READING BETWEEN THE LINES: Interpreting Trump’s Not-So-Subtle Threat To India To Do More In Afghanistan

The India-US relationship has conventionally been undergirded by commonly shared democratic traditions, despite periodic upheavals. Thanks to president Donald Trump, this is likely to change soon and acquire a transactional shade based on quid pro quo, where acknowledgement is contingent on favours extended.

This was evident when Trump unveiled his long overdue strategy for Afghanistan, a nettlesome issue that’s remained unresolved through the last four presidencies to now bedevil a fifth one. Apart from his trademark bluster and rhetoric, Trump’s speech revealed two distinct strands: a deal-based approach to achieving strategic objectives, and, a marked candour that separates his speech from the studied diplomatese of past presidents.

Obviously, no speech on Afghanistan and South Asia can ignore India. But, Trump’s hat-tip to India and its critical role in maintaining regional stability has acquired a new binary, apart from a foreboding tenor: “We appreciate India’s important contributions to stability in Afghanistan, but India makes billions of dollars in trade with the United States, and we want them to help us more with Afghanistan, especially in the area of economic assistance and development.”

This is a curious statement, tethering Indo-US trade to India’s help in Afghanistan, and can be parsed in multiple ways.

One, this is a clear and overt threat: cooperate or else. President Trump has been waving the trade flag in all his perorations concerning India. He has been unequivocal about seeking enhanced market access for US goods and services. The joint press statement issued during prime minister Narendra Modi’s Washington DC visit has him saying: “It is important that barriers be removed to the export of US goods into your markets, and that we reduce our trade deficit with your country.” Indo-US trade touched $114.8 billion during 2016, with India enjoying a $30.8-billion trade surplus. It would seem Trump has made India’s trade with the US contingent upon cooperation in Afghanistan.

There is a second aspect. India’s port and associated connectivity projects in Chabahar, south-east Iran, have been delayed. The port, and its rail and road linkages, are expected to provide India an alternative trade route to Afghanistan and other central Asian republics, bypassing Pakistan. The highway linking that port with Hajigak mines in Afghanistan is expected to facilitate movement of iron ore for Indian steel plants. The Afghan Iron and Steel Consortium, a group of six companies led by public sector Steel Authority of India and brothers Naveen and Sajjan Jindal, has won concessions for three iron ore mines, including projects to set up steel and power generating companies in the Hajigak region. Connectivity is expected to help operationalise the $10 billion project, which is beneficial for both India and Afghanistan.

Many similar Indian projects are either in limbo or progressing slowly due to a combination of factors: concerns over security, changing domestic political configurations in Afghanistan, and the global economic slowdown rendering initial cost and revenue estimates awry. A lot will, therefore, depend now on how the US plays its cards with Iran and how additional US boots on Afghan soil affect India’s spectrum of projects in the war-ravaged economy.

There is a third angle, albeit an unspoken one. There has been speculation for some time now that Trump’s Afghan adventure is fuelled by a desire to help US companies access the nation’s vast mineral resources, still unexploited. The minerals range from iron ore, copper, and zinc to precious gems (lapis lazuli, emeralds, rubies) and even rare earth minerals like lithium. Many of these are being illegally mined by the Taliban and other militant rebel factions, largely as a funding source. While many estimates about the value of minerals trapped under Afghan soil have been thrown around, it is believed that the lure of access to these resources is what changed a reluctant president’s mind about continuing the US’s engagement in Afghanistan.

Trump’s exhortation to India on Afghanistan could, thus, also be viewed as an implicit inducement: cooperate and we will allow you to share in the mineral spoils.

Finally, the Indian reference could be an attempt to placate the US’s strategic and political community, which has as many India supporters as opposers. Hence, the attempt to pack both “for and against” sentiments into a short and contradictory statement.

On its part, the Indian ministry of external affairs (MEA) has welcomed Trump’s Afghan initiative, though the gamely and cryptic approval is conspicuously silent on the noisy undertones of the speech. Any shades of glee detectable in MEA’s response, can, of course, be attributed to schadenfreude.

Trump has thundered against Pakistan and held out direct threats to that country. “We can no longer be silent The MEA’s respo about Pakistan’s safe havens for terrorist organisations, the Taliban, and other groups that pose a threat to the region and beyond…We have been paying Pakistan billions and billions of dollars; at the same time, they are housing the very terrorists that we are fighting. But that will have to change, and that will change immediately.”

The MEA’s official reaction welcoming issues of safe havens and cross-border terrorism was predictably pointed.

To be fair, the MEA’s response has been circumscribed by the duality in Trump’s speech. His bluntness on Pakistan is a break from usual president-speak: This is the first time that a sitting US president has openly used such harsh words against traditional ally Pakistan. At the same time, the ambiguity arising from the odd pairing used in the India reference, which is open to multiple interpretations, is bewildering. But it does reveal a slice of Trump’s foreign policy bias: a calculus that will increasingly be based on give-and-take.

The article was originally published in qz.com and can also be read here

The Republic of Statistical Scramble

Straightening out data inconsistencies should be a government priority

Many a caustic word has been exchanged in the acrimonious debate over the Indian economy’s employment data. One set of numbers claims the current phase of economic growth as jobless. Alternative data sets have accompanied vigorous assertions of rising employment. And then there are many in the middle, trying to make sense of the scant (and outdated) data and wondering how anybody reached any conclusion at all.

Welcome to the republic of statistical scramble in the age of Big Data. The Bharatiya Janata Party’s (BJP’s) 2014 election victory was predicated partly on the promise of enhanced economic well-being; straightening out data inconsistencies should be a priority on the path to fulfilling that promise.

Take a look at labour data. Currently, employment data is collated from different surveys, each one measuring different things using varied methodologies. NITI Aayog’s task force on improving employment data recently released the first draft of its report, which lists how several arms of the government get involved in collecting and mashing up data. The report is unequivocal about the current state of data collection: “The available estimates are either out-dated or based on surveys with design flaws that render them unsuitable for inferring nationwide employment level.”

On the demand side, the National Sample Survey Organization (NSSO), in the ministry of statistics and programme implementation (Mospi), conducts a comprehensive household survey once every five years, with the last one occurring in 2011-12. The labour bureau in the ministry of labour and employment also conducts two household surveys—a quarterly quick employment survey and another on an annual basis. These are in addition to the decadal population census surveys, which measure two variables: a headcount of all types of workers at 10-year intervals and all non-agricultural enterprises, regardless of size.

On the jobs supply side, Mospi conducts a statutory annual industries survey for units registered under the Factories Act, 1948. NSSO also conducts an unorganized units survey; this is in addition to the micro, small and medium enterprises (MSME) census conducted by the MSME ministry. Finally, various government administrative bodies, such as the Employees Provident Fund Organization (EPFO) or Employees’ State Insurance Corporation (ESIC), provide some indication of organized sector employment trends (though this is being increasingly undermined by growing preference for contract labour). In addition, there are some private sector surveys also—for example, by the Centre for Monitoring Indian Economy.

All these measures suffer from some infirmity, whether it’s methodological, unviable sample size, inability to distinguish between different types of employment, long gaps or irregular frequencies. But one thing is common: the findings only provide a partial picture and are therefore useless as a tool for policy design. Part two of the Economic Survey says: “The lack of reliable estimates on employment in recent years has impeded its measurement and thereby the Government faces challenges in adopting appropriate policy interventions.”

The NSSO has, in the meantime, begun a fresh, ambitious annual exercise to map all nature of employment data; a quarterly survey will generate similar estimates for urban areas. In its report, NITI Aayog has recommended, among other things, vast improvements to existing surveys, institutional and legislative changes, overhauling physical and digital infrastructure and more aggressive use of technology to crunch the time-gap. 

But the study might need to extend beyond employment data because statistical distortions also exist in other areas. NITI Aayog provides an example about the state of statistical confusion: each enterprise, while filing returns or statutory information, is assigned a different identification number under Good and Services Tax Network, EPFO, ESIC, Factories Act and Shops and Establishment Act.

This problem is not restricted to enterprise data and exists in other government departments as well. Take the example of estimating the cotton crop. Two separate ministries release two separate estimates every year.

The agriculture ministry’s cotton crop estimate for 2015-16 was 30.15 million bales of 170kg each, while the textile ministry’s estimate for the same year was 33.8 million bales—that’s a difference of 620 million kg! In the previous year, 2014-15, the estimates put out by the two ministries were 34.8 million bales and 38 million bales, respectively. This divergence seems bewildering, especially when acreage estimates from both the ministries broadly tally.

Forget discrepancies between ministries: this paper had reported (goo.gl/vsYGzc) how cotton yield figures differ widely within the agriculture ministry. There have also been reports (goo.gl/fd9adW) about vastly varying data on the number of taxpayers added since demonetization emerging from different parts of the government. Mismatch between data sets from within the government also breeds scepticism regarding the statistical robustness of national accounting, especially when anecdotal evidence seems contra to buoyant gross domestic product data.

India’s magnificent statistical heritage distinguishes the nation from its neighbours, whose growth record is often viewed with scepticism globally. This infrastructure needs an urgent overhaul to maintain credibility, perceive economic trends and deliver appropriate policy prescriptions.

The article originally appeared in Mint newspaper on August 23, 2017, and can also be read here

RBI’s Studied Silence Over External Vulnerabilities

Critics are questioning the wisdom of the RBI after a 25 basis point reduction in benchmark interest rates fell short of capital market expectations

The Reserve Bank of India’s (RBI) 25 basis point reduction in benchmark interest rates fell short of capital market expectations. They were expecting a deeper cut but the Monetary Policy Committee (MPC) played safe, given uncertainty surrounding the future inflationary path. Critics are questioning the wisdom of the central bank and its MPC.

MPC members surely deserve to be cut some slack. But, in the general din over low food inflation, insufficient interest rate cuts and RBI’s unchanged neutral policy stance, the central bank’s policy statement omitted mention of a small crimp: a tsunami of portfolio flows, another possible source of inflationary pressures. The central bank’s studied silence about external vulnerabilities raises many questions.

This rush of foreign currency has forced RBI to take steps which have disappointed overseas debt markets and investors: for instance, rules have been tightened for issuing masala bonds through introduction of maturity floors and interest rate caps. This comes when masala bonds were gaining popularity with both issuers and investors. In another (though seemingly unrelated) circular, the RBI has sought to elongate the maturity profile of investments by foreign portfolio investors (FPI) in government bonds. Capital markets regulator, Securities and Exchange Board of India (Sebi), followed through with another circular, ordering a temporary stop to future masala bond issuances.

The RBI has probably sensed higher risk—in terms of both rates and exposures—in the opening of masala bond floodgates, especially after offshore arms of certain Indian companies raised foreign currency loans in overseas markets and then on-lent the proceeds to domestic entities as rupee bonds. This structure defeats the entire purpose of shielding Indian borrowers from exchange rate volatility since it provides original lenders with an indirect claim on domestic assets.

Sebi’s rationale is that FPI investments in corporate bonds have reached close to the limit of Rs244,323 crore. This ceiling includes all rupee-denominated bonds, offshore or on-shore. The regulator’s circular also states that masala bond investments can resume only after limit utilization falls below 92%.

RBI’s rear-guard action also probably stems from the combined effect of two other reports—its own report on India’s external debt and the annual External Sector Report from the International Monetary Fund (IMF). Both sound circumspect about India’s rising short-term foreign debt levels. The IMF reports states: “Given that portfolio debt flows have been volatile and the exchange rate has been sensitive to these flows and changes in global risk aversion, attracting more stable sources of financing is needed to reduce vulnerabilities… Further initiatives on creating a more conducive business environment, particularly the implementation of long-standing labour market and power sector reforms, are necessary to attract greater FDI flows.”

FPI investments in equity and debt markets saw combined net inflows of Rs171,581 crore till July end. This is six times more than the Rs27,055 crore invested by FPIs during the same period of 2016. This surge had rupee appreciating by almost 5.8% between 2 January and 31 July.

Such large inflows put RBI’s absorption skills to the test. First, it has to intervene in the foreign exchange market to absorb foreign currency inflows so that portfolio investments do not push up the rupee-dollar rate beyond its sustainable and economic value. The resultant overhang of rupee liquidity then requires a second defensive action: the RBI has to mop up liquidity through a variety of instruments. For example, in the 11 working days between 17 July and 29 July, RBI absorbed Rs405,228 crore. Sterilization has its costs, especially when central banks sell high-yield domestic instruments while buying relatively low-yielding foreign currency assets. There are also fiscal implications.

The central bank’s woes do not end here: it needs to calibrate another two-step dance. The RBI’s remonetization exercise is still far from complete but it is unable to accomplish that at full tilt, given the wash of domestic liquidity. At the same time, it has to ensure that there is enough liquidity to make up for lost productivity during demonetization. Both will require precision and fine-tuning. Plus, it needs to ensure there’s just enough liquidity to keep yields soft.

There’s another dilemma. The FPI investment limit in corporate bonds was fixed when the exchange rate was below Rs50 to a dollar and common sense dictates a re-calculation of the limit. But the central bank is not doing that just yet, given that its hands are full trying to staunch current inflows.

Times like these are ripe for conspiracy theories. There are misgivings that RBI’s efforts could be an indirect attempt to ensure borrowers do not export the domestic bank credit market to offshore centres. While bank credit growth remains anaemic, Bloomberg data shows Indian companies raised $8.9 billion through overseas bond sales till July, 63% higher than the previous year. It is believed many companies took advantage of tightening spreads and used foreign currency bond sales to refinance domestic bank exposures, thereby intensifying balance of payments risks.

The MPC statement omits mention of external sector developments. Hopefully, the RBI will separately provide a more comprehensive communication that details the risks and the mitigation measures.

The article originally appeared in Mint newspaper on August 9, 2017, and can also be read here