debt that threatens to collapse many of the constituent economies of the EU. The old borrow and spend model is largely discredited and is being pursued with near zero interest rates and easy monetary liquidity only to prevent seizure from sudden withdrawal. All of this applies also to the US with the proviso that it is very much bigger as an economy and more likely to be able to right itself.

Africa too cannot pay China enough in currency terms, but can, and does, hand over large tracts of natural resources that can be developed on very favourable terms. But that too costs massive money that China must provide for the infrastructure development before it can cash in.

The Iranians and other bits and pieces of the Middle East such as Syria, parts of Libya and Egypt and some of the “Jasmine” states leaning towards a radical Muslim hue, essentially hostile to the West, can buy Chinese goods and armaments. But these are largely barter deals. Most of it is in exchange for oil, but their populations, and consequently their appetites, are not too large.  So the balance of trade suffers in any case. 

Asia and the Pacific region is fragmented, over- fished by too many vendors, and that really leaves only India.

The brand new leadership in China, Li just now, and Xi  a little earlier, realise that they need to ramp up the commercial engagement with India which has a vast market of young people and huge pent up demand for very many things China is good at. And this means real confidence building measures with a country that feels inferior after the 1962 licking and ever since. But yet, we could certainly use Chinese collaboration in many areas.

Take for example our quaint railway system, fit only for a remake of “Jewel in the Crown” or  Richard Attenborough “Gandhi”. There is nothing remotely up-to-date about the Indian Railways even though it is ostensibly large enough to warrant ( debatable) a separate budget presentation every year.

   

Our infrastructure building takes forever to build, and the Chinese by contrast are experts at executing mega projects in record time.

For India, it is important not to feel militarily threatened. We have been witnessing an encirclement via our South Asian neighbours, Nepal, Sri Lanka, the unreliable and forever delinquent Pakistan, even Myanmar and Bangladesh, but it is starting to dawn on the Chinese that this policy  is not serving them very well. 

All these client states cannot fill Chinese coffers. They need China much more than China needs them. But India could enrich China, as it can all the countries of the West currently down on their luck.

This can become the basis of a very different kind of entente cordiale between the two Asian giants that account for nearly half the population of the world. 

It is no wonder then that President Xi  is looking forward to meeting our PM Manmohan Singh on the sidelines of the forthcoming BRICS Summit in Durban next week.And why President Xi and Premier Li, both representing a change of the power guard in China, have been signalling a desire to boost bilateral ties with India, which they call one of the “most important”.

It will take us Indians a long overture to trust the Chinese, because we have been there before in the Panchsheel days, only to be roundly thrashed by Chou En Lai and Mao. Besides, proxy Pakistan is in no mood to pipe down. And yet, the future demands a rapprochement that can benefit both countries much more than the present state of wariness.

(1,093 words)

March 20^th, 2013

Gautam Mukherjee

Cyprus Bailout To Dip Into Russian Loot

Cyprus Bailout To Dip Into Russian Loot

Why so much Russian off-shore money is stacked in the EU’s Mediterranean outpost of Cyprus, rather than in traditional havens like Switzerland is a bit of a mystery. Is it really the “Trojan Donkey” for the Russians in the 17 member EU? Between straight deposits and Russian companies registered and operating out of Cyprus, the exposure is in the region of $60 billion.

Of course, higher returns on investment due to Cyprus’ soft laws, low taxes and offshore haven ways, have something to do with it. Switzerland offers security and stability but not very many of the other bells and whistles.

But there may be quite a few Russian oligarchs getting ready for a haircut and shave on its Cypriot exposure. After the recent Cypriot parliamentary resolution refusing to tax their bank depositors, Cyprus will be looking for a bailout from the Russians instead.

This could work for both. Vladimir Putin has already expressed anger and outrage at the unprecedented demand for Cyprus to pay part of its own bailout requested from Brussels, about half the money needed. And Russia has helped Cyprus in the past and might do so again particularly if Cyprus offers a stake in the development of its offshore oil and gas fields.

The spotlight on Nicosia reveals that of the $27 billion foreign money stacked in Cypriot banks, largely seeking to be laundered on a no- awkward- questions- asked- basis, $19 million is Russian. The laundering does draw India into its ambit because of a treaty with Cyprus, India imposes a low withholding tax on profits in Indian debt and securities, and Cyprus takes no capital gains tax at all. Most FII money into stocks however comes to India via Mauritius.

   

The EU is offering $ 13 billion (Euro 10 billion), to keep the key Nicosia banks from collapsing after they became the 5^th country in the Eurozone to ask for a bailout. But instead of footing the bill in its entirety, Brussels has asked Nicosia to come up with 5.8 billion Euros on its own.

This initiative may be emanating from EU’s leading economy, Germany, getting a bit sick of bailing out country after country, albeit after asking for painful austerity measures.

Meanwhile, Cyprus banks are closed while the negotiations continue, but there is already an ATM- based- run. This could get very much worse once they open, later this week or early next week, irrespective of the deal hammered out.

This is quite a dangerous prospect, as copycat bank runs could materialise all over the weaker sections of the EU as depositors try to get their money out of the Government’s reach.

The idea to tax the deposits is not Cypriot.  But this manoeuvre is setting a precedent that is making the rest of the EU jittery too. It is unsettling as an idea because sovereign debt is meant to be sacrosanct. It is traditionally backed by s guarantees and is not meant to be liable to being deleveraged by unilaterally grabbing a slice of the deposited money.

Depositors are, after all, lenders to the banks and the Government. They are actually the White Knights, the bedrock savers that underpin every economy. And they are not the ones who ran up the bill and liabilities at all. They are not usually the borrowers, and not the ones who actually owe the money. 

Since bank and sovereign liabilities all over the EU are at a frightening overhang of 320% of GDP  it is not just the depositors who need to worry.

In the US, the debt liability burden accounts for 83% of the entire economy. This US debt too is a very large sum, amounting to trillions of US dollars, almost in a 1:1 ratio, meaning some 13 trillion dollars in a 15 trillion dollar economy. But at least the debt doesn’t lap the economy three and a quarter times!

However this plays out at this time, the problem is so severe that neither the US nor the Eurozone are going to be in the clear any time soon.

Having said that, the admirable thing is that the economies of the West have been kept afloat ever since 2008, despite such massive challenges. There are, over five years later, signs of economic revival all around, at least on the current account, and in terms of a mild employment revival.

The management of the humungous debt however is the legacy of the past, and will cast a shadow far into the future.

And it is this fact that will shift the balance of power relentlessly to BRICS. And more particularly witness the establishment of China, which is highly solvent, and possibly India, if it changes its deficit financing ways; achieve global economic leadership.

(788 words)

March 20^th, 2013

Gautam Mukherjee