I thought India was better than Vietnam!

When I first started to look at the economy of Vietnam I thought it is a pretty small economy that is overly reliant on exports and investment and has struggled to maintain its macroeconomic stability off late.

I was also pessimistic about the economy on account of the heavy state involvement in production as well as banking. More than 80% of banking is state controlled and the state owned enterprises (SOEs) contribute to about 35% of the economy. There is heavy channelling of bank lending to state enterprises and that leads to inefficiencies.

Such a scenario in Vietnam made me think that our India is doing quite well. We are a democracy and private markets here are not interfered with. Well all this remains the truth but when compared to Vietnam, I now realise, we are certainly not doing better.

The reforms for the two countries started around the same time (1986 for Vietnam and 1990 for India) and Vietnam has managed to achieve a comparable per capita income already. Like India, Vietnam didn’t contract during the Global Financial Crisis and the growth rates for both countries are quite similar.

What came as a surprise to me is that government owned banks still control 75% of Indian banking system and 3% of their loans are bad. Most of these bad loans are attributable to loans to government owned entities or projects like the Indian Airlines.

And that is not the only negative comparator; India also visited a similar macroeconomic instability recently as Vietnam with high inflation, high twin deficits, and low forex reserves.

Well, India certainly has a much bigger economy than Vietnam as of now but that is due to the enormity of its size. In terms of the economic fundamentals credit must certainly go to Vietnam for catching up so fast despite years of strife on account of the infamous Vietnam War.

Tight budgets, deleveraging households lead to a new equation of output (Y= I + X-M) for biggies

In economic theory, one of the ways output is defined is by the expenditure method. According to this approach the GDP of an economy is the sum of expenditures by the households, by the governments, by the corporations, and the net exports of a country. Symbolically the equation is Y= C+G+I+(X-M).

However, this equation seems to be getting pruned in the aftermath of the Global Financial Crisis (GFC). Most of the developed world is suffering from a sobering phase where the households that were so far consuming as if there was no tomorrow are drastically cutting back their spending and instead focusing on deleveraging. In UK, harsh economic conditions actually led to a decline in real disposable income in March 2011. Such a phenomenon has occurred after about 30 years.

Similarly heavy public debt burdens in most of the developed world have led to severe austerity cuts that comprise of budget freezes and job cuts. UK is already undergoing a four year spending review which would see decline in real expenditures, and USA has frozen discretionary spending. Greece recently witnessed loss of some 15,000 public sector jobs and this number of course is just a harbinger of what is likely to come.

So the developed world has basically ruled out any growth in the contribution of (C) and (G) to (Y) in the output equation. Instead they are banking on (I) and (X-M) to offset the loss of growth in two of the erstwhile leading engines of growth.

The growth plan broadly reads as follows: make private sector invest more by reducing the crowding out by the government sector, and leverage and redirect this investment so as to be able to serve external markets and external demand in emerging economies by way of exports. Given the rising cash surpluses with developed world corporations and the rising middle class in emerging economies the plan seems perfect on the face of it.

However, this plan runs on big assumptions about the feasibility of such a large structural change in the developed world economies as well as the appetite of the emerging economies for such exports and investments. Only time will tell if this experiment around a pruned output equation would do the job.

“Chinternational” – How China has become the gateway to international trade for Indian Industry!

Emerging economies of the BRIC (Brazil-Russia-India-China), especially the BIC have become a must for the trade orientation of almost all economies in the globe today. Simultaneously trade between the BIC nations has picked up tremendously in their attempt to foster south-south relationships. Within this intra-region trade, however, the I-C trade seems to be catching fire more profusely than the B-I trade. The former stands at about $60 billion today while the latter is at $8 billion or so.

Coming from a time when the Indian Industry was so afraid of Chinese products being dumped here, the pace at which the things have changed often surprises me. Today every businessman seems to have either been to China or plans to go there some time. China comes up in day-to-day conversation as if it was just another market in one of our Indian states.

The other day I went to the bicycle market on Esplande Road in Chandni Chowk (Delhi), and was sitting in a small shop when one surrounding shop owner stopped by. The two proprietors were casually talking of how INR weakness was affecting trade with China. Well, cycle trade is still a small scale industry (SSI) in India and expecting this trade to have become international in such a manner came as a surprise to me. Unconfirmed reports suggest that biggies like Hero Cycles also source some of their products from Chinese markets. The industry has embraced cheap products from the country as a way of being competitive and stopped looking at Chinese as hostile gobblers of our market.

Similarly, in the textile industry, Pallavi Aiyar (author of Smoke and Mirrors) suggests that Shaoxing City is more like a little India where approximately 10,000 Indians could be working or living. Apart from this data my interaction with a resident of Jhansi (U.P.) onboard a train to Delhi suggests that traders from the city frequently visit China for textile business.  

Electronics is another industry where Chinese imports to India are quite common, and Palika Bazar (Delhi) prices fluctuate with the prices of product in China and the INR/USD exchange rate. My friend from Rajouri Garden (Delhi) also mentions how china is important in the furniture trade. In fact I feel it might be hard to find an industry in India that is not trading with China currently (and I would encourage the readers to suggest some such industries.). When I enrolled myself for a mandarin course at IGNOU (which I never managed to finish,) I found so many businessmen from varying industries registered for the classes.

What is interesting is that for many Indian businessmen international trade first started with China. This is a country that is capable of not just producing high-tech goods which countries like America also produce but because of its emerging economy populace capable of producing low-end mass products as well. Products like cycle spares or torches or solar plates or polyester rolls that are needed in the daily life of a common Indian.

While it certainly feels euphoric to see an industry like bicycle go International with this China trade what is somewhat worrisome is that this flow is highly lopsided with India running a trade deficit with China of about $20 billion in the year 2010-11. When I look at the exporting side, I can only remember of a friend that exports print machinery, and an advertisement by Paharpur Industries about the world’s factory (China) buying cooling systems from them. Well, I am certain that our services industry that is known for its competitiveness globally would be one of the biggest exporters to China as well but in the absence of focus on manufacturing it would be wishful to expect this trade to balance any time soon. 

Defining public debt no less difficult than getting rid of debt....

Different institutions/nations use different measures to denote the sovereign debt of a nation. This generally leads to confusion when countries need to be compared. It is therefore important to be aware of all the classifications and the suitability of each for different purposes. So, what is the most relevant public debt measure for nations?

Possible classifications:

-          Total debt vs. Public debt /Government debt /National debt

o   Total debt refers to debt of the government sector as well as the private sector owed to local or foreign bodies.
      "But Krugman's point, which is correct, is that many make the mistake of assuming that government debt is equivalent to external debt and they overestimate the burden that it imposes on a country." (AntonioFatas and Ilian Mihov on the Global Economy)

-          General government debt vs. Federal debt

o   General government debt refers to debt owed by all levels of government – Federal, state and local – collectively.

-          Gross debt vs. Net debt

o   Net debt refers to gross debt minus all financial assets.

Who uses what?

o   IMF World Economic Outlook (WEO) database as well as IMF Fiscal Monitor provides data for General Government Gross Debt level only.

o   Australia Budget reports data only in ‘General Government Net Debt’ terms.

o   UK uses the Public Sector Net Debt measure which is basically the general government net debt figure.

o   The debt measure used by European Union is General Government Gross Debt (GGGD). This differs from the UK fiscal measure, PSND, in two important respects.  The first is the sectoral boundary; being defined as General Government it excludes the net debt position of public corporations, which are included in the public sector.  The second is that is measures gross liabilities and does not net off liquid assets.

o   India: Unlike the USA where the centre and state debt data is difficult to find at a place RBI’s Macroeconomic and Monetary Developments Quarterly clearly lays out state, centre, and combined/consolidated public debts. The Status Report of the MoF, DEA, released in November 2010 lays out a debt reduction roadmap up to 2014-15 which again segregates clearly the central, state, and consolidated/general government debt.

o   The broadly quoted measure for USA debt is Gross Federal Debt which is the sum of debt held by government accounts plus debt held by public. State and local government debt data is not easy to find.  Congressional Budget Office (CBO) in its reports refers more to ‘debt held by public’ component of Federal Debt.

o   “The difference between gross debt and net debt is very large for some countries. For example, for 2011 the OECD projects that Japan’s gross debt will be 204.6% but its net debt will be 121.5%, a significant difference, and close to the projected 106.7% net debt of Italy. Indeed, some analysts believe that net debt is a more appropriate measure of the debt situation of a particular country. However, since not all governments include the same type of financial assets in their calculations, the definition of net debt varies from country to country and makes country-to-country comparisons difficult. Therefore, gross debt as a percentage of GDP is the most commonly used government debt ratio and is the way that the OECD measures debt.” (Global Finance magazine)


 “In principle, net debt is a more appropriate measure of government indebtedness. There are, however, some concerns with the concept of net debt. In addition to some measurement question (which assets to include, at which value), the government needs to refinance all its gross debt and not only the net part, so in terms of flows, it is the gross debt that matters. Also, while it makes sense to exclude government debt held by the government, some of this debt is part of a fund that covers future pension liabilities that are unaccounted for in the budget. And here is where the assessment of government solvency gets more difficult: what you really want to do is not just to look at government debt but also at future revenues and liabilities.” (Antonio Fatas And Ilian Mihov, INSEAD professors)

Natural disasters as indicators of global interdependence and competitiveness

 Globalisation as a phenomenon is no longer new. One wouldn’t be surprised if a neighbourhood shopkeeper in a developing economy uses the term in his/her day to day conversation. However, it is a phenomenon of mammoth proportions where the actual ground transactions defining this phenomenon are almost infinite in nature. This then makes it almost impossible for even the experts to be aware of all possible linkages and often the reaction is – oh! I didn’t know this was dependent on this.

I recently had such an experience. I was planning to go to Thailand to enjoy what is widely considered its competitive advantage – tourism. The plans, however, had to be aborted because of the flood situation which is still going worse. I understand that the airlines would be affected, hotels would be affected, and sellers of souvenirs would be affected and so on but I could not fathom that the sales of Honda cars in India would be affected because the Greater Noida plant in Uttar Pradesh sources some components from there.

For that matter I didn’t even know that Thailand has established itself as a reliable vendor of auto components and manufacturer of CBUs for global giants like Honda, Ford, Toyota, Isuzu, etc. Textiles competitiveness was known to me but for Thailand be an automotive base even when it doesn’t have any indigenous manufacturer was surprising for me. In fact further research showed to me that Thailand is a much bigger exporter of passenger cars than India. For that matter Thailand is the biggest exporter of passenger cars and race cars by value amongst all developing economies (see figure below).

Beyond the supply-chain disruptions induced by Thai floods, the Australian floods and cyclone (December 2010- January 2011) highlighted the critical role played by the country in the commodities industry, the Japanese earthquake and Tsunami made people aware of the deficits in the auto industry, the drought and fires that destroyed crops in Russia in 2010 had people worried about wheat prices, and now the drought in southern USA is worrying the markets about cotton prices.

While it would remain a big debate whether increasing globalisation is responsible for increasing natural disasters (if they are statistically increasing) the natural disasters today certainly serve as a barometer for the interconnectedness of the global economy.

The news of setting up of a particular supply chain across geographies by a corporation generally remains confined to the business media and annual reports, however, the news of a disruption in supply networks gets much more broadly covered. Also such news gets covered not just in the nation where the tragedy has struck but also in each such nation where the loss of production is having any impact.

While risk preparedness ensures that to a larger extent such events do not hurt much, (Disarming the value killers – Deloitte) such tragedies would continue to provide a not so comfortable route to understanding the global supply linkages.

When PIGS worship dogs, and dogs act maturely

These are interesting times that we are living in. The awe of the ‘west’ is largely over and the developing countries are moving towards economical and somewhat cultural convergence with the developed world.

As this convergence unfolds there would be so many situations that would be so nostalgic for the citizens of the south bloc. Many would be reminded of the past when they were treated as inferiors and often ridiculed.

It is true that it would still be a couple more decades until when such treatment would be vastly over but things seem to be moving in the right direction.

One notional instance that came to my mind as the Eurozone crisis unfolds is the coining of the term ‘PIGS’ to denote the debt-ridden countries of Portugal, Ireland, Greece, and Spain. Well it is true that this term is an acronym but at another level it is also symbolic of the structural malaise in these nations.

This then is far turn around from the times when Indians were considered on par with dogs. During the British colonisation there apparently were notices outside places mentioning ‘Dogs and Indians not allowed’ and Mahatma Gandhi was thrown out of his first class compartment in a train owing to this belief held by the Britishers.

Today nobody dares call Indians dogs. Instead everybody is wooing India and the Indian market and this includes the PIGS. Over the past few years most of the indebted developed nations have embarked on an ‘export oriented growth’ path as domestic demand vanished. Heads of state of most of these nations have come to India with huge business delegations to get a pie of our domestic demand.

India, however, is maturing in its attitude along with its economic maturity. It is not retaliatory or revengeful but is opting for all such options that are broadly good for its masses. This is best captured in the decline of the ‘left’ in India. The left quit the central government formed by UPA-I when it opposed the nuclear bill in 2008. The Communist Party, however, apparently misjudged its strength and suffered a serious blow in the 2009 parliamentary elections. 2011 turned out to be worse. The left was wiped out in the state elections in the last two remaining left bastions—Kerala and West Bengal. In Bengal, the left had been in control since 1977 and the defeat this year marks the end of an era.

At another level, and to be candid, India itself is manifest with so many forms of discriminations between its people – the lower and the upper classes, the minorities and the Hindus, the rural and the urban, the women and the men – and so on and so forth. Aravind Adiga’s acclaimed ‘The White Tiger’ provides a glimpse of such an India. However, as any observer of India would agree, significant strides have been taken with respect to reducing all such biases.

These are glorious days for India and all (an increased number of, if not all) its citizens. Days of opportunity when we can redeem our esteem and also show an India grounded in a higher value system.

American economy – chronicle of a death foretold?

Gabriel Garcia Marquez’s novel ‘chronicle of a death foretold’ is a fascinating story of how a man who sees his death and still keeps moving towards it. Today when I read about the status of the American economy I see an uncanny resemblance to the story.

The Fed, the Government, and most of the decision makers individually know of the direction they are headed to but still appear to be unaware of the direction they are headed to collectively. Most of them have heard and analysed the Japanese lost decade(s) and how it managed to not come out of the liquidity trap, however, they appear to either foresee that they are also headed there or they are all individually hapless.

The Democrats can’t convince the Republicans to go for a fiscal push that is big enough and soon enough, and the Republicans can’t convince and ensure the Fed from not creating more and more liquidity in the system through a series of Quantitative Easings (QEs).

Few years have already passed by in the recession and the immediate aftermath of a slow recovery. In the current scenario nobody is expecting a robust recovery anytime soon. In totality, in retrospect it might well be a complete decade of ‘laidback’ recovery if I might call it. And the structural losses of productivity, and unemployment, and competitiveness will likely never be recouped.

Japan didn’t manage to come out of crisis at that time because it didn’t have a precedent to go with. The decision makers couldn’t decide but they were totally unaware of the possible damage. America knows of it and is still treading the same path. It is true that both situations are not 100% comparable but they are not that disjunct as well. Marquez could maybe claim sometime later that the protagonist in his novel was meant to denote the American economy in the days to come.

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I recently came across and article by Krugman in NYT that confirms to my feelings above:
"Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth."