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Capital controls in the air

Sun, 22 Nov 2009 15:46:00 GMT

There has been an avalanche of analysis in the past few days about the latest news from the US bond market: Real interest rates at the short end of the market have turned negative. This is a clear indication that the US Federal Reserve is operating an astonishingly loose monetary policy in a bid to fight the recession in the world’s largest economy.

The effects of this loose monetary policy are being felt in many emerging nations, where new asset bubbles have been spotted and currencies are appreciating. Brazil has taken the unusual step of imposing a tax on capital inflows and one on local companies raising foreign money through the issue of American depository receipts.

Illustration: Jayachandran / Mint

An open capital account is a worthy long-term goal but there are all sorts of disagreements on how a country should deal with short-term spikes in capital inflows that tend to be pro-cyclical and thus complicate central bank policy. Malaysia had closed its capital account to protect its currency during the Asian financial crisis of 1997, freeing itself of the impossible trinity and allowing it to keep interest rates low to help its real economy.

There is equally compelling evidence that companies with global balance sheets have any number of ways to step around capital controls while countries that impose such controls tend to suffer in terms of reputation risk. It is in this context that an intriguing suggestion by economist Arvind Subramanian caught our attention.

“Brazil recently botched its attempt at such controls because the policy action was half-hearted, anxious about the reaction of markets. One possibility could be coordinated restrictions on capital flows action by a set of emerging markets that could be blessed by G-20. No doubt this would be risky, perhaps even counterproductive, but in these unusual times, no policy option should be off limits, at least for discussion,” wrote Subramanian in a post published by The Baseline Scenario, a blog run by former International Monetary Fund chief economist Simon Johnson.

There is already global coordination going on to manage global issues such as the economic crisis and climate change. Subramanian says since the cause of the increased flows is common to all countries, namely Fed policy, it will be a policy challenge not just for individual countries, but also for emerging markets as a group.

Though the minor appreciation in the rupee pales in comparison with the almost 30% rise in the value of the Brazilian real, the Reserve Bank of India (RBI), too, will have to start grappling with how it plans to manage the flood of dollars coming into the economy (almost $15 billion in the stock market alone, according to the last count).

A lot of attention will be on what RBI governor D. Subbarao says and does about this problem.

How should India deal with spikes in capital inflows? Tell us at views@livemint.com

The bitterness of sugar

Sun, 22 Nov 2009 15:46:00 GMT

Sugar in India is a bitter-sweet story. The protests last week by thousands of farmers in Delhi were part of the drama re-enacted every few years since Independence. The sector continues to be governed by archaic laws and rules, and price discovery mechanisms for the sweet substance are weak. The result is that all three sides in the sugar story—consumers, sugar cane farmers and sugar companies—are unhappy.

Every year, the Union government fixes the minimum price of sugar cane that sugar mills have to pay farmers when they purchase the raw material from farmers. This never satisfies farmers. Under political pressure from farmers’ lobbies, the state governments in cane-growing regions increase this price further. The state advised price (SAP) is the real floor price that mills have to pay. The result is that over the years, their profitability have been dented badly.

The latest episode began after certain Supreme Court judgements regarding pricing of sugar compulsorily bought by the government from sugar mills. To meet the altered situation after the apex court orders, the Union government took two steps in October. On the production and pricing of sugar, it issued an ordinance called the Essential Commodities (Amendment and Validation) Ordinance 2009. On the sugar cane front, it created Sugarcane (Control) Amendment Order 2009. Under this order, the difference in the price fixed by the Union government and SAP was to be paid by the state governments. Both orders should be seen together as they reflect state intervention in different stages of the sugar production cycle.

The political impact was immediate. Farmers understand the pricing dynamics of sugar and sugar cane very well. Financially wobbly governments such as Uttar Pradesh would be in no position to bear the burden of the gap between SAP and the price fixed by the Union government. Under the new regime, sugar mills would have some breathing space but life had become difficult for state governments and various political parties. Sugar cane farmers are one of the best organized political lobbies in India. It was only a matter of time before the order would have been nullified. The government now plans to introduce a new Bill in Parliament. The sugar story is set for more twists and turns in the future.

Should the government stop meddling in the sugar sector? Tell us at views@livemint.com

Ratan Tata and Subir Gokarn

Thu, 19 Nov 2009 16:02:00 GMT

There is an underlying common theme between the succession plan of a corporate patriarch and the appointment of a senior central banker.

Ratan Tata said on Wednesday that the next chief of the Tata group could be a foreigner. On the same day, the government finally cleared the appointment of Subir Gokarn as the deputy governor of the Reserve Bank of India (RBI).

Both these events point in the same direction: the readiness to pull in the best talent from outside the normal boundaries set up by the two organizations. The Tata group has always been run by an Indian and almost inevitably by a Tata in its 140-plus years of existence. RBI, too, has mostly reserved its top jobs for people within a charmed circle of central bank insiders or civil servants. Among the few exceptions: R.K. Hazari came to RBI via Bombay University and the Economic and Political Weekly while C. Rangarajan came in from the Indian Institute of Management, Ahmedabad.

There is a lesson here for the rest of the Indian government and corporate sector. Top jobs in companies are still reserved for family scions while it is difficult to get a senior position in government unless you have climbed the civil service ladder. There have been notable exceptions, but the general trend has not been very inspiring.

India has changed. Large corporate groups have gone global, in the scope of their operations as well as the funding of their balance sheets. Governance, too, requires special expertise that does not necessarily lie within the generalist administrative services that were designed to serve a colonial state.

The change to a culture of global talent searches in the case of companies and lateral entries in the case of the civil services is not going to be easy or rapid. Just think back at the shock in Japan when Carlos Ghosn, a Frenchman of Lebanese origin, was appointed head of Japanese car maker Nissan in 1999. He has now been honoured by a Japanese manga comic book on his life.

Civil services in most nations tend to be closed shops that bristle at any suggestion that outsiders should be brought in from time to time.

Have we just seen the first signs of change?

Do Indian organizations have to spread the talent net wider? Tell us at views@livemint.com

The world is not enough

Thu, 19 Nov 2009 16:02:00 GMT

Chances are that it will be an expensive dinner —foreign policy-wise, that is. When US President Barack Obama hosts Prime Minister Manmohan Singh for a “state dinner” next week, matters may end up being restricted to a culinary agenda.

They should not. After the highs of the George Bush Jr years, relations between the two countries have cooled almost to freezing point. Obama’s recent visit to Beijing and his joint statement with President Hu Jintao are a case in point. Viewed in isolation, the statement does not amount to much: China and the US merely pledged support for improving relations between India and Pakistan. Simple. When seen as part of a train of developments, it is a shocker. The US is ceding political and diplomatic space to a known antagonist of India, one that is allied with Pakistan. How can China promote peace? It sees India as a future rival that needs to be curbed now. It also knows that if Pakistan implodes, India will simply become too powerful to control.

Illustration: Jayachandran / Mint

Its efforts will be geared to prevent this.

For the US this is no more than throwing a few shekels at China. This has been done with knowing disregard of Indian sensibilities, but with total regard to US’ changed strategic priorities. India figures quite low in the new American order. Thus, the chances of an Indo-US partnership to further our interests are slim at the moment. The US under Obama has retreated to a position of defensive realism. In simpler terms, it wants to safeguard the real estate that it has and let China have a bit more of it to keep it happy.

The Prime Minister should be aware of this and should not get befuddled with the “honour” of a dinner hosted by Obama. The Americans know how to flatter us. We should know this, too.

We have to bide time. Meanwhile, we should not even think of ceding ground to the US. So far, India has not done that. We have not let it interfere in our dealings with Pakistan, save the pro forma talks with Islamabad. There will be renewed pressure on this front. We should resist that.

At the same time, when it comes to cooperating with the US in areas that are of interest to it, we should set a high price. It is important to do so, if we are to send Washington the right signals.

Let us hope that India will not be forced to stare at an empty plate in South Asia.

Gastronomic honour or realpolitik: What will the PM choose in Washington? Tell us at views@livemint.com

A difficult quest for peace

Wed, 18 Nov 2009 19:10:00 GMT

Bargaining with an armed opponent is a nightmare for any negotiator. Indian Maoists, who control a big chunk of territory and have plenty of guns, know this well. In a recent letter in the Economic and Political Weekly, their spokesperson, Azad, put a high price on any talks with the Union government.

The Union government had only one condition for discussions, that of giving up arms. Azad pointedly rejected this: “Asking Maoists to lay down arms as a precondition for talks shows the utter ignorance regarding the historical and socio-economic factors that had given rise to the Maoist movement.” This is the least of it. There are other demands that are nearly impossible to meet. These include scrapping of mining projects in tribal-dominated areas and withdrawing police and paramilitary camps from violence-affected areas. The icing, however, is yet to come: the government’s stand that they abjure violence is irrational.

Illustration: Jayachandran / Mint

These demands have been justified in phraseology for which Maoists are well known. Explanations are peppered with expressions such as “people’s rights”, and “liberation from exploitation”. These words cannot hide the simple truth that extremist control of people and territory depends on gun power.

The logic is simple and was explained many decades ago by economist Mancur Olson Jr. Labour unions, special interests, agricultural and industrial lobbies and other pressure groups have to offer inducements to keep their flock together. Otherwise, many members will be tempted to a free ride. They will partake of all the gains while not contributing money, time and other resources for achieving collective goals. In many cases, the threat of violence is a good adhesive for an otherwise fractious collection of persons. In far-flung areas where dangerous and armed men abound, tribals dare not say anything that will endanger their lives.

Unless the government grasps this truth, all efforts at engagement will turn into appeasement. And appeasement does not work. It is here that the other track of Maoist strategy takes over (track II, petty bourgeois edition). Prime-time liberals warn the government that any police action will result in “genocide” and that India will be a sham democracy if the government tries to restore order.

This has weakened the resolve of the government. Contrary to Leftist speculation about a powerful and intolerant state, the government of India is prone to dithering in the face of adverse public opinion. In this case, it should not waver. Offensive operations are the only way to silence the guns.

Why is the government hesitant to fight Maoists? Tell us at views@livemint.com

The mystery of mirror neurons

Wed, 18 Nov 2009 16:03:00 GMT

The theory of mirror neurons illustrates a well-known Aristotelian observation: that man is wired, by nature, to be a social animal. Our mirror neurons fire when we act—when we are poked, or when we move a hand—but they also fire when we see others perform the same actions. The discovery of these neurons in 1996, by a team led by Giacomo Rizzolatti, and subsequent research by Vilayanur Ramachandran, among others, have spawned a clutch of practical-minded conjectures. These span a range of topics; mirror neurons are thought to lie at the heart of certain characteristics of autism, but they also help explain why pornography can be enjoyable. Ramachandran has been a charismatic roving ambassador for mirror neuron theory, expounding it most recently at a TED India workshop and at two lectures in New Delhi.

Most strikingly, mirror neuron research manages to bring together neuroscience, psychology, philosophy and sociology. These neurons engender empathy, plugging their owner into the human race at large. Yet we don’t feel pain when we watch others in pain, indicating that the human mind has a sophisticated concept of “self”. Ramachandran has even postulated that around 100,000 years ago, an efflorescence of mirror neurons helped early humans watch a useful or aesthetic action and learn to repeat it. Without these neurons, culture would never have spread—and culture, Ramachandran says, is what makes us human. These are attractive hypotheses, not least because they seem to strike at fundamental questions about ourselves.

But these are all still hypotheses. Sceptics point out that we have no idea where mirror neurons live in the brain; scientists have only observed certain areas light up on imaging technology and suspected them to be knots of mirror neurons. There is also more to cognition than the ability to learn through mimicry; macaques, after all, have mirror neurons, but they have not developed for themselves an advanced culture. One psychologist has even questioned the very nomenclature, stating that the function of the neurons is to anticipate, not to mirror. The grinding lab research to confirm these theories is yet to come, and an open mind is required throughout. What will truly differentiate us from the macaques is not our awareness of our mirror neurons, but our patiently earned knowledge of precisely how important they are.

Can mirror neurons unlock the secrets of the mind? Tell us at views@livemint.com

The business of war and games

Tue, 17 Nov 2009 15:44:00 GMT

The geeks and gamers, it appears, are going to revive the economy. Or at least, they’re doing everything in their power to do so.

With utter disregard for the state of the global economy, gamers in the US, the UK, France and Germany have thronged shops to buy copies of Call of Duty: Modern Warfare 2, a multi-platform shooting game. According to estimates, the game sold 4.7 million copies in the first 24 hours of being put on sale, raking in around $310 million. It was released worldwide on 10 November. That makes it the biggest entertainment opening weekend of all time. The closest film competitor was the second instalment in the rebooted series of Batman movies, The Dark Knight. While that movie currently holds the record for the biggest film opening ever, it still managed to make only half of Modern Warfare 2’s mammoth collection.

The success of the game’s launch, and the climate in which it achieved this, point to a growing shift in the entertainment industry’s pecking order. Video games now easily make as much money as Hollywood blockbusters. And they require as much budgetary and creative inputs to produce as well. Grand Theft Auto IV, the game that had the biggest opening before Modern Warfare 2, has been estimated to have cost $100 million to produce.

From a content perspective Modern Warfare 2 is somewhat indicative of the turmoil on the contemporary world stage. With several pockets of conflict all over the atlas, video games no longer have to tap into that endless reservoir of inspiration, World War II.

Modern Warfare 2 has ultranationalists taking over Russia, US spies helping engineer a civilian massacre and, finally, the Russians invading the US and occupying the White House. Washington, DC, is turned into a battlefield and, at some point, a nuclear warhead explodes over the US capital, destroying, conveniently for the plot and graphics designers, the International Space Station. And, but of course, the action begins with a battle against militants in Afghanistan. (Who better to voice some of the macho martial bravado for the in-game characters than rapper 50 Cent.)

Modern Warfare 2 may be imagining mayhem on a massive global scale. But in the real world, the millions in sales is good news for the economy, and food for thought for the entertainment business.

What are the reasons for the success of Modern Warfare 2?Tell us at views@livemint.com

A washout at Copenhagen

Tue, 17 Nov 2009 15:44:00 GMT

It is now increasingly clear that we should not have high expectations from the global climate change talks to be held in Copenhagen in December.

US President Barack Obama on Sunday poured the final tumbler of cold water when he said that “we should not make the perfect the enemy of the good”, a far from subtle hint that negotiators from 192 countries are unlikely to come to a binding agreement.

Illustration: Jayachandran / Mint

What now? It appears there could be a political agreement next month followed by a more detailed treaty a year later in Mexico City: feel good followed by do good.

Developing countries such as India and China have been under immense pressure to give up their old negotiating principles and become good boys. The Manmohan Singh government has been trying to tread a delicate—some would say confused—path: defending the old position that India is not yet ready to sacrifice economic growth while signalling that it does not wish to be a global deal breaker either.

We had in a 20 July editorial cited an interview of Thomas Schelling, who won the 2005 Nobel Prize for his original work in game theory and collective bargaining: “…I think (nations) ought to drop the idea that there are going to be enforceable commitments. There have never been enforceable commitments on anything of that magnitude. And I think they should try to negotiate not what emissions level they will seek in 20 or 50 years, but what they will actually do.” Schelling then compared the complex climate change challenge with the North Atlantic Treaty Organization, or Nato. The agreement to defend western Europe against a Soviet attack was only two pages and there was never any enforcement mechanism. Yet Nato worked. “Because when responsible governments make serious commitments, they stick to them, especially when they see other governments sticking to them,” said Schelling.

The point is that Nato did not succeed because it was based on explicit targets on how much to slow a Soviet attack or by calculating the probability of an attack. It showed that it is not what you promise but what you do that is important.

This newspaper does not dismiss multilateral negotiations; but it also believes that domestic legislation by leading countries is important for a self-reinforcing network of credible commitments. The US should make the first move, as the world’s biggest polluter and its most potent power.

Is a global climate change deal really possible? Tell us at views@livemint.com

Rethinking economic reforms

Mon, 16 Nov 2009 17:34:00 GMT

As the Union government gets ready to disinvest partially from several public sector units, there is some pessimism on its ability to deliver on more meaningful economic reforms. Most reforms of the big push kind are politically difficult, but there is still ample scope for smaller but useful steps.

The consensus now is that perhaps the would-be reformers were too ambitious and did not contend with political realities. A 2005 World Bank report, Economic Growth in the 1990s: Learning from a Decade of Reform, said that clearly. The other view is that it is futile to even contemplate far-reaching changes in labour laws and financial sector reforms among a host of other problematic areas. In this view, exemplified by the Harvard economist Dani Rodrik, reforms only occur in the wake of crises, wars or upheavals on a similar scale.

If the path to such reforms is blocked, other things can be done. This would be mostly at the level of individual firms. There are many simple things pertaining to management practices, technology and credit availability that can make a difference. The focus ought to be on companies employing fewer than 25 workers. Given their huge numbers but technological and relative managerial backwardness, helping them can have a sizeable economic impact. Steps such as managing shop floors, inventory control and equipment maintenance, among other issues, can make a big difference. The problem is that even such simple advice and consultancy is often beyond the means of small firms.

Credit availability is another issue. This is an area where there are few, if any, political problems. Instead of extending money for priority sector lending, if a part of this credit flow could be directed to this end, the returns would be much higher. A simplified legal framework for bankruptcy and liquidation proceedings managed by fast-track courts could change things. It would immediately improve credit flow as banks would not have to fear loans turning into non-performing assets.

These arguments may appear to be a climbdown from the big-ticket reforms that could propel India into a double-digit growth pattern. They are. But what else can be done to keep our still enviable growth record? It is time to look for things that can be done and forget what ought to be done.

Have economic reforms been stalled for now? Tell us at views@livemint.com

At the mercy of imbalances

Mon, 16 Nov 2009 17:34:00 GMT

John Maynard Keynes once observed that if you owe someone £1,000, you’re at his mercy; if you owe him a million, he’s at yours. But what happens when one nation owes another $800 billion? It would seem that they’re jointly at each other’s mercies, unless they are capable of fundamental change.

Whether nations are so capable will decide the epilogue to the US-China imbalance story that is slowly gaining currency as a major factor behind last year’s financial panic, as also a major solution to the world’s ills. It now forms the backdrop to US President Barack Obama’s visit to China this week.

Illustration: Jayachandran / Mint

The story begins in the 1970s, when China embraced the West’s markets while US companies, troubled by trade unions in an age of stagflation, pushed off to the East. Cheap Chinese exports—anchored by the yuan’s peg to the dollar—helped a consumption binge. In turn, China’s trade surplus has over the years added to foreign exchange reserves now worth $2.2 trillion. This surplus had to be invested somewhere; China chose the world’s most liquid asset: dollar-denominated US treasurys. This demand lowered interest rates, fuelling further consumption.

We repeat this prologue only because it shows how the last 30 years may have rendered imbalances inextricable for economic stability in both these nations.

In China, prosperity has had an urban bias. Hung Ho-Fung explains in November’s New Left Review how lack of rural development prompted urban migration, while depressed wages kept consumption low. The resulting emphasis on investment benefited coastal centres: Little surprise that a coastal elite now dominates the Chinese government, especially at the highest levels. Alter this model, and the foundations of Chinese political economy—an authoritarian state already insecure about the slightest protest—could crack.

On the other side, author Fred Goldstein notes in his Low-Wage Capitalism (2009) that the largest employer in the US economy has transformed from the well-paying General Motors in the 1970s to a stingy Wal-Mart today. Workers haven’t minded this because both cheap goods and cheap credit were available, courtesy China. Increase US interest rates or cut off cheap imports, and the US labour market may be looking at an upheaval.

This leaves the middle chapters of this story ambiguous. Washington wants the yuan to appreciate—a point Beijing both admits and gets adamant about, as it did last weekend. China blames loose US monetary policy—as its banking regulator did over the weekend—to which Washington nods, but still insists on maintaining low rates for “an extended period”. All the while, both sides seem farther from a resolution, holding the rest of the world at their mercy.

How will US-China imbalances be resolved? Tell us at views@livemint.com

Countering the MNS threat

Sun, 15 Nov 2009 15:33:00 GMT

It is good that two Maharashtrians with moral authority have tried to prick the Raj Thackeray bubble. Sachin Tendulkar has said that Mumbai belongs to all Indians and Rashtriya Swayamsevak Sangh chief Mohan Bhagwat has spoken out against the divisive politics of the Maharashtra Navnirman Sena (MNS). Meanwhile, the MNS has shot off a letter to the State Bank of India in Mumbai asking it to give priority to Maharashtrians in the local recruitment of bank clerks.

Thackeray’s politics invites either passionate defence or passionate condemnation. Such reactions widen the divide and eventually help his brand of divisive politics. It is time to clinically take apart the MNS’ pernicious agenda by drawing people to the centre.

Illustration: Jayachandran / Mint

Raj Thackeray feeds off the economic insecurities and cultural anxieties of Marathi speakers in the Mumbai region. These are not unique: Such responses to immigration have been seen in areas as different as London and the tribal regions of Chhattisgarh. Bhagwat has pointed out that the issue of local language and its rights have cropped up all around the country and need to be dealt with carefully. Thackeray wants to fan these fires rather than douse them. Dealing with him needs to take this fact on board.

Bal Thackeray pioneered anti-outsider agitations in Mumbai in the mid-1960s, and his rebellious nephew is merely copying what the uncle did. That the same issues continue to resonate shows that street fighting has not helped working class and lower middle-class Maharashtrians even after 40 years. The Shiva Sena got a few of them clerical jobs or helped them set up vada-pav kiosks rather than prepare them for a global economy, while party leaders became successful real estate barons. The MNS will do the same.

Immigration is a winner: Those who come into a region bring skills while also getting a chance to earn more. A Mumbai without “outsiders” would see an economic collapse: depopulation, a labour shortage, uncompetitive wages, a steep fall in real estate prices and a loss of economic vitality.

The bigger threat is that MNS-style politics will take root in other growth regions which receive waves of immigrants from failed north Indian states. India is finally moving to a national market for goods and services because of the imminent introduction of the goods and services tax. A splintering of the national labour market at this juncture would be bad news for the country.

That is why the virus must be tackled before it spreads through a variety of measures: a special Centrally administered fiscal package for Bihar, job training for local youth who feel threatened by immigrants, and a greater respect for local languages and cultures.

How should India respond to the likes of Raj Thackeray? Tell us at views@livemint.com

The myth of a national market

Sun, 15 Nov 2009 15:32:00 GMT

There is perhaps no creature in the economic landscape that is as difficult to understand as the consumer, and even more so in troubled times such as these when the world economy is in turmoil.

There was a time when marketing experts innocently believed that all consumers would behave in similar and predictable ways once they climb the income ladder. This belief was most famously expressed in a much-cited article published in the May-June 1983 issue of Harvard Business Review by Theodore Levitt: The Globalization of Markets.

In that article, Levitt predicted that world markets would become more homogeneous, a convergence of consumer behaviour. It was a well-argued and convincing argument, but the reality that emerged after the rise of globalization was very different: consumer behaviour continued to be prey to cultural norms and local realities. This is the world of the Maharaja Mac and the tandoori pizza.

But are national markets homogeneous, especially in large countries such as India and China? An article in the latest issue of the McKinsey Quarterly says that the battle to win Asian consumers should be fought “cluster by cluster, city by city”.

“To be effective in Asia, consumer companies must think regionally but sell locally: They do better by focusing on urban clusters than by conceiving of an entire country as one market,” writes Todd Guild, director in McKinsey’s Tokyo office.

Indian retailers have already got a sense of this, which is why the merchandise they display depends on which city or even suburb a store is located in. But cities in a country such as ours are great melting pots, as immigrants pour in and change them irrevocably. Understanding these dynamics will perhaps be as important to companies selling consumer goods here as traditional issues such as pricing and promotion.

As consumers in the US and other rich countries continue to be weighed down by the pressure of falling asset prices, stagnant median wages and job losses, it is Asia that is being seen as the next great consumption engine. But understanding the new Asian consumer will require a lot of research, deep thinking and failed experiments.

India: one market or many? Tell us at views@livemint.com

A muddled nuclear story

Thu, 12 Nov 2009 17:15:00 GMT

Here’s a piece of good news for Pakistan: no one is about to snatch its precious nuclear weapons. There are serious doubts if anyone outside the country, the Americans or Indians, can lay its hands on them. It is an entirely different matter that the Taliban may be able to do so. If, however, a recent story in The New Yorker is to be believed, the US may help Islamabad secure its nukes.

The story, by journalist Seymour Hersh, said the Barack Obama administration has been “…negotiating highly sensitive understandings with the Pakistani military. These would allow specially trained US units to provide added security for the Pakistani arsenal in case of a crisis”. Denials have been fast and furious: fast by the US state department, and furious by the Pakistani establishment.

Illustration: Jayachandran / Mint

It is difficult to ascertain the truth of a story that has been denied. Two things are, however, certain. First, as Hersh noted in his piece, it is highly unlikely that Pakistan will give the location of its nuclear stockpile, spread over a big country, to the US. Among Pakistani officials and the public at large, there is intense distrust of the US. The unsaid consensus is that in a crisis situation, these weapons are likely to be seized and taken away. This, it is felt, will leave Pakistan defenceless, for nuclear weapons are seen as a guarantee against Indian attempts to annihilate it. This is understandable, for a nation whose daemons have turned against it (as the daily and deadly terrorist strikes show) is bound to be terrified.

There is a bigger question, too. In a short-run crisis situation, it makes good sense to take away certain crucial components (such as the triggering devices) of these weapons. Such steps will deny terrorists access to a functioning nuclear device. From a strategic perspective, however, this makes little sense: If Islamabad’s nuclear weapons are taken away, it can, potentially, alter the balance of power in South Asia. A Pakistan sans its nuclear deterrent will be no match for India. The US will not let that happen. That is where the rub of the problem lies: Terrorists need access to just one weapon, so all weapons (or their parts) have to be taken away (or made dysfunctional). Pakistan will let no one do that. It is a none-or-all situation unless, of course, there are further “understandings” that such weapons will be returned to Pakistan once a crisis is over.

These are difficult issues to resolve. The level of mistrust and conflicts of interest of various kinds make it a messy situation.

Will Pakistan let the US guard its nuclear weapons? Tell us at views@livemint.com

Cars: cheaper, faster, greener

Thu, 12 Nov 2009 17:13:00 GMT

Carlos Ghosn this week said the small car that the Nissan-Renault combine is planning to produce in collaboration with Bajaj Auto would be even cheaper than Tata Motors’ Nano, though he did not disclose the price point he is keen on.

Let’s keep aside for now the elitist fears that millions of such ultra-cheap cars will convert our cities into a 24x7 gridlock. There is no reason why one set of Indians should enjoy the benefits of personal mobility while another should not. The entry of new competitors in this space will also put pressure on the profits of car companies, perhaps in the same way we are seeing price wars in telecom finally blowing holes in the revenues of telecom companies.

But the race to build ever cheaper cars has a broader significance. It shows that India could potentially redefine the economics of many key industries by clever engineering and radical redesign. It is worth noting that the likes of Ratan Tata and Ghosn are setting price-based goals for the engineers and designers, rather than being obsessed with speed and power. We are reminded of how Dhirubhai Ambani set an internal goal for the then-undivided Reliance Industries’ telecom business: A call should be as cheap as a postcard.

The global auto industry is at an interesting crossroads. The age of petrol will come to an end and climate change concerns are already driving a push towards alternatives such as hybrids and fuel cells.

Schumpeterian moments of radical technology change can throw a market wide open to challengers. US, Japanese and European car makers are currently ahead in the race to build a new generation of fuel-efficient cars.

But it is not inconceivable that the eventual discontinuity may arise from a lab or shop floor in India or China. It also matters that many global auto firms are in financial trouble and are culturally attuned to make and sell cars in the US rather than Asia.

India is already redefining the cost structure of the global car industry. This is just one example of what some experts have evocatively described as India’s strength in Gandhian engineering. Indian car firms should have the confidence to enter the race to find a replacement for the internal combustion engine as well.

Can India redefine the auto industry? Tell us at views@livemint.com

A double-front oil attack

Wed, 11 Nov 2009 19:45:00 GMT

Global oil prices around $80 have already put India’s macroeconomic and import watchers on red alert. This won’t be the first battle fought. India had to go through this last year, when crude oil spiked to $147. Matters calmed when the world economy slipped into recession, sharply lowering oil demand— and, hence, the price. Now, prices are marching upwards again, prompting questions about oil’s future outlook.

The world scene, reflected by the International Energy Agency (IEA)’s World Economic Outlook 2009 released on Tuesday, makes for one battle front. IEA predicts global oil demand to rise from the 85 million barrels per day (bpd) that it is now to 105 million bpd by 2030—supply more or less matching. India and China will consume more, but West Asia will also produce more. Not too bad, right? However, the Guardian reported this week that, according to an IEA whistle-blower, these figures are distorted. Apparently, owing to US pressure, the agency has made rosy estimates—presumably to downplay concerns that oil has already hit its production “peak”.

Illustration: Jayachandran / Mint

We don’t know if this is true; but “peak oil” concerns, existing since the first oil shock in the 1970s, have now strengthened. The theory, best expressed by US scientist M. King Hubbert, suggests that oil production resembles a bell curve, which will have to reduce after hitting a peak. After a point, it will take a barrel of oil worth energy just to drill for one, nullifying net gain. And even if companies wanted to invest in technology to ease production, the downturn has dampened chances—as IEA notes.

That leaves India staring at $80 oil, a front that may well be advancing over time.

But there’s a second front. Made up of the government’s regime of tightly regulating oil prices, this one behaves more like a fifth column.

Considering India imports at least 70% of its oil, oil companies bleed red when global prices increase—but the government refuses to alter local ones. To finance under-recoveries, worth at least Rs103,908 crore in 2008-09, the government last year had to resort to off-balance sheet bonds.

The longer this continues, the more the fiscal deficit widens. And the longer it takes for deregulation, the longer the market is denied price signals—depriving domestic oil firms the chance to channel investment, and also possibly skewing consumption.

India may or may not win against the first front. But unless it does something against the second front, it will lose the war for fiscal sanity and energy stability.

What is the outlook for oil? Tell us at views@livemint.com

DIAL and the weak regulator

Wed, 11 Nov 2009 15:16:00 GMT

India’s airports regulator is off to a bad start. In its very first order, the Airports Economic Regulatory Authority (Aera) has let Delhi International Airport Pvt. Ltd (DIAL) off the hook. DIAL was levying so-called development charges on a captive market of fliers who had nowhere else to go.

DIAL imposes a development fee of Rs200 on domestic passengers and Rs1,300 on international travellers. It was allowed to impose these charges by the Union civil aviation ministry in February. This fee will allow DIAL to garner roughly Rs1,827 crore, the funding gap in the project.

In its order, the regulator was supposed to review this situation. Instead, it has created more problems. DIAL’s resort to this fee was ad hoc, and its arguments that adverse financial conditions forced its hands don’t wash. There are two issues at hand. DIAL has not given Aera its final project costs. It demanded an extension, and got it—for a second time; the ministry had given it one earlier—until end-January to declare these costs. The new airport is expected to be operational by March.

In essence, the time between the opening of the airport and the firm being able to estimate its final costs is no more than two months. This speaks poorly of DIAL’s financial management practices and nothing else. Why should consumers be penalized for this?

More serious is the absence of any reasoning in the order of the regulator: The order did not give any reasons for acceding to DIAL’s request. It simply noted the facts of the case and gave an extension to DIAL. For a quasi-judicial body, this is poor performance close to abdication of duty.

The bigger danger lies in the circumstances surrounding the liberalization of the aviation sector. Much of the discretionary power continues to rest with the ministry that can, and has, behaved erratically in handling such issues. Unless the right precedents are set now, there is a danger that governmental inefficiency may be traded for crony behaviour by the private sector. Today, airlines and airport developers are allowed to do what they please. Aera will simply be unable to do its job if it does not get its act right, quickly.

Can Aera regulate the aviation sector properly? Tell us at views@livemint.com

Climate change and security

Tue, 10 Nov 2009 15:14:00 GMT

The economics of climate change is disputed. However, its effects are visible and soon it may be time to take a hard look at one of them: its fallout on security.

On Monday, the Union ministry of environment and forests clarified that the “retreat” of Himalayan glaciers wasn’t due to global warming. A week earlier, there were reports of China constructing a “dam” over the higher reaches of the Brahmaputra river in Tibet. The two stories are linked by one theme, that of India’s water security. South Asia is home to a large mass of humanity. Any reduction in water availability has the potential to ignite political and security crises which, whenever they arise, cannot be isolated in national boundaries. China, India and Pakistan will be embroiled in the resulting disputes together.

Illustration: Jayachandran / Mint

For India, the problem is acute. If it is the loss of river waters that poses the danger on one front, it is the rising sea level that is another source of trouble on its eastern flank. With the erosion of its land mass, an influx of persons from Bangladesh is a very real danger now. Bangladesh’s government does not have the capacity, economic and scientific, to tackle this threat. It is unlikely to develop this in time to meet the challenge. The result: more “climate refugees” in eastern India where earlier waves of Bangladeshi immigrants have already altered the demographic landscape.

Further down, in the Indian Ocean, the Maldives is a country that is under physical threat of submergence under rising ocean tides. While the eloquent president of that country, Mohamed Nasheed, has been to New Delhi and has raised these concerns, no one seems to be paying attention to his pleas. India should. If our ambitions in the Indian Ocean are to go anywhere, the existence of a friendly Maldives is essential. That alone, if not friendship with a neighbouring country, should make us reach out to that beleaguered country.

These are not conventional threats that have military solutions. Whenever these situations emerge, they are likely to involve migration of populations, droughts, decline in agricultural outputs and a higher incidence of diseases. Meeting the security aspects of these emergent situations requires very different thinking from what we are accustomed to now.

In the US, for example, the department of defence and the Central Intelligence Agency already are devoting substantial resources to understanding the security outcomes of these challenges. In India, the debate continues to be focused on emission cuts, mostly. It is time our policymakers looked in other directions as well.

Is climate change a security threat to India? Tell us at views@livemint.com

Rock, scissors, paper, gold

Tue, 10 Nov 2009 15:13:00 GMT

About a week after the Reserve Bank of India spent $6.7 billion to buy 200 tonnes of gold from the International Monetary Fund, prices of the yellow metal have hit a record in nominal terms, crossing $1,100 an ounce even though they are still below their 1980 peaks in inflation-adjusted terms. To cross the latter, gold will have to move beyond $1,885 an ounce.

It is interesting to see who has been buying to push up prices. The New York Times last week cited data from the World Gold Council to report that consumption of gold for jewellery dropped 20% in the second quarter of 2009 while investor demand increased 51%.

Gold bugs may be hoping for a return to the earlier era when gold was the currency of trade and exchange. But they are daydreaming. There is enough economic research to show that the inflexibilities of the gold standard made the Great Depression worse. Thus, nations that could not adjust their currencies were forced into protectionism, a move that made the 1930s crisis even worse.

An economy in a crisis needs extra liquidity and the supply of gold is fixed: No chances of quantitative easing there.

However, the current rally in gold prices does have quite a bit to do with the quantitative easing that many Western central banks have done to stave off a financial collapse. More paper money and the same amount of gold are bound to change the relative prices of these two assets. That is what is happening: A drop in the dollar is mirrored by the rise in gold prices.

The future direction of gold will depend on whether inflation rears its head and whether the dollar continues to decline.

Investor Jim Rogers bases his forecast that gold prices will double to $2,000 an ounce on these two assumptions. Economists such as Nouriel Roubini—who shot to fame earlier this decade when he became one of the first to warn about a coming financial collapse—rubbish Rogers’ price forecast. They expect deflation rather than inflation.

We do not share some of the more grand beliefs of the gold bugs. But if central banks continue to print money, we would not be surprised if gold prices continue to rise.

What does the rally in gold prices indicate? Tell us at views@livemint.com

Financial reforms ahead

Mon, 09 Nov 2009 15:25:00 GMT

Prime Minister Manmohan Singh has done well to bring financial sector reform back on the agenda in a speech at the World Economic Forum shindig in New Delhi on Sunday.

There is nothing exceptionable in what Singh said. In fact, it would not be unfair to say that he rolled out all the standard clichés: the need to develop the market for corporate bonds, the pension and insurance sectors, and the futures markets. The Reserve Bank made some moves towards a more open financial sector in its October monetary policy statement.

Illustration: Jayachandran / Mint

India needs a robust and well-capitalized financial sector if its national savings are to be put to productive use. Take infrastructure, for instance. Nobody can deny that India needs more roads, ports, power and airports. Minister for roads and highways Kamal Nath has called for a decade of infrastructure to follow the past decade of information technology.

Infrastructure projects are long-term and, hence, need long-term finance that is best provided by insurance and pension companies. A deep market for corporate bonds will both allow firms access to new sources of finance, allow fixed-income investors a new option to diversify risk and help develop a yield curve that will make monetary transmission more efficient.

The tricky part of financial sector reform is sequencing. What comes first? A headlong rush towards full capital account convertibility or a free-float rupee is uncalled for right now. Singh has done well to be more modest about what form financial reform should take now. In other words, he has not ignored the obvious lessons from the Western financial crisis.

Another related issue that Singh will have to tackle is the size of the fiscal deficit. Nearly one-fourth of the banking sector’s resources are compulsorily used to buy government bonds. The sheer size of the government’s bond issuance programme also distorts the money markets and the yield curve, an issue that cannot be separated from the broader goal of financial sector reform.

That said, there are clear reasons why new initiatives are needed to strengthen the financial sector. Raising the foreign investment levels on insurance and pension firms and pushing through changes to create a robust market for corporate bonds are, in our opinion, the most obvious first moves.

The debate on financial sector reforms became bitter and personal in 2007 and 2008. It is time for a more reasoned debate.

Should India choose modest or dramatic financial reforms? Tell us at views@livemint.com

A Buffett at the rail station

Mon, 09 Nov 2009 15:24:00 GMT

Warren Buffett has built his reputation as the modern world’s greatest investor as much for what he hasn’t done as for what he has. His contrarian decision to steer clear of the tech mania that gripped the world around a decade ago is as significant as his famous investments in strong consumer franchises such as Gillette and Coca-Cola.

So what he does with the money he manages has a far wider significance than the actions of less celebrated money managers.

Two of Buffett’s latest buys are in sectors that are so clearly old economy: railways and coal. The investment star is ready to pay $26 billion in stock and cash to buy Burlington Northern Santa Fe Corp. Analysts have also pointed out that the company Buffett is eyeing is not a pure railroad play. It also has tracks and rights of way near some very lucrative and low-sulphur coal near the west coast of the US.

Buffett has his fair share of critics. Financial blogger Barry Ritholtz has in a recent post attacked Buffett’s decision to team up with Goldman Sachs to buy tax credits from Fannie Mae—a mortgage lender that was bailed out by the US government last year with taxpayer funds. The US treasury shot down the proposal. Ritholtz said, “This paper transaction would have provided precisely zero value to...taxpayers.”

“For Warren Buffett’s Berkshire Hathaway to team up with Goldman Sachs (which he now owns a healthy chunk of) is a bit of a revelation: We have been spun by his genteel manner, his aw shucks down-home-isms, his off Wall Street, less bloodthirsty approach to investing, into somehow believing he was different,” thundered Ritholtz.

But that does not mean Buffett’s recent move into railroads is any less interesting. That the sage of Omaha has spotted opportunities in two industries which were dismissed as being in terminal decline not too long ago, may tell us something about how their economics could change.

Buffett wrapped a patriotic flag around himself when he tried to justify his interest in the railroad as a bet on the US recovery. But businessmen in India who have interests in infrastructure already know that you can make a killing by owning a road or airport.

That’s one area where they are one step ahead of Buffett.

How does one make sense of Buffett’s latest interest? Tell us at views@livemint.com