Prime Minister Narendra Modi’s first budget was a disappointment, his first winter session of Parliament was an embarrassment, his passage of a slew of ordinances was touched by a hint of panic, and it’s still unclear if key economic legislation like insurance FDI and the general services tax will even get past his second budget.
Yet, foreign capital continues to flow. Greenfield foreign investment remains low, though it has at least rebounded from the bottom-scraping levels it reached last fiscal. Once you took out the usual end-of-the-year profit taking, the FII flow into India has been remarkable. And it continues to come in.
The Indian investor remains cautious about the stockmarket. The Indian corporate investor is even more wary. Having been burnt by the previous six or seven years by the last government, they are all waiting for concrete evidence of policy change before they put more money into expanding factories and plants.
Yet the foreigners keep coming.
One reason for this is that there aren’t too many places a foreign emerging market fund manager can put his money. As one equity player in London once told me,” There are a billion pounds in floating emerging market funds that have almost only India to go to these days now that Turkey, Brazil, Russia and a few others are belly-up. The FIIs, he told me, were buying and selling to each other so the Indian investor didn’t really matter.
Two, many overseas investors understand the damage done to the Indian economy by the United Progressive Alliance regime, especially the last five years of the Manmohan singh government. The fiscal deficit remains out of control. Bad loans are clogging up the banking system. The energy sector remains paralysed.
If anything, many of the institutional investors see how this would take a long time to unwind.
What worries them more is the tomtomming of calls for interest rate cuts by various senior government officials. This unnerves long-term financial investors, like pension funds, who focus on the broad parameters of the economy and policy and not short-term measures to get a quick burst of growth. For them, cutting interest rates prematurely is a sign of bad policy, that Modi wants to suborn an independent central bank, and means inflation would come back sooner than later.
They thus applaud Raghuram Rajan’s stance. As a Citibank study noted, India was a good place to be because of three things 1) Rajan, 2) the fall in global commodity prices and 3) Modi’s absolute majority in the lower house. No mention of Arun Jaitley or the key personnel in government.
In other words, Modi’s seeming “haste makes waste” method of governance gets him applaud with foreign investors who seen in this exactly the sort of long-term, stable policy mindset that they want.
Even on foreign policy, New Delhi is working on an ad hoc, ultra-pragmatic approach to diplomacy – and this is earning him points. This lack of geopolitical vision is actually acceptable now because there are no major government to government threats in the region. Sparring on the borders yes, but the chance of even a Kargil type situation is minimal. Modi is doing exactly what a Wall Street investor would want him to do in foreign policy.
As the rouble careens southward in value and, more importantly, capital flees Russia’s bleak economic future, the likelihood of capital controls being re-imposed by the Kremlin increases geometrically. Once that happens, the rouble will have isolated itself in a manner that belies Vladimir Putin’s 2009 claim that the “Rouble can claim for the role of a reserve currency.”
The present crisis aside, the future trajectory of the Russian economy looks so bleak – for reasons of demography if nothing else – that the future of the rouble is one of retreat, slowly returning to the Soviet shell it had emerged from post-Cold War. And this in turn will reflect an increasingly inward looking worldview of Moscow’s leadership.
It is interesting to speculate as to the trajectory of the rupee, the currency of an economy about the same size as Russia’s. The answer seems to be that the rupee is following a slow but steady path to the internationalisation that Putin alluded to. But New Delhi will do it in a manner far less outspoken than Moscow. Which is why it may succeed.
I am pretty certain no Indian prime minister and possibly finance minister has publicly spoke of the rupee as being a global reserve currency like the dollar or euro. Such musings are left to the Reserve Bank and central bankers are extremely wary of such an Idea.
G Padmanabhan, deputy central banker of India, in a 2013 speech spoke at length about the rupee becoming a currency of the world. “The Indian rupee is a natural candidate for being considered for greater internationalisation.” But this should be largely in the area of “trade invoicing”, he said, and generally in a “careful and gradual manner.” But most of his speech was about the reasons why the rupee had a long way to go: India’s economy was too small, too prone to current account deficits, too dependent on foreign hot money, too inflation prone and so on. Ultimately, no one was using the rupee overseas.
None of this is a surprise. A macro-economically challenged India, rightly, is cautious to a fault about the health of its currency. What is surprising is, when one looks closer at the figures, despite the lack of enthusiasm of New Delhi – and the opposite sentiment in Moscow – the rupee has become nearly as internationalised as the rouble in recent times. And the economic future of India is much better. The rupee worldview is one of greater integration and, possibly, reserve currency status. We should “aspire” to see the rupee as an “international currency” said Padmanabhan.
The latest Triennial Central Bank Survey of the Bank of International Settlements throws up some interesting numbers regarding rupee versus rouble use in the international markets. One, despite the lack of enthusiasm for such activity by New Delhi, the rupee has been bandied around the international currency markets in a manner comparable to the rouble. Two, the rupee’s rise in the international system has a more stable upward trajectory. And this will be greatly enhanced after the Crimean bust-up between Russia and the West.
Example A: the rouble percentage of global foreign exchange market turnover has gone from 0.3% in 1998 to 0.9 in 2010. The rupee went from 0.1 to 1.0 percent in the same period. By 2013, however, the rouble had jumped to 1.6% while the rupee had stayed at 1.0 – reflecting presumably the halving of India’s economic growth rate in the intervening period. One suspects these trends will reverse for both currencies in the next few years.
Example B: When the global foreign exchange market is divied up by currency and by instrument, the rupee fares surprisingly well. The rouble is much more used: daily average in April 2013 the rouble turnover in such markets was $ 85 billion. The rupee figure was $ 53 billion. But the rouble was used much more heavily in spot transactions while the rupee led the way in outright forwards: $ 24 billion compared to $ 9 billion. Since outright forwards lock a buyer of that currency for a set time at a set exchange rate, the greater rupee figure would seem to be a vote of confidence in the stability of the currency – at least over the rouble.
India’s greatest challenge will be to persuade other countries to consider invoicing their trade in rupees. The currency is still too unstable – it just escaped a meltdown last fall. But compared to the rouble who’s present collapse is just a reminder that it went through the same, only worse, in 1993, the rupee looks like its backed by gold. Over 90% of India’s trade is dollar invoiced and even Bangladesh has rejected the use of the rupee for such purposes.
The recent issuance of rupee bonds by the World Bank slowly helps deepen the pool of instruments that are rupee backed – and financial market depth is a crucial criteria for a reserve currency. But the simple lack of full convertibility and the simple size of the Indian economy means the rupee will go global over a longer time frame. However, one prediction that can be made: the rupee will get a seat at the global high table before the rouble.
Vladimir Putin, nine years ago, described the Soviet Union’s collapse as the “greatest geopolitical catastrophe” of the 20th century. While one argue whether that was much of a catastrophe given how dysfunctional the Soviet Union had become in its last few decades, from a Russian perspective that might make sense. Read more
The Maoists guerrillas of India are back in the news after a lull of almost half a year. The skirmishing never actually stopped – an Indian Air Force helicopter took bullet fire during the third week of last month, putting one soldier in hospital.
The recent ambush that saw over a dozen Central Reserve Police Force personnel killed was, in military terms, not much of an indicator of where the struggle between government and the guerrillas was going.
Government forces seeing a spike in casualties is nowadays often evidence of that the paramilitary forces are on the offensive, moving deeper and deeper into the forests of east central India that serve as the main hideaways of the Maoists. The casualties may increase, but they are actually evidence of New Delhi asserting its authority.
Who is winning the war? Let us first consider some trends in the Maoist movement in India.
One, the overall casualty rates resulting from Maoist problems has fallen dramatically since violence peaked a few years ago. The peak of violence – in recent times – was 2010 and 2009. The home ministry’s figures indicate that the total number of deaths – civilian, military and guerrilla caused by leftwing extremism – reached 1128 and 1117. Those years were also the only ones when Maoist “incidents” touched over 2220 for the only these two years. Today the annual figures for both indices is about half that.
Two, the nature of the Maoist struggle has changed. The leadership is no longer the middle class intellectuals who gave these movements such an idealistic and romantic image in the 1960s and 1970s. An image that continues to survive among some armchair leftists in India’s urban centres to this day. Today, most of the leaders are of tribal origin, disinterested in ideology and, as a recent Open magazine cover article showed, ignorant of Fidel Castro or Mao himself. But this has also meant that while the movements, as their several Maoist groups who are semi-autonomous in nature, are still representative of tribal marginalization they have become more brutal in their actions, often killing other tribals and sexual exploiting women.
Three, while this is harder to pin down, after visiting Chhattisgarh and the Bastar area, I would argue the government forces are slowly but surely gaining the upper hand against the Maoists. In Raipur, officials talk of bringing the whole red problem to a close in a few years. This certainly exaggerates – Jharkhand must cease to be as dysfunctional as it is today for even a chance of that happening.
But the figures are telling. Despite the great publicity given to large scale ambushes by the Maoists, the numbers show that security forces have seen their losses plummet. Between 2007 and 2010, the government always lost over 200 men, the peak being 2009 with 317 dead. Since then, the figure have halved. In 2013 the losses were only 115. Maoist figures are harder to judge: the organization takes away its dead after fighting and so official figures are just estimates.
But the recent statement celebrating “a decade of struggle” by the Communist Party of India (Marxism-Leninism) was notable for its figure of 2500 deaths in its ranks because of fighting – substantially more than the 1800 that the home ministry gives for the 2003-2013 period. This would indicate a rebellion that has been much harder hit than people realize.
Finally, there is evidence that the economic prosperity and social development is slowly eating away at the sense of deprivation that led to the rise of Maoism in the first place. In a number of states, like Telangana and Andhra, the Maoists have been left hanging by a nail. Chhattisgarh has been a steady economic success story, especially given the very low socio-economic indicators that it began with. Poverty remains, but the sense of hopelessness that led many tribals to turn to the gun may be receding.
The Little Red Book is hardly over, but one gets a sense that rather than the last word on anything it may be heading to be a chapter that may soon be closed.
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Why did Narendra Modi go to Fiji and hold a summit of nearly a dozen South Pacific nations – including the half-island state of Papua New Guinea?
The idea was put to him by the Indian foreign ministry, one of the few times in recent times they have impressed the prime minister one suspects. Why did Modi lap it up?
Different theories abound.
One is that he has a vision of mobilizing the Indian diaspora for both domestic political and foreign policy ends. It helps that the Indian minority in Fiji is so small that they are no longer part of a political struggle between the Indian migrants and the Fijian natives. But it is hard to see how this remote island and its small population will be of much use to him.
Another is the great geopolitical game supposedly being played between India and China, and sometimes the United States. India struggles to extend its military power beyond the Straits of Malacca. Melanesia and Micronesia are beyond even its navy’s imagination. Neither India nor, I suspect, China has a chapter on the South Pacific in its Grand Strategy Blueprint.
In fact, Modi was sensibly modest in what he offered the islanders. India cannot match the aid commitments of players like China and even New Zealand. But, says Jenny Heyward-Jones, Micronesia expert of Sydney’s Lowy Institute, “they are tailored to areas India has a comparative advantage…and have a reasonable chance of development impact in the island countries.” Tele-medicine, for example, makes sense given the distance between the islands and limited medical infrastructure.
I believe Modi going to Fiji is really an example of a larger pattern of leaders of two-tier countries building larger global profiles. Shinzo Abe is now one of the most travelled Japanese prime ministers in history. And it isn’t just about reducing Chinese influene. He also went to countries on India’s periphery where New Delhi’s diktat is still stronger than those issued by Beijing. And Chinese leaders have been everywhere.
At the heart of this is a simple fact that the West’s influence in the world has dipped a lot the past few decades. In addition, emerging economies have to hardsell themselves across the world to investors.
Modi understands the importance of narrative. He does at home anyway and I presume he gets it overseas. When he went to the United States he needed to change the narrative on India following five years of dismal UPA government. And he did, more successfully than many others who tried like the leaders of Turkey and Brazil, as one president of a prominent US think tank told me.
By putting aside one day in Fiji, probably holding an Indo-Africa summit at some point, even doing a tour of Latin America in a few years, Modi will keep adding to this new India narrative.
Some of this may have an immediate diplomatic benefit, as the world squares for another round of climate change negotiations. The South Pacific islanders, who face extinction, are hardliners against carbon emission won’t necessarily be won over by Modi’s climate change pitch. As Heyward-Jnnes notes, “climate change is an existential threat..its the one thing that unites them, even against their friends.” But hopefully they will at least understand where India comes from when it pushes hard against carbon pressures.
Prime Minister Narendra Modi shocked the international system when his government blackmailed the Doha round of the World Trade Organisation by saying, in effect, “give us a permanent food security solution or we will block the unrelated trade facilitation agreement (TFA).” Read more
I have been browsing Henry Kissinger’s latest volume, World Order, and had a chance to hear him live and close-up in New York City. Read more
Once again, the Sino-Indian border is the epicentre of an Asian geopolitical tremor. Not an earthquake, but it causes just enough shakes to weaken diplomatic efforts to at least ease relations between the two countries.
But where the Chinese incursions at Demchok and Chumar unusual?
The difficulty is that the border, for all of its Himalayan proportions, is more fluid than most people realize.
One, there is the issue of demarcations. There are two Lines of Actual Control which tell where the two armies have physical control. In between there is an extensive no man’s land in which snake two claims lines which more often than not overlap each other.
Two, there is the issue of infrastructure. While the Chinese have built extensive infrastructure on their side of the border, India has begun to catch up only in the past five years or so. But this is important: improved infrastructure means more frequent patrols and, say, jeeps instead of pack mules. Change the road system and patrols are more frequent – inevitably the more often Indian and Chinese troops will bump into each other.
Three, the operating procedures between the two sides on handling the border keep changing with new border agreements. These agreements are necessary to keep pace with the improved infrastructure, weapon systems and the entry of such things as helicopters and drones.
This makes it hard to draw from raw numbers whether this is a consequence of a Chinese tactical decision or a simple fallout of, say, a better road and warmer weather that season.
Looking at the raw numbers – of which there are, this being India, different and often contradictory figures depending on the agency one talks to – there is clearly an increase in border transgressions by China in the western sector.
In the period up to 2011, such incursions normally numbered about 200 per year. Then from 2012 this number has doubled to the 430 range. This present year, 2014, is set to match this new range.
Harder to judge is the quality of such intrusions. One thing seems certain is that China border action is focusing on a few specific areas. In Ladakh these are Chumar, Demchok, Pansong Lake (Three Idiots fans please note), Depsang and a half-dozen smaller points. All these largely match the 1959 claims line of China, an older claims line now seemingly in the midst of being revived physically.
There is an additional issue which New Delhi doesn’t like to admit.
Over the years, India has become much less aggressive about patrolling the full extent of its claims area, even the full extent of its LOAC. This seems to have been because of piecemeal decisions over the years that have led the Indian patrols to restrict themselves to hugging the LOAC. As Shishir Gupta points out in his book Himalayan Face-Off, “Indian patrols do not go up to the LAC on advice of the CSG in these areas.” The CSG is the quasi-official China Study Group that advises the government on such issues. This has immediately meant the furthermost claims areas of India have become de facto areas of Chinese control.
After the fall in Sino-Indian relations in the latter years of Hu Jintao, India built up both infrastructure and the began pushing its patrols forward. Confrontations have been inevitable.
So, yes, the Sino-Indian border is becoming just a bit more heated. It will continue to do so. Both these countries are experiencing a rising nationalism. India has also seen the emergence of a more shrill television media that is no longer prepared to accept the relatively common back and forth that takes place on the border of both sides intruding. Better infrastructure, better patrolling and, in the case of India, a sense that too much was conceded in the past decade and needs to be reclaimed.
There is a new norm emerging on the Sino-Indian border for better or worse. And the two governments need to hammer out an even more comprehensive border management agreement to make sure the norm is institutionalized in a manner that keeps the guns quiet.
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