Response to FT article - India's 'bumble bee' defies gravity

Dear David,

I recently read your article titled "India's 'bumble bee' defies gravity” published on Financial Times dated February 16^th 2012. Here are some of the after thoughts that I wanted to share with you.

The front page of ‘Financial Times’ referred this article with the reference 'Undependable India'. That description was quite damaging. I do not agree with that. India has been an open democracy with the much open market for the last 2 decades. If today's India not dependable, then a communist China or an ex-Soviet Russia is more dependable to the capitalistic world is it?

Unlike the west, India does not have the ‘sophisticated’ incarnation of bribing called ‘lobbying'.
India is not a banana republic as you quoted somebody’s words in the article. It’s the largest democracy in the world. You should also understand that India is still trying to recover from devastation of the centuries of external aggression. It is a country where the national reconstruction is still under progress. The western world would interpret the word 'National Reconstruction' as ‘a contract to rebuild a country’s infrastructure after bombing that country . The 'National Reconstruction' that I am referring is a much deeper meaning. If a country is under continuous external aggression for centuries, the society would become rigid & selfish and divided. Rebuilding such fractured society into a vibrant nation is what I am referring as National Reconstruction’.

India is perhaps the most capitalistic country in the world today. We don't run ‘Government Motors’ (GM can also be called that way). We don’t have to bail out banks, insurance companies and mortgage agencies. We don’t have a large 'per capita external debt' that we cannot grow out of. Countries with those characteristics are the undependable ones, you never know when they will go 'bust'.

I personally feel that Vodafone should have been asked to pay the tax that was due ($2.9 billion) & that verdict was wrong. It has also sets a wrong precendence.

Other hand, the mentioned court verdict on the 2G spectrum case is a very positive one. Even during the court proceedings the corporate executives who tried to bribe were behind the bars. The judgement to cancel 2G licenses sent a very loud & clear message that 'if your company thinks that it can get a favourable deal by influencing the government, that deal may not last for ever'. Isn't it a positive message? It is. Especially for the people of India who have been let down frequently all the 3 pillars of Indian democracy (executive , Legislature & Judiciary)

It might not be positive for European companies like Bofors / BAE, (or even American companies like 'Enron' ) which are used to bribing governments to get business deals.

Business deals & asset valuations are not written 'on stone’. They should be re-negotiated with changing circumstances.

I don't agree with the cry that decision like this will impact 'Foreign Direct Investment' into India. ‘The verdict has not singled out any foreign companies. What is even more important is that ‘the foreign companies are NOT treated specially’ like the case of Vodafone.

Even if the 'so called' foreign direct investment dries up, it’s not a big deal for India. The statistics on foreign direct investment in India shows that the FDI is 'very little' compared to the investments derived from savings of Indians themselves. Most of the foreign money coming is the name of investment is 'hot money' chasing the stock market, which you cannot consider as long term capital investment.

You will not hear these opinions neither from the Indian businessmen in the cocktail parties that you attend / nor from the regular Indian English media. It is the voice of strong and vibrant, resurgent India.

Thanks for your closing remarks in the article. I am quoting it again, 'If India had a strong government, less corruption and more policy visibility', just imagine how high it could fly'.

with regards
Arul Krishnamoorthy
4mythoughts.blogspot.com

India pays for oil imports from Iran in Rupees

It is a major break through that India has worked out a Rupee based payment strategy with Iran for its oil imports.

The nuclear sanctions from the West (especially U.S) are irrelevant to India. It is an established fact that 'Abdul Qadeer Khan' was running a 'nuclear walmart' and was supplying technology to Iran, Libya & North Korea. Perhaps God knows (sorry Allah knows), who else bought the technology from that 'nuclear walmart'. Did U.S impose any sanctions on Pakistan. NO.

U.S does not import any oil from Iran. That's one of the reasons for sanctions. There will not be any 'oil shock' for them. That's not the case for India, which import 12% of its oil from Iran.

If Iran is a threat, what about Saudi Arabia. It has one of the most militant forms of Wahhabi Islam. It is not just a co-incidence that '16 out of the 19 hijackers' of 9/11 were from Saudi. Osama bin laden was from Saudi. Will U.S impose oil sanctions on Saudi Arabia.? NO. It will not becuase it is second largest oil supplier to the U.S. To protect this oil interest, the 2500 member Saudi royal family is protected by U.S troops.

So, the oil sactions are irrelevant for India, even if it gets the blessing of the United Nations. U.S acts to protect its own interest, similary India should protect its interests too.

The actual brighter side of the payment agreement is mode payment being Rupee. This was done to beause the current Euro based payment that go via Turkish banks will get blocked due to new sactions. The deal is for 45% of the oil imports from Iran totalling about $ 5 billion.

It is not just $5 billon worth of oil that India has managed to buy, but also the '$5 billon U.S Dollars that India did not have to buy'. (or an equivalent billons of Euros that India did not have to buy).

China also imports oil from Iran. India & China more import oil than all of Europe combined (second only to U.S). If both these countries start paying with their own curencies for their oil imports, just imagine the impact for U.S dollar & Euros. The key demand for these currencies in the form of oil payment will get reduced. The above currencies will take a bigger impact and Indian Rupee will appreciate against them.

A stronger currency is good for stronger India. I fully understand the compulsions with which this payment arrangement was made. Irrespective of the sanctions, I think India should try to push for Rupee based payments for oil imports, for India's own benefit. This was one of the developments that i forecasted ( yes. not a wish list anymore ) in my earlier 'letter to Mr. Soros' ( http://4mythoughts.blogspot.com/2012/01/letter-to-soros.html ) . I am glad it has started already started happening. Thanks U.S, for the oil sanctions imposed on Iran.

Letter to Soros

Dear Mr Soros,

Yesterday ( 26^th Jan 2012), CNBC covered your speech at Davos with your quote ‘the Heavily indebted countries that now are in a position of a Third World country that it is too heavily indebted in a foreign currency.’

Knowing you from some of your work, I was quite surprised to hear the term ‘Third world’ from you.

The term 'third world country' was created in the days of the cold war to denote that countries that neither subscribe to Capitalistic nor Soviet models. The term is generally used with the negative connotation as they were poorer. Not only the term is out-of-date since the Soviet era is over, but also ‘We have only have one world, whether some people like it or not’ . We all share it with others with other inhabitants of this planet.

The term ‘developing nations’ could have been a better alternative. Especially given your background in nurturing open societies, the mentioned term was not expected out of you.

I am a citizen of India. I neither like my country referred to as ‘Third World ‘ nor any other country referred that way.

Secondly, coming from the developing part of the world, we don’t want to be compared with failed nations in Europe for the following reasons:

· The current state of the poorer countries and the developing nations can be attributed to the external aggression and colonial rule from Europe that plundered them. But these western nations that are getting bailed out their own bad governance. These nations simply failed to live within their means.

· We are hardworking people and not ‘hardly working’ category that live on government hand-outs in Europe

· We don’t run the huge governments (that even overtake soviet models in some cases) that nurture entitlement culture in the name of social welfare.

Coming to the third part and the most interesting part of the statement, i.e. ‘owning debt in foreign currency’.

The above scenario is not favourable to the borrower because the borrower cannot manipulate the currency in which the debt is ‘to be’ paid off. Majority of the western nations today enjoy the ‘skewed model’ for own in debt in their own currency. It’s not only the whole model is skewed in the borrower's favour but also the mountains of debt have grown higher than ‘the Alps’. These debt mountains are often described in dollar value, % of annual GDP, etc. But the term that we have not heard much in sovereign debt episode of the current crisis is the ‘per capita debt’. I think the above term describes the magnitude of the problem.

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

As of year 2011, the per capita debt of Ireland is 500,000 U.S dollars whereas the per capita debt of Ethiopia is 51 U.S dollars. Let’s keep aside the hypothetical belief that many countries like Ireland will grow out of this mountain of debt and repay it.

What I infer from the per capita debt figures is that ‘if Ireland had to have a fire sale of national assets to pay its debt obligations tomorrow then it will not be very different from the present day Somalia.’ (I don’t have anything against my Irish brothers; I have just picked up a country from the top and bottom of the debt rating list.)

Just because a country is located in the Europe does not mean that it cannot be poor. It is sad that Greece and few other nations that lived beyond its means will default eventually. At the same time, it is also unreasonable to expect the rest of the world to pay their bills.

The current crisis, we have gone from bailing out companies to bailing out countries. Now are we are at the stage of bailing out continents. We need to fix this debt culture before we get stage of bailing out the whole planet.

The current debt levels are not only sustainable for many of the countries, but also they are ‘too big to bail out’.

In addition to current debt, the western economies have bigger holes in their budgets in the form of social security obligations. Their debt problems get more complicated with higher social issues like higher percentage of broken families, alcoholism, falling number of marriages and lower number of children that are born.

If you consider the amount of debt piled up by countries, ‘the rich countries are not really rich and poor countries are not really poor’. The western countries have had their share favourable terms in the international financial & political arena for a reasonable amount of time. I would like make the point by quoting by George Orwell ‘All animals are equal, some animals are more equal than others' from the novel 'Animal farm'. But this trend will not continue for ever,

The countries in the eastern hemisphere will start dictating terms by

· Not deciding to buy any of the debt from the west and can start selling their current debt to the western central banks (that are already actively buying sovereign debt)

· Reducing the forex reserves in currencies by moving to commodity reserves

· Economic unions with local settlements that does not involve western currencies

· The whole concept in which currencies are traded in pairs may change

· - The idea of a reserve currency itself will be challenged (not that just whether the reserve currency is U.S Dollar / Euro)

The next meeting to save the capitalism might not even be anywhere in the western hemisphere (forget about meeting again in Bretton Woods).

The end of the welfare state

Last week, the finacial daily newspaper in UK, Fiancial Times ran a series of articles titled 'Capitalism in Crisis'. There were lot of good articles from eminent persons, inlcuding Alan Greenspan.

I did enjoy their insights but for me this whole series sounded more like an obituary to welfare state rather than an analysis of current state of the soverign debt issue.

Majority of the western nations have been living beyond their means for a long time. They have been borrowing money and printing money to unsustainable levels. They had balance sheets with of mountains of debt even before the credit crunch. For many nations, the problem only got exasperated by the credit crunch episode.

The austerity measures that these countries have started, is just the beginning. Its the beginning of the end of the welfare state.

In my opinion, the western nations should rethink their concepts of a welfare state not only due to question of affordability but also look into its relevance today. Their welfare state model was created when half the world was under the communism. It's not relevant anymore.