One Local and Three Global Risks Facing India

As India lurches towards the 2019 general elections, it might be appropriate to list some of the risks that confront the country

The beginning of a new year usually sees think tanks and insurance companies list their version of perceived global risks over the next 12 months. As India lurches towards the 2019 general elections, it might be appropriate to list some of the risks that confront the country.

India’s numerous direct and indirect geopolitical challenges are well known. Some of these are: problems with a mendacious neighbour on the western border; China’s aggressive expansionism and its belligerent posturing in the South China Sea; smouldering conflicts between Saudi Arabia and Iran and Qatar aggravating; the proxy war in Syria coming to a boil; and tensions further escalating in the Korean peninsula.

War and geopolitical conflicts have persisted throughout modern history and 2018 is unlikely to be an exception. But, India’s primary concerns spring from geo-economics, traditionally neglected in future risk scenarios and risk mitigation frameworks.

Three large risks dominate the landscape and they all impinge on both the fiscal and current account deficits.

The first one is uncertainty over oil prices and India, a large net importer, is directly exposed to this volatility. Slow but certain recovery in the global economy has pushed oil prices from the 2015 lows of $30 per barrel to over $60 now. The future direction of oil prices will be decided in a power play between USA-based shale producers and the informal alliance between the Organization of Petroleum Exporting Countries (Opec) and Russia.

The unofficial Opec-plus arrangement has been successful in cutting oil production and slashing overstocked inventories. As oil prices have risen, record volumes have gushed from the US, threatening to eclipse production from the world’s two largest producers—Russia and Saudi Arabia. There are apprehensions that as prices further appreciate, some other South American oil producers might add to the US flood. This might force the Opec-plus grouping to push for further production cuts which could eventually threaten the agreement. Added to the mix is the risk that energy prices and flows might become the next weapon in the renewed US-Russia conflict.

As things stand, the Opec-plus agreement is scheduled to be reviewed soon and is likely to be extended. Even if they agree to wind down the arrangement, it has to be done in an orderly fashion, without disrupting markets. India is exposed to these volatilities through its reliance on oil imports, and its recent agreement with the United Arab Emirates to construct strategic oil reserves might be a bit too late.

India’s second geo-economic risk emanates from the wave of protectionism that threatens the global economy, particularly the ongoing trade war between the US and China. Apart from real and threatened tariff measures affecting India’s exports to the US, there are indirect consequences also.

The Economist Intelligence Unit notes in a recent publication, Cause for Concern: “Any ramp-up in protectionism would certainly have repercussions beyond North America and China. Prices and availability for US and Chinese products in the supply chains of companies from other nations would be badly affected. Consequently, global growth would be notably curtailed as investment and consumer spending fall back.”

India’s third geo-economic risk originates from a person: Jerome H. Powell, the Federal Reserve chairman. Based on his recent testimony to Congress, markets are sensing greater aggression compared with his immediate predecessor (Janet Yellen) and, consequently, expecting three to four interest rate increases during 2018. This could inject a new degree of turmoil in the markets, especially in the face of what many find unsustainable asset markets. The Reserve Bank of India’s sixth bi-monthly monetary policy statement noted: “Financial markets have become volatile in recent days due to uncertainty over the pace of normalisation of the US Fed monetary policy…The volatility index (VIX) has climbed to its highest level since Brexit.“

India, like many other emerging markets, is particularly vulnerable, given that recent asset market developments are predicated on global capital flows. Any reversal of these flows could spell trouble for not only asset valuations but also future capital raising. The World Economic Forum’s The Global Risks Report 2018 states: “…economic and financial risks are becoming a blind spot: business leaders and policy-makers are less prepared than they might be for serious economic or financial turmoil.”

It would be negligent not to account for risks on home terrain: various state assembly elections in 2018 and general elections in 2019. Governments, on the eve of elections, are tempted to loosen policy restraints, succumb to populist forces and spend more. Another election-related threat looms. Risk Map 2018 from specialist risk consultancy Control Risk states: “A political environment in which parties leverage emotive and controversial social issues for electoral support could foster the spread of adverse nationalist rhetoric, potentially posing risks for foreign businesses in 2018.”

That said, with 16 general elections already under India’s belt, the next one also falls in the business-as-usual category. Therefore, in the balance of risks confronting India, the beyond-border challenges remain trickiest as they run the risk of derailing India’s twin deficits and, as a consequence, critical macro variables like inflation and growth.

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

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

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.