India and international financial services

The opportunity in the crisis

In today’s DNA, Mukul Asher & Azad Singh Bali argue that it is an opportune moment for India to make a serious play in developing international financial services:

It may seem odd to stress the need for developing international financial services (IFS) during the fragile recovery from the global financial and economic crisis. The Reserve Bank of India (RBI) has argued with considerable justification that its conservative approach to liberalisation of the financial sector has significantly contributed to mitigating the macroeconomic impact of the current global crisis.

Nevertheless, diminished prospects of the current providers of IFS due to the crisis and subsequent rethinking of the appropriate role of finance; India’s own growth prospects; and its vision of emerging as a major economic power strongly suggest that this is an opportune time to develop IFS in India.

…The development of IFS in India primarily for domestic needs should be the first priority. This phase may last perhaps a decade. As India’s financial and capital markets acquire greater depth and size, in the subsequent phases, India could consider serving the needs of international clients and become a global financial centre. It is therefore clear that the policymakers and the stakeholders need to sustain their efforts and focus over a long term, and plan sequencing of this process carefully.[DNA]

Copenhagen gains

No deal is a good deal, but the real deal is geopolitical

Back in October 2007, this blog had argued that because “it requires unprecedented international co-operation at a time of geopolitical flux…we can’t expect meaningful international co-operation on tacking climate change”. Instead “the immediate ray of hope is unilateral domestic action: states may be compelled to adopt sustainable environmental policies driven by a largely domestic cost-benefit analysis.”

This in the end, is what happened at the Copenhagen summit (see Saubhik Chakrabarti’s op-ed). That’s just as well, because it is not in India’s interests at this stage to be straitjacketed by an international treaty binding it not merely to carbon emission targets, but also to accept measurement and verification systems that would allow some unaccountable UN body to sit in judgement over India’s policies.

But the real gains were geopolitical—neither the United States nor China could have their way without India’s support. This fact was neither lost on the United States nor on China. The European Union is likely to realise it as soon as it recovers from its shock and sulk. Copenhagen, more than the G-20 summit earlier this year, provides an indication on how geopolitical decisions of the first half of the twenty-first century are likely to be made. If the UN system can accomodate the shift in geopolitical power, then those decisions are more likely to be made under the UN framework. If it cannot, the UN system will have to contend with faits accompli, much like the one in Copenhagen.

It would be dangerous for India to take this shift for granted—but despite the immensity of its national challenges, it must understand the strength of its own position in the international system and play its cards accordingly. Given the pace of the geopolitical shifts, it is imperative for India to strengthen and reform its diplomatic corps. In his interview with Pragati, Shashi Tharoor suggested that the government has approved an expansion of the foreign service and the implementation is in the hands of the civil service. Well, it had better hurry.

By invitation: How can we be sure Dr Singh has answers?

V Anantha Nageswaran

TN Ninan’s weekend rumination on Manmohan Singh’s purported successes on the external front is disappointing for two reasons: it does not make any useful point and it is misleading. The ongoing global financial and economic crisis is neither about global financial regulation nor its architecture.

In all fairness—whether or not Dr Singh was and is a great economist is beside the point—his tenure this time around, even after the Communists left the alliance, has not exactly been inspiring. He might not have been able to carry the day with his proposals. But he could have, at least, articulated the change, the vision and the blueprint that India needs, thus helping whoever comes after him (or himself) when conditions turn more propitious. The only thing we know is that he missed the Communists in his coalition. Continue reading By invitation: How can we be sure Dr Singh has answers?

Should America squeeze its own companies to squeeze Iran?

Even if it can be done, forcing foreign oil firms to not sell gasoline to Iran will hurt the US economy

Writing in the Wall Street Journal, Orde F Kittrie argues that the incoming Obama administration must exploit Iran’s “economic Achilles’ heel”—the fact that it has to import refined gasoline—to persuade it to negotiate over its nuclear programme. Since Iran imports gasoline from five firms “four of them European: the Swiss firm Vitol; the Swiss/Dutch firm Trafigura; the French firm Total; British Petroleum; and one Indian company, Reliance Industries”, he calls upon the Obama administration to insist that the Swiss, Dutch, French, British and Indian governments stop gasoline sales to Iran from their countries’ companies. (linkthanks Harsh Gupta)

In addition, he suggests that the US could act on its own:

Consider India’s Reliance Industries which, according to International Oil Daily, “reemerged as a major supplier of gasoline to Iran” in July after taking a break for several months. It “delivered three cargoes of gasoline totaling around 100,000 tons to Iran’s Mideast Gulf port of Bandar Abbas from its giant Jamnagar refinery in India’s western province of Gujarat.” Reliance reportedly “entered into a new arrangement with National Iranian Oil Co. (NIOC) under which it will supply around . . . three 35,000-ton cargoes a month, from its giant Jamnagar refinery.” One hundred thousand tons represents some 10% of Iran’s total monthly gasoline needs.

The Jamnagar refinery is heavily supported by U.S. taxpayer dollars. In May 2007, the U.S. Export-Import Bank, a government agency that assists in financing the export of U.S. goods and services, announced a $500 million loan guarantee to help finance expansion of the Jamnagar refinery. On Aug. 28, 2008, Ex-Im announced a new $400 million long-term loan guarantee for Reliance, including additional financing of work at the Jamnagar refinery. [WSJ]

It is unclear if Mr Kittrie is proposing that the US government purchase all that gasoline from Reliance at a premium over market prices, so as to deny the Iranians that gasoline. As for financing arrangements by the US Export-Import bank, what Mr Kittrie does not realise or forgets to mention, is that they exist because Reliance is purchasing goods and services from US suppliers. Withholding loan guarantees will be counterproductive to US commercial interests—for European and Japanese suppliers will be too keen to replace their American competitors, and their respective Ex-Im banks will supply the requisite loan guarantees. In any case, Reliance is unlikely to have too much of a difficulty in securing such guarantees, even in today’s financial markets.

Whatever the merits of the proposal to squeeze Iran through a policy of gasoline denial, Mr Kittrie’s proposal will hurt the US economy. Now, why would Mr Obama want to do that…when the US economy is already in the doldrums?

Pragati November 2008: The Sri Lanka dilemma

Contents

PERSPECTIVE
Don’t abandon the Tiger
A Sinhala-dominated Sri Lanka is not in India’s interests
T S Gopi Rethinaraj

The moment of truth on the LTTE
The decimation of the Tamil Tigers is a good thing
Subramanian Swamy

Tuning a new balance
China’s military transformation and the implications for India
Arun Sahgal

Looking back at Amarnath
India must seize the opportunity that has come in the wake of the crisis
Raja Karthikeya Gundu

IN DEPTH
The strategic imprint of India’s presence
A discussion on strategic affairs with Jaswant Singh
Nitin Pai & Prashant Kumar Singh

ROUNDUP
In tandem: military and civil bureaucracy
Differentiating military advisors and military commanders
Sushant K Singh & Rohit Pradhan

Faith in the system
The state must not restrict religious freedoms
Rohit Pradhan & Harsh Gupta

Rajiv Gandhi’s last manifesto
The Congress Party must rediscover its 1991 vision
V Anantha Nageswaran

The end of financial capitalism: what now?
Competent economic management has become all the more important
Mukul G Asher

BOOKS
Not a moment of boredom
Reviews of Pallavi Aiyar’s Smoke and Mirrors and Praveen Swami’s India, Pakistan and the Secret Jihad
Nitin Pai

Download it from here

IMF to Pakistan’s rescue?

It looks like Pakistan will have to go in for an IMF rescue package to stave off a sovereign default. The countries who used to historically come to its aid—the United States, Saudi Arabia, China and the UAE—might even prefer it this way. In fact, according to one (rather inspired) news report, the United States made its support for even an IMF package conditional on Pakistan staying on the course in the war against the Taliban and al-Qaeda. The United States and Saudi Arabia are co-chairing the Friends of Pakistan club—but judging by the Richard Boucher’s comments, this forum will kick in to support the Pakistani economy after it is rescued by the IMF.

The Pakistani government is left with little choice but to negotiate an arrangement with the IMF (and such is the state of affairs that the IMF team has refused to travel to Islamabad due to fears over its security, choosing to meet in Dubai instead). After the post-rescue condition of the economies it rescued in the 1990s, the IMF’s rescues are something that economies, and most certainly their leaders, shudder to even think about.

Now it is possible that the IMF might have learnt from its previous mistakes and is today more sensitive to the political side-effects of its economy policy prescriptions. But beyond the hyperventilations of the Pakistani media about the ignominy of it, the Pakistani government is unlikely to want the IMF’s straitjacket—or any straitjacket—to constrain their hand, so that they could go about business as they have always done. But the straitjacket might hurt Pakistan in other ways:

A commitment to economic reform is the precondition for more money; Pakistan has been asked to reduce its fiscal and trade deficits, reduce its current and development expenditure, reduce its subsidies, and increase its tax-to-GDP ratio. These are all good, sensible measures that Pakistan needs to achieve stable medium-term growth. However, they are not enough. Pakistan must think long and hard about economic reforms that will incur the displeasure of western governments and the IFIs. Consider the case for capital controls. Dismantling barriers to the entry and exit of capital made Pakistan an attractive investment destination in the 21st century. While the world was awash in liquidity and investors were looking far and wide for opportunities to earn money on their capital, Pakistan basked in the glow of foreign money. However, the same mechanism that made it easy to quickly attract money has become a millstone around our necks now that the economic tide has reversed. So while reform is certainly needed, the government must avoid the temptation to simply follow foreign dictates once again. [Dawn]

Related Link: Simon Cameron-Moore explains the situation; Mosharraf Zaidi has an interesting op-ed on the role of bankers and bureaucrats in this context. And Ikram Sehgal calls for capital controls…on the hawala channel.

Safe under the carpet

Whose wealth was kept out of the financial system?

Al-Qaeda’s. (Sunday Levity. Yes, this joke is on the rest of us)

The Associated Press reports that

Al-Qaida, which gets its money from the drug trade in Afghanistan and sympathizers in the oil-rich Gulf states, is likely to escape the effects of the global financial crisis.

One reason is that al-Qaida and other Islamic terrorists have been forced to avoid using banks, relying instead on less-efficient ways to move their cash around the world, analysts said. [AP]

Because it was forced to keep its money under mattresses (okay, carpets) it might have escaped the dramatic losses due to the global financial crisis. Not entirely though. Unless they managed to cash out in time, terrorist financiers must have lost some money in the stock market, which they were alleged to be milking.

Credit crisis could benefit India

On the virtues of making haste slowly

V Anantha Nageswaran would smile when he sees the Economist Intelligence Unit concede that:

Ironically, the current global situation is also making India’s measured pace of economic reform look wiser than before. At a time when Western countries are frantically nationalising banking assets, the Indian government’s reluctance to sell more than 49% in its state-owned banks—which control some 70% of banking assets—now seems reassuring. In addition, India has not yet introduced full capital-account convertibility, which protects its currency, while its careful control of foreign borrowings by domestic companies limits dependence on the global financial system. Regulators have also periodically introduced curbs to slow the formation of potential asset bubbles, such as higher provisioning and prudential requirements on real-estate lending.

The EIU believes that while there would be some short-term worries, Indian companies are likely to use the crisis to make overseas acquisitions.

Intimations of a severe global depression

And the risks of a hard landing for India

Nouriel Roubini issues a dire warning (linkthanks Ananth)

The US and advanced economies’ financial system is now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.

On the real economic side all the advanced economies representing 55% of global GDP (US, Eurozone, UK, other smaller European countries, Canada, Japan, Australia, New Zealand, Japan) entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies…

Countries with large current account deficit and/or large fiscal deficits and with large short term foreign currency liabilities and borrowings have been the most fragile. But even the better performing ones – like the BRICs club of Brazil, Russia, India and China – are now at risk of a hard landing. Trade and financial and currency and confidence channels are now leading to a massive slowdown of growth in emerging markets with many of them now at risk not only of a recession but also of a severe financial crisis. [RGE]

Offering a list of policy measures and calling for “radical and coordinated actions” he argues that

central banks that are usually supposed to be the “lenders of last resort” need to become the “lenders of first and only resort” as, under conditions of panic and total loss of confidence, no one in the private sector is lending to anyone else since counterparty risk is extreme. And fiscal authorities that usually are spenders and insurers of last resort need to temporarily become the spenders and insurers of first resort. The fiscal costs of these actions will be large but the economic and fiscal costs of inaction would be of a much larger and severe magnitude. [RGE]

Understanding the global financial crisis

Credit asphyxiation

Ajay Shah describes the reasons for the crisis, and the current panic…

Once a financial panic starts, only government intervention can solve it. Once trust is lost, only governments, with the power to print money and pay off debt through future taxes, can offer credible financial guarantees, and get the financial sector to work again.

An ideal big government effort at resolving these problems would involve three elements. It would involve stemming the bleeding of housing-related securities that are available at fire sale prices and are very illiquid. It would involve a government induced and policy supported mechanism for financial firms to raise fresh equity capital, going beyond the hundreds of billions of dollars that financial firms have raised by themselves. And, I think it would have to involve some mechanism through which the top 20 financial firms would get a detailed look at each others internals, so that they can start trusting each other and the money market can sputter to life.

The Paulson plan which has obtained support from lawmakers in the US is explicit about the first element: the US government will buy something like $700 billion of housing-related securities. This is a step in the right direction. But the other two problems remain : financial firms are low on equity capital and don’t trust each other. We continue to live without a money market. [Ajay Shah/FE]

…and what might solve it.

One of the most promising elements of a policy response has come from the UK on Tuesday. This involves three elements: liquidity injection to compensate for the collapse of the money market, guarantees for medium financing of banks, and equity injections into eight banks. Key design features of this package, and the magnitudes of resources involved, appear to have improvements compared with the American efforts. If this leads to a revival of the money market in London, this would mark a major step forward in resolving the crisis.
[Ajay Shah/FE]

Related Links: Niranjan Rajadhyaksha on how the crisis might affect the Indian economy, and what the Indian government should do about the global crisis.