POTUS Donald Trump’s India Visit: The Takeaways

The 2 day India visit of US President Donald Trump, started at Ahmedabad, on 24^th Feb’2020 & concluded at Delhi, the next day, with a stopover, in between, at Agra – to see the iconic Taj Mahal. Trump, generally, is known to dislike long travel & would not have undertaken the India visit - a 8000 mile, 19 hour trip - if he wasn’t assured of benefits that would aid his re-election bid later this year; having escaped impeachment, he must have been keen to erase bad headlines, resurrect his image & assure his electorate that he is an immensely popular international leader capable of extracting trade/defense deals to “Keep America Great” – his likely 2020 election campaign slogan. Prime Minister, Narendra Modi, did not disappoint, either, by carefully curating the event: feeding into Trump’s ego with supporters & performers lining the streets of Ahmedabad, cheering President of the Unites States's (POTUS) cavalcade, soon followed with a grand reception, titled “Namaste Trump”, graced by a capacity crowd of 1.25 lakhs, at the largest cricket stadium in the world, at Motera. The defense deal worth $3 billion – consisting of 24 MH-60R Naval + 6 AH64E Apache helicopters - signed the next day- makes him a happy man; he would fervently hope that a significant part of the 4.4 million strong Indian diaspora, in the US, largely traditional Democratic Party supporters, would shift to the Republican party, helping him, especially, in the swing states like Florida & states like Texas where the contest appears to be tighter this time round.

“Event Manager’ Modi, rightly, capitalized on Trump’s weakness for flattery & spectacle, perhaps, learning from the Saudis who organized an elaborate “Ardah” sword dance at the Murabba Palace, in May 2017, the French, who  invited the POTUS for the Bastille day celebration, in July 2017, the Japanese, who invited him as the first state guest after the new King Naruhito’s coronation, in May 2019 or the British feted him with a 4 course meal, at the Buckingham Palace, with Queen Elizabeth, in June 2019. That Trump was delighted with the same is evident since he termed his reception “incredible”. The personal admiration was evident when Modi described Trump as a man who “Thinks Big” & the latter reciprocated by describing Modi as an “exceptional leader & great champion of India & my true friend” – during his Motera speech & “religious, calm man” but “strong” & confident that he “will take care of terrorism”, during the presser.

First Lady of the United States (FLOTUS), Melania,, was seen in a white jumpsuit with a green sash with golden threads – ticking 2 of the 3 colors of the Indian national flag; the missing saffron – a Hindu symbol - & the presence of green – identified with Islam - caused a minor internet outrage. Trump's speech, at Motera , however, compensated by ticking the right boxes: he assured that India & US shall jointly fight against “radical Islamic terrorism” while managing a balancing act by saying that “his administration has been working with Pakistan to crack down on terrorists & militants that operate on Pakistani borders” instead of using the words “on its soil”; after all US needs Pak to nudge the Taliban to sign a face saving deal to facilitate American withdrawal from a “very difficult & dangerous part of the world”, Afghanistan, without a loss of face. By proclaiming that every nation has a right to “secure & control its borders” & that the US & India are committed towards working together to “stop terrorists & fight their ideology” he, perhaps, expressed support for the Citizenship Amendment ACT (CAA); his reluctance, during the presser, to be drawn into the CAA issue, calling it “upto India” to handle buttresses the assessment.  He praised India – “a democratic, peaceful, tolerant & free” country” & perhaps drew a contrast with China – that “seeks power through coercion, intimidation & aggression”.

Interestingly, while Trump or Melania did not don their ear phones, while listening to Modi, speak in an unfamiliar Hindi, Ivanka did so & that perhaps highlights 2 issues: his lack of attention to detail unlike Ivanka & explains why she has emerged as his trusted adviser.

The speeches by the two leaders had their hilarious moments caused vide mispronunciations inviting memes galore; while Modi addressed POTUS as “Dolan Trump”, Trump lived up to his reputation with a series of gaffes: “Vivekananda” as “Viveka-mu-nand”,  Vedas as Vestas, “Sachin” Tendulkar as “Soochin”, “Virat Kohli” as “Virot Kolee”,  referring to Modi as “Chi wala” against “Chai vala”(Tea seller) but that is excusable especially when Indians too, while speaking, in their nonnative tongues, fall prey to a similar ignorance. Otherwise, he succeeded in pressing the right notes. His specific reference to Indian achievements in the space field is interesting & that explains why the US, generally, reticent in terms of sharing cutting edge technology, is keen to collaborate with India in the areas of space & drones.

Trumps remarkable stickiness to the script & his “conservative answers”,  calling CAA violence is “upto India” to handle & religious freedom, in India,  is better “relative to other places” would be seen by the ruling Bharatiya Janata Party(BJP) as a foreign policy triumph. The two jarring notes though: Trump’s offer for “mediation” with Pakistan, again, during the press meet - & averring that “Kashmir has been torn between a lot of sides” & “there are two sides to every story” - & his apparent refusal to have the vegetarian fare, including broccoli & corn button samosas, served to him, opting, instead, for non-vegetarian stuff.The Indian foreign policy & political establishment should never forget the negative consequences of a "no liquor" policy followed earlier & should serve food preferred by a visiting dignitary; after all the way to the heart passes through the stomach.

That the relationship has traversed a long way, since the cold war era, is reflected in the Indo-US joint statement’s  reference to a “Comprehensive Global strategic partnership” & “strategic convergence in the Indo-Pacific” & “US-India-Australia-Japan Quadrilateral consultations" - an euphemism to contain China - & the “partnership between USAID & Indian Development partnership administration”, perhaps, to counter China’s Belt & Road initiative, the “Blue Dot network”  & calling on “Pakistan that no area under its control is used to launch terrorist attacks”. While the statement reiterated India’s status as a “Major Defense partner”, the decision to reinvigorate the “homeland security dialogue” between the Indian Home Ministry & the US department of Homeland security & intent to establish a “counter narcotics working group” & “promptly conclude phase 1 of a comprehensive bilateral trade agreement” & expand the energy trade to coking/metallurgical coal – over & above the LNG, oil & nuclear energy already underway - is indeed welcome.

The Trade deal is a work in progress, perhaps, because Modi is a “tough negotiator” but Trump believes that “India is probably the highest tariff nation in the world” & “it has to stop at least as it pertains to the US”. This implies that the trade pressure on India shall continue; the Japanese realized that trade pressure did not cease despite the brilliant Trump welcome they served. Trump “admires” India & calls his visit a diplomacy of “great friendship & respect” with a potential to go places – a “natural beautiful enduring friendship”.

Development of relations, with India, has a bipartisan support, across the aisle, in Washington DC, but the “Howdy Modi” event in Texas, in Sept, 2019 & the “Namaste Trump” event, this month, risk identifying, the Indian govt., closely with the Republicans, leading to a Democratic Party backlash. The last 3 decades, have largely seen Democratic & Republican parties enjoy a 8 year revolving cycle of US Presidentship & it is probable that Trump could get a 2^nd term; however, the Indian foreign policy establishment should evaluate, if the benefits of a closer identification with Trump – who is only “transactional”, in his outlook – is helpful, in the short run, during the next 4 years, is worth imperiling India’s relationship with the Democrats. One fervently hopes that despite trade friction & the apparent unease in the Congress on Kashmir & the citizenship issue, the congruence of values, geopolitics & commerce shall help take this defining relationship of the 21^st century to new heights.

The State of the Economy & Budget 2020-21 Recommendations

India suffered 6 consecutive quarters of de-growth, culminating in a 4.5% GDP growth, in Q2 FY20 & is optimistically expected to clock a 5% GDP growth in FY20 & a 5 - 5.5% growth next year. Incorporating the former Chief Economic Advisor – Arvind Subramanian’s – claim that the growth rate, as per the new GDP series, overstates growth by 2.5%, reveals a shocking  growth rate of 2.5% only, requiring “antibiotics & not painkillers” as per the former head of the Prime Minister Economic Advisory council (PMEAC), Rathin Roy.

With nominal GDP at 7.5% & borrowing rates around 10%, there is no economic logic to seek credit for expansion. Furthermore, with capacity utilization trending between 72-76% (68.9% only in Q2FY20, 73.7% in Q1 FY20, 76% in Q4 FY19 as per RBI – Reserve Bank of India) there is no incentive for expansion, especially when assets are available at a steep discount, vide the Insolvency & Bankruptcy code (IBC).

Crony capitalists raided the banking network till 2014, & after Governor Raghuram Rajan instituted the Asset Quality Review (AQR), in Dec 2015, & put 11 PSU Banks under Prompt Corrective Action (PCA) - effectively debarring them from lending - they started raiding the Non-Banking Financial Companies (NBFCs) instead & the party ended with the Infrastructure Leasing & Financial Services (IL&FS) crisis, in 2018, prompting de-growth. This, perhaps, is a bigger root cause to decelerating growth as compared to Demonetization or a “faulty GST”. The Indian Banking, Finance Services & Insurance (BFSI) sector is thus fragile & “Loan melas” & “mudra loans” could only kick the can down the road.

The Periodic Labour Force Survey (PLFS), conducted by the National Sample Survey Organization (NSSO), pegs unemployment at 6.1% in FY18, a 45 year high. However, new jobs generated, as per NSSO, during FY2000 - FY2005 was 6 crore while FY 2005 - FY2012 was 1.5 crores only, indicating that India has been facing a problem of lack of good employment opportunities for quite some time, perhaps, because Indian Industry is more keen on putting up capital intensive rather than labour intensive industries, raising the spectre of the “demographic dividend” turning into a “demographic curse”, with the attendant consequence of social strife.

Faced with such a bleak economic commentary, RBI opened up the monetary policy tap, with a 135 point reduction in repo rate, in 2019, but faces issues of transmission; with current Repo rate at 5.15 % & inflation at 7.35%, in Dec 2019, RBI will be forced to pause. Furthermore, savings rate dropped form 37.8% in Mar 2008 to 30.5% in  Mar 2018 & hence the need to maintain a  Real interest rate of 1 - 1.5% - a good compromise between the needs of the depositors & the borrowers, even while the latter could demand a negative / zero real rate of interest.

Sector wise Health Matrix

The auto sector is facing stress with de-growth in sales starting, Oct 2018, roughly coinciding with the onset of the IL&FS crisis, impacting consumer credit to auto sales; this is also in line with the global secular trend of reduction in auto sales because millennials’ prefer ride hailing apps over auto ownership. Rajiv Bajaj, of Bajaj Auto, avers that increased insurance costs implemented from Sept 2018, making of additional safety features like Anti Braking System (ABS) mandatory, since Apr 2019 & the proposed leap from BSIV to BSVI, from Apr 2020, leading to at least a 30% hike in vehicle costs explains slowing sales in 2 wheelers. It is probable that the weak economic sentiment coupled with job losses & a wait for better electrical vehicle offerings are other causes forcing customers to postpone purchase. Auto sector contributes 15% to GST & 7.1% to GDP. While manufacturing contributes 15% to GDP, Auto at about 47% of manufacturing is critical to the health of the economy, impacting derived demand products: steel, tyre, paints, carbon black etc.

While the rise in protective tariffs & the resolution of stressed assets like Essar & Bhushan steel, vide Insolvency & Bankruptcy Code (IBC) has somewhat helped alleviate suffering of the steel industry, the pain in the power, aviation, telecom, BFSI, Real Estate  etc. sectors persists.

With states like AP dishonoring Power Purchase Agreements (PPAs), in lieu of buying solar power, at discounted rates, power plants running on fossil fuels, like coal, are seeing low utilization & could emerge as the next Non- Performing Assets (NPAs). The centre mandated opening of a bank guarantee/Letter of credit by discoms, in favour of power generating companies, since Aug 1^st 2019, to avoid addition to Rs 41,747 crores of outstanding dues, is impacting demand & generation. In the aviation industry, Jet & Indian Airlines are on the block while Indigo is facing headwinds. In the Telecom industry, Vodafone-Idea is threatening to throw in the towel. As per Knight Frank, India’s top 7 cities have 42 months of unsold stock of flats, end Q2FY20, an indication of the precarious situation in the real estate industry; while the govt. has announced a Rs 25,000 crore real estate fund, the quantum of unfinished projects in the top 7 cities alone is worth 4.6 lakh crores. The sordid list continues indicating that the economic recovery, with so many industries in the Intensive Care Unit (ICU), is way off.

With traditionally heavy capex spenders, like Reliance, busy deleveraging their balance sheets, expecting Indian industry to revive with a rise in private investment is foolhardy. Creating a “bad bank” as advocated by some, to accelerate credit,& hence investments, could actually be counterproductive when capacity building on project appraisal skills or erection of Chinese walls, between the govt. & the BFSI sector – to prevent “phone banking”- an euphemism for cronyism - have not been implemented yet. With low capacity utilization & with a weak demand scenario, characterized by diminishing consumption, the Indian private sector will be loath to invest, forcing the govt. to do the heavy lifting, for at least the next 4-8 quarters. Unless domestic demand rises, foreign investors too would prefer a “wait & watch” mode & hence foreign direct investment (FDI) too cannot come to the rescue.

Perhaps, because of the listed headwinds, the govt. increased custom duties, during the last few years, emerging into a “protectionist avatar” - maybe for some time - to increase capacity utilization.

Against this bleak economic scenario, it is important that the center release pending dues to the states so that states are not forced to cut expenditure which otherwise would accentuate a negative spiral of de-growth. This is critical since the combined budgets of all states is more than the central budget. Suggest the following further for reviving the economy:

(1)Revive Consumption:

Ideally a loose monetary policy is complemented by a tight fiscal policy but the current extraordinary situation, perhaps, demands a Keynesian stimulus. However, Sajid Shenoy, of JP Morgan, estimates the fiscal deficit of the centre (3.3% of paper but could be closer to 4.4% as per Rathin Roy), states (2.6% budgeted but could rise to 3% this year) & off balance sheet items at 9% leaving little fiscal space. However, a higher fiscal deficit, if used for capital spending, is still defensible. Fiscal & monetary taps opened up simultaneously, without structural reforms, though, would invite stagflation – high inflation & low growth. Hence the need for a loose monetary & fiscal policy with structural reforms, to prime growth, to be slowly moderated after 4-8 quarters. As structural reforms yield results only in the medium term, demand & consumption revival is the immediate ask by placing money in the hands of the citizens of the lower quartile of society who would perhaps, spend the entire amount on consumption, unlike others who shall have a greater propensity to save, more so during times of economic distress.

During the last 5 years, with investment & exports being weak, consumption emerged as a saviour which has since started weakening; Consumption has dropped to 57% of GDP & hence a need for revival. Rural demand can he enhanced by spending more under Mahatma Gandhi Rural Employment Guarantee Scheme (MNREGA) but knowing Modi’s disdain towards the scheme, it is unlikely to be approved. He could very well spend under “Har Ghar Nal”.

Modi had promised tap water, to all households, as part of his 2019 manifesto. Bringing river water vide canals to all villages/cities is capital intensive & the govt. – of all hues - record on relief & rehabilitation of the displaced has been pathetic.  Furthermore, climate change has led to the emergence of extreme climates. To address both the objectives, lakes can be dug, on govt. land, in the outskirts of villages/cities from where piped water can be provided to the nearest catchment under “Har  Ghar Nal”. The presence of these new water bodies shall serve as sinks to rain water/floods & moderate climate. Suggest a spent of Rs 50,000 crores, every year for the next 3 years, under this head.

Ideally, Direct Benefit Transfer (DBT), of the Rs 75000 crores, currently spent as fertilizer subsidy, directly into farmers accounts could help but transfers under PM Kisan have been tethered to clean up the database of beneficiaries; likewise, DBT of the 1.84 lakh crores spent as food subsidy. However, since the political economy was kept greased vide these subsidies, interest groups would torpedo moves towards DBT.

(2)Revive Investment: Investment rate dropped from a peak of 41.2% in Q2FY12 to 29.7% in Q2FY20. With Indian BFSI sector fragile, either FDI or govt. spending has to come to the rescue since the Indian private sector is unlikely to display the appetite for reasons explained earlier.

The govt. can raise revenues vide divestment with the promise that the entire proceeds of asset sales shall be used, entirely, for building new assets to avoid the accusation from the opposition of selling “family silver”; it is a case of selling one asset to erect another with the bonus of creating additional employment, they could reason. The Govt. has never achieved divestment target beyond Rs 1 lakh crore but needs to target an ambitious fig. of at least 1.5 lakh crores, during FY 21.

The reduction of taxes for manufacturing to 17.17%(15% basic Tax+10% Surcharge+4% education cess) for companies incorporated started after 1^st Oct 2019 & starting production by 31^st Mar 2023, meant to attract new supply chains from abroad, taking advantage of the US-China trade war, would be a slow burn, especially due to investor caution on slowing demand & news regarding social strife, in India, courtesy issues, like CAA-NRC & states like AP reneging on contracts.

It is important to learn lessons from Vietnam - the greatest beneficiary of shifting supply chains from China. Vietnam- with a GDP 1/12^th India’s, has exports 75% of India’s in 2018 against 6% in 1960 & 34% in 2000. The Prime Minister should task his commerce minister with a one point agenda: bring supply chains to India -a "once in a generation" opportunity" as per Dr Arvind Virmani.

(3)Exports: While an export policy comes under the realm of the Commerce Ministry, the FM should arrange for zero rating of exports, under GST, to prevent working capital lock up due to delayed refunds. However, this too shall come under the remit of the GST council & outside the budget.

GST revenues at around 1 lakh crores per month against 1.2 lakh crores target – about 20% shortfall. Arvind Subramanian recommended a revenue neutral rate of 15.5% while the average realization, at launch, was 14.4% which has progressively dropped to 11.6% (~20% shortfall), since govt. reduced GST rates for interested parties, for short term gains, before state elections – 5% on food before Gujarat elections etc.; Increase in GST rate to 15.5% - with 3 slabs –could be a recommendation to the GST council, to be implemented, only after the economy has started looking up.

(4)Infrastructure Focus: The govt. has already announced, in Dec 2019, that they plan to spend $102 lakh crores during the next 5 years on infra – 25 lakh crores in power, 20 lakh crores in roads, 14 lakh crores in Railways etc.; the FM could explain in the budget how she plans to raise resources for funding the same. Budget FY20 announced a capital spend of Rs 0.64 lakh crores for Railways & Rs 0.68 Lakh crores for Roads & Highways; this can be increased to Rs. 1 lakh crore each.

The govt. should announce a spend of Rs 25000 crores, with a matching contribution by the states, to buy new electric buses which shall not only help the auto sector but also the  steel, tyre & carbon black revival; better public transport & last mile connectivity shall also have positive environmental consequences.

(5)BFSI Reforms: With bank mergers announced, integration of all PSU general insurance companies the next step; listing of Life Insurance Corporation (LIC) could net additional revenues but since LIC is forced to emerge as a white knight to rescue the govt. in its divestment targets, impacting valuation, listing may be delayed.

It is time to clean up the mess in private banks like Yes bank; reforms in the shadow banking network – NBFCs – co-operative banks should happen over the next 5 year.  Announce Rs 25000 crores as a financial sector safety fund. Perhaps, additional allocations would be needed in the subsequent years too to nurse the sector back to health.

That Banks are reluctant to lend is buttressed by about 4 lakh crores lying under reverse repo. To address the issues of “phone banking” & Asset liability mismatches encountered by banks in project finance, suggest the following options:

(a)Revive Developmental Financial Institutions (DFIs) like the erstwhile ICICI, IDBI, IFCI etc. suggests Sajjan Jindal; Vinayak chatterjee, of Feedback Ventures,  suggests govt. contribute 2 lakh crore equity & raise 8-10 times that amount vide debt to achieve the purpose. Moneylife’s Sucheta Dalal, however, reminds us of the run on DFIs, in the 1990’s, by companies like Essar, Jindal, Usha etc. & challenges its viability

(b)Encourage creation of private DFIs with stakes held by international pension funds, sovereign wealth funds etc. to deter “phone banking”. Hopefully, they display more professionalism.

(c)Deepen corporate debt market & debar PSU banks from subscribing to corporate debt beyond 20% (say) of issue size.

(6)Encourage FDI:  The “dirty dozen” firms that were the first to be brought to the IBC, for resolution, were all run by Indian promoters, who caused Indian banks much harm unlike foreign firms, like HUL, Nestle etc. India attracted $61 billion of FDI last year – about 2% of GDP; perhaps time to increase it to 4% of GDP by Increasing FDI limit in Insurance from 49% to 74% & 100% under automatic route for all sectors except sensitive ones like defense.

(7)Reduce PIT: Reduction of corporate tax has led to a clamor for reducing personal income taxes (PIT) to ensure parity. As per an IMF paper, only 20% of tax savings, post reduction in corporate taxes in US, to 21%, has flowed into investments & the scenario is unlikely to be different in India; perhaps, the govt announced the measure as a hedge against joining Regional Comprehensive economic Partnership (RCEP).

Reducing personal income taxes, especially, during these times when tax collection is under stress is generally, thus, not a recommendation. However, reduction of taxes in the lower slab & compensation by introducing 35% & 45% slabs could be attempted; however, GOI would prefer continuance of surcharge & cess since they are not part of the divisible pool with the states.

With a rebate of Rs 12500, on incomes between 2.5 – 5 lakhs, no citizen with an income under 5 lakh pays tax while the 5-10 lakh slab attracts a 20% tax, which could be reduced to 10% to spur consumption. Promise a road map of reducing the tax, on incomes between 10 - 25  lakhs, from 30% to 20%, next year & recover losses by introducing higher tax slabs. Direct Tax Code, could be a better alternative, at simplification & removal of exemptions,  but since all governments, want to play God, on budget day & having experiencing the loss of power, post indirect tax reform with GST launch, no central govt. is likely to play ball. Therefore the proposed slabs

Income Tax Slabs	Current	Proposed
2.5-5 lakhs	5%; Rebate of Rs 12500/- ensures zero tax	Retain
5-10 lakhs	Rs 12,500 + 20% of income over 5 lakhs	Rs 12500 +10% of income over 5 lakhs; to be announced for FY21
10-25 lakhs	Rs 1,12,500+30% of income over 10 lakhs	Rs 1,12,500+20% of income over 10 lakhs; to be implemented from FY22
25-50 lakhs		Rs 4,12,500+30% of income over 25 lakhs; to be implemented from FY22
50-100 lakhs	Rs 1,12,500 +33% of income over 50 lakhs. 33% is due to a 10% surcharge over 30%	Simplify with a  35% slab
100 -200 lakhs	Rs 1,12,500 +34.5% of income over 50 lakhs. 34.5% is due to a 15% surcharge over 30%
200-500 lakhs	Rs 1,12,500 +37.5% of income over 50 lakhs. 37.5% is due to a 25% surcharge over 30%	Simplify with a 45% slab
500 lakhs & above	Rs 1,12,500 + 41.25% of income over 50 lakhs. 41.25% is due to a 37.5% surcharge over 30%
Currently a 4% Health & Education cess is applicable on all the slabs which needs to be eliminated

With no "wealth tax/Estate" tax in India, the 45% tax slab is not quite as regressive as it is generally made out to be.

Conclusion: India is facing a “silent fiscal crisis” as per Rathin Roy & the next 4-6 quarters are going to be a trial by fire; the Finance Minister can emerge victorious by unleashing steps, at demand revival, in the short run - vide DBT, spent of Rs 50,000 crores under "Har Ghar Nal", Rs 1 lakh crore each under Railways & Roads & Highways (against 0.64+0.68 Lakh crores budgeted last year), Rs 25000 crores for buying electrical vehicles with a matching contribution by the states etc. - & allowing, structural reforms - lower corporate taxes, opening up of FDI, factor market reforms etc. - to fire in the medium to long term. Adroit handling, is a prerequisite, & that shall determine if India emerges as a global powerhouse like Japan, South Korea or China or an “also ran” like Turkey, Brazil, Thailand or South Africa.

Welcome 2020!!

As we bid adieu to tempestuous 2019, we note,
US Congress impeach Trump, British Johnson vote,
Brexit, closer to reality, EU headwind trouble,
Even as Amazon fires turn it to savanna rubble.

Closer home, Modi wins handsomely & Article 370 goes,
Supreme Court Green lights Ram temple but economy slows,
CAA protests, in North-East, against granting citizenship to Bengali Non-Muslims,
While National NRC protests, against likely citizenship withdrawal to Muslims.

Pak-Turkey-Malaysia crescent axis created,
Pak-China iron brother hood further cemented.
Nepal with communists, Lanka with Chinese leaning Rajapaksas' lunge,
NRC fraying relationship with Bangladesh & Afghanistan, a foreign policy challenge

Right wingers, Bolsonaro, in Brazil & Viktor Orban, in Hungary, earlier  win,
Taking advantage of slowing growth & increased xenophobia sin,
Muslims interned in Chinese Xinjiang & Myanmar Rohingyas' driven out,
Force Nobel laureate, Suu Kyi, to defend herself in an international court bout.

Arabs, Kurds, Turks & Persians fight; Middle East burns,
A Yemeni Houthi attack on oil fields, Saudi Arabia earns,
Iran-US skirmishes increase, US withdraws from Syrian perch,
Allowing Turkey to displace Kurds, US leaves allies in violent lurch.

People's movements evict strongmen in Sudan & Algeria for a song,
While Student Protest extradition to China, in Hong Kong,
In Iraq, Iran, Chile, Nicaragua, Bolivia, Russia people on street,
Non peaceful, people movements explode, as we 2020 greet.

Beti Bachao; Beti Padhao!!

Patriarchy, the lion king, in the volatile, violent, hinterland,

Unequal Sabhas, Khaps, led by men only, in our motherland,

Others, like Germans, reverentially, call it Fatherland,

paradoxically, greater respect for woman where they stand.

Trial of fire, crossing multiple hurdles a girl is born,

Death in womb or after birth infanticide they are gone.

Denied education & nutrition to help her brothers,

Suffers death again, she, sacrificing for others.

Escaping death but suffering scars possibility live,

as lurking sexual predators - neighbors, relatives - jive,

for a toddler now, teenager then  or even a granny in some session,

even as “marital rape” remains as anathema for even a discussion.

Democratic Hinduism, unlike other religions, has female gods,

Trinity of Shakti, Lakshmi & Saraswati – Trimurti consorts,

How do we deny girls- Lakshmi (wealth) & Saraswati (education) – gain,

& equate “Shakti” only to the ability to endure dols of pain?

As gender ratio degenerates, stunts & nears wither,

Men desperately seek women for marriage hither & thither.

Perhaps, time for Saas, Bahu & menfolk together get,

Divine realization dawns & they let

“Beti Bachao; Beti Padhao”

Is India Right In Not Joining RCEP (Regional Comprehensive Economic Partnership)?

India, on Nov 4^th 2019, withdrew from the mega regional trade deal, the RCEP (Regional Comprehensive Economic Partnership) that would potentially account for about 30% of world trade & 50% of population. Its consisted of 16 members, the 10 Member ASEAN Association of South East Asian nations)-Myanmar, Thailand, Laos, Vietnam, Cambodia, Singapore, Indonesia, Malaysia, Brunei & Philippines- & its 6 trading partners-India, China, Japan, South Korea, Australia & New Zealand.  India’s existing Free Trade Agreements (FTAs) with 12 countries – 10 countries of ASEAN, Korea & Japan- of the 15 likely RCEP members, is a risk mitigation strategy.  Surely, the Indian decision was based on a sound cost benefit analysis; the conciliatory joint statement released that said that RCEP members shall start formal work to ink the pact by 2020 but shall try to resolve India’s issues, perhaps, indicates that the door is not completely shut yet.

Voices in favour of joining RCEP

The industry body, Confederation of Indian Industry (CII), strongly advocated India joining RCEP. A high level advisory group headed by Surjit Bhalla, the former member of the Prime Minister economic advisory council (PMEAC), claimed that the rupee is not over valued & argued for a reduction in custom duties-both the upper range & number of tariffs rates over a 5 year period- to double exports form $500 billion in 2018 to $1 trillion in 2025(CAGR of about 10%).

Pradeep Mehta, Ex Shell chief & Secretary General of CUTS International, avers that the share of intermediate goods in global Merchandise trade is 60-70%(World Trade Organization 2013 Report) which despite coming down to 50% now (World bank’s World Development report WDR 2020), due to increased protectionism globally, is till substantial & hence suggests joining RCEP to access Global Value Chains (GVCs) & to resuscitate a rules based international trading order. Furthermore, import of high quality & less costly intermediate “goods has multiple benefits: Cheaper access to end consumers, positive effect on productivity of firms, raised export growth, expanded employment & increased domestic income”. While, globally, import content in exports has risen from 20% in 1970s to 40% in 2013, in India’s case it increased from 19% in 2005 to 25% in 2011 & dropped to 16% in 2016. WDR report estimates that a 1% increase in GVC participation boosts per capita income by more than 1% higher than a 0.2% income gain from standard trade. He advocates joining RCEP along with domestic factor market reforms, power, logistics, reducing red tape & encouraging co-operative federalism as a strategic way forward.

Former NITI Ayog chief, Arvind Panagariya holds that if “we are sitting outside, no multinational would want to come here”; joining RCEP & duty free access thereof to a large Asian market would be an added incentive to entice multinational investors he reasons.

Voices against joining RCEP

Puja Mehra, shared the following data on Livemint, 4^th Nov issue, indicating a widening of India’s trade deficits post conclusion of FTA’s with the prospective RCEP nations. Contrast that with India having a trade surplus with SAARC nations, under SAFTA, essentially meaning that we are tigers only in South Asia alone; as per Asian Development Bank, India’s FTA utilization rate of 25% is amongst the lowest in Asia due to faulty commitments, high logistics cost & strict rules of origin.

	FTA implemented from	Trade Deficit($ billion)
		2008-09	2018-19
ASEAN	1st Jan 2010	8	22
Japan	1st Jan 2010	3	6
Korea	1st Aug 2011	5	12
		2003-04	2018-19
China	No FTA	1	53
		Trade Surplus($ billion)
		2005-06	2018-19
SAFTA*	1st Jan 2006	4	21
*SAPTA : South Asian Free Trade Organization

Unfortunately, many in industry have been lobbying for protectionism – including but not restricted to a relook/abrogation of existing FTAs - & export incentives including currency depreciation instead of enhancing competitiveness. At a US-India spat at the WTO (World Trade Organization), the latter has ruled that Indian export incentives violated the trade body norms vide a subsidy of about $7 billion helping steel, pharma, chemicals, IT products, textiles & Apparel ; this could lead to withdrawal of Merchandise Exports from India Scheme(MEIS), Export Oriented Units Scheme (EOU), Duty free imports for Exporters Scheme & other sector specific schemes like – Electronic Hardware Technology Park Scheme, Bio Technology Park Scheme, Export Promotion of Capital Goods Scheme. This is clarion call to Indian industry to work on long term competitiveness.

The Swadeshi Jagaran Manch – part of the RSS family – to which the ruling part of India, BJP, also belongs has for long been opposed to the RCEP & that, perhaps, has tilted the scales of the decision.

Indian manufacturing accounts for 15% of GDP & 49% of manufacturing is contributed by the Auto sector. Industry body, SIAM (Society of Indian Automobile Manufacturers) has advocated & secured high import tariffs up to 100% on Completely Build Units (CBUs) & 125% on second hand vehicles to help “Make in India” local value addition & job creation tariff; it has been consistently demanding that CBUs & engine imports should be kept in the negative list when India concludes any FTA.

With about 50% of Indian population dependent on agriculture & the small land holdings-67% of farmers hold less than a hectare & 85% less than 2 hectares- & India’s attempts at increasing manufacturing to 25% of GDP by 2022-to shift farmers in higher productive jobs & reduce underemployment- proceeding at a tepid pace, keeping tariffs high was a logical corollary to protect farmers from the likely destabilization caused to livelihoods due to an import deluge. Ex. Huge dairy products imports from New Zealand if RCEP was concluded.

Indian Offer

Thus the initial Indian offer – to protect agriculture - was as follows

	Overall offer	Offer for agricultural products	Offer for Non-agricultural products
ASEAN	65% of tariff lines to be eliminated immediately & 15% more in 10 years adding up to 80%	35% of tariff lines to be eliminated immediately & 5% more in 10 years adding up to 40%	75% of tariff lines eliminated in 10 years but backloaded
Japan & Korea	65% of tariff lines to be eliminated in 10 years		86% of tariff lines eliminated in 10 years
China, Australia & New Zealand	80% of tariff lines for  Australia, 62.5% for New Zealand & 42.5% for China to be eliminated over 10 years	Tariffs to be eliminated for 15 products from China over 10 years	50% of tariff lines eliminated in 10 years

The offer was rejected by other nations & the subsequent Indian offers are not in the public domain.

Indian Thinking

Biswajit Dhar, of JNU, on 16^th Nov issue of Economic & Political Weekly, writes that Indian trade balance across product categories is as listed below

	Trade Balance($ billion) as per WITS
	Capital Goods		Consumer Goods		Intermediate Goods		Raw Materials
	2010	2017	2010	2017	2010	2017	2010	2017
ASEAN	-2.3	-3.5	3.8	6.1	-3.9	-8	-5	-4.7
Japan	-4.2	-4.5	1.4	0.4	-1	-2.4	0.6	0.8
Korea	-4	-5.6	-0.1	-2.1	-1.9	-3.9	0	0
China	-18.3	-39.1	-4.2	-8.6	-6.2	-12.5	8.2	1.9

Takeaways:

(a)India-China deficit exploding without a FTA till date & joining RCEP could potentially expand it further; even raw material trade balance has dropped from $8.2billion, in 2010, to $1.9 billion, in 2017, due to NTB (Non- tariff barriers).

(b)Indian markets are easily exploited by FTA partners while Indian exporters are unable to leverage the lower tariffs offered.

©India is a net importer of finished & intermediate goods & a net exporter of raw materials (except ASEAN due to coal imports) indicating the low share of value addition for India as a consequence of trade; India has little presence amongst GVCs  in these countries.

Consequent to the US-China trade war & to prevent dumping of steel products, India enhanced steel tariffs (2017) & followed it up by increasing tariffs on electronic components including mobile phones & TV components(Union Budget 2018), textiles(July-Aug 2018), auto parts, synthetic rubbers, electronic components(Budget 2019).India faces a twin balance sheet problem – a $260 NPA(Non-performing Assets) crisis of banks & bloated debts on corporate balance sheets & utilization trending between 72-76%. Protectionism apart from IBC (Insolvency & Bankruptcy Code) resolution twin vectors employed to increase utilization &move targeted industries into the green to be able to pay off banks.

Further, India, faced with an economic slowdown, announced a reduction in  corporate tax rates, in Sept 2019, to 17.17% (15% basic tax+10% surcharge+4% cess) – amongst the lowest rate in the world - for all manufacturing firms established on or after 1^st Oct 2019 & starting production before 31^st Mar 2022. Govt. would have reasoned that while joining the RCEP would help us with supply chain integration in the region, value addition in the IT, Mobile etc. industries thus far has merely left us as assemblers even while critical technologies & products like printed circuit boards, TV panels, solar panels etc. get produced elsewhere; it might be a better alternative to attract companies with the lower corporate tax to set up an entire ecosystem in India – which is viable considering the large domestic market availability.

India with an advantage in services was seeking labour mobility which was denied, perhaps, because ASEAN does not allow labour mobility even amongst its member countries. India wary of Chinese dumping was seeking stricter “country of origin” clause & auto trigger of tariff protection if imports cross a certain threshold which was not palatable to China. India has terminated 58 of the 83 Bilateral Investment treaties (BIT) - it had entered into earlier - but the “Protection of Foreign Investors” clause in RCEP would have negated the move. India’s concerns on the lack of “Electronic commerce” definition remained especially with regard to “data protection”.  Furthermore, India wanted tariff reduction from 2019 peaks while other countries wanted a 2014 cut off - when Indian tariffs were lower. India did not get any credible assurances on market access & Non-Tariff barriers (NTBs). Thus India’s decision not to join RCEP appears more of a fait accompli.

Way Forward

Since India is the largest domestic market after China & having seen the tremendous growth achieved by China over the last 30 years, investors are likely to be enthused by the new corporate tax norms to relocate entire supply chain ecosystem to India. Prudent that the commerce minister & Defense Minister be tasked with laying out a Red carpet to investors & achieve targets on relocation.

India unable to take advantage of FTAs signed is a sign of manufacturing incompetence & time for Industry to initiate corrective measures. As an example, the Auto sector, if competitive, should have been a huge exporter. Protectionism, needless to say is a disservice as it adds costs to the consumers & hence must only be a short term measure.

Decontrol agriculture exports so that Indian farmers gain advantage of international prices even while maintaining control on imports for protection. Indian overproduction in crops like rice, wheat, sugar etc. & the likelihood of India’s aggressive entry into export markets likely to depress prices, it is time for India to rethink its MSP (Minimum Support Price) strategy. Since removal of MSP for these 3 products could lead to a political hullaballoo, de-market the growth of these water guzzling crops, through anaemic MSP rise even while increasing MSP sharply for coarser cereals like jowar, bajra etc. -  that use lesser water - & nudging change in food habits the same way the “Swatch Bharat” campaign succeeded in making behavioural changes in cleanliness. Likewise, prudent to have an export thrust on fruits, enjoys more margin than cereals. In short, it is time for agriculture apart from Finance to contribute more towards export growth.

FTA with EU to regain loss in garment share to Vietnam/Bangladesh crucial; further woo global  top 5-10 firms to set up labour intensive set ups in textiles, leather & toys for both job creation & shifting excess manpower from agriculture to manufacturing. Doubling of farmer incomes is more likely to happen by reducing the denominator by 50%.

Industry has certain legitimate concerns. Indian power tariffs are high since industrial tariffs cross subsidize retail customers; since the proportion of cheaper non-renewable power in the overall mix is on the rise, time to pass on the lower costs to the industry. Likewise, Indian logistics costs 12-14% unlike China at 8-10%; time to convert all ports into SPVs, sell stake & convince the labour unions that the entire proceeds of sale shall be used for development of their port alone. While removal of cross subsidy on Railway freight by increasing passenger fares is an option to reduce logistics costs, it is unlikely to be implemented. Furthermore, zero rating of exports to prevent money getting locked up in GST & creating cash flow issues for the industry.

Conclusion

India, by not joining RCEP, has done well to prevent Chinese dumping in the short term but if both the govt. & industry do not pull up their socks to improve competitiveness the hurrah shall be short-lived.