RCEP and India

 Regional Comprehensive Economic Partnership (RCEP) is the economic alliance formed with China and other 14 countries primarily from Asia recently but including  non Asian countreis like australia, New Zealand. India was said to have entered into this economic pact and was negotiating for its membership, but withdrew later when it rightly found that this trade partnership would only benefit other countries but not its interests.

Maybe in the long run India would have to enter this trade pact but certainly not at this time when China's hegemony is strangling many of the Asian and African countries.

With many of the other Asian countries India already has a free trade pact except China.

China is a net exporting country to India and therefore any free trade pact removing the tariff barriers would only directly and indirectly benefit China.

Let us look at the specific pros and cons to RCEP:

Pros

1)The purpose of RCEP was to make it easier for products and services,investments, intellectual property rights of each of these countries to be available across the region. Differential rights have been granted to economically less developed countries

2)this pact covers the economic powerhouses of Asia including Japan, China and South Korea covering roughly 30% of Global GDP and 30% of World's population.

3)the pact is intended to reduce redtape and also tariffs.

4)it will bring about uniform customs procedures and  rules of origin which will facilitate global supply chains and trade within the region.With less regulatory framework trade will become seamless.

Cons:

1)this does not cover labour unions, environmental concerns and sustainability,human rights and government subsidies.

2)it does not commit countries to open services and other vulnerable areas of their economies.

3)Some countries may become dumping grounds for other manufacturing countries.The pact consists of countries that are the largest exporters of the world.

4)India's trade deficit with 11 RCEP member countries has worsened post 14 RTAs(Regional Trade Agreement) already signed with them. There have not been any significant export gains for India out of the already existing 14 RTAs.

5)Tariff reduction in a calibrated manner suggested by India has not been accepted by other RCEP countries. India suggested that with ASEAN countries it will reduce tariffs by 80%,for other countries like Japan, South Korea by 65% and for other countries like China, Australia,New Zealand by 42.5%.The countries disagreed and demanded uniform relief of 90% on tariffs.

(Courtesy:Rabobank Research analysis)

6) In order to protect domestic manufacturing, India suggested auto-triggering and snapback measures which will kick in immediately if certain agreed thresholds get breached in imports from certain countries esp. China for manufacturing imports and Australia and New Zealand for dairy products and other ASEAN countries for plantation products like Rubber .

7)India is already suffering from half of its trade deficit coming from China, and post the pact its trade deficit may worsen as with other RTA countries since India is a big consumption destination with vast population.Moreover the vagueness in addressing the concerns on trade in Services sector in which india has a comparative advantage.  also left India with no option but to keep out of it for some more time.

8) Since India has launched its "Atmanirbhar Bharat", PLI schemes for giving a huge push for Make in India , India will be benefited from RCEP after its manufacturing sector makes some significant gains in the domestic market.

9)Some countries do not see political alignments with few other countries like India and China due to the ongoing geopolitical tensions.(link)

RCEP member countries have kept the door open for India and india may well take a decision to join this after a year or two lag when its domestic economy starts growing at 8-10%. India can bring strong institutional policy framework to RCEP and many countries want India to be in RCEP as a counterbalance to China's growing clout and influence.

India, its agriculture lending a helping hand during the pandemic!

 India's agriculture has hit a new high when the entire country is under lockdown and the industry has hit the rock bottom.Kharif sowing as on 5th Sep20 has reached 1095 lakh hectares which is 6% more than what was the sown area in kharif season 19-20.The acreage of paddy has grown by 8% to 396 lac hec.over previous year.The acreage under Oilseeds has grown by 12% to 195 LH; Pulses by 5%  to 137 LH; Cotton by 3% to 129 LH and Coarse cereals by 2% to 179 LH.This has been facilitated by 9% increase in rainfall during June-Sep 20 to 795mm.

All five summer grown Oilseeds has seen higher than anticipated increase in their respective MSPs  and better procurement during the initial months of Covid pandemic phase.The increase in Minimum Support Prices including that of Paddy announced at the beginning of Kharif season in june 20 has really helped in increasing the sowing area and in augmenting the revenue of the farmer.

That apart, India has witnessed a 23% increase in farm exports dominated by Rice and Sugar, in the Q1 of Fy 20-21. These are all heartening news from the agri sector.

However the worrying patches, in the otherwise bright outlook,are the outstanding dues of over Rs.14.2K Cr. of Sugar Mills in UP to the cane growers. The State Govt has raised the FRP(Fair & Remunerative Price) by Rs.10 on an average as a policy measure during this cane crushing season, starting Oct 1.Sugar Mills have approached the Govt for a subsidy to pay the farmers in order to tide over the Covid induced difficulties.

Modi Govt has also constituted a Agri Infra Fund of Rs.1 lac cr. The Infra Fund is for catalysing the Agri-infra development and help build pivotal infrastructures like warehouses, cold storage, and nurture farm assets. This will bring about a increase in Agri share of GDP in the economy from 15% approx and thus improve the livelihood of those dependant on agriculture.(link GDP).

Modi Govt has promised doubling of farmers' income  by 2022 which is a daunting task ahead and Govt. is well focussed on this with far reaching structural changes made in the last few months by amending Essential Commodities Act and by liberalising farm trade , land leasing for agriculture across the country.

Now the country is looking forward to the Rabi season.

Inflation, Monetary policy and India

 The minutes of the recent meeting of Monetary Policy Committee  of RBi which were released this week, contain some interesting mentions. One of the news columns said that RBI minutes mention 'uncertainty' 12 times, 'growth' 43 times and 'inflation' 147 times It has expressed concern over inflation and it seems to be valid as CPI has remained above 6% which is more than the tolerance limit of RBI. Alongside, India is experiencing severe GDP growth pangs as its IIP has remained in the negative territory in the first quarter and in July also. Services sector is in a deeper mess except of course ITES, SAAS etc. which have been affected to a lesser extent. It looks like only Agri sector has not been impacted adversely so far ,as the progress of monsoon has been satisfactory and the spatial dispersion also fairly good.

The RBI Deputy Governor Mr.Michael Patra had said : "If inflation persists above the upper tolerance band for one more quarter, monetary policy will be constrained by the mandate to undertake remedial action, including an immediate and more than a proportionate response to head off the build-up of inflation pressures and prevent it from getting generalized." So, to sum it up ,we have classic case of "stagflation"- a combo of GDP slowdown and inflation.!

CPI in India has a higher weightage for food and fuel indices and these two are certainly not amenable to monetary policy measures. In India fuel price is driven more by Govt . policy measures and it is feeding into inflation with its rippling effects on the rest of the economy widespread.When pandemic is restricting economic activities profiteering becomes rampant in vegetable and food prices. When the supply chain and free movement of people and commodities happen, the inflation tendencies will come down. Cost push inflation of food prices will not listen to monetary policy signals in the short term in Indian conditions. As India is driven more by cash , there is a quite a lag in food inflation responding to monetary policy measures, if at all it is significant. May be hoarding and black marketing of these vegetables,cereals ,staples etc. may come down a little bit.However Govt. initiatives through Essential commodities and anti-hoarding sticks used by Govt. through other means incl. emergency imports may be more effective in the short term to bring down food prices.

When the economy is awash with liquidity, the prices in general have tendencies to go north .More so when the supply constraints remain elevated due to lockdowns,e-passes and uncertainties compounded by fear for life and livelihood affecting the income. In these circumstances. RBI should look at high CPI as extraordinary during the pandemic period and should start looking at Core inflation now and then revert back to CPI only after the pandemic is seen plateauing.In the meantime, RBI may seek a temporary amendment for its inflation targeting, switching to Core inflation in times of extraordinary circumstances like a pandemic,global financial crises etc. and then have a glide path back to CPI inflation targeting after the crest of the crises is over.

Import Trade restrictions and Make in India-Atmanirbhar!

 Import Trade wall or barriers are not new to India. The country had very steep walls in terms of Tariffs, licensing ,quotas etc. all in the name of safeguarding the domestic industry. When the country gained independence, many of the industries were either nascent or anemic and in order to restore their health, Central Govt had no option but to erect some import restrictions so that local industries in the economy are nurtured. This grooming of domestic industry with level playing field took a new turn in the late 1960s and 1970s with widespread nationalisation of private enterprises, ushering in an era of erratic socialism all in the name of protecting the citizens from private profiteering.

This concept led to erecting walls within the country between the commanding heights of Govt. undertakings and the Private enterprises. The private sector was neglected and was left to fend for itself and scaling up an enterprise became a uphill challenge for private sector. Inorder to protect them from imports from manufacturing bases around the world with deep pockets several safeguard duties and tariff walls were made stiff .

But all this had a negative side effects as the local industry became flabby, lethargic,self seeking, ignoring Tech.upgradation, without stiff market competition on Quality , Cost and Delivery.All this was done with the good intention of making India self restraint through import substitution. But the unintended consequences of this led to high cost of manufacuring and poor quality product.This situation was reversed when GOI started reducing tariffs and import restrictions through some pragmatic steps inviting foreign direct investments in the early 1990s.

By the time we missed the bus and Chinese who started this in 1980s had a clear headstart over us. Our two steps forward and one step backward strategy in all these matters of import policy were designed by bureaucrats with the hidden intent of rent seeking politicians, businessmen and babus behind it.

Only after the advent of Japanese, US ,German and South korean companies started their manufacturing bases in India , Quality, Cost and Delivery gained attention and became the guiding lodetones of enterprises keeping them lean and mean. This tough market competition has helped India in achieving the pinnacle of success in Auto sector especially in becoming World's top two wheeler manufacturing base.

That said , now there is lot of discussion on Govt's announcement of Trade tariffs for imports from China and licesing and ban on import of defence equipments,  high end TVs etc. The heated debate of back to the moribund policy of import restrictions in the name of Make in India- Atmanirbhar Bharat is indeed a good one.  

Does this mean back to the future?

But there can be an argument in terms of supporting this policy of  import restrictions.

When fledgling industry is sought to be setup like in high end tech products, these specific products may require some sort of support or sops for a initial few years. When foreign direct investment is invited for huge sunrise industries, such import walls will be helpful but all but temporarily. If there is a sunset clause introduced for all these tariff or sops or subsidies, it should be welcome. Govt. should make it a point to insert a sunset clause for all these import walls except in very few strategic sectors which may not exceed five on the whole.Govt should not give an impression that it is interested in augmenting its tax revenue through these high import duties.

India has given a great fillip to Make in India- Atmanirbhar in some of the industries like Auto, Smartphones etc which has generated huge employment opportunities in the country. Inorder to give a temporary boost to this policy, Govt has done the right thing by introducing few Tariff walls in order to promote the above stated policy  and these Tariff barriers should neither be seen as a way of revenue rising, nor as a permanent fixture to protect the domestic industry.

RBI monetary policy and the state of the Indian economy

 RBI's recent Monetary Policy announcement after MPC considered the latest economic factors, CPI etc , came out with no repo rate cut. Primarily because CPI is elevated and at an uncomfortable level as far as RBI is concerned.since the mandated and stated objective of RBI is now inflation control, RBI has decided to hold the rate this time despite the economic slowdown calling for a steep rate cut.RBI also mentioned that this year would see real GDP contraction after more than four decades, but still decided to save the powder for a more rainy day or for a day when the bang will be worth its buck.

India is facing rising prices also esp. food prices, fuel prices and therefore is experiencing a cost push inflation. There is a school of economists who say the inflation is fueled by easy liquidity floating in the economy and the stock exchange boom , gold price rise all indicate to easy money into areas where some quick money can be made.Even RBI is predicting a rise in inflation levels in Q2 but has refrained from an inflation forecast.

Gold price,as Ruchir Sharma in today's TOI blog(link )puts it, rises due to uptick in demand whenever interest rate is lower than the inflation rate. But Gold being a safe haven investment booms when the rest of the economy sees more volatility elsewhere esp. in stable investments. There is a rush of outflow from equity MFs in July but is it going to Debt MFs or to stock market or to gold  is anybody's guess.But there is greater desperation driving up buying Gold rather than preference as an investment.

All this paint a confusing story but with tinges of liquidity bulge which may become an inflation down the road, unless the productive resources are used for assets and jobs creation. But the silverlinings are shallow oil prices, decent monsoon, burgeoning foreign exchange reserves and surplus in current account balance. So, cost push factors in inflation are slightly mitigated in the near to short term.

CII 's recent 111th Business Outlook survey,July 2020, which was released last month revealed that out of three indeces Current situation index, Expectation index, Business confidence index, the Current Situation Index of Q1 of Fy 20-21 is similar to the levels of Q4 of Fy 19-20! Only the Expectations and Business Confidence levels in the economy have deteriorated during Q1 of Fy 20-21 as compared to earlier quarter.

Dr.Manmohan Singh in his BBC interview has also clearly said that this human crisis created by the pandemic calls for greater spending and greater borrowings by the GOI, even upto another 10% of GDP for tackling health, military and economic challenges of the country. His wise words would be worthy of listening now.(link)

But this borrowing must have a clear exit clause linking it to FRBM Act requirement of glided fiscal deficit path to 3% of GDP eventually in the short to medium term of 3/4 years. Only this can bring back investors into the country. Otherwise Fiscal profligacy is the scourge of the growing economies like India.

There are no simple answers but quick actions,as outlined by PM in his speech on the occasion of  Ram janmasthan Temple laying foundation,have to be taken by the Govt. Quoting from Kamba Ramayana he said "காலம் தாழ ஈண்டு இனும் இருத்தி போலாம்" என்றான் இராமன்" which essentially means we should not procrastinate taking actions to rectify the situation. A well focused fiscal stimulus, vaccine or no vaccine, is an urgent imperative.

Hammer and Dance strategy- both with Corona and China!!

Initially, when COVID 19 started spreading in India, PM Modi announced a war on Covid 19 and every single citizen abided by his exhortation.

Many newspapers and media personnel screamed Modi is going hammer and tongs at Covid 19 virus in order to scorch it totally.

But after a few lockdowns, both PM and the common man understood with humility that Covid demands hammer and dance strategy to deal with it.

So we are now reconciled to the fact that we must learn to live with Covid 19 at peace instead of waging a losing war. Adapting to its speed and spread, the common man is now equipped with mask, social distancing etc. to tackle it and dance with it.

Govt adopts the hammer and the common man adopts dancing with it.

Hopefully, this will become a considered foreign policy also with China, the birthplace of Covid19. Hammer at LAC and then dance with it in commercial and trade space!!Also, dance with China to wean it off Pakistan!!

Government's asset monetisation

Policy prescriptions are flying thick and fast and on my part, I am adding one more .

All Economists including me are prescribing deficit monetisation, pump priming etc. taking a leaf out of Modern Monetary Theory.

As against this,Central Govt. has an alternative which is called Asset monetisation, according to me.Govt calls it Disinvestment/Divestment of PSUs. When the whole world is reeling under Covid pandemic , will there be a suitor for Air India?

Even if there is a good buyer will he be willing to pay the right price for Air India.What will be the benchmark for its valuation when the whole industry is bogged down by this pandemic and its repercussions on the travel industry.

In such unprecedented situations , it is best advised not to go in for outright sale transactions of Government stake in PSUs including Air India, BPCL,etc.

Similarly, other intangible but real assets are Spectrum waves (link), Mining/Abiotic  ,Biotic Resources which are hidden inside the Earth, Ocean ,Space etc., Potential Renewable energy sources, which have future economic value and can add to GDP when suitably exploited without degrading the environment.

If these resources are valued properly, and India identifies these assets in terms of monetising its strengths, then India will have to look for its Enterprise value and raise suitable resources upfront for its current requirements in investing in its infra development.

In fact even lands owned by Indian Airports Authority can be used better by allowing usage of its land underground for commercial purposes.Even some of the defence lands can be wisely used under the ground for commecial purposes without in any way jeopardising defence security.

India's research, design and manufacturing capabilities!

If you do a SWOT analysis of India's capabilities, certainly Software prowess will be among the top in the list in terms of technological leverage. Pharma will come next to it and there are others like leather goods, cotton textiles, garments etc.

There is one niche area where India has excelled in all- Research, Design and Manufacturing capabilities and that is two-wheeler production. Even though India borrowed the technology from Japanese manufacturers initially, now India has its own name in the world for 2 wheeler manufacturing competing and even outshining the best in the world.

Yesterday I was listening to a panel discussion on defence manufacturing. Two out of the four panelists predicted in about 5 to 10 years time, India will be among the first three in terms of Research, Design and Mfg. of niche defense equipment incl high-end weapons built on the cutting end technology. According to them ,it has been made possible by the coherent, calibrated and painstaking efforts of this Govt. starting from Manohar Parrikar as the Defence Minister.

One of the panelists being Air Vice Marshal(retd) knew what he is talking about in terms of Govt. policies and the dilly-dallying attitudes of bureaucrats in carrying the agenda of the Govt. forward. He said that the dance involving the Govt, bureaucrats, and the armed forces have got into synchronized steps with well thought out targets after listening to the Defence Mfg.Industry.

Apart from these industries, India is also looking at developing capabilities in semiconductors, smartphones, chemicals and high-end pharma, renewable energy power equipment production, Mobility solutions etc. India stands to gain by investing in cutting edge technologies in Nano, AI, Robotics, Space, IoT, ML, DL, etc. For these things, India's investment in Targeted Research and Development will have to be substantially scaled up as a percentage of GDP.

Alvin Toffler in his "Powershift" mentioned about Knowledge, Wealth and Power/Violence as the three dimensions (கல்வியா,செல்வமா,வீரமா?) of the society with Knowledge being mentioned as the most democratic of all levers.India has to use that lever to its advantage.

Then, India can leapfrog into Industrial Revolution 4, since India was forced to miss the first three Industrial Revolutions by design!