Emerging Markets Need to Prepare in Advance to Deal with Uncertainty

Managing Director of the International Monetary Fund Christine Lagarde speaks as Governor of Reserve Bank of India Raghuram Rajan looks on during an event at the RBI headquarters in Mumbai March 17 2015.Unconventional monetary policies, which include large purchases of government debt, has been used to provide policy accommodation in advanced economies since the 2007 global financial crisis.  However, these policies have had both positive and negative spillovers.

During a recent visit to India, International Monetary Fund (IMF) Chief Christine Lagarde, cautioned that “the unconventional monetary policies have had strong positive spillovers for the global economy, and by implication for India and other emerging markets.”  However, “it is also true that these policies led to a build-up of risks.” 

Between 2009 and the end of 2012, emerging markets received about US$ 4½ trillion of gross capital inflows, representing roughly one half of global capital flows.  Such inflows were concentrated in a group of large countries, including India, which received about US$ 470 billion (IMF, 2015).  As a consequence, bond and equity prices rallied, currencies strengthened, and spillovers to asset prices and capital flows were even greater than from earlier conventional policies (IMF, 2015).  “The danger is that vulnerabilities that build up during a period of very accommodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility,” she told Raghuram Rajan, Governor of Reserve Bank of India (RBI) and audience at the headquarters in Mumbai, March 17.

I agree the next move for emerging markets is to prepare in advance to deal with this uncertainty.  The reality is that as economic conditions improve in at least some advanced economies, portfolio rebalancing out of emerging market economies can be expected, and some volatility cannot be ruled out.  Remember the surprise indiscriminate capital outflows from India mid-2013?  With all eyes on US Federal Reserve change in posture, the timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets.

Photo source: voanews.com

The Superior Financial Powers of Modi’s Fiscal Roadmap

One of the key features of the Modi administration’s fiscal roadmap is the move to increase disinvestments to include both disinvestments in loss making units, and some broader strategic disinvestments.  The government plans to raise 695 billion rupees ($11.2 billion) in the year starting April 1, an amount crucial to its efforts to narrow the budget deficit.

The sale target includes stakes in central public sector enterprises, holdings in non-government companies, strategic disinvestment and Specified Undertaking of the Unit Trust of India (SUUTI).  In an interview with Bloomberg News (March 3), Disinvestment Secretary Aradhana Johri  reported India’s divestment receipts in the current year ending March 2015 was at 254 billion rupees.  The government is looking to raise 285 billion rupees through sale of its holdings in SUUTI, Bharat Aluminium Co and Hindustan Zinc Ltd.

The scaling up of disinvestments is ambitious, and highlights an important characteristic of Indian federalism: Central government possesses superior financial powers.

Part of the revenue levied at the Central government is of course redistributed among states, on the basis of advice of the organizationally independent Finance Commission or through the National Institution for Transforming India (NITI Aayog), and constitutes a significant source of income for them.  However, the impression that is thus created is one of profligate states, and a more careful and sophisticated Central financial management (Mitra/Pehl, 2012).

Since the liberalization of economic policies and the decentralization of policymaking to states from the early 1990s onwards (and even before then), states have been able to exercise some autonomy in regulating their own development trajectory (Mitra/Pehl, 2012).  However, the picture today is one of differentiation among India’s states in terms of their fiscal capabilities as well as their developmental potential, and a need for reform of inter-state mechanisms of coordination and equalization (an issue NITI Aayog promises to address).

The government is firm on achieving a fiscal deficit target of 3% in 3 years.  The fiscal deficit targets are 3.9%, 3.5%  and 3.0% in FY 2015-16, 2016-17, and 2017-2018  respectively.  But that journey has to take account of the need to increase public investment.

Budget Proposes Game-Changing and Revenue Significant Reforms

There are several specific proposals in the Budget 2015-16 to recalibrate India’s tax effort so that fiscal consolidation may be achieved in the short and medium term.  The game-changing and revenue significant proposals include:  Goods and Service Tax (GST) and Jan Dhan, Aadhar and Mobile (JAM) – to implement direct benefit transfer.   “GST will put in place a state-of-the-art indirect tax system by April 1, 2016.  The JAM Trinity will allow us to transfer benefits in a leakage-proof, well-targeted and cashless manner,” said Finance Minister Arun Jaitley during the budget speech on February 28.

In preparation for the introduction of the GST, the Government has been taking consistent policy steps to expand the scope and reach of service tax.  The shift is monumental in terms of changes in the mode of implementation and will undoubtedly require a transition phase.

Economics for the Common Man

AAP chief and its chief ministerial candidate for Delhi Kejriwal waves to his supporters in New DelhiAam Aadmi (AAP), or Common Man Party ran a  simple but formidable campaign, beating back the Bharatiya Janata Party (BJP) ambitions to gain political capital in a Delhi state election.    The message was simple, “Never underestimate the power of the common man.”

Economics for the Common Man  

Aam Aadmi Party Common Man Political Cartoon published on AAP website 10 February 2015

The rise of the AAP’s Arvind Kejriwal, Delhi’s new Chief Minister and former tax inspector provide important insights into the nature of politics at the grassroots level in India.  On the one hand, ‘pro-poor polices and clean government’ is the narrative for the ‘common man.’  Politicians functioning as intermediaries with the state acquire influence and amass political capital (Krishna, 2012).  On the other hand, a great deal of hard work is required to mobilize non-caste based political entrepreneurs who can deliver economic benefits and provide avenues for greater political participation (Krishna, 2012).  From this vantage point, it is imperative that the ruling party remain focused on redistributing wealth from the more advantaged to the less advantaged.

The Challenge for Economic Reforms 

In October 1929 Sir Basil Blackett characterized political unrest in India as an economic phenomenon of the middle class, the “outcome of discontent and maladjustment” (Foreign Affairs, October 1929).   Today, the challenge for economic reforms in India is inclusive growth.  Social unrest and protests similarly runs deep in resource-rich areas of central and eastern India, where rapid economic growth has been accompanied by rapidly growing inequality (HRW, World Report: 2012).

Prime Minister Narendra Modi swept to power with the biggest national election victory in three decades, promising to revitalize India’s economy, fix governance and push through reform legislation by executive decree.  However, economics for the common man is systematic.  The strategies and processes that create, break down, and recreate social coalitions in the party system require calculated tactical alliances (Swamy, 2012).   Institutions in the economic system must distribute rights and realize solutions.  When these transaction are taken into account, it turns out that the existence of firms, the structure of the financial system and even fundamental features of the legal system can be given a relatively simple explanation (see Coase, 1960).

BRICS to Discuss Creating it’s Own Rating Agency

BRICSBRICS experts will meet in March to discuss the idea of establishing an independent credit rating agency announced Brazilian Ambassador to Russia Jose Vallim Antonio Guerreiro.  The agency would become an alternative to the ‘big three’ firms: Standard and Poor’s (S&P), Moody’s, and Fitch Group.

The BRIC [Brazil, Russia, India and China] idea was first conceived in 2001 by Goldman Sachs as part of an economic modeling exercise to forecast global economic trends over the next half century; the acronym BRIC was first used in 2001 by Goldman Sachs in their Global Economics Paper No. 66, “The World Needs Better Economic BRICs”.

Today, their collective contribution (which includes South Africa) to global economic growth over the last decade has reached 50%, which makes this group of states the leading power in global economic development.   In addition, BRICS accounted for approximately 11% of global annual foreign direct investment (FDI) flows in 2012 (US$465 billion); and 17% of world trade with combined foreign reserves estimated at US$4 trillion.

“We may need to look for alternative indicators and broad approaches to assess the ‘health’ of economies,” said Ambassador Guerreiro. “I do not believe that the new agency will be something to resist the existing institutions.  They do their job, and certainly, there is a demand for their services.  But it is possible that the BRICS countries will elaborate a different approach”  (Office Group, SCO BRICS, Ufa 2015).

The challenge of course, is how the procedures of existing rating agencies can be applied more fairly to all economies.  The credit rating firm Standard & Poor’s will pay $1.5 billion to resolve a collection of lawsuits over its ratings on mortgage securities that soured in the run-up to the 2008 financial crisis, concluding one of the U.S. government’s most ambitious cases tied to the housing collapse.  The settlement comes after more than two years of litigation as S&P tried to beat back allegations that it issued overly positive ratings in order to win more business (Reuters, 2015).

Incentivizing Trade and Investment

The U.S.-India Business Council (USIBC) hosted President Barack Obama and Prime Minister Narendra Modi for a first-ever joint address to the U.S. and Indian business communities on Monday, January 26 in New Delhi along with the Government of India’s Department of Industrial Policy & Promotion (DIPP), the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce & Industry (FICCI).

Is Bioenergy a Bad Idea?

WRI14_WorkingPaper_4c_WRRIX_012815.pdf_A new study published by the World Resource Institute (WRI) has sparked new debates about bioenergy.  The Report titled, “Avoiding Bioenergy Competition for Food Crops and Land,” show that any dedicated use of land or growing bioenergy inherently comes at the cost of not using that land for growing food or animal feed, or for storing carbon.  Particularly concerning, experts say “Bioenergy, energy derived from any fuel that comes from biomass, is an inefficient use of land to generate energy,” (Searchinger and Heimlich, 2015).  Here’s the problem: India’s growth is driving just this type of energy consumption.

India’s Economy is Expected to Grow

According to the World Bank, India’s economy is expected to grow by about 5.6 percent in Indian fiscal year (IFY) 2014/15 (April-March), an increase over the sub-five percent levels in the previous year.  This would be the strongest among major developing economies between 2013 and 2016.  Importantly, India’s growth, which drives energy consumption across all major sectors, would make India the fourth largest energy consumer, following the United States, China, and Russia (GAIN Report, 2014).

India’s Biofuel Policy 

The Government of India (GOI) approved India’s National Biofuel Policy in 2009.   The policy encourages use of renewable fuel as an alternative to petroleum and proposes to supplement India’s fuel supply with a 20 percent biofuel (i.e. bioethanol and biodiesel) mandate by end of 12th Five-Year Plan (2017).

The salient features of the policy, include: strengthening India’s energy security; farming degraded soils or wastelands not otherwise suited to agriculture; providing financial incentives for feed stocks, conversion processes, production units and innovation; advancing biofuels technologies in the marketplace; and, meeting the energy needs of India’s vast rural population by stimulating rural development and creating employment opportunities and addressing global concerns about containment of carbon emissions through use of environment friendly biofuels (GAIN Report, 2014).

Implications for Domestic Energy Base

Man hauling Sugar Cane in Chandigarh Punjab. Photo taken by Sophia N. Johnson 9 October 2008

First, biofuels are an alternative energy option due to the availability of feedstock crops. Since the sugar industry is one of India’s largest industries, sugar cane and its processing byproduct are widely available for bioethanol production (Chand, Kumar et. al., 2008).

Second, while India’s domestic energy base is substantial, India continues to import significant amounts of energy resources.  In IFY 2006/07, imports of fossil fuels grew at a rate of seven percent, which outpaced consumption growth by three percent.  However, in last three fiscal years, higher petroleum prices led to demand contraction (GAIN Report, 2014).  Currently, coal and oil constitute 66 percent of India’s total primary energy consumption basket.  Natural gas maintains a seven-percent share of the basket, and renewables such as wind, geothermal, solar, hydroelectricity, and waste account for 25 percent of India’s total energy.  Nuclear accounts for a one-percent share.

Third, the biofuel industry could have significant impacts on the health, education, and productivity of the rural poor population in India.  Some anticipate that the biofuel industry will create new jobs for the poorest communities in India because biofuel production requires mostly unskilled labor, which is widely available in rural areas (Chand, Kumar et. al., 2008).

Finally, the poor are unlikely to reap any benefits or additional income from the biofuels industry.  Biofuel production has the potential to cause harm to the rural and urban poor.  The Indian government cited that there were over 30 million hectares of wasteland available for jatropha production around the nation.  The question seems to be, whether biofuels widen or narrow the inequality gap?

The New Delhi Deal

U.S. President Obama and India's PM Modi wave towards the media during a photo opportunity ahead of their meeting at Hyderabad House in New DelhiThe New Delhi Deal initiated by U. S. President Barack Obama and Indian Prime Minister Narendra Modi last week has emboldened India’s economic reform agenda and deepen U.S. – India bilateral relations.  The two countries reached agreement on a series of measures designed to reinvigorate commercial trade, restore the confidence of investors in India’s vast market, and resolve differences over the liability of suppliers to India in the event of a nuclear accident and U.S. demands on tracking the whereabouts of material supplied to the country.

  “Chalein saath saath; forward together we go.”

 – India-U.S. Delhi Declaration of Friendship

Trade and Investment

Under President Obama, trade between the two countries has increased by about 60 percent to nearly $100 billion a year (White House, 2015).  Speaking at a U.S.-India Business Council Summit in New Delhi,  President Obama announced a series of steps that will generate more than $4 billion in trade and investment with India while supporting thousands of jobs in both countries:

  • The Export-Import Bank will commit up to $1 billion in financing to support “Made-in-America” exports to India.
  • OPIC will support lending to small and medium businesses across India that will result in more than $1 billion in loans in underserved rural and urban markets.
  • The U.S. Trade and Development Agency will aim to leverage nearly $2 billion in investments in renewable energy in India.

Climate Change

The President and Prime Minister Modi pledged to enhance U.S.-Indian cooperation on our mutual climate and clean energy goals. The new deal ranged from financing initiatives aimed at helping India use renewable energy to lower carbon intensity.  The progress made on combating climate change, include the U.S.-India Partnership to Advance Clean Energy (PACE) umbrella program and technical work on emerging technologies.

The agreements include:

  • Enhancing bilateral climate change cooperation to achieve a successful and ambition agreement in Paris this year.
  •  Cooperating on Hydro-flurocarbons to make concrete progress in the Montreal Protocol in 2015.
  • Expanding PACE-R, the U.S.-India Joint Clean Energy Research and Development Center, to extend funding for research on solar energy, energy efficiency, and advanced bio-fuels.
  • Launching air quality cooperation to help urban residents reduce their exposure to harmful levels of air pollution.

More than 80% of electricity generation in India comes from fossil fuels and the power sector consumed nearly 70% of the coal the country produced in 2011, according to the International Energy Agency (IEA, 2014).

Human Rights

President Obama addressed an audience of 1,500 at Siri Fort Auditorium in New Delhi on the final day of his trip.  In a pointed message, the President pressed India on the need to address wider social challenges, including human trafficking and slavery, the status of girls and women in society, religious and racial tolerance and the need for programs to empower young people (Baker/Barry, New York Times: 2015)

There is a Great Deal of Variation in the Conditions of Life and Labor of the Indian ‘Working Class’

One of the consequences of economic liberalization in India, as elsewhere in the world, has been to encourage the informalization of labor, so that the share of organized, formal employment in the labor force as a whole has been declining (Harriss, 2010).

India’s labor laws, many conceived during British rule, have stifled manufacturing and hindered job creation.  Companies with more than 100 employees must obtain government permission to fire workers, a provision that discourages companies from expanding and hiring.  In 2012, about 84 percent of manufacturers in India employed fewer than 49 people, keeping a large majority of the work force in the informal sector with little job security and few benefits (16, October 2014, New York Times).

Development and Job Creation

The national program, ‘Make in India,’ is designed to transform India into a global manufacturing hub.  The reforms include plans to streamline labor laws and make scrutiny of factories transparent to curb harassment by government inspectors, cut red tape, develop infrastructure and make it easier for companies to do business.

Prime Minister Narendra Modi was elected on a platform of development and job creation.  “For the success of ‘Make in India,’ ease of doing business should be given priority,” said Modi at the event launch in September 2014.  Labor regulations are among the biggest challenges to setting up manufacturing in India, which fell to 134th place this year in a World Bank index of countries for doing business.

Aligning India’s Labor Strategy 

There is a great deal of variation in the conditions of life and labor of the Indian ‘working class,’ and it cannot be expected that a common political class consciousness can be at all easily developed (Harriss, 2010).

At the India Economic Summit (2011), delegates sought to align India’s labor strategy with the evolving global context as well as the development priorities for India and South Asia.  The success of ‘Make in India’ also depends on realizing youth potential, with added improvements in the education system, infrastructural investments, and an agenda for equitable distribution of opportunities.

India Had the Third-Largest Number of People Living with HIV in 2013

World AIDS day 2014According to the Joint United Nations Programme on HIV and AIDs, or UNAIDS, India had the third-largest number of people living with HIV in the world at the end of 2013, and it accounts for more than half of all AIDS-related deaths in the Asia-Pacific region.  In 2012, 140,000 people died in India because of AIDS.

The Economics of HIV/AIDS

One argument is that the scale of the HIV/AIDS epidemic is so great and so threatening to overall social and economic development that it constitutes an emergency that requires a direct response (Canning, 2006).  The Indian government has been providing free anti-retroviral drugs for HIV treatment since 2004, but only 50 percent of those eligible for the treatment were getting it in 2012, according to a report from the World Health Organization.  This strategy has been effective in delaying the decline in the immune system, the onset of opportunistic infections, and death (Canning, 2006).    However, the reach means stronger prevention measures are required, now.

Ethical Arguments 

world aids day india

National human rights institutions have become increasingly engaged in addressing HIV-related human rights issues (UNAIDS, 2013).  Stigma and punitive environments continue to have a negative impact on the rights of key populations at higher risk and other vulnerable groups. If the goal is to maximize the health benefits produced, developing-country governments and international institutions should focus their health spending first on the prevention of HIV transmission, before moving on to treatment (Canning, 2006).  However, emphasizing treatment before prevention in financially-constrained environments comes at the highest cost, deaths.

Follow

Get every new post delivered to your Inbox.