Reorienting India’s Trade Policy

It is vital that India’s trade policy, while taking cognizance of GST’s nitty-gritties, also realigns domestic trade infrastructure with the altering global trade landscape

India’s commerce ministry is conducting a mid-year review of its trade policy to closely align it with the roll-out of the goods and services tax (GST) on 1 July. Truth be told, GST is important but probably too narrow a peg to hang India’s trade policy from; it might make more sense to re-anchor the policy in the shifting framework for global trade and the rapidly evolving nature of globalization.

Deep resentment against globalization’s misaligned distribution effects, a widening wage gap and increasing inequality have given birth to an aggressive brand of nationalism. Strands of these have now found utterance in the economic and political policies of many countries. Brexit in the UK was sold as regaining economic independence from the European Union. US President Donald Trump’s executive decisions on trade (withdrawing from the Trans-Pacific Partnership, restricting H1B visas, threatening the North America Free Trade Agreement) or geopolitical moves (hectoring European leaders or abandoning the Paris climate change agreement) were custom-built to address localized grievances. The sharp pivot by both countries—main actors in constructing the post World War II global trade, financial and security architecture—has made globalization a guessing game, bereft of its earlier certainties and confidence. Both countries are now seen as flag-bearers of a neo-isolationist doctrine.

Australia, New Zealand and Singapore are also following in the US’ footsteps, complicating India’s traditional trade matrix. The picture is further muddied by two momentous shifts occurring in the subcontinent’s neighbourhood. One is the ambitious Belt-Road initiative, a vehicle designed to rejuvenate China’s surplus domestic capacity and to give expression to its expansionist aspirations. The second is the recent schism in the Gulf with Saudi Arabia, Egypt, Bahrain, the United Arab Emirates, Libya, Yemen and the Maldives collectively imposing informal sanctions against Qatar by shutting down transport links and choking essential supplies.

All these developments are bound to reorder the global trade system. Therefore, it is imperative that India’s trade policy, while taking due cognizance of GST’s nitty-gritties, also realigns domestic trade infrastructure with the altering global trade landscape. It is also perhaps the perfect opportunity for the policy to be more of a strategy document rather than a manual. The statement accompanying the 2015 Trade Policy states: “Change has been a constant in the global economy, not least in the international trading landscape.” Never was a truer word spoken, and never has there been a better time to factor this truism into the national trade policy.

Three areas demand trade policy’s attention.

One is to prepare for less reliance on traditional trade partners in the West while increasing India’s trade and investment footprint in alternative markets, such as the African continent. India started looking at Africa seriously after the launch of economic reforms in 1991 and then with renewed vigour after the 2008 crisis. However, promises to increase two-way trade between India and Africa to $90 billion by 2015 have remained largely unfulfilled. India’s trade with Africa touched $56.7 billion during 2015-16, down from $72 billion in 2014-15. The drop is largely due to the fall in oil prices, which contracted India’s import bill with Nigeria. Meanwhile, China-Africa two-way trade touched $215 billion during calendar 2014.

India has intensified its relationship with Africa, which includes initiating several high-level visits since 2015. Prime Minister Narendra Modi, President Pranab Mukherjee and vice-president Hamid Ansari have between them visited 16 countries, with senior cabinet ministers visiting the remaining countries on the continent. During May, the African Development Bank held its 52nd annual meeting in Ahmedabad.

More needs to be done, of course. Trade policy can examine how coordinated action between commerce, finance and external affairs ministries might help in expanding India’s trade efforts; for example, a larger presence of Indian banks outside the conventional East African theatre can help reduce export credit costs. This includes reducing delays in implementing projects under Lines of Credit, India’s flagship instrument for development diplomacy.

Second, there is a need for a clear link between India’s trade policy and Make In India, including strategic linkages through global value chains. Policy clarity will be required whether India desires domestic manufacturing platforms that double as supply hubs for a global market, or assembly units that can be folded up and relocated elsewhere when cost arbitrage dries up (Chinese mobile units are perhaps a good example). Trade policy may be able to play a role here.

Finally, there is trade in services. There seems to be a concerted move within the rich countries—through the Organisation for Economic Cooperation and Development—to open up trade in services, including movement of professionals. This has been India’s longstanding demand because trade in services has been asymmetric so far—high in capital flows, information and communication technology, but low in free movement of professionals. Rising unemployment, particularly in Europe, could be driving Western agencies to prise open employment markets elsewhere. India’s demand (and strategy) for trade facilitation in services should find some articulation in the revised trade policy.

The above article was originally published in Mint newspaper and can be read here as well

Rex-T: Sharp Edge of Donald Trump’s Foreign Policy

Donald Trump’s choice for secretary of state, Rex Tillerson, is an old oil hand; do not be surprised if his statecraft leads to fresh geo-strategic conflagrations

A small spark can light up an entire forest and leave it wreathed in smoke and ashes for days. They say the flapping of a butterfly’s wings translates into weather changes halfway across the world. Nassim Nicholas Taleb pulled out a black swan from his risk bucket to explain hard-to-predict catastrophic events.

Will there be one careless spark, a languid butterfly or a black swan to distinguish 2017? Some events of 2016—Brexit, Donald Trump’s surprise election victory, oil prices creeping up, boardroom brawls at Bombay House and demonetization—will continue to influence developments in 2017. But this being the merry season for compulsive crystal gazing, here’s hazarding a wild guess about one risk element that might set 2017 apart.

It’s called Rex-T: US president-elect Trump’s choice for secretary of state, Rex Tillerson. He’s not to be mistaken for the Jurassic carnivorous dinosaur; but he’s also not quite the cardboard character from a Steven Spielberg movie set. An Exxon lifer and chief executive officer, Rex-T has been described, variously, as a deal-maker, a hard-boiled negotiator, an inveterate networker. In selecting Rex-T for the position, Trump is bringing the oleaginous mix of history and politics back to centre stage after almost a century.

Exxon Mobil CEO Rex Tillerson, Donald's Trump's choice for secretary of state. Photo credit: Reuters

Anthony Sampson’s classic The Seven Sisters: The Great Oil Companies And The World They Shaped describes how oil multinational corporations exercised inordinate heft in shaping early 20th century geopolitics: “The (US) government…preferred to use the oil companies, at a discreet distance, as the instruments of national security and foreign policy.” Texaco, Exxon, Standard Oil, BP, Shell, Gulf Oil and Mobil carved up vast territories in the Middle East, left behind by a retreating Ottoman empire, between themselves for oil concessions; occasionally, they even helped the US state department or British foreign office redraw political boundaries to suit business interests. Rex-T’s appointment rekindles suspicions of close links between oil and US statecraft.

The first risk arises when the US Senate foreign relations committee meets to confirm Rex-T’s appointment, which will then have to be endorsed by the entire Senate. It is speculated that this could be in jeopardy, given Rex-T’s Exxon background, the company’s business interests in Russia and the man’s proximity to Russian President Vladimir Putin. Many Republican senators have voiced their discomfort with Trump’s choice of the US’ future foreign policy architect: too compromised, too close to the enemy. If the confirmation falls through, events can take a different turn. That’s a risk in the unknown-unknown category because Trump’s backup choice is not known.

Assuming Rex-T obtains the confirmation, the state department can be expected to follow a certain policy trajectory. At this point, it might be safe to assume that part of Rex-T’s foreign policy design will be influenced by three chief factors: his oil background (having worked in Exxon all his life), his company’s Russian assets, rendered uneconomic by US-imposed economic sanctions, and his close friendship with Putin.

It might also be realistic to expect that Rex-T will bring two economic sanctions back into play: Russia and Iran. The US will probably relax economic sanctions against Russia, as Trump has hinted several times. The noose regrettably tightens in Iran’s case. A huge question mark looms over how Trump will follow through with the US’ recent extension of the Iran Sanction Act, which was expected to lapse at December-end. The renewal provides Trump with a window to reimpose punitive sanctions if he is convinced that Iran is violating the Joint Comprehensive Plan of Action signed with the US, France, Germany, China, Russia and the UK. Incensed by the renewal, Iran is already threatening to build a nuclear submarine.

Will Rex-T be the spark that ignites this risk? Consider this: The Organization of the Petroleum Exporting Countries’ (Opec’s) members and non-members (primarily Russia) recently agreed to cut oil output. This had an immediate impact: Oil prices moved up sharply. Also consider this: Trump has promised to revive the US’ shale oil and gas industry, asserting during his campaign that this will create two million jobs. This additional output could potentially depress prices again.

The only way to keep prices up is to take out a large producer from the equation. And that could be Iran. The country’s oil exports, which dropped to a low of almost 1.1 million barrels per day (mbd) in 2013, is now back to almost 2.5 mbd on the back of almost 4 mbd of production. However, low oil prices have deterred revenue from reaching pre-2011 levels. Iran, which has so far refused to heed any Opec call for production cuts, seems to have finally agreed during November’s 171st ministerial conference in Vienna to reduce production marginally.

On the stump, Trump repeatedly railed against Iran and carped about the nuclear deal; vice-president-elect Mike Pence even threatened to “rip” it up. Will Rex-T be the sharp edge of this machete, to keep oil prices high and revive his old company’s sunk investments in Russia? Closer home, high oil prices further compromise India’s fiscal fragility. 

There is an even chance that Rex-T will baulk and this risk won’t play out. But, then, Trump has introduced another known-unknown to the equation: Peter Navarro, a well-documented China-baiter, as head of the White House National Trade Council. If Trump’s administration does initiate the promised trade war with China, that’s another future wrinkle for the global economy.

On that note, wish you all a happy 2017!

The above article was first published in Mint newspaper on December 28, 2016. It can also be read here.

Book Review: The Wrong Idea of America

A former White House aide and economist makes a surprisingly sloppy appraisal of US’ problems

The Price of Prosperity: Why Rich Nations Fail And How To Renew Them
Todd G Buchholz
Harper, an imprint of HarperCollins Publishers
367pp; $29.99

Brexit has eloquently demonstrated what a terrible bummer nostalgia can be. Wallowing in a sense of persecution and aching for long-lost days of glory, British leaders ceaselessly campaigned to leave European Union; and, nostalgia made for a good tool to rouse, exhort and even to delude. But with “leave” leaders and campaigners increasingly abandoning ship, it is quite evident that nostalgia has limited currency in good governance.

Author Milan Kundera was rather cutting about it: “In the sunset of dissolution, everything is illuminated by the aura of nostalgia, even the guillotine.” When former empires and superpowers refuse to go gently into the fading light or remain steadfast in denial about reality biting their heels, nostalgia is a helpful analgesic that numbs the pain.

Todd G Buchholz uses this anaesthesia to quite remarkable effect. His latest adds to the growing list of works harking back to an imagined ideal period, keen to revive an illusory greatness. This sense of “greatness” is also quite unidimensional, with some of modernity’s post-War distortions embedded deep.Greatness of another kind

The author’s mission is simple: he sets out to diagnose what’s gone wrong with his great country — and here greatness is primarily a shorthand for prosperity — and how it can be revived. But do not be misled by the words “Rich Nations” in the title; this book is mostly about the US. His prescriptive analysis also betrays his politics, which often dips into partisan territory; ironically, he remains blissfully unaware of just how much this limited political worldview has eroded his “great’ nation.

For example, he laments how the Barack Obama administration has not taken advantage of current low interest rates by issuing long-tenor bonds of, say, 50 or 100 years’ maturity. Locking into long-maturity bonds at rock-bottom rates does indeed make sense. Instead, he sees White House opting for the shorter end of the yield curve because interest rates are usually lower at that end. And, here comes the conspiracy theory: lower interest rates help deflate debt-to-GDP ratios and provides an illusion of a lower budget deficit, “flattering the president’s fiscal profile”.

Strangely, the author ignores how a partisan Congress has dogged President Obama’s executive actions. Is there a possibility that the Obama administration issued short term bonds to avoid a combative and obstructionist Congress, which needed any excuse — including bonds longer in maturity and higher in interest rates — to trip up the president?

It’s also funny that Buchholz should complain about short term holdings: as former managing director of Tiger hedge fund, he should know a thing or two about them.The immigrant’s case

Buchholz’s starting hypothesis posits that as nation-states get prosperous, their birth rate drops. Consequently, there are more elderly than young working people. Who does all the work then? The immigrant, of course. And, then he remits his earnings home. Ergo: the immigrant should be integrated better into the American society, so that he can look up to George Washington as a forefather, even if he surrounds his Thanksgiving turkey with some ethnic dishes.

So there it is, Solution No. 1: a strange nationalistic formula that can cure numerous economic ills. His nationalism is also time-stamped: it must pay obeisance to only cultural icons adopted in the past 240 years; whatever existed before July 4, 1776, is not worth knowing. Nationalism also means regaining GMC — grit, mobility and confidence — which defined American exceptionalism in the past.

This is a strange salmagundi of suggestions, which flirts with patriotism without trying to sound too reactionary, strains to accept immigrants without sounding xenophobic. Anecdotal evidence makes up for actual facts, poor research leads to hypotheses, history is used to suit pre-determined conclusions.

Let’s look at poor research: “Traditional Hindu culture honours boys above girls, since the religion requires that parents be buried by a son.” Will somebody please educate Mr Buchholz on Hindu funeral rites, especially since Hindu Americans make up almost 1 per cent of the country’s population.Missing in action

And that’s exactly the nub of everything that’s wrong with this book. While dwelling upon patriotism and nationalism in good motherhood, apple-pie American style, Buchholz misses the US’ main fault-lines — growing inequality — or the myriad reasons behind stagnating real incomes.

It is glib to point fingers at outsourcing but how do you sort out Corporate America, with its flawed governance structures and undue focus on three-monthly profits (which rewards large-scale retrenchment if it helps nudge up stock prices)? Buchholz is silent. Not a single word about how strong, public institutions made the US a true liberal democracy and how their decay is perhaps an important cause behind the slip from “greatness”.

There is also no mention about the US’ hegemonic role in global negotiations, which has systematically eroded multilateralism. The US was one of the principal founders of the post-WWII global multilateral architecture which was then successfully subverted to suit narrow, partisan, private corporate interests. And, of course, Buchholz refers to the 2008 meltdown as a “global” financial crisis, which in itself is symbolic of how blinkers have narrowed the fabled American vision.

In trying to attempt a broad-brush future manifesto for the US, Buchholz may have bitten off a bit too much. There is a lot of research, but some of it fails to meet strict academic rigour and some of it is pointless. The book is readable, written in fast-paced prose and that is it’s only saving grace.

This book review was originally published in The Hindu BusinessLine. It can also be read here.  

What does Brexit mean for India?

On June 23, the United Kingdom will vote on whether they wish to remain a part of the European Union through the Brexit vote. The debate surrounding the vote has spurred many a heated and emotional debate. While the Indian government has not declared anything publicly - remaining in the EU would be beneficial to Indian businesses.

The Brexit referendum on June 23 — whether the United Kingdom (U.K.) chooses to stay on in European Union (EU) or to quit the mega regional agreement — has spawned its fair share of heated and emotional debates. Equities, commodities and currency markets have tossed and turned at either prospect. Indian markets have also been agitated at the likely outcomes. An impassive view, though, shows that Indian trade and business interests might benefit from UK staying in.

While the Indian government has not taken a public position on the issue, since it doesn’t want to be seen interfering in another country’s sovereign exercises, newspaper reports says Indian ministers have conveyed to their UK counterparts against exiting.[1]

This stand may have been informed by Indian business’s unambiguous and public support for UK staying on in EU. A statement issued by the Federation of Indian Chambers of Commerce and Industry (FICCI) says unequivocally: “…we firmly believe that leaving the EU, would create considerable uncertainty for Indian businesses engaged with UK and would possibly have an adverse impact on investment and movement of professionals to the UK.”[2] While the other leading industry association, Confederation of Indian Industry, has refrained from issuing any official statements, its representatives have expressed their reservations in different interviews.

There are valid reasons for Indian business concerns.

One, Brexit supporters say the UK will be able to sign new and better trade agreements — free of EU’s restrictive rules — with its strategic partners, such as India and China. They also cite the stalled India-EU trade and investment talks to buttress their argument. However, experience shows negotiating trade and investment pacts takes a long time. For example, the India-Korea Comprehensive Economic Partnership Agreement took five years to finalise[3]. There are concerns over the interim uncertainty for trade and investment flows.

There is another associated hassle. Assuming that Indian business tides over the interim uncertainties, it will still have to adhere to two different standards and rules when trading in the same geography. This entails additional costs.

Two, most Indian businesses use the U.K. as a springboard for their European operations, given India’s historical and cultural affinity with the country. If those favouring exit win, Indian businesses will have to install a parallel set-up on mainland Europe for conducting their operations. For instance, a portion of the Indian foreign direct investment (FDI) into the UK is to access the European markets. Now, Indian companies will have to separate their investments for the two distinct markets. This means additional costs, regulatory wrangles and legal complications. In addition, the complexity of negotiating new tax laws is likely to prove a nightmare.

Three, there are apprehensions that a Brexit success would inspire other EU members to explore a similar option. This would lead to fragmentation and the Indian government would then have to negotiate separate agreements with each country. This will add to the general confusion and add to regulatory and compliance costs for Indian business.

Finally, Brexit might raise myriad central banking problems. First, Reserve Bank of India (RBI) will have to re-calibrate its monetary policies to cope with the currency markets volatility. Additional liquidity measures might have to be implemented to stave off rupee volatility; this might temporarily derail the central’s banks monetary policy objectives for 2016-17.

But more importantly, if Brexit goes through, expect prolonged volatility in the currency markets and a sharp drop in both pound and euro values. This will not only mean a downward revision in valuation of RBI’s currency reserves, it will also require the central bank to re-adjust the composition of its ForEx reserves. Though not substantial, RBI’s volume of euro and sterling pound holdings are also not exactly negligible.

This feature was exclusively written for Gateway House: Indian Council on Global Relations. It can also be read here.

References
[1] Watch on Brexit, oil prices; The Telegraph; June 17, 2016;http://www.telegraphindia.com/1160617/jsp/business/story_91646.jsp#.V2TnN-Z96uU

[2] Singh, Dr Didar A; Ficci Secretary General; Ficci Comments on UK Referendum on Brexit; February 24, 2016; http://ficci.in/PressRelease/2293/ficci-press-feb24-uk.pdf

[3] Ahmed, Shahid; India-Korea CEPA: An Assessment; pages 45-98; Korea and the World Economy, Vol. 12, No. 1 (April 2011);http://www.akes.or.kr/akes/downfile/12.1.3_ahmed.pdf