Ruchir Sharma is the head of emerging market equities and global macro at Morgan Stanley Investment Management. He generally spends one week per month in a developing country somewhere in the world. In 2012, his book Breakout Nations – In Pursuit of the Next Economic Miraclebecame a best-seller. The paperback version of the book was recently published.
The book among other things pointed out that the most important factor behind decade long economic boom in the emerging markets, a worldwide flood of easy money, had been largely overlooked. That era of easy money is now coming to an end, believes Sharma. “My entire case which I have even made in the book was the fact that the entire boom of the last decade, where the growth accelerated from 5-6% to 8-9% was totally global in nature, and that had nothing to do with India specific factors. And that boom is now unwinding. Now can we undershoot 5-6% for a year or two? Yeah we can,” said Sharma. In this free-wheeling interview he speaks to Vivek Kaul.
Recently you wrote an article in the Foreign Policy magazine titled “The Rise of the Rest of India”, in which you talk about Indian states that have done well over the past few years. What are the factors that make for a breakout state among the Indian states?
A very simple definition is that the state has been able to consistently grow above the national average over a five to ten year period. Often you can associate that growth to some change in policy or leadership which has taken place. It is the same as the concept that I have used in my book Breakout Nations.
What is the concept of Breakout Nations?
It is about which are the countries that are likely to grow faster than the emerging market average and compared to other countries in the same income group, over a five year period. The same concept I have applied to the states in India. The question I have tried to answer is which are the states which have grown above the national average for a five to ten year period. Often this growth is associated with some leader who has to come power.
Which are the states right now you feel are the potential breakout states or have already broken out?
The states where the most impressive results have been seen are Gujarat, Bihar, Madhya Pradesh Odisha, Chhattisgarh, Delhi etc. These are the places where typically you have seen growth. The ones where the most impressive delta or change has taken place, have basically been Bihar, Odisha, Madhya Pradesh, Chhattisgarh etc. That area has done well.
What about Gujarat?
Gujarat has done well. But Gujarat was already doing well in the previous decade. Its impressive that it has done better from a higher base. Similarly for Maharashtra, growth rates have been okay, but in the last couple of years they have begun to fall. And Maharasthra is so dependent on the legacy industrial base or the whole golden triangle of Mumbai, Pune and Nashik, that I don’t know how to call it a breakout state necessarily.
Does the Indian constitution need to be re-jigged to give Indian state more economic power?
I’d say that maybe later but to me that is not the big thing. India has three lists, central, state and the concurrent list. And the big thing in India which has happened is that a lot of the issues which were in the state list and the concurrent list have been usurped by the the centre over time. And this has got to do with environment, mining, labour and even things like food. The whole culture needs to be a collaborative culture rather than the centre deciding or one leader deciding that okay these are the five things that India is going to do. We have had centralised leadership in the past. We have had the Indira Gandhi days. Now you can argue that is that what you want? Economic growth wasn’t great during that period. You can argue that it sowed the seeds of secessionist movements rather than bringing the country together. So I am not sure this heavy handed centralised leadership is what works for a country like India, where the polity is so diverse.
How can this be tackled?
The first thing you can start doing is by giving the power back to the states. India’s constitution envisaged a federal structure. It is just that over time particularly the 1970s and the 1980s, a lot of the state powers were usurped by the centre in the name of centralisation and in the name of the the secessionists taking over. Using that kind of cover, a lot of power was usurped. The whole point is that when you have national schemes, you have to give much more flexibility to the states. For example, the planning commission is now talking about 10% discretion to the states. That can be increased to 30% or 50%, rather than the criteria and the mandates being set by the centre.
In a recent column for the Financial Times you wrote “The irony is profound…Voters are wondering aloud how their “breakout nation” became a “breakdown nation”, seemingly overnight.”
Can states be breakout states when the country is in a breakdown mode?
Of course not. The national average is ultimately summation of the states. The only reason for optimism that I still find is that at the state level things are a bit better. State level leaders understand how to succeed in various parts of India rather than having a one size fits all national policy. Having said that, there are issues at the state level as well. Many states have their own crony capitalists. At times they are autocratic and anti democratic. But my entire point is that there is a ray of optimism.
Five years ago we were drawing straight lines stating that India’s GDP growth has been 8-9% and if it continues for 10 years where will we be. If it continues for 20 years where will we be and so on. Today it is hard to be optimistic on the country because there is so much negativity which is going around. To me the breakdown is a perception thing more than a reality.
Are there things that can be done to set it right?
One flaw to me is this culture of lack of accountability. If you look at India today the lack of accountability starts of from this whole separation of party and government. This has really been one of the fault lines of India which is that to run a country with a division between party and government is really very difficult. It fosters a culture of lack of accountability.
Could you elaborate on that?
There is this perception that has been for years now that there are something things which when you ask the people in the party, that why they are not being done, they say its the government’s responsibility to do this. And you ask the government and they tell you we don’t have the political power to do it. That lack of accountability then just flows down, with everyone being busy protecting their own turf and not taking any collective responsibility for anything. So that fault line to me for one needs to end, which is that you can’t have the separation of the party and the government. Also the fact is that if you look at the world what you see is that technocrats have not been very good as heads of states.
What do you mean by that?
They have been very good as support staff. But as heads of states if you look at Latin America and Asia, in the past, there are more examples of mass based leaders being successful. This is because reforms are political in nature. You can’t have them being administered by technocrats. Technocrats neither have the political understanding nor the political capital to implement reforms. Reforms need to be sold to people. Hence they are political decisions. Given this, you need a mass based leader at the top.
So that brings me to the logical question. Is that leader Narendra Modi?
See I am not sure of that. I don’t want to get into this thing about who it should be or who it shouldn’t be. My entire point is the fact that you have mass based leaders at the state level. The states are not run by technocrats. The breakout states that I speak about are run by politically smart people, who understand what needs to be done for development, and who get that connection of what is good economics and what is good politics. They see the bridge between the two. To me its about mass based leaders. Whether India can have this at the national level, I am a bit more sort of doubtful about.
But do successful state level leaders transform into national leaders?
It has never happened. Never. That’s the staggering point. Many leaders have tried to go out. The list is a long one. From Sharad Pawar to Mulayam Singh Yadav and even someone like a Mayawati, they have all tried to build a national footprint but they have never been able to succeed. Often having strong regional roots is a liability at the centre because then they begin to associate you only with one particular state. Even in the Congress I find it fascinating that there is so much talk as to who could be the next candidate for Prime Minister. I would think that logically it should be a chief minister rather than any of the national leaders.
But no one comes to my mind when I think of the Congress chief ministers…
Exactly. Logically we should argue that by any chance if Sheila Dikshit wins the next election then she should be the automatic choice for being the next PM candidate assuming that Rahul doesn’t want the top job. Someone like her should be the top person for that job. You need someone with a mass base, who understands politics.
What has suddenly gone wrong with the rupee. Between January and May it yo yoyed between 53.5 to around 55.5 to a dollar. But after that it has fallen dramatically...
A lot of it has to do with this fault line across emerging markets which is the fact that all countries with a high current account deficit have really taken a big hit as far as their currencies are concerned. The whole game began to change, as is well documented by now, after the Federal Reserve decided that it wants to think about tapering off its quantitative easing. After that the the US interest rates have risen a lot. The 10 year interest rate has gone up by 100 basis points since May. This has obviously led to people evaluating how much money they want to put up internationally.
But is the rupee falling just because of the Federal Reserve thinking about going slow on money printing?
The fact is that we have our own domestic problems which are compounding the whole thing. There is a sense that no one’s in charge and that we have an election coming up. There is a sense that it will be very hard for the government to make tough decisions to remedy this situation. Also, some of the problems have not been fully appreciated or recognised. One thing that we are just about coming to realise is that corporate India has too much leverage. It is very concentrated leverage amongst a few companies.
Do you see the rupee falling more?
We are in the midst of a panic and magazine articles have their own time cycles. In panics I just can’t say where these things will stop.
Can we say that the rupee is falling because the rupee is falling?
It’s a global panic now. The train has left the station and you can’t now catch it. And where it stops I don’t know. That is the sense I get. This is not say that this is not our problem. If we did not have a large current account deficit we wouldn’t have this problem today. But the fact that we have a large current account deficit and are being punished globally for it, is just a reality.
Should the RBI try and stop the rupee’s fall or let it find its own level?
I don’t think that we have a local solution anymore. All that the RBI can do is to moderate the fall. But we have seen with other currency attacks that when currencies are under panic foreign exchange intervention can be very ineffective. The classic case was the British pound in 1992. What India can do is to figure out how to correct these things over a period of time, which is what we should think about. RBI or whoever it was in charge in Delhi was doing much worse before. They were following this bureaucratic impulse that you come up with this one decision all the time to show that you are doing something.
Is India anywhere close to Thai crisis of 1998, where the country more or less ran out of foreign exchange?
I don’t think that it is as extreme as that. What happened in Thailand was a very extreme situation. Their short term debts and current account deficit were larger than what we have. Having said that one thing that I have known about crises is that you only know about these things post facto which is that after every crisis you come up with new factors to add to the list of the things that you should watch out for. I think that is the whole point. If you look at the past crises this does not seem as dire as what we saw in East Asia in 1997-98 or in India in 1991. But my only caveat here is that you always come up with the real reasons post the crisis.
Economic theory has it that as the currency depreciates exports go up and imports fall. But in the last two years as the rupee has fallen, our trade deficit(the difference between imports and exports) has gone up dramatically. How do you explain that?
The recent fall of the rupee has been very sharp but before this the rupee was adjusting for the high inflation we have had for such a long period of time. Exports are dependent on multiple factors, exchange rate being only one of them. Global demand which is another major factor influencing exports, has been weak. If just changing the nominal exchange rate was the game, then it would be such an easy recipe for every country to follow. You could just devalue your way to prosperity. But in the real world you need other supporting factors to come through. You need a manufacturing sector which can respond to a cheap currency. Our manufacturing sector, as has been well documented, has been throttled by all sorts of local problems which exist.
What are the other impacts of a falling rupee?
One of the factors that has been under-appreciated in this drive to see the currency go lower is that there is a negative effect also on the huge foreign exchange loans taken by the corporates. So even though there is not much that can be done to stop the rupee’s fall you can’t at the same time wish that you can just devalue your way to prosperity because there is a negative feedback loop which takes place.
And a lot of exports are import dependent…
Yes. There is a negative feedback loop because the corporate sector is heavily indebted in foreign currency. So that is the problem.
So there is a corporate debt crisis brewing up. You have pointed out in the past one in four Indian companies does not have enough cash flow to repay its debt. How do you see that playing out?
Those companies are just going to be shunned for a long period of time. People are now just investing in the 15-20 big companies and keeping away from the rest. India has lost a major competitive advantage. India’s advantage that used to be quoted to foreign equity investors, particularly portfolio equity investors, was how we have a huge number of companies to invest in. That has shrunk incredibly now. Some of these companies are not going to be able to survive, that’s the harsh reality.
Oil prices are at an all time high in rupee terms. What sort of impact will that have on the fiscal deficit. The finance minister said today(on August 27, 2013, the day the interview was taken) that come what may the government will meet the fiscal deficit target of 4.8% of GDP. Can we buy that?
We achieved the target last year. But you have to understand how that was done. The government will have to really freeze spending, and that in turn will compress consumer demand. The issue is whether they have the political appetite to do that. Or the government will have to raise diesel prices. Currently, they are Rs 9-10 behind on the under-recoveries. They need to raise diesel prices by such a massive amount to stick to the fiscal deficit target. So can the government meet its fiscal deficit target? Of course they can. But the price unfortunately in this case will be economic growth.
If they don’t increase diesel prices they have a problem. If they do increase diesel prices they have a problem.
Exactly. That’s the negative feedback loop I talked about. The days when you could just move the exchange rate from x to y and hope that exports will pick up, is a very simplistic solution. It does not take into account the negative feedback loops that can arise in terms of corporate debt denominated in foreign currencies and also the fact that the oil import bill gets considerably worse.
There is a small cottage industry that has sprung up in trying to explain why the current fall of the rupee is due to international factors. How much of the rupee’s fall is due to international factors and how much of it is due to local factors?
Probably we can divide it 50:50. As I said, the fact of the matter is that if we were not running a current account deficit today, we would not be having this panic. Sure there would be some sell off because all emerging markets are under pressure. Growth forecasts across emerging markets have been downgraded regardless of their current account deficit. Nevertheless, it is ironical that the Chinese currency is up for the year. The currencies of some of the countries like Mexico and Philippines have fallen very slightly because they don’t have current account deficits. It is a very current account deficit centric problem that we are currently seeing now.
But the current account deficit did not appear overnight.
This is the irony, that the crisis has been badly managed. These fault lines have existed for a while. The current account deficit has been going up continuously over the last two to three years above levels which most economists consider to be sustainable. And we ignored that. In our desire to keep growth artificially high in 2009 and 2010, we engaged in a lot of stimulus government spending. We let our fiscal deficit blow out. We violated the FRBM (Fiscal Responsibility and Budget Management Act) and have never ever gone back to that. The Prime Minister has ignored so many fault lines.
Could you elaborate on that?
He dismissed crony capitalism as being something which possibly is the right of passage that any country going through an early stage of development will have to go through. Every such country will have its own robber barons. So what is the big deal that India does? He dismissed the rise in inflation by saying that rise in food prices are a sign of prosperity. He kept on going on about how savings and investment ratios are so high that growth is unlikely to ever dip below 8-9%. And on each one of them any sort of serious economic analysis would suggest that these arguments were flawed.
And this had a huge impact?
We know that if you have crony capitalism it can lead to a backlash against wealth creation. Look at issues like the ban on iron ore exports, the mining of coal etc. Some of this is because we have had crony capitalism and that has led to a backlash against wealth creation and that has led to these bans to start with.
What about the inflation argument offered by Manmohan Singh?
The whole business about inflation rising because of a rise in prosperity is a real myth. Why has China not seen this massive inflation problem despite 30 years of great growth? Why did Korea and Taiwan did not see any sustained inflation pressure? Or even Japan during there very high growth phrases? Why? This is a total myth. India’s inflation rankings have deteriorated considerably. Our inflation used to be always below the emerging market average for the last 20-30 years. It’s only in the last three to four years that we have been way high than the emerging market average, not just bit higher, but way higher. Also, other countries with high savings and high investment have also seen a growth fall off. The Soviet Union’s investment to GDP ratio was 35% before the collapse. It was all bad investment. This is what happens when there is too much academic focus on things.
In a recent column in the the Financial Times you wrote “A not so funny thing happened while the world was watching for an emerging market crisis to erupt in China. The crisis erupted in India instead.” Could you elaborate on that?
For the first half of the year a lot of focus was on China. China has had a massive credit binge over the last five years. And in recent times we have seen in the US, Spain etc, typically countries which have had a massive credit binge are vulnerable because when you increase your debt over a short span of time of three to five years you accumulate a lot of bad assets. And that leads to trouble for the entire banking system. So people have been very worried about the high debt to GDP ratio in China. Even I have been concerned about it and written about it. There were people sending out alerts on a China crisis. I think very few people were sending out alerts about a India crisis.
Exactly. That’s the irony to me. Everyone was looking for a crisis in China and it ends up erupting in India, first.
The Indian economic growth has fallen to around 5%. Do you see us going back to the good old Hindu rate of growth of 3.5%?
No that’s not been my case. Hopefully things have changed there. There is a lot of natural buoyancy. What I do find more impressive compared to 30-40 years ago is the quality of state chief ministers. They have improved a lot in comparison to the 1970s and the 1980s. In fact even the 1990s. The moment we think of the third front we all get a bit scared because we think of the motley crew which ran the government in the mid 1990s. If you look at the state chief ministers today, they are generally better. My entire case which I have even made in the book was the fact that the entire boom of the last decade, where the growth accelerated from 5-6% to 8-9% was totally global in nature, and that had nothing to do with India specific factors. And that boom is now unwinding. Now can we undershoot 5-6% for a year or two? Yeah we can. We overshot for a while, we can undershoot for a while. That is still my base case scenario. I am not willing to give up on India and say that India is going to go down the route of 3% growth which existed till 1980. Also it is important to remember that the aspiration levels of the people here are too high now to tolerate that kind of an outcome. They will force something to happen to change that outcome.
Any view on the food security bill which was recently passed by the Lok Sabha?
I have no strong view on that. My concern is about the fact that you can’t keep writing cheques that which the country can’t cash. We need to understand that we can only spend that much. And if we have to spend extra then we have to show stuff that we can cut elsewhere. The big damage of the food security bill is not the bill itself but the fact that why was this not used at the very minimum by the Prime Minister as an excuse to say okay, if you want to pass this, you have to raise diesel prices by an ‘x’ amount, so that we offset some of the cost.
The interview originally appeared in the Forbes India magazine edition dated September 20, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
My father takes the Delhi Metro to work. Of late it takes him nearly 25 minutes to get into the Metro station in the evening. This is because the line for the security check is very long.
Basically the high price of petrol and diesel is forcing more and more people to take the Delhi Metro. And things will only get worse on this front in the days to come.
On August 15, 2013, the price of the Indian basket for crude oil touched an all time high of Rs 6680.46 per barrel (around 159 litres). In dollar terms the Indian basket for crude was priced at $ 108.59 per barrel. One dollar was worth Rs 61.52 on August 15, 2013. And this led to a price of Indian basket of Rs 6680.46 per barrel.
This number would have gone up even further today, given that the rupee has depreciated further against the dollar. It touched an all time low of 62.76 to the dollar today. Even if we assume the same price of the Indian basket in dollar terms (i.e. $108.59), at Rs 62.5 to a dollar, this works out to Rs 6786.88 per barrel. This is higher than the price on August 15, 2013.
In a press release dated August 16, 2013, the Ministry of Petroleum and Natural Gas, talks about the increasing under-recoveries on diesel. The under-recovery on diesel has gone up to Rs 10.22 per litre for the fifteen day period ending August 15, 2013. Before this, the under-recovery was at Rs 9.29 per litre. This leads to a daily under-recovery of Rs 389 crore or Rs 11,670 crore for the month. That’s the under-recovery just on diesel. Other than this there are under-recoveries on cooking gas as well as kerosene. The under-recoveries for the first quarter of 2013-2014 (i.e. period between April 1, 2013 and June 30, 2013) stood at Rs 25,579 crore.
This is likely to go up during this quarter, given the depreciation of the rupee and the increasing price of oil. Oil prices have been going up internationally because of the uncertainty that prevails in Egypt. The “fear premium” is getting built into the price of oil. As a report in the Daily News and Analysis points out “Egypt controls the Suez Canal and the 320 km Suez-Mediterranean (Sumed) crude oil pipeline, which together account for around 2.5% of the global crude oil supply. Logically, any threat to these two major infrastructural landmarks could lead to a disruption in supply from the Middle East to customers in the United States and Europe.” And this is driving up the price of oil in dollar terms. Along with this the depreciating rupee has led to a “double whammy” for the price of oil in rupee terms.
Based on the recommendations of the Kirit Parikh Committee, on June 25, 2010, the government of India announced full deregulation of the prices of petrol and at the same time announced that diesel prices would soon follow suit. This meant that the international price of oil would determine the price of petrol and diesel in rupee terms. Till then, the government used to force the oil marketing companies(OMCs) to sell oil at a price which did not make commercial sense for them. The government subsequently compensated the OMCs for these under-recoveries.
While petrol prices were deregulated, the same did not happen in case of diesel prices. As A Citizen’s Guide to Energy Subsidies in India points out “The Government of India (GOI) on 25 June, 2010 announced the full deregulation of the prices of two crucial petroleum products: petrol and diesel. Henceforth, prices of these two products will be determined by the unfettered play of market forces and government “subsidies” on these products…Petrol prices were liberalized from June 2010 and it was reported that diesel prices would soon follow suit.”
But the diesel prices did not follow suit. “The government announced on November 24, 2011 that diesel price deregulation had been put on hold owing to the rise in the level of food inflation. a rise in diesel prices would result in an increase in freight charges levied by transport companies. This would, in turn, feed into higher prices of food commodities,” the report points out.
Only very recently, the government started to increase the price of diesel, to reduce the under-recoveries. But with the international price of oil going up and the rupee depreciating against the dollar, even at higher prices, the under-recoveries on diesel haven’t come down. The under-recovery on diesel was at Rs 9.29 per litre in January. It is now at Rs 10.22, despite diesel prices going up.
It remains to be seen how the government deals with the situation. If it increases the price of diesel it will translate into higher inflation.
If it doesn’t pass on the higher prices to the consumers, then the fiscal deficit of the government will shoot up because it will have to compensate the OMCs for the under-recoveries. Fiscal deficit is the difference between what a government earns and what it spends.
Elections in five states are to be held in December 2013/January 2014. These states are Delhi, Mizoram, Madhya Pradesh, Rajasthan and Chattisgarh. The Congress is not in power in three out of the five states.
Prices of diesel were not raised before the Karnataka elections. Given this, it is likely that the price will not raised in line with the ‘real’ price of diesel. Hence, the fiscal deficit of the government is likely to go up. “We are concerned with the government’s ability to stick to its budgeted fiscal deficit target,” wrote analysts of Nomura in a recent report titled India: turbulent times ahead.
A higher fiscal deficit will lead to higher borrowings by the government. This will lead to higher interest rates as a higher government borrowing will crowd out others. This will slowdown economic growth even further.
If the government tries to maintain the fiscal deficit and at the same time not pass on the higher price of diesel to end consumers, then it will have to slash spending. As the Nomura report points out “If the government wants to stick to its budgeted fiscal deficit target (of 4.8% of GDP in FY14), it will have to either slash spending or substantially hike diesel prices – either way, it will hurt growth.”
Whatever the government does on the diesel price front, the short point is that we are screwed.
The article originally appeared on www.firstpost.com on August 19,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Every country needs foreign currency to pay for its imports. The foreign currency needed is typically the American dollar or the euro. This foreign currency is earned through exports. India is no different on this account.
But what happens when the imports are greater than exports as is the case with India? This leads to a situation where the country does not have enough foreign currency to pay for its imports. How does the country then pay for its imports? What comes to the rescue are remittances of foreign currency made by the citizens of the country living abroad. These remittances can then be used to pay for imports. India is the world’s largest receiver of remittances. In 2012, it received $69 billion, as per World Bank data.
But even with such large remittances being made, a country may not have enough foreign currency going around to pay for its imports. In such a situation, the country is said to be running a current account deficit (CAD). In technical terms, the CAD is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances.
In 2012, India’s CAD stood at $93 billion, which was only second to the United States in absolute terms. As Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management point out in a report titled Don’t Take Your Eye of the Ball “At $93billion, India’s CAD in 2012 was second only to the US in absolute terms, and higher than the UK, Canada and France.”
The following table from the report shows the list of countries with the highest CAD in absolute terms. Even if we compare CAD as a percentage of GDP, only South Africa and Turkey are ranked ahead of India.
India’s high CAD is primarily because of the fact that it has to import a large portion of the oil it consumes. For the year ending March 31, 2013, the country imported $169.25 billion worth of oil. This forms nearly 34.4 percent of India’s total imports.
With oil prices falling in the recent past, this has given reason for hope that India will be able to control its CAD in the time to come. The price of the Indian basket of crude oil stood at $101.58 per barrel as on May 3, 2013. On January 31, 2013, the price was $111.44 per barrel. So, clearly the oil price has fallen over the last three months and this should help India control the CAD is a logical conclusion being made.
And this has led to a lot of optimism among the lot who run this country. The finance minister on a recent visit to the United States said, “If exports rise sharply, if the oil prices soften more quickly, the current account deficit could be contained at 2.5 percent even by next year.”
This is being a tad too optimistic, as Hattangadi and Kelkar put it, “even if we assume lower energy prices will result in a saving of about $20 billion in the current fiscal year”. This means the CAD will stand at over $70 billion, which is not a small amount by any stretch of imagination.
What has also helped in controlling a galloping CAD to some extent has been a fall in the price of gold and various steps taken by the government to discourage buying of gold, like increasing the import duty on it. Gold imports declined by 11.8 percent to $50 billion during the period April 2012-February 2013.
Falling oil and gold prices may have come as a boon but what has somewhat negated this effect is rise in the import of coal. In the first nine months of the financial year 2012-2013 (i.e. the period between April 1, 2012 and December 31, 2012), coal imports jumped 70 percent. This trend is likely to continue. “Despite having the fifth largest coal reserves in the world, India’s coal imports this year may rise to 130 million tonnes, up 50 percent from two years ago,” write Hattangadi and Kelkar. In 2012-2013 (i.e. the period between April 1, 2012 and March 31, 2013), the coal imports are expected to be around 110 million tonnes.
So unless India takes concrete steps to address its energy sufficiency, its high CAD is likely to continue. As Hattangadi and Kelkar write, “India has done little to adequately address energy self-sufficiency. After declining for almost 20 years until 2005, US energy self-sufficiency has gone up from 69 percent to 80 percent. In contrast, India’s energy self sufficiency has been falling from 90 percent in 1984 to 63 percent in 2011.”
With the coalgate scam currently haunting the government, it is unlikely that much will happen in the area of encouraging private production of coal in the months to come.
As mentioned earlier India ran a CAD of $93 billion in 2012-2013. What this means is that the sum total of foreign exchange that came in through exports and remittances was not enough to pay for imports. So where did the remaining foreign exchange to pay for imports come from?
This is where foreign investors came in. Foreign investment in the form of foreign direct investment and portfolio investment (the money that comes into the stock market and the debt market) has been in the range of $40-50 billion in the five out of last six years.
Foreign investors bring money into India in the form of dollars, euros or yen, for that matter, and exchange it for rupees to invest in India. This foreign exchange accumulates with the Reserve Bank of India or any of the banks, and is bought by importers looking to pay for their imports.
Hence it is safe to say that to a large extent India remains dependant on foreign investors to continue financing its CAD. And that explains why Finance Minister P Chidambaram has been on several foreign roadshows over the last few months trying to encourage foreign investors to invest more in India.
But there are two problems here. As Chidambaram said in the budget speech earlier this year, “The key to restart the growth engine is to attract more investment, both from domestic investors and foreign investors. Investment is an act of faith.”
And faith can turn around very quickly. When the financial crisis erupted in 2008-09, foreign investment fell to $8 billion from the $40-50 billion level. Any sense of a crisis can lead to foreign investors stopping to bring money into India. They might also start withdrawing the money they have invested in India.
The other problem here is that how does the finance minister motivate foreigners to invest in India, when Indian businessmen are looking to invest abroad. As Ruchir Sharma writes in Breakout Nations, “At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 percent, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2 percent just five years ago.”
And if all this wasn’t enough imports are not the only thing competing for foreign currency. Over the last few years more and more Indian businesses have borrowed abroad given the low interest rates that prevail internationally. This money now needs to be returned. Hattangadi and Kelkar estimate that “the total amount of debt that will likely come up for redemption or refinancing in the current year is about $165billion, which is about $20billion higher than last year.” Hence, imports and repayment of debt will be competing for foreign currency.
So yes, oil prices and gold prices are falling, but there are other reasons to worry about, when it comes to the current account deficit, something the political class that runs this country, isn’t really talking about.
The article originally appeared on www.firstpost.com on May 7,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Its early morning in Lutyens, Delhi. Chidu has just gotten up from sleep and is sitting in the lawn in front of his bungalow, waiting for his attendant to bring him his cup of morning coffee and the business newspapers. The attendant soon arrives very excited by the fact that Chidu has been awarded an Oscar by The Economic Chimes.
“Sir, sir, sir,” the attendant came running with the day’s pink papers and a cup of strong kapi like the way Chidu liked it.
“What happened?” asked Chidu. “Did Madam say something?”
“Madam?” the attendant asked. “When does she ever say anything? Mr Patel does all the talking for her.”
“Oh. You got me worried on a Monday morning,” said Chidu, sipping his cup of filter coffee, and adjusting his Ariel white Mundu. “So why are you so excited then?”
“Sir, you have been awarded the Oscar!” exclaimed the attendant.
“Oscar?” wondered Chidu adjusting his pashmina shawl.
“Yes sir, Oscar!”
“They must have given it to me for lifetime achievement then,” said Chidu with a proud smile on his face and a ‘halo’ around his head.
“Lifetime achievement?” asked a surprised attendant.
“Yes. What is politics if not a performance?” stated Chidu. “We politicians are the best actors after all.”
“But sir you are not even 70!”
“So?” asked Chidu.
“So you cannot be given a lifetime achievement award,” explained the attendant.
“But why not?” quipped an irritated Chidu. “In some cases things happen a little faster.”
“Arre sir, you are not getting my point.”
“What is your point?”
“Sir, lifetime achievement awards are given to those who have already retired. Or to those who are not retiring, and are expected to retire after they accept the award,” the attendant said. “
“And, you are a young turk by Indian political standards,” the attendant said. “Your days in politics are just about to start.”
“Oh, yes. Oh, yes. I am only 67 now. My best days are clearly ahead of me. I am just a little over a year older to Madam, you see.”
“For a moment you had me worried sir,” the attendant remarked with a slightly worried look on his face. “In my mind I had almost started to look for a new job.”
“Don’t worry. Don’t worry. I still have at least two decades of politics left in me,” said Chidu trying to pacify his attendant. “So what is this Oscar thing then?”
“Sir, The Economic Chimes has given you an Oscar,” answered the attendant.
“The Economic Chimes?”
“Well, when I was at Harvard, one of my dorm mates told me the Oscar is awarded by the Academy of Motion Pictures, Arts and Sciences.”
“So how can The Economic Chimes give me an Oscar?” wondered Chidu.
“Maybe the promoters must have picked up a stake in the Academy also, like they do in other companies. You know they must have assured the Academy some publicity in lieu of a stake?” said the attendant.
“Maybe,” replied Chidu, picking up The Economic Chimes to check.
“Sir how is the kapi sir?” asked the attendant. “Got my wife to make it today.”
“Oh. Is that the case?” said Chidu, talking to himself.
“Yes sir. She makes good coffee no?”
“I am not talking about the coffee,” blurted Chidu, slightly irritated by now.
“I am talking about the Oscar,” said Chidu. “The Economic Chimes has given me a growth Oscar.”
“Oh. I saw Oscar and your name in the headline and got totally excited.”
“I don’t blame you. These pink papers are so boring that it is very difficult to read beyond the headline anyway,” said Chidu. “On most days they put me to sleep.”
“But what is a growth Oscar sir?” asked the attendant. “I thought an Oscar is an Oscar.”
“Well it is a figure of speech. What they are basically trying to say is that I will do a good job in the budget of creating economic growth.”
“Economic growth?” wondered the attendant. “But sir things are so bad. Inflation is almost at 10%. Our growth in imports is nearly 13 times our growth in exports. Our current account deficit is at an all time high. Our fiscal deficit is reaching monstrous proportions. Our external debt is huge. The industrial growth contracted by 0.6% in December. Interest rates continue to remain high. Another pink paper reported today that fresh orders of companies are at a four year low.”
“Yes, I know all that,” said Chidu, sipping his coffee.
“So, where is the question of economic growth?” asked the humble attendant.
“Well, do you work for me? Or the opposition?” quipped Chidu. “Have you joined the BJP?”
“No sir I am totally secular till now. I work for you sir,” replied the attendant. “But then if you can’t convince me about economic growth, how will you convince the world at large?”
“World at large? What is that?” replied Chidu. “I only need to convince Madam, her son and Mr Patel.”
“But the world at large?”
“Oh The Economic Chimes is already doing that. They are batting for me.”
“But how can they so positive in such dark times?” wondered the attendant, finding it very difficult to let go.
“I can see through their strategy,” said Chidu. “I went to Harvard after all.”
“Be Positive is their strategy.”
“But as far as I know that is a blood group?” remarked the attendant.
“Okay. I am in no mood for poor jokes right now. See the idea is that if the largest pink paper projects news positively, then people will soon start believing that things are actually positive and once people start believing that things are positive, things might actually turn out to be positive.”
“It’s a mind game my dear.”
“But what if people don’t feel positive?” asked the attendant.
“Yes that is indeed a possibility. But then what is the harm in trying? It is like the concept of Aal is Well from the movie 3 Idiots. If you keep repeating Aal is Well, Aal is Well, things turn out well.”
“Yes sir,” said the attendant. “But isn’t that only in the movies?”
“That is the challenge my dear, to turn reel life into real life,” said Chidu, rather philosophically. “And for that we all need to be actors, from the media to the politicians.”
“Yes sir,” replied the attendant, finally getting the gist of what his boss was trying to convey.
“Oh and your wife makes wonderful coffee!” said Chidu.
“Ha ha! So you are trying the B+ strategy on me!”
“Well if I can’t convince you, how will I convince the world at large?” said Chidu, trying to have the last laugh. “We politicians are brilliant actors after all and if not an Oscar, I at least deserve a Filmpair.”
The article originally appeared on www.firstpost.com on February 25, 2013
(Vivek Kaul is a writer. He can be reached at [email protected])