Prep for civil services : August 2013

Friday, August 30, 2013

Economist - India's economy scares

THE rupee’s tumble continues to grip India. On August 29th Duvvuri Subbarao, the departing boss of the central bank, told an audience in Mumbai of the widespread “dismay about the ferocity of the depreciation”. Today, on August 30th, I spoke to the boss of a big hotel in the city who says he is preparing to dollarise his business. The rupee is too flaky to operate in, he said. “It’s just like Russia and Indonesia in the 1990s.” Shortly after this, Manmohan Singh, the prime minister, addressed parliament on the matter. While part of the currency slump is a “natural” correction to reflect high inflation, he said, “foreign exchange markets have a notorious history of overshooting. Unfortunately this is what is happening”.

That statement looks correct on a three-day time horizon. The rupee almost breached 69 per dollar earlier this week. On August 30th it bounced back to 65.7, making it the best-performing big currency worldwide that day, though still leaving it down 16% year-to-date. The vote by Britain’s parliament against military action in Syria has helped push down oil prices. That is helpful for India, a big energy importer. And some of the Reserve Bank of India’s tweaks have calmed nerves. On August 28th the central bank said it would provide dollars directly to India’s big oil-importing firms. That will stop them having to sell rupees in the spot market. It is an indirect way for the RBI to use its reserves to support the exchange rate.

Whether India’s currency has stabilised is another matter. There is plenty to worry about. The prospect of the Federal Reserve ending its purchases of bonds draws ever closer, especially with good news from the American economy this week. That means the “Great Exit” of money from emerging markets may continue. Both Indonesia and Brazil raised interest rates this week to protect their currencies, making India relatively less attractive. A foreign investor in town told me at he would not invest in India until it raised its rates. He had arrived in India expecting to allocate more funds to it now prices have fallen, but after several days he felt more pessimistic and reckoned that the slump had further to go.

As if to confirm that view, GDP figures were released on August 30th for the quarter to June. Growth slowed to 4.4%, from 4.8% in the preceding quarter. Manufacturing contracted. These figures do not yet reflect the credit crunch that has taken place over the last two months, so it seems likely that GDP growth will slow even further. A good monsoon may boost farming, but the formal, industrial bit of the economy is in dire condition. On August 27th Palaniappan Chidambaram, the finance minister, said that the government had fast-tracked $27 billion of power and other projects stuck in red tape. But I have yet to find a full account of these proposals. In the past such announcements have contained far more hype than substance, as we explained in an article in June.

That credit crunch is still pronounced, even if the rupee has recovered a little. Most measures of stress in the financial system are still flashing red, reflecting Indian banks’ bad debt problem. Credit default swaps on State Bank of India, which measure its risk, have soared. Short-term market interest rates have not come down. The government has yet to show much desire to clean up banks’ dud loans and is instead putting more pressure on them to “extend and pretend”.

Even as mayhem stalks the currency market, the election campaign is ramping up. India’s legislators may be lousy at making decisions about economic reform, but they are remarkably decisive at passing more populist measures. Early this week a new programme to increase food subsidies was agreed. Moody’s, a credit rating agency, warned that this will put more pressure on the public finances. Then the lower house of parliament approved a new law on land reform. It replaces a decrepit act that is over a century old. But businesses say the new rules will make it even harder to buy land to set up factories, with long delays becoming the norm.

If the rupee still looks vulnerable, India has three options, none very palatable. One is to let the currency fall further. In most countries a cheaper currency would boost exports and help close the current-account deficit. But India’s manufacturing industry is too small and too bound in red tape to ramp up quickly. So a turn-around in the balance of payments may take time during which investors could panic. Meanwhile the weaker currency may destabilise the domestic economy by adding to inflation and increasing the government’s subsidies on fuel and thus its borrowing.

The second option is to do the opposite and increase interest rates to attract more foreign money in, following the path of Indonesia and Brazil. But this would further hammer Indian industry, which is already in poor shape, and probably increase bad debts at banks too. If the economy slowed further as a result, equity investors might begin to worry about corporate earnings declining and pull out their roughly $200 billion of investments in listed shares. Inducing a credit crunch in India might make things even worse.

The last option is to lower government borrowing. It is running at 7% of GDP (including India’s states) and has stoked excess demand in the last few years, widening the current-account deficit. The populist political mood doesn’t make big spending cuts easy, though, and while it is often accused of epic profligacy, India’s central government has pretty low expenditure relative to GDP—about 15%. There is simply no way it can cut its way to a balanced budget. What India really needs is more tax revenues. But with a narrow tax base—only 3% of Indians pay income tax—this might mean concentrating tax rises on the formal economy, which is already reeling.

For now my sense is that the authorities’ plan is to let the rupee trade freely but hold out the threat of an interest rate rise or direct intervention in the currency market to try to scare off speculators. At the same time they will squeeze borrowing as much as is possible during an election and use administrative measures, such as higher duties, to try to cap imports. It is a bet that the economy will pick up soon and that growth will make India’s problems fade away. The trouble is that the economy is still decelerating.

Wednesday, August 28, 2013

The Hindu - india and currency swap agreements

Rattled by the continued decline in the value of rupee, the Commerce and Industry Ministry has constituted a task force comprising representatives from the Ministry, Department of Economic Affairs, Reserve Bank of India (RBI), SBI, industry bodies FICCI, CII and Federation of Indian Exporters Organisation (FIEO) to work out currency swap arrangements with key trading partners of India.

An official statement said that in view of the rising trade deficit and consequent CAD, a need has been felt to examine the role of currency swap arrangement/agreements in order to suggest a possible mechanism to address the issue. It has been decided to constitute a Task Force.

The task force will restrict itself to issues pertaining to the swap of national currency for trade purpose only. “The purpose of the task force is limited to examine swap of national currency for trade which is distinct from currency swap agreements of Central Banks,’’ the official statement said.

The Task Force will examine various types of such arrangements and their implication for India’s trade and financial system besides studying the pros and cons of such pacts. It would also explore the possibility of currency swap agreement between India and identified countries and make recommendations accordingly. The Task Force may submit its recommendations to the Department of Commerce in four weeks, it said.

The issue had come up for discussion during the Board of Trade meeting chaired by Commerce and Industry Minister, Anand Sharma. Currency swap agreements involve exchange of one currency for another currency. A dollar swap arrangement would help India support the rupee. Swap agreements in US dollar is expected to provide confidence to the market and prevent excess volatility in financial and foreign exchange markets.

Currency swap has emerged as an important derivative tool after the global financial crisis of 2008 to hedge the exchange rate risks. India has signed currency swap agreements with Japan ($15 billion) and Bhutan ($100 million). China has shown active interest in entering into such an agreement with India, but it is yet to be signed.

The inter-departmental group of the Commerce Ministry will also have representation from Export Credit Guarantee Corporation of India. It would explore the possibility of using local currency for trade with major trading partners and advice on pros and cons of the same, it added.

DNA - Iran- Afghanistan- India

Afghanistan, its neighbours are busy with plans to deal with the blow back and shore up their interests. India and China have taken the lead in Afghanistan's infrastructural and economic development, and Kabul has been promised military support too. However, prosperity may be denied the resource-rich Central Asian country just yet. Normalisation needs stability, which is premised upon economic development, which in turn is affected by Kabul's success against the Taliban. For all the assurances given, that may be easier said than done.

With the US retreat from Afghanistan and resources stretched thin everywhere, the most effective way of fighting the Taliban is a coalition. Not only does this share resources but it also allays suspicions of each partner. Iran and India collaborated in a limited manner after the last US withdrawal from the region; this time, Russia may be an additional partner, though Pakistan, China, and the United States have their own agenda.

As modern wars have taught us, victory for an anti-Taliban coalition has not only a military component but also lies in economic and social development. Iran offers one solution to this via its port of Chabahar on the Arabian Sea. India partially developed Chabahar under a 2003 agreement, and as the only Iranian port to have access to the sea, Chabahar eases the pressure on Bandar Abbas, Iran's major port in the Straits of Hormuz. Tehran has asked India to complete developing the port and connect it to the Trans-Iranian Railway via Fahraj but the latter has been dragging its feet on the project.

Afghanistan has also been eager to see Chabahar grow, creating alternate trade routes than through the Pakistani port of Gwadar. Afghanistan's relations with Pakistan have not been smooth, and despite agreements, there have been difficulties in the trade route. While Iran has already connected the Afghan city of Zaranj to Chabahar, the Indian Army's Border Roads Organisation constructed a major road between Delaram and Zaranj in 2009, linking Chabahar to the Kandahar-Herat highway.

Chabahar would ease many problems at once - for Iran, it would allow easier access to the ocean and Tehran would be able to draw transit fees for the commodities that would pass through; land-locked Afghanistan would be given an alternative to Gwadar, a little over 100 kilometres from Chabahar; India would be able to address its balance of payments with Iran and bypass its rival, Pakistan, in accessing Afghanistan, Iran, and Central Asia; pipelines carrying oil & gas from Central Asian republics would also have a much shorter route to the sea, saving millions. Furthermore, Gwadar's location in the troubled Pakistani province of Balochistan makes Chabahar a better choice for international shipping.

Not surprisingly, Washington continues to run with the hares and hunt with the hounds in South Asia. The United States has been negotiating with anyone who might allow it a dignified exit from Afghanistan; on the one hand, it is talking to the "good" Taliban, while on the other, it has repeatedly urged India to play a greater role in Afghanistan. Meanwhile, Washington's military assistance to Pakistan continues unabated, despite Delhi's strong objections, so that those "Rawalpindi boys [may] be able to face India with dignity."

However, the rub lies in the sanctions regime implemented by the United States and the European Union on Iran for its nuclear programme. Washington is well aware of the impact the quick development of Chabahar can have on the Iranian economy as well as its ability to evade sanctions and is therefore unwilling to relent in its confrontation with Iran for the sake of making gains in Afghanistan. While both states can tango around inspections forever, the critical issue for Iran is its right to enrich uranium for its reactors. This issue has plagued the non-proliferation regime since its inception in 1968 and was one of the major sticking points in the United States' negotiations with India on civil nuclear cooperation in 2008.

Even if Washington were willing to consider acceding to Iranian enrichment rights in exchange for the most stringent inspections conditions, it would be impossible to do so. While Iran's concerns about sovereignty are similar to Indian objections raised in the Eighteen-Nation Disarmament Committee in the 1960s, unlike the latter, the former has signed the Non-Proliferation Treaty and is bound by its stipulations. Furthermore, Iran's support of the Hezbollah and Syria, its relatively opaque and authoritarian system, its Holocaust denial, and sharp anti-Israel rhetoric raises warning flags in multiple global capitals. Allowing Iran to enrich uranium beyond regulations lowers its breakout potential, something no one has the confidence in Tehran to allow. Finally, making an exception for Iran on enrichment, that too so soon after making one for India, would severely destabilise the non-proliferation regime.

Thus, the United States' policy in one region of the world conflicts with its objectives in another and it takes little imagination to know which goal is more important to Washington. Similarly, it would be surprising if other powers were to kowtow to Foggy Bottom's wishes. Despite sanctions, India and China have been purchasing oil and iron from Iran; while Russian oil revenue benefits from Iranian crude being under sanctions, Moscow is willing to forego those benefits for geopolitical ones by using Iran against the West. Sanctions have forced Tehran to pivot east, and it remains to be seen how hard the US Congress is willing to pinch Iran's largest trading partners - China, India, Japan, and South Korea - to make its point.

India finds itself in a delicate position - it needs access to US trade and technology, and however much it is publicly denied, to help it balance China. Yet its most valuable partner arms Pakistan, is an obstacle in Afghanistan, and complicates ties with Iran. Some in the Indian commentariat fantasise about Delhi playing a role in bringing Tehran and Washington to the table, but that is all it will remain. To play a successful arbitrator, India must have something to offer both sides. India's geopolitical incompetence and an economy that is committing seppuku as you read leaves little for it to offer. After decades of shirking responsible policy, Delhi is suddenly finding that it has nothing to offer when it counts.

The Hindu - probable war on syria

There is neither any justification for the West's imminent military intervention nor any substance to its claim that the assault will be limited and short-lived.

An air strike on Damascus and other strongholds of the Bashar al-Assad regime in Syria, led by the U.S, U.K. and France, seems imminent. In the days and weeks to come, we will be duly informed by pundits that Syria is not Iraq - and hence not a shambolic intervention - what with its proven arsenal of weapon of mass destruction (WMDs). This military assault, we will be told, will be quick and decisive, and intended only to deter Mr. Assad and other war criminals from using chemical weapons. Above all, the familiar refrain of the United Nations’ “inability to act” on Syria will be sold as the primary motivation behind this illegal intervention.

For starters, the claim that a Western air strike will be short-lived – according to a Washington Post report, lasting for all of two days – is absurd. It is incredulous to suggest a “drive-by” attack will somehow make the Syrian government think twice before using chemical weapons, if it has not already done so. On the contrary, Bashar al-Assad made it clear last year he will resort to them if Syria is attacked from outside. History too bears adversely on such claims. In 1998, the US and UK bombed Iraq without UN Security Council sanction, with the goal of taking out its WMD manufacturing facilities. Operation Desert Fox, which lasted for four days, not only went well beyond its mandate of targeting WMD-specific installations in Iraq, but also set back UN efforts at disarming the regime. In its aftermath, former Secretary of State Henry Kissinger famously said, “I would be amazed if a three-day campaign made a decisive difference, or if we can even precisely define what we meant by WMDs that we were going after [...].” The fog of war that persisted after this bombing allowed the Western military-industrial complex in 2003 to invade Iraq, on the pretext of destroying WMDs.

The NATO attack on Yugoslavia in 1999 - which in the backdrop of a deadlocked Security Council, is being held up as a precedent to justify an assault on Syria - too began with the objective of halting President Slobodan Milosevic’s aggression. In the carpet bombing that followed, NATO’s deplorable targeting of civilian facilities, including hospitals and embassies, to attain its objective has been well documented. As with the NATO’s 2011 intervention in Libya, we can be sure Syria’s broadcasting agencies and media outlets, especially the Syrian Arab News Agency, will be targeted in this attack.

No intervention against the regime can be successful without taking out its powerful propaganda machine. Make no mistake: whatever the Obama administration may have us believe, the military intervention in Syria is not going to be quick, decisive or limited in scope.

Unilateral intervention predicated on the use of WMDs by a regime finds no backing in international law. Whether the West likes it or not, there is no alternative to legitimising the use of force in Syria but through express sanction from the UN Security Council. The Obama administration’s attempts to circumvent the UN Charter in this regard represent one of the greatest threats to the comity of nations since the Second World War. As Ian Hurd, a political scientist at North-western University, notes, the United States has always been careful to justify its aggression under the Article 2(4) of the Charter, which generally prohibits unauthorised intervention. Even the egregious unilateralism of the Bush years saw the United States trying to mount a defence, however indefensible, of the Iraqi invasion under the UN Charter. President Barack Obama instead plans to justify his attack on Syria based on principles contained in the Geneva Conventions and the Chemical Weapons Convention, neither of which is applicable in this context. Syria is not even a signatory to the CWC. In effect, the United States is asking a sovereign state to comply with the provisions of a treaty it has not signed, failing which it will intervene militarily. How’s that for sound legal precedent?

The West has sought to advertise this intervention as its stepping in where the UN failed. If airstrikes do occur as planned, it is unlikely the international community will get to know if Ds were ever used in Syria, either by the Assad regime or by the rebels. The UN, which has dispatched an inspection team to verify such claims, will not have had an opportunity to present its findings at the Security Council. The Wall Street Journal has reported how the Obama administration in fact tried to convince the UN to pull its team out from Damascus. This is now a recurrent pattern: the UN Monitoring team in Iraq, which in 2003 found little evidence to substantiate the Bush administration’s WMD claims, was discredited by the West for standing up to its warmongering. NATO’s bombing of Libya offered no chance for the Security Council to hear on-the-ground reports from the UN Secretary General’s Special Representative. The French intervention in Mali earlier this year came after Paris failed to address the African International Support Mission’s (AFISMA) long-standing request – endorsed by the UNSC – for financial and logistical assistance. The quick and dirty multilateralism that the West wants and achieves through “coalitions of the willing” is no substitute for the UN’s deliberative process. Hans Blix, head of the 2003 UN inspection team in Iraq, rightly suggested in an interview to Huffington Post recently, “political dynamics are running ahead of due process.”

Those who assert the United States and its allies have been reluctant to intervene in this conflict perhaps suffer from selective memory loss. As early as October 2011, and in July 2012, the West put forth draft resolutions in the Security Council that invoked Chapter VII measures under the UN Charter – their passing would have effectively allowed for military intervention in Syria. The dogs of war have thus far only been allowed to bark. It is imperative the international community steps in immediately, before they are unchained.

WSJ - RBI s measures to prevent rupee s slide

India's central bank Wednesday started a facility to meet the daily dollar requirement of the country's three state-run refiners, a step that may provide some respite to the rupee currency which fell to a new low against the dollar earlier in the day.

Refiners, which import most of the crude oil they process, are the largest buyers of dollars in the foreign-exchange market in India and they arrange dollars by inviting bids from financial institutions and large dealers. The central bank's foreign-exchange swap window for refiners will take the bulk of their dollar demand away from the spot market.

India bought crude oil worth $169 billion in the last financial year ended March 31.

The Reserve Bank of India said it would sell dollars to Indian Oil Corp.,530965.BY -0.17% Bharat Petroleum Corp. 500547.BY -7.98% and Hindustan Petroleum Corp. 500104.BY -7.65% through a designated bank with immediate effect.

"It will help the rupee to recoup some losses, but it is the geopolitical tension, not market demand, which is weighing on the market sentiment," said Pramit Brahmbhatt of Alpari Financial Services Ltd.

Wednesday, the Indian rupee fell by 3.7%, its steepest one-day decline in years, to 68.80 against the dollar in late Asian trade as investors pull back from emerging markets in response to a likely U.S.-led military intervention in Syria. Concerns over the Syria crisis are also pushing oil prices higher.

Mr. Brahmbhatt said he expects the rupee to open higher and move up to 65 to the dollar Thursday.

"It [the swap window] is positive at the margin," said Cristian Maggio, a London-based strategist at TD Securities.

The recovery in the rupee may be short term as the step doesn't fix India's long-term dependence on oil imports, which will widen an already large current-account deficit, he said.

TOI - Rukmini, GSAT 7 , India s first military satellite

NEW DELHI: India's first dedicated military satellite GSAT-7 or "Rukmini", which will be launched by Arianespace from French Guiana on Friday, will provide the Navy with an almost 2,000-nautical-mile-footprint over the critical Indian Ocean region (IOR).

Essentially a geo-stationary communication satellite to enable real-time networking of all Indian warships, submarines and aircraft with operational centres ashore, the 2,625kg Rukminiwill also help the Navy keep a hawk-eye over both Arabian Sea and Bay of Bengal. "From Persian Gulf to Malacca Strait, it will help cover almost 70% of the IOR," said a source.

The "over-the-sea use" Rukmini, with UHF, S, Ku and C-band transponders, is to be followed by GSAT-7A with the IAF and Army sharing its "over-the-land use" bandwidth. The Navy has been clamouring for such a satellite for close to a decade now to shorten its "sensor-to-shooter loop" - the ability to swiftly detect and tackle a threat — but the delay in the indigenous GSLV rocket to carry satellites and other factors have been the stumbling blocks.

India, of course, has been a late — and somewhat reluctant — entrant into the military space arena despite having a robust civilian programme for decades. Without dedicated satellites of their own, the armed forces were relegated to using "dual use" Cartosat satellites or the Technology Experimental Satellite launched in 2001, apart from leasing foreign satellite transponders for surveillance, navigation and communication purposes.

China, in sharp contrast, has taken huge strides in the military space arena, testing even ASAT (anti-satellite) weapons against "low-earth orbit" satellites since January 2007. "With counter-space being a top priority, China has been testing its 'direct-ascent kinetic kill' capabilities. It also has active programmes for kinetic and directed-energy laser weapons as well as nano-satellites. By 2020, it hopes to have a space station with military applications," said a source.

Incidentally, around 300 dedicated or dual-use military satellites are orbiting around the earth, with the US owning 50% of them, followed by Russia and China. But India has lagged far behind in utilization of the final frontier of space for military purposes, refusing to even approve the long-standing demand of the armed forces for a full-fledged Aerospace Command, as earlier reported by TOI.

Though officially against " any offensive space capabilities or weaponization of space", the defence ministry in 2010 had come out with a 15-year "Technology Perspective and Capability Roadmap" that dwelt on the need to develop ASAT weapons "for electronic or physical destruction of satellites in both LEO (2,000km altitude above earth's surface) and GEO-synchronous orbits". These portions were quietly deleted in the roadmap released earlier this year.

DRDO contends it can develop ASAT weapons if required by marrying the propulsion system of the over 5,000-km Agni-V missile with the "kill vehicle" of its two-tier BMD (ballistic missile system) system.

Apart from working on "directed energy weapons" at its Laser Science &Technology Centre, DRDO also has futuristic programmes for launching "mini-satellites on demand" for use in the battlefield as well as "EMP (electromagnetic pulse) hardening" of satellites and sensors to protect them against ASAT weapons.

But all that is in the future. Dedicated military satellites like Rukmini will help India keep real-time tabs over the rapidly-militarizing IOR, where China is increasingly expanding its strategic footprint, as well as on troop movements, missile silos, military installations and airbases across land borders.

Tuesday, August 27, 2013

Important terms and definitions

Contract farming - Contract farming is defined as a system for the production and supply of agricultural or horticultural products under forward contracts between producers/suppliers and buyers. The essence of such an arrangement is the commitment of the cultivator to provide an agricultural commodity of a certain type, at a time and a price, and in the quantity required by a known and committed buyer, typically a large company.

The Hindu -Kepler telescope

The failure of the second of the four gyroscope-like reaction wheels of the Kepler space telescope in May this year brings down the curtain on its primary mission of identifying planets outside our solar system, namely exoplanets. A spare wheel failed in July last year. Three wheels are necessary for maintaining precision steering for the telescope to identify exoplanets that are orbiting Sun-like stars at distances where the surface temperature of earth-sized planets might be suitable for liquid water to exist. Till recently, the 0.95 metre-aperture telescope was fixedly gazing at some 150,000 stars in the constellation Cygnus to look for any dip in a star’s brightness when a planet crossed it. At least, three such transits are required to confirm the signal as an orbiting planet. Based on this approach, the telescope has successfully been able to confirm 135 exoplanets and identify over 3,500 candidates during the four-year period from May 2009 to May 2013. More importantly, the space telescope, which completed its prime mission in November last year, has returned voluminous data. As about two years’ worth of data remains to be analysed, the treasure trove may, in all probability, spring some more surprises and answer the very question that inspired the Kepler mission — “are earths in the habitable zone of stars like our Sun common or rare?” Aside from using the transit method to hunt for exoplanets, Kepler has used the asteroseismology technique to decipher, among others, the size and mass of about 500 stars. This technique looks for subtle periodic variations in a star’s brightness.

Though the telescope can no longer hunt for exoplanets using the transit technique, as an August 22 study in Nature reveals, the data collected by the telescope would help in estimating a star’s size and mass by studying the “minute variations in total solar brightness” using a different technique — the flicker method. Calculating the size of a star would help in confirming if the candidate exoplanets are indeed earth-like. The technique, first tested on 500 stars whose size and mass are known, has already been used to determine the size of 1,000 stars; Kepler has collected the flicker data of about 50,000 stars. Even in its crippled state, Kepler can still be used for collecting information about extrasolar planets by using yet another technique — microlensing. This method looks for magnification of a star’s light when two stars align themselves with respect to the telescope. Any star with orbiting planets could even double the brightness of the other star’s light. Even as Kepler’s fate is being decided, there can be no denying that it has revolutionised our understanding of stars and earth-twins.

TOI - india pak chenab war

Pakistan has raised objections to four power projects being built by India on theChenab river on the ground that they allegedly violate the Indus Waters Treaty.

The projects include the 850-MW Ratle power project and the 1,000-MW Pakal Dul hydroelectric plant, minister of state for privatization Khurram Dastgir told the National Assembly or lower house of parliament.

Information on these plants was received by Pakistan last year and Islamabad objected to their designs, he said during question hour yesterday.

Pakistan has raised the issue with India at all levels. A protest about the alleged reduction of water flow in the Chenab was lodged with India by the Permanent Indus Waters Commission and the Foreign Office, he said.

The Indian Commissioner for Indus Waters had been asked to provide complete information about these projects, he added.

Dastgir said India had recently started construction of the Ratle power project and Pakal Dul hydroelectric plant.

He contended that under the Indus Waters Treaty, restrictions were imposed on the design and operation of hydroelectric plants, storage works and other river works to be constructed by India on western rivers.

The treaty provides a procedure for settling disputes and any issue between the two sides is first examined by the Indus Waters Commission. If the Commission fails to resolve the issue, diplomatic channels are used to settle the matter or it can be referred to a neutral expert or court of arbitration, he added.

The Hindu - speculation as a cause of rupee depreciation

The rupee that touched another record low at below 66-to-the-dollar, is on a downward slide the end of which none can see. What is clear is that this round of depreciation has been sharp and rapid. Even over 2013, it is clear that the currency was more or less stable for much of the first half and has depreciated by 16 per cent or more vis-à-vis the dollar over the last two months (see Chart).

This does signal that there are more factors than the so-called fundamentals responsible for the currency’s recent collapse. It is indeed true that the current account deficit on India’s balance of payments rules high, indicating that the country’s demand for foreign exchange exceeds its ability to earn it. But it has been high for sometime and expectations are that the deficit as a ratio of GDP could fall marginally in the coming months. So this alone cannot explain the dramatic decline in the rupee’s relative value. It is also true that foreign investors and lenders, who were more than willing to send hard currency across the country’s borders in search of profit, are now less willing to do so. Moreover, with fears that the policy of quantitative easing, under which the US Federal Reserve was pumping dollar liquidity into the world system, is to be ‘tapered off’, investors are reportedly returning to the US and dollar denominated assets. But though the flow of capital has shrunk as a result, India still seems to receive enough foreign capital inflows to finance its deficit and even add marginally to its reserves. So that too cannot be an immediate explanation for the rupee’s plight.

We may be reaching a point where the artificial situation in which a country with a large current account deficit has a relatively stable and even occasionally appreciating currency because of large capital inflows cannot hold anymore. But the timing of the rupee’s collapse is not easily explained only by the conventional fundamentals.

Enter, therefore, the ‘speculator’, who has decided to bet against the rupee, as a potential explanation for the rupee’s condition. The government and central bank are clearly looking in this direction. Besides working to increase foreign capital inflows into the country, a number of measures have been taken to reduce dollar asset accumulation by residents and prevent hoarding of the dollar by institutions involved in trade in the currency. Moreover, the Reserve Bank of India, which has been pointing fingers at the currency derivatives market as a speculative hub where the dollar rules higher, now argues that prices in those markets, or those driven by speculation, are beginning to influence spot dollar prices in terms of the rupee.

It recent Annual Report is quite direct. Noting that the volume of trading in exchange-traded currency derivatives increased from Rs. 2.6 billion in September 2008, when such trading was first permitted, to Rs. 234.4 billion in June 2013, the RBI hints at a link between this and exchange rate volatility. According to it, econometric tests suggest “there is causality running from speculation to exchange rate volatility”. Given this conviction it is not surprising that: “The Reserve Bank recently banned proprietary trading by banks in the currency futures/exchange-traded currency options markets. Such trading is allowed only on behalf of clients. SEBI also tightened exposure norms for currency derivatives to check excessive speculation by increasing margin requirements and curtailing open positions on currency derivatives.”

But the efficacy of such measures is under question, and there are other markets where the RBI or SEBI can do little. There exists a market termed the “non-deliverable forward” (NDF) market for the rupee. This the rupee version of markets for non-convertible or partially non-convertible currencies of countries with capital controls that ostensibly emerged to hedge exposure in such currencies, but then developed as sites for speculation. A typical NDF contract would involve an agreement in which one party agrees to buy at some date in the future a notional quantity of dollars at a contracted forward rate, implying a sum of rupees (say X). On the settlement date, the investor would be able to sell the quantity of dollars purchased and deliverable at the prevailing spot price, to obtain, say Y, rupees. The difference between the two would reflect the profit or loss in the trade. Such trades are however settled in dollars in these over the counter markets, since the counterpart currency such as the rupee is “non-deliverable”. The forward contract rupee-to-dollar rates reflect the direction in which speculators expect the rate to move.

If capital controls are strong, developments in these NDF markets should not affect prices in onshore spot markets. But financial liberalisation dilutes those controls. There is now evidence from many emerging markets that prices in the ‘offshore’ NDF markets affect ‘onshore’ dollar prices. The RBI refers to a study which “suggests that there is a long-term relationship between the spot and NDF markets for the INR” and that during periods of depreciation “shocks originating in the NDF market may carry more information, which gets reflected in on-shore segments of the market”. The transmission mechanism is not clear, but it could be the involvement of domestic banks in these markets because, though “onshore financial institutions are not allowed to transact in the NDF markets”, “since domestic banking entities are allowed specific open position and gap limits for their foreign exchange exposures, there is scope for domestic entities to participate in the NDF markets to take advantage of any arbitrage.” Besides that, foreign banks and corporate entities with an international presence can participate in the NDF market. Liberalisation has only increased the intensity of such linkages between onshore and offshore markets.

In sum, a series of changes that have occurred since financial liberalisation began have increased India’s exposure to the adverse effects of currency speculation. Given the nature of these changes there is little that the RBI and the government can do about such speculation, despite the claim that: “While introducing currency futures, the Reserve Bank and the Securities and Exchange Board of India (SEBI) had put in place various safeguard mechanisms to monitor positions, prices and volumes in real time so as to control excessive speculation.” In any case, there is nothing whatsoever the RBI and the SEBI can do to curb speculation in the NDF market that is outside its jurisdiction.

It is, therefore, possible that the sudden and sharp depreciation of the rupee is the result of the spillover onto domestic spot markets for the currency of speculation-driven price trends in derivative markets. In which case the slide is difficult to control and can continue with no clear prediction possible where the decline will take the currency in the days ahead.

NDTV - Chidambaram's 10 point formula for revival of indian economy

Controlling fiscal deficit: The first task at hand is to control fiscal deficit - at 4.8 per cent, the Finance Minister said. He said that while the fiscal deficit was not in control when he took over and was threatening to go beyond 6 per cent even though the Budget said 5.1 per cent, he has managed to keep it in control. He added that the best way to control the deficit was to cut down on expenditure.
Controlling current account deficit: Financing the current account deficit has become a major challenge, Mr. Chidambaram said. He said the government will contain the deficit it at $70 billion or below, and will safely finance it.
Adding to the reserves: While the reserves are adequate, it is important to add to it, he said. We must use FDIs, NRI investments, banking capital and ECBs, the minister added.
Reviving the investment cycle: It is important to unblock the stalled projects, and ensure quicker disbursal of funds where projects have been approved. The Cabinet Committee on Investment has so far cleared 173 projects with an investment of Rs. 1,93,806 crore.
Quicken the capex programme of PSUs: Public sector enterprises are sitting on large quantities of cash and it is important to quicken the capital expenditure programme, said Mr. Chidambaram. Even the performance rating of the top management will be linked to it, he added.
Capitalise the public sector banks: While the public sector banks are well capitalized and are well above the Basel III norms, it is important to pump in more capital in them to boost investor confidence, Mr. Chidambaram said. He said Rs. 14,000 crore will be invested in the PSU banks, adding that every rupee that is gained out of the disinvestment in Coal India Ltd will be used to capitalize public sector banks.
Reap the benefit of the good monsoon: Nothing must be done that will come in the way of maximising agricultural production, and therefore, the gas allocation to fertilizer sector will be maintained and not a single unit of gas will be reduced, the minister said. This will ensure that the maximum amount of fertilizer is provided to farmers all through the year. Banks, too, have been instructed to provide as much loan as the farmers require, he added.
Encourage manufacturing: Mr. Chidambaram said manufacturing has been allowed to languish in the country, and given India's size it was important that the sector is revived. He said the imposition of customs duty on high-end flat screen TVs was not capital control, but a way of encouraging manufacturing in the country. Manufacturing must be encouraged in power, steel, metal, automobiles, electronic hardware and textiles, he said, adding that India was currently importing items that could easily be manufactured in the country.
Encourage exports: Unless exports are increased, the current account deficit cannot be reduced. Exports have risen 11.7 per cent in July 2013 over the previous year. Trade deficit has narrowed to $12.3 billion in each of these months. Services exports have increased every month since April 2013. Therefore, some of the measures are beginning to bear fruit.
Resolve impasse in coal, iron sector: Issues over the environmental and land clearances that have come up due to judicial interventions should be inquired into, but new blocks should continue to be auctioned.

Monday, August 26, 2013

The Economist - India's economic woes

ON THE morning of August 17th most of India’s economic policymakers gathered in the prime minister’s house in Delhi. They were there to launch an official economic history of 1981-97, a period which included the balance-of-payments crisis of 1991. The mood was tense. India, said Manmohan Singh, the prime minister, faced “very difficult circumstances”. “Does history repeat itself?” asked Duvvuri Subbarao, the outgoing head of the Reserve Bank of India (RBI). “As if we learn nothing from one crisis to another?”

The day before Indian financial markets had had their rockiest session for many years. The rupee sank and stockmarkets tumbled. Money-market rates rose. The shares of banks thought to be either full of bad debts or short of deposit funding fell sharply. The sell-off had been made worse by new capital controls introduced on August 14th in response to incipient signs of capital flight. They reduce the amount Indian residents and firms can take out of the country. Foreign investors took fright, fearful that India might freeze their funds too, much as Malaysia did during its crisis in 1998.

India’s authorities have since ruled that out. But markets keep sliding. On August 20th the RBI said it would intervene to try to calm bond yields. The rupee has dropped to over 64 to the dollar, an all-time low and 13% below its level three months ago. It is widely agreed the country is in its worst economic bind since 1991.

India is not being singled out. Since May, when the Federal Reserve first said it might slow the pace of its asset purchases, investors have begun adjusting to a world without ultra-cheap money. There has been a great withdrawal of funds from emerging markets, where most currencies have fallen by 5-15% against the dollar in the past three months. Bond yields have risen from Brazil to Thailand. Some governments have intervened. On July 11th Indonesia raised its benchmark interest rate to bolster its currency. On August 21st its president said he would soon announce further measures to ensure stability.

India, Asia’s third-biggest economy, is more vulnerable than most, however. Economic news has disappointed for two years, with growth falling to 4-5%, half the rate seen during the 2003-08 boom. It may fall further. Consumer-price inflation remains stubborn at 10%. A drive by Palaniappan Chidambaram, the finance minister, to push through a package of reforms and free big industrial projects from red tape has not worked. An election is due by May 2014, adding to uncertainty.

India’s dependence on foreign capital is also high and has risen sharply. The current-account deficit soared to almost 7% of GDP at the end of 2012, although it is expected to be 4-5% this year. External borrowing has not risen by much relative to GDP—the ratio stands at 21% today—but debt has become more short-term, and therefore riskier. Total financing needs (defined as the current-account deficit plus debt that needs rolling over) are $250 billion over the next year. India’s reserves are $279 billion, giving a coverage ratio of 1.1 times. That has fallen sharply from over three times in 2007-08 (see chart 1) and leaves India looking weaker than many of its peers (see chart 2).

It is therefore vital that foreign equity investors stay put. They own perhaps $200 billion of shares at current prices. They have sold only about $3 billion since May, but if they head for the exit India would have no defence.

This is not a repeat of 1991. When India last had a crisis Boris Yeltsin was about to stand on a tank in Moscow and Nirvana was hitting the big time. Things have changed in financial terms, too. Back then India had a fixed exchange rate, which the state almost bankrupted itself trying to defend—it had to fly gold to the Bank of England in return for a loan. Today India has a floating exchange rate and a government with almost no foreign-currency debt. A slump in the currency poses no immediate threat to the government’s solvency.

The pain will be felt in other ways. Private firms that owe most of India’s foreign debt will be under intense strain, particularly if the rupee drops further. Some will go bust. Market interest rates will stay high, causing a liquidity squeeze. All this makes life even tougher for India’s state-owned banks, which already have sour loans equivalent to 10-12% of their loan books. Inflation will rise. And the government’s finances will be under strain as the cost of its subsidies on imported fuel gets bigger.

There is probably little the authorities can do to shore up the currency in the short term. The rupee is one of the world’s most actively traded currencies and at least half the turnover is abroad. Privately, officials reckon the rupee’s fair value, taking into account India’s higher inflation and productivity over the past few years, is a little less than 60 per dollar, so the market has yet to overshoot wildly. Raghuram Rajan, the incoming governor of the RBI, is likely to take a hands-off approach.

That doesn’t mean the government will—or should. On August 19th it banned the import through airports of duty-free flat-screen TVs, which Indians can often be seen heaving through check-in at Dubai. It may seek to raise duties further on gold imports, which Indians are addicted to in part because it is seen as a hedge against inflation. Gross gold imports were 3% of GDP last year, blowing a huge hole in the external finances. History suggests the higher taxes on gold imports are, the worse smuggling gets. But India imports 800-odd tonnes of bullion a year. That’s a lot of gold to hide in suitcases.

The government will also try to persuade the Supreme Court to lift its ban on iron-ore exports, imposed after a series of corruption scams. At its peak this industry generated exports worth about 0.4% of GDP, although experts doubt that mothballed mines can be ramped up fast. The government may also cut fuel subsidies. That would reduce demand for imported fuel and help it hit a fiscal-deficit target of about 7% of GDP (including India’s states).

The longer-term solution to the balance-of-payments problem may be to ramp up India’s manufacturing sector, and thus its industrial exports. But that will take a big improvement in the business climate, not just a cheap currency. Despite the rupee’s 27% tumble in the past three years there is scant sign of global manufacturers shifting production to India.

India’s position could still get worse. But assuming things stabilise, when the official histories come to be written about 2013, what might they say? Most likely that the rupee’s slump caused a severe shock to the economy that made a recovery in growth rates even harder. But perhaps, also, that it prompted a more serious debate about the policies that India needs to become less vulnerable to the whims of an unforgiving world.

The economist - food security or vote security?

“HISTORIC” and “unparalleled” were the words Sonia Gandhi, boss of the ruling Congress party, used to describe India’s new food law at a launch in Delhi on August 20th. She promised an end to hunger for the poor. More accurate terms for the law and its introduction would be “expedient” and “chaotic”. The scheme aims to reach 800m of India’s 1.2 billion people, giving each a monthly dole of 5 kilos of rice or wheat, at a nominal price. That makes it the world’s biggest serving of subsidised food. Yet it has been launched amid confusion, cynicism and claims of fiscal irresponsibility.

The food scheme became law in July when the prime minister, Manmohan Singh, Mrs Gandhi’s factotum, introduced it as an ordinance—a rarely used executive power to which Parliament eventually has to agree. Mrs Gandhi fears a thumping at a general election due by the end of May, so Congress is now rushing to push the scheme through. Parliament still has to be persuaded. She sought to tie the bill to the memory of her husband, Rajiv Gandhi, who was assassinated two decades ago and whose ballyhooed birthday was chosen as the day of the launch.

Opponents tried everything to stop the bill being discussed, but debate was set for August 22nd. The opposition Bharatiya Janata Party dares not block the bill for fear of being cast as anti-poor. The party’s de facto leader, Narendra Modi, who used to talk of the need for small government rather than populist handouts, attacked it for promising too little in the way of rations.

The new law is good in parts. It makes sense to enshrine a national obligation to give children a daily hot lunch and new mothers a six-month stipend. It is wise to promote better nutritional help and health care for under-sixes, especially girls, using the existing Integrated Child Development Services. Helping populous states with most of the poor is overdue. Hints that cash transfers might one day replace help-in-kind are also welcome.

But much is rotten about the food scheme. It is too costly. India already spends 900 billion rupees ($14 billion) a year on a bloated system of grain procurement. Half is badly stored and rots, or is stolen. With many new recipients, the cost will rise by nearly two-fifths, to 1% of GDP. That is equivalent to what India spends on public health.

Some argue that it is not a given that the money will always be badly spent. Jean Drèze, a development economist, says that the system will improve because a wider pool of recipients can insist on better service. He cites the experience of recent programmes in Chhattisgarh state.

Yet given the chronic abuse of procurement and food schemes elsewhere, massive theft and waste will surely continue. The food scheme is also badly targeted. Surveys suggest that 2% of Indian households are hungry at some point in the year. Just over 20m people, many in tribal areas or rural bits of northern states, need more help. Yet two-thirds of India’s total population will get the new food aid. That broad splurge of handouts is driven more by raw politics than by development priorities.

It would be better to deal with pitifully bad nutrition than plain hunger. Walk around any north Indian village where grain seems adequate, and stick-thin people offer evidence of how few nutrients are being absorbed. Roughly half of all children under five are malnourished. Save the Children, a British charity, said in June that over 60m children, aged five or younger, are stunted. The consequences can be grim: damage to young brains, a reduced capacity to learn, even death.

Yet helping children requires more than a supply of base calories. A lack of protein or vitamins in diet, dirty water, neglect of girls, lack of education on hygiene and ill-nourished mothers who get pregnant too often: all contribute to the problem. Arvind Virmani, a prominent economist, argues that cleaning up water supplies, especially by building sewage systems, would do far more good against malnutrition than doling out more grain. Just a simple hand-washing campaign could be of huge help.

Even some backers of the new food act admit, in private, that more spending on public health is the greater need. UNICEF, the UN children’s agency, says that diarrhoea kills over 400 young children in India every day. Two-thirds of Indians lack proper sanitation. Some estimates suggest that 70% of drinking water is seriously polluted with sewage. No wonder, says Mr Virmani, infected people fail to absorb nutrients, whatever their diet. Only when votes are in supplying lavatories, and politicians clamour to lend their names to sewage systems, will that change.