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Quick Edit | On the prowl again

Sun, 22 Nov 2009 19:13:00 GMT

The announcement by Reliance Industries Ltd that it has bid for a controlling stake in LyondellBasell, the world’s third largest chemical company, is a sign that animal spirits are back in Indian boardrooms.

One effect of the financial panic that struck the world at the end of 2008 was that major Indian companies decided to steer clear of ambitious investment plans. The investment surge was stopped in its tracks and government spending had to be increased to prevent a collapse in growth.

Companies have been able to raise new equity and refinance old debts over the past six months, thanks to the easing of financial conditions. But much of that money has been used to repair balance sheet damage rather than fund new growth plans.

Reliance’s bid could make this the biggest overseas acquisition by an Indian company. As those companies that went in for ambitious leveraged buyouts realized, a lot will depend on how well the financial risks are managed by the acquirer.

Quick Edit | And now, peak uranium

Sat, 21 Nov 2009 06:30:00 GMT

The rise in global oil prices over the past few months have nudged an old fear back to life: peak oil, or the belief that the amount of oil the world pumps out of the ground each year has peaked.

Peak oil fears and the huge carbon emissions from coal have given nuclear power a second life. Governments across the world are ready at the starting block of a race to build nuclear reactors. So is India, which is one reason why the civilian nuclear deal with the US is so important.

But nuclear power needs a radioactive input: uranium.

But the world already uses more uranium than it mines every year. The gap is covered by reprocessed fuel, uranium that is re-enriched, and from civilian or military stockpiles.

A blog linked to the MIT Technology Review says that “civilian western uranium stocks will be exhausted by 2013” and many countries will face uranium shortages soon.

The Wall Street Journal says nuclear operators are on edge because of fears about the looming uranium shortage.

Uranium may soon become an important factor in India’s energy security strategy.

Quick Edit | Blame it on Rio

Fri, 20 Nov 2009 00:40:00 GMT

A country known for the mesmerizing skills of its footballers suddenly finds its economic policymakers making some bizarre moves.

Brazil set the ball rolling a month ago when it imposed a tax on foreign capital flowing into its booming economy. The reason it did so was that this flood of foreign money was making the Brazilian currency expensive and its exports uncompetitive in the global markets.

This tax on capital inflows soon became a talking point across the world. Some feel the Reserve Bank of India should use the same tactic.

Brazilian companies found the obvious loophole: issue American depository receipts (ADRs) to global investors and then allow them to convert these into local shares traded in Rio de Janeiro.

This loophole has now been plugged by another tax, on ADR issuance. We will not be surprised if companies find more loopholes and the authorities try to plug them.

So, is this a bicycle kick that Pele would have been proud of or merely a spectacular self-goal?

Quick Edit | Trading places: a TV fable

Wed, 18 Nov 2009 18:12:00 GMT

Sometimes it takes a make-believe “reality” television show to highlight some of the fundamentals of Indian society. A show, The Big Switch, places slum-dwellers and BlackBerry users side-by-side. Most viewers will agree that this scene could only be conjured up for TV.

Sociologist Jürgen Habermas emphasized the importance of vibrant discussion in public spaces for a truly engaged democracy. But many of these spaces in India—whether in English or vernacular newspapers, or on social networking sites, for example—are limited to specific communities of citizens. It’s hard to imagine upper-class Indians and slum-dwellers engaging substantively with one another.

Some social scientists have decried the decline of civil society in the digital era. Yet, maybe we can find space for inclusive public debate in the most unlikely of sources— such as this reality show, where at least a handful of Indians from very different backgrounds engage with one another in a prolonged way.

Quick Edit | The economics of Maoism

Tue, 17 Nov 2009 18:40:00 GMT

Large parts of India are under sway of the gun. In states such as Chhattisgarh, Jharkhand, Orissa and West Bengal, taking up guns against the government is a profitable activity. It makes economic sense. Investment in the technology of conflict is cheap: In West Bengal, a pike or a lance is sufficient to keep the police at bay. In Jharkhand, an AK-47 does the job. There are increasing returns to investment in violence.

For the governments, there are diminishing returns to curbing violence. Manpower loss is one issue. Then it makes little sense to assert control in areas that lack industries and agriculture of a productive kind. The sunk costs are so low that they do not come close to the variable costs incurred on a daily basis. The situation is also fair game for the punditry and the commentariat sitting safely in big cities. By their powers of persuasion, they markedly raise the costs of the state in countering Maoist violence.

It is another matter that the language adopted for doing nothing is more sweet and not so stark. But that does not hide the issues at hand.

Quick Edit | 3G slower than 2G?

Mon, 16 Nov 2009 18:09:00 GMT

It wasn’t meant to be this way.

By now, India should have completed the issue of 3G licences for data-rich telecommunication services.

Instead, the country is still hosting pre-bid conferences ahead of an auction of third generation, or 3G, spectrum that is scheduled for January. Interestingly, a similar conference was held in December.

The delay could hurt India in more ways than the government may have considered. After all, India’s much-touted telecom boom is running the risk of coming apart at the seams—the result of price-based competition that is seeing profits shrink at the country’s largest telecom firms.

So, potential bidders for 3G spectrum are realizing that apart from all the regulatory grey areas, they will also have to deal with a business environment where there’s no easy money to be made.

Clearly, it isn’t just companies, but also countries that stand to lose when they take too long with their so-called “go-to-market” strategies.

Quick Edit | Schumpeter in India

Sun, 15 Nov 2009 18:13:00 GMT

Hopes of a new wave of economic reforms are once again in the air.

There is little doubt that more than 25 years of reforms have lifted growth rates in India and helped pull millions out of poverty. An India that mortgaged gold in 1991 has now bought 200 tonnes of it from the International Monetary Fund.

But economic reforms offer another promise: the opportunity for new firms to elbow out incumbents and inject continuous economic vitality. New research by Laura Alfaro and Anusha Chari suggests that this promise has not been met. State-owned companies and firms set up before 1985 continue to dominate the business landscape; the only exception is the growing importance of new private companies in the services sector.

Why does India’s business structure continue to be ossified? Is this an indication of oligopolistic capitalism? Do new firms not get access to finance? Does the inspector raj hit start-ups harder than older firms that have learnt to game the system?

These are reasons for worry if you believe in Schumpeterian renewal.

Quick edit | Pandit Barack Obama

Fri, 13 Nov 2009 17:28:00 GMT

More than eight out of 10 Indians were born after the death of Jawaharlal Nehru in 1964, so it is very difficult to imagine the influence he had over a young republic.

Nehru-baiting is a popular sport today. There is no doubt he made several mistakes in his economic and foreign policies, but his vision, leadership and patriotism need not be doubted.

One way to understand the paradoxes of Nehru is to compare him with a modern political icon: Barack Obama, both eloquent orators, with support bases that cut across traditional divisions and the ability to use their personal charisma for politics.

The parallels run deeper. Nehru and Obama are part of a long tradition that believes public policy run by experts can solve pressing national problems. They were/are liberal internationalists who used personal popularity to influence countries, though there is also a healthy dose of realism. To critics, they are woolly romantics with their heads in the clouds.

One difference: Nehru led an emerging nation, Obama leads a nation in crisis.

Quick Edit | Another step forward

Thu, 12 Nov 2009 19:45:00 GMT

Much ink has been spilt criticizing the Reserve Bank of India’s (RBI) conservative approach to financial sector reform. Still, this caution helped India stave off the worst of the financial crisis. Now, with solid signs of recovery, such as industrial output, India is signalling returning to the reform path.

Last weekend, Prime Minister Manmohan Singh emphasized this agenda by noting “gradual, but steady” financial reforms. And that’s just how RBI likes it.

On Thursday, the central bank released comprehensive guidelines on the use of foreign exchange derivatives, suggesting piecemeal changes. Take cross-currency options, where a bank exchanges dollars for yen to hedge against dollar liabilities, which are now allowed. In last month’s policy review, RBI said it would even introduce credit-default swaps, whose entry it had wisely stalled in 2008.

What’s more, this review signalled the end of monetary accommodation and RBI’s focus on a new problem: Inflation. Now that growth is again a certainty, it’s important the central bank keeps an eye on inflation and financial stability.

Quick Edit | Why companies hoard cash

Wed, 11 Nov 2009 18:15:00 GMT

It is well known that Indian companies love to hoard cash, rather than use it to fund new investments or give dividends to shareholders.

The question is: why do firms stash cash when they do not need it?

In a blog post, Anoop Singh, director of the International Monetary Fund’s Asia-Pacific department, offers two fresh explanations in the context of Asian firms. He says, “Asia’s corporate savings puzzle lies at the heart of its economic imbalances”.

First, high corporate savings are related to low levels of corporate governance, so shareholders cannot use their voting power to demand higher dividends and prevent firms from hoarding cash.

Second, Asian companies choose to hoard for a rainy day because of low levels of financial sector development in the region. “The more liberalized the financial market, the less firms hoard cash, because they have easier access to funding and are less worried about being shut out of financial markets,” writes Singh.

It is rational to have a high preference for liquidity.

GST: the victory of politics

Tue, 10 Nov 2009 18:33:00 GMT

Political bickering and grandstanding seem to be winning the day.

India needs a single goods and services tax (GST) to integrate a fragmented national market and spur economic growth.

The trade-off between immediate political gains and long-term economic gains can be put in stark terms: The net present value of introducing GST could exceed half a trillion dollars, Finance Commission head Vijay Kelkar estimated in an October speech.

But a discussion paper by the empowered committee of state finance ministers released on Tuesday suggests the overdue GST roll-out will fall short of the ideal.

The discussion paper is strangely silent on the most pressing issues of discussion. Key sectors such as real estate and electricity are missing in the document. Petroleum will be excluded from GST while natural gas, oddly, is still up in the air. No specific rates have been set, and a bunch of short-term and state-specific political compromises haven’t been resolved.

The signs are ominous.

Quick Edit | The tale of two prisoners

Mon, 09 Nov 2009 19:00:00 GMT

Mohammad Afzaland Manu Sharma belong, on surface, to very different classes of prisoners. Afzal has been sentenced to death for conspiring to plan the 2001 attack on Parliament. Sharma is serving a life sentence for the murder of Jessica Lal.

They, however, expose a big flaw in the Indian penal system: The influential can get what they want, even if they are behind bars. Sharma got a parole recommendation from the Delhi government. He requested parole citing his mother’s illness and was granted one after jail authorities certified his “good behaviour”.

The question is: how many murder convicts get parole when their mothers fall ill?

Clearly, not many.

In Afzal’s case, the execution of his death sentence has fallen hostage to assorted political pressures and liberal fashions: Short of the recovery of assault weapons and bullets, a person is held to be innocent.

Such interference in dispensing justice greatly lowers the cost of committing crime and actually fuels lawlessness in society.

Quick Edit | Main Street to Dalal Street

Sun, 08 Nov 2009 18:18:00 GMT

The US labour department said this weekend that the unemployment rate in the world’s largest economy touched 10.2% in October, the highest in 26 years. This means that 8.2 million Americans have lost jobs since the start of the recession.

Growing job losses are likely to have several effects, the most important being that the US Federal Reserve will find it hard to raise interest rates despite the need to do so. The fear of even more job losses in the months ahead will dampen consumer sentiment as families prefer to save rather than spend.

These hard facts point to a further decline in the US dollar, which is not just the preferred currency of trade and foreign exchange reserves, it is also replacing the Japanese yen as the new funding currency for the carry trade. A weak dollar and near-zero US interest rates will ensure that this carry trade continues to grow, sending a tsunami of short-term money into Asian stock markets.

Regional regulators will have to be on their guard.

Quick Edit | Hamlet and climate

Fri, 06 Nov 2009 18:12:00 GMT

The prince of Denmark once described his land as a prison. Advanced countries are quite close to getting into one at Copenhagen. Until now, they have resorted to the tactic of blaming developing countries for not agreeing to emissions cuts. This even as developed countries’ plans for cuts were often riddled with loopholes and were well short of what is required in reality.

Preparatory talks for the summit at Copenhagen have floundered because rich countries could not sort these issues. A Reuters report on Friday quoted Antonio Hill of Oxfam International as saying, “There’s no question: they’re trying to get a get-out-of-jail card.” But there’s no escaping jail after many developing countries announced plans on emission cuts and better energy use.

The tactic now is to say that whatever is agreed at Copenhagen will be “morally binding” on all countries. This, while a legally binding treaty is thrashed out in 2010. That too has the potential to fail, unless rich countries bring something else to the table: sincerity. They have not shown much of it so far.

Quick Edit | Saying goodbye to rules

Thu, 05 Nov 2009 18:33:00 GMT

First, the good news. The Union government finally seems to be getting its act right on finding money for social sector spending without borrowing and adding to the fiscal deficit. The cabinet’s decision on Thursday to uniformly offload at least 10% equity from profit-making public sector units clearly points in that direction.

Here’s the bad news: The money from disinvestement will not be routed through the national investment fund for the next three years. This is the second time when a rule-based system, devised by the government, has been abandoned due to political exigencies. The first instance was that of holding the Fiscal Responsibility and Budget Management Act-mandated deficit targets in abeyance earlier this year.

There is no doubt that India has faced—and will face in the future—difficult economic and political conditions. That does not mean that carefully crafted laws and rules should be swept aside, even for a short time, at the mere appearance of a problem. That affects the country’s credibility. That’s dangerous.

Quick Edit | Protectionism, EU style

Wed, 04 Nov 2009 18:29:00 GMT

When it comes to the real world, free trade is hardly what Adam Smith would have imagined it to be. There is, no doubt, truck and barter, but hardly of the kind that Smith saw between a brewer and a baker.

The European Union (EU) has flagged concerns such as child labour and environment just before the India-EU summit on Friday. The EU wants these concerns factored into a free trade agreement with India. This is, of course, a naked attempt at extracting concessions from India and has little to do with free trade. It has everything to do with protectionism. Such clauses are mercantilist, but are dressed as humane concerns and are handy in protecting one’s companies from competition.

Child labour has complex reasons. Unless those reasons are addressed, banning products and companies using such labour will not end child labour. It is also a function of India’s willingness to engage in dialogue that such issues are raised in the first place. Does the EU bother China with such concerns? Why do moral matters gain salience only when the EU deals with India?

Quick Edit | Getting the right CIC

Mon, 02 Nov 2009 18:45:00 GMT

The Right to Information (RTI) Act has formidable foes. It is only fitting that our next chief information commissioner (CIC) be equally formidable, if not more. Kiran Bedi, India’s first woman Indian Police Service officer, who is being endorsed by persons as diverse as Anna Hazare and Aamir Khan, is one such candidate.

All too often, RTI petitions fail due to a combination of bureaucratic stonewalling (firewalling is a better description) and “sympathy” of information commissioners towards officialdom. It makes sense for governments to appoint retired officials: They often display a marked lack of enthusiasm to chase the truth and great energy to save their serving friends from embarrassment. This does not make sense for citizens.

To make RTI meaningful, the recruitment pool of commissioners needs to be liberalized: Eminent persons from different walks of life should be tried and those with bureaucratic backgrounds avoided. If the government decides on another civil servant appointment, that would be unfortunate.

Quick Edit | The coming season of LUV

Sun, 01 Nov 2009 18:33:00 GMT

Trust an advertising man to come up with a smart way to describe an emerging economic reality.

Borrowing from what a blogger wrote last week, Martin Sorrell of WPP said in a weekend interview that western Europe will see an L-shaped recovery, the US will see a U-shaped recovery and the major developing countries will see a quick V-shaped bounce. Together, you have the LUV-shaped recovery.

There is growing evidence that this is indeed how things will look. The International Monetary Fund and others have been pointing this out for some time now. The question: Is it time to bring back the late and unlamented decoupling thesis?

That would be a leap of faith. Asian countries trade a lot among themselves in intermediate inputs, but a huge chunk of final global demand still comes from US consumers. The latest data show they continue to be shell-shocked.

Yet, we would not be surprised if decoupling gets another airing in the coming summer of LUV.

Quick Edit | Rise and fall of finance centres

Fri, 30 Oct 2009 18:57:00 GMT

A global financial centre is akin to a popular software or hardware product: the more people access it, the more valuable it becomes—even making it near irreplaceable. Just as the dominance of Microsoft Office can’t be easily broken, New York or London can’t easily be dislodged.

Then again, the effervescent world of capital can just as easily dislodge these theories.

A Bloomberg poll on Friday notes that relatively new Singapore outpaces the old City of London as investors’ preferred place of doing business. New York, which earlier this decade was seen as losing prominence to London, is now clearly at the top. Up-and-coming Shanghai gets 11% of the votes.

How such fortunes for financial centres change is a question up in the air. It is one that has animated Indian policymakers, too, most recently with the Percy Mistry committee in 2007. Mumbai, with its English speakers and its back to a $1 trillion emerging economy, would seem a natural choice.

But that will still take years of investment in infrastructure, as well as the build-up of a sound regulatory structure. That can’t be rushed.

Quick Edit | US economy revs up

Thu, 29 Oct 2009 18:50:00 GMT

That the world’s largest economy has grown 3.5% in the July-September quarter, as data released on Thursday shows, is no small thing. But such a quick rebound is perhaps only testament to the wartime skills of US authorities. Managing the peace will certainly be trickier.

Motor vehicle output added 1.66 percentage points to the last quarter’s output change, courtesy Barack Obama’s “cash for clunkers” scheme that spends $3 billion to get Americans to trade in an old car for a new one.

Consider also that the US Federal Reserve has given no indication of ceasing its monetary accommodation. With 5.8 million Americans still on unemployment aid, a central bank committed to full employment may extend these easy policies. And it will take time for a turnaround in output to help labour markets.

Factor in the little tidbit that the US has a printing press like none other at its disposal, and suddenly there’s the fearful image of a US leader claiming “Mission Accomplished” aboard an aircraft carrier.