“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."
 

Messy America or a messy world

We Indians are used to getting depressed after picking up the morning newspaper. News of non-functional government, road rage, political gimmicks, and injustice is generally all over. And many of us, and of course many in this world look to America as an ideal place to be in. Not for nothing is the phrase ‘the American Dream’ so popular.

However, when I read the NYT today it made me feel bad. The denial of clemency to Troy Davis and the mention of police forcing witnesses to testify incorrectly, bad news on Afghanistan front and a reminder that this would be a never healing wound, the governor of California Jerry Brown finding it difficult to deal with Republicans and the images of the debt default crisis and so on and so forth. This is news but this is symbolic of the fundamental fractures that have appeared in the American system and it is tough to believe if these could be cured especially when the inspiring Obama is appearing hapless.

 It is true that sometimes we feel good that as we are growing economically and therefore politically in the global arena the so called bosses of this world are seeing a decline. Only recently was I emailing the YouTube videos of American ‘tent cities’ to my colleagues in my office. However, at another level America for all its bossism is also a set of superb values. Well many Indians feel that we have stronger values than say Americans but my reading is values in India are more of hypocrisy.

Europe again is in crisis which is not just economy related but reflective of deeper malaise in the system. So that makes me wonder if we are all in a period of institutional decline or is this a transitional phase of say a couple of decades when the high would converge to the low and then the low would reach to a higher pedestal. In other words would Indian or Chinese values and institutions graduate and mature enough to ever reach the status of an ‘American Dream’ in its true sense.

Or has something changed drastically in the set of human values that would never allow us to recreate such a nation. As Fareed Zakaria mentions we are a bit more pessimistic today because of the flood of easy information, and I am cognisant of that. There are no world wars, no cold war of the previous magnitude, increasing longevity and so on, and terrorism kills lesser number of people than events in say earlier times. There is also a flood of philanthropy lead by the likes of Gates and Buffetts.

What do you think then? Is it a messy America or a messy World?

Quick, advanced, quarterly.............. how does one comprehend so many estimates?

I am an economist but I have been struggling with the number of estimates that are generated these days. Say we talk about a developed economy which unlike the Indian economy publishes very granular economic data. There would be thousands of variables related to GDP, Inflation, Industry, Credit etc. that are published. While this is certainly a good and useful thing to do what troubles me most is the series of estimates that get generated.

In terms of regularity of reports you have weekly, monthly, quarterly, half-yearly and annual reports. Then in terms of the preciseness of reporting you have the quick estimates, then you have the advance estimates, and then you have a set of revised estimates. Top all this by the number of agencies that report these estimates – the central bank, the treasury, the statistical agency, the chambers of commerce, the commercial and investment banks, the budgetary bodies, the independent/ autonomous bodies that evaluate economic and public finance figures, the supranational bodies like the IMF, OECD, and World Bank and last but not the least the think-tanks. How many estimates does this all make? And this does not include forecasts. It also does not include the revisions in series, and revisions in base numbers that happens every few years. It also does not include the estimates of so many other economies in this coupled world that can have an impact on the economy under discussion.

The problem is by the time one analyses one set of estimates, a new set of estimates arises. Each economist can cite his set of estimates and prove another economist incorrect and defend his/her own turf. Well I have heard of the rationale for publishing the estimates at as short an interval as possible – you are warned of any lurking dangers at the right time. However, I think this is taking it a bit too far. We are facing a surfeit.