Will 2016 Be A Year Of Change For The Better

By The Dollar Business Team(With inputs from TDB intelligence unit) | January 2016 Issue | The Dollar Business

The year gone by was a testing one for the global economy. It was a calendar marked with slower than expected global output and trade growth, reduced capital flows, meltdown in commodities, conflicts across parts of the world and currency devaluations – all of which have triggered fears of the next global recession. And though India fared better in this dull environment, there is need to enact key policy proposals (like the GST bill) this new year. As the calendar on our desktops get replaced, hope persists that factors affecting world trade too will change for the better, with forecasts indicating revival across domestic and world economies. The Dollar Business takes a look at key elements and occurrences that could change world trade in 2016. 

World Trade 2016 - Past To The Present

Shivani Kapoor | January 2016 Issue | The Dollar Business

2015 – the world went through a lot last year. Not that it was very different a year in terms of the variety of incidences that made headlines. But the frown-worthy developments far outweighed those that gave economic and political leaders smiles. World markets hit by the financial slowdown in China; slow growth of labour force and investments affecting the US economy in the first quarter; sovereign debt crisis in Europe and fears of EU falling apart (triggered by Grexit); Russia, Denmark, Ecuador, Serbia, Moldova, Luxemborg, Brazil and many others experiencing negative quarterly GDP growths; stagnation across markets like Japan, Portugal, Switzerland, Canada, Germany, Netherlands, Australia, Italy, South Africa and others; conflicts across Syria, South Sudan and other parts of the world; economies in the developing world growing anaemic; commodities losing price advantages; refugee crisis hitting Europe and the Americas – 2015 was more of bad news than good.

There were some good tidings though; the first interest rate hike by US Federal Reserve since 2008 signaling signs of revival in the US economy, modest growth reported across some nations in Europe, withdrawl of sanctions against Iran, signing of The Trans-Pacific Pact (TPP), and inclusion of the yuan in the basket of reserve currencies by IMF (and China promising that it will gradually get its currency on a free-float mode). But like we stated earlier, what the global economy weathered in 2015 makes the world hope more that 2016 doesn't get worse. It's like praying to avoid drowning deeper into the negative zone than hoping to fly into the positive. Such was 2015 for earthlings.

But 2016 is a new year. And in the present, every single day you hear of political leaders making statements that "change for the better" is only round the corner. And that probably is true given how our race is addicted to forgetting the bad past and living the new, happier present. We have conditioned our minds to believe that whatever happens, happens for the greater good. Look at China for instance. Until end of 2015 we spoke of China as an engine that was losing steam. Today, we talk about the economy as one moving from being a volatile, fastgrowth and exports-driven economy to a stable, mature and domestic consumption- oriented economy. Humans are born with hope. They swear by it as long as they live. And the world economy is dictated by hope – that the newly elected government will better govern, that new sectors will give rise to global growth, and that Africa will become the China of the early 2000s.

And hope it is which makes us believe that 2016 will be a year more peaceful, better governed and more fruitful for foreign trade. Before we cross over to 2016, let's look back at how global economy fared in 2015.

GLOOMY PICTURE

According to various think-tanks, 2015 was a disappointing year for growth. The United Nations in its World Economic Situation and Prospects 2016 report downgraded the world GDP forecast in 2015 to 2.4% from 2.8%, attributing it to low commodity prices, weakening emerging economies and increasing volatility in global markets. OECD too trimmed its world growth forecasts to 2.9% from the 3.0% it had forecasted earlier in 2015. The think-tank attributed weakened global economic growth and the lowest global output expansion since 2009 to trade slowdown. In its November 2015 outlook, it predicted global trade growth at just 2% in 2015, a pace described by OECD Secretary-General Angel Gurría as “deeply concerning”. The OECD warned that the trade which had dropped only five times in the past five decades was dangerously close to levels usually “associated with global recession”. IMF too used lower numbers to forecast global growth: 3.1% in 2015. It put the blame on falling commodity prices, turmoil in China and other developing countries.

SLOWDOWN EXPLAINED

According to IMF, global growth in the first half of 2015 was 2.9%. “Economic activity in some advanced and emerging market economies in east Asia and economies of ASEAN members was a bit weaker than expected, reflecting lower exports and a slowdown in domestic demand,” the IMF report stated. Growth was below forecast for both advanced economies and emerging markets. Let's quickly understand what markets like US, EU, Russia, China and Brazil went through during a disorderly 2015.

US exports declined in 2015 for the first time since 2009. Growth was weaker than expected. For most part of the year, the Fed kept short-term interest rates at a record low, which it hiked by 25 bps in December. It marked the first increase in rates for the first time in a decade, hinting at the recovery of the US economy.

Measures of business sentiments in Europe slipped, which was worsened by the refugee crisis. Growth in the region slowed to just 0.3% in the third quarter. OECD warned of high levels of underemployment in the eurozone.

The decline in GDP in Russia and a larger-than-expected recession in Ukraine reflected the fallout of conflict in the region. A collapse in oil prices coupled with Western sanctions pulled Russia deeper into recession with economy contracting 4.6% in the second quarter. The IMF expects Russian GDP to shrink further by 3.4% in 2015.

China’s slowdown further affected the momentum of global economy. In a move that stunned world financial markets, in the second half of 2015, China devalued the yuan to boost exports, a move that sparked fears of a ‘currency war’. A near-collapse in its stock market in early summer caused a great deal of international concern. China’s economy decelerated to a growth of 6.9% in the third quarter, its slowest pace since the global financial crisis. In October, its industrial production growth fell to a six-month low. Since China is a major importer of raw material from commodity producers, a fall in Chinese demand for raw materials hammered the prices of commodities in countries like Brazil, Canada, Indonesia, Australia, etc., markets that once thrived on their supplies to China.

According to IMF, the downturn in Brazil was deeper than expected. In September, the country’s sovereign rating was cut to junk by S&P, taking away the investment grade the country enjoyed for seven years. As rising unemployment and higher inflation weakened domestic consumption, Latin America’s largest economy sank deeper into recession to a level described as ‘outright economic depression’ by Goldman Sachs.

Affected by tumbling oil prices, declining commodity prices and geopolitical turmoil, economic activity in sub-Saharan African also fell short of expectations. South Africa expanded y-o-y by 0.7% in the third quarter of 2015, after being subject to a 1.3% contraction in GDP during the second quarter.

With the exception of India and China, rest of the BRICS nations (Brazil, Russia and South Africa), which were once the blue-eyed boys of world economists, appeared jaundice-struck in 2015. While OECD expects the Indian economy to grow 7.7% in 2015 and 8% in 2016, China is pegged to grow at 7% in both these years. Brazil on the other hand, would contract 0.5% in 2015. It is also expected that the Latin American nation’s struggle would continue in 2016 with an estimated growth of 1.2% as against a higher forecast that was envisioned earlier. Similar is the case with Russia and South Africa that have been clocking an annual average growth rate of 0.6% and 1.5% respectively over the last five years. Factors such as weak international trade, slowing capital flows and slumping commodity prices across the globe have added to their woes. Projections are that exports from BRICS in 2015 will turn out to be worse than in any of the previous two years.

SP'OIL'SPORT!

Global oil prices dropped through much of the third and fourth quarter of 2015, after appearing to be stabilising in the second quarter of 2015. For the first time in seven years, Brent crude futures fell below the $39 per barrel (pb) mark in December 2015. [It stood at $36.88 as on December 18, 2015.] The last time this happened was when recession loomed large in 2008. Experts have started talking about oil price breaking a decade low. With OPEC and US drillers continuing to pump out record volumes of oil and reduced expectations of industrial and infrastructural activities in 2016, oil will continue to play spoilsport for nations who consider it their bread and butter. There is little hope that the oil glut will improve in 2016.

DEPLETED RESERVES

2015 was also a bad year for forex reserves. Of the 100 largest economies analysed by TDB Intelligence Unit, 60 of them had recorded a fall in forex reserves in the second quarter of 2015 as compared to a quarter back. These included the likes of US, China, Japan, Brazil, etc. [India was an exception.]

RECESSION IN 2016?

Seven years after the onset of the global financial crisis, there have been growing indications that a global downturn might be on the cards. With prolonged periods of slowing economic growth, financial markets drowning in debt, and growth in unemployment rate, market analysts put the likelihood of a severe global downturn, if not another global recession in 2016.

OECD has already warned that global trade had slowed to a pace “associated with global recession” and so has Citigroup. Citigroup economist Willem Buiter projects, “The chances of a global recession in 2016 are growing.”

SILVER LINING

Despite fears, think tanks are predicting a rebound of the global economy in 2016. OECD has projected a strengthening of global growth to an annual 3.1% in 2016 and 3.6% in 2017.

Amid volatile global financial conditions and heightened expectations, consensus is that India will become one of the fastest growing economies in the world in the coming years. Mumbai- based SMERA Ratings forecasts India’s economy to grow at 7.6% in FY16 and 8.6% in FY17. “The next financial year will be relatively stable, but much will depend on the situation in the Middle East and Far East. With an accommodative monetary policy and relative liquidity in the system, we believe that demand for consumer goods will increase,” Sankar Chakrobarti, CEO and Executive Director, SMERA, tells The Dollar Business.

While India is poised for high growth, there are still doubts whether it can remain insulated from a global slowdown. Chakrobarti thinks that India can’t remain insulated from global supply shocks. “Any supply shock has the potential to make matters worse for the Indian economy,” he maintains.

WHAT WILL 2016 BRING?

There is little doubt that after a rather subdued 2015, global activity will gather steam in 2016, translating into a modest improvement in the global growth rate as compared to 2015. But there could be a radical change this time. The last time the world had an economic belly-flop, all attention immediately turned to developing economies. The developed world hoped volatility would instill a path to growth. That was in 2008-09. Now, with the world fed up of volatility-conditioned growth that has given rise to too much uncertainty, the spotlight may just move back to developed markets like US and EU. That could be the biggest change that 2016 could bring to world order. It's like saying, "Move over BRICS. Move over China... Make room for the First World."

Growth prospects for US look good with economic growth improving in 2016. However, it could see weak investment and slower productivity despite solid domestic demand. Helped by gains from a drop in oil prices and accommodative monetary policy, the eurozone is set to strengthen. Improved exports, higher imports, investments and productivity would be a marked feature of the eurozone in 2016.

Not to say however that the outlook for emerging market economies (EMEs) is bleak. Many Asian markets like India, Indonesia, Philippines, Vietnam, Thailand, Singapore, etc., will experience a more economically conducive 2016. [Better than 2015 growth prospects in China though are ruled out.] Also, while growth is unlikely in the Latin American region, there is much potential for economic expansion in Africa and sub-Saharan Africa.

2016 will be a year of developed economies, economic revivals across the eurozone, bounceback for some commodities, fiercer currency wars, rounds of heightened negotiations on FTAs, bigger role of e-commerce in global trade and such events that will continue to win attention of the global audience.

Nations like India, with concrete policy gameplans in place (like Make in India, GST rollout, strategies to attract more FDI, etc.) will thrive.

 

 

 

CORNELL UNIVERSITY - "AMERICA WILL NOT SAVE THE WORLD IN THE NEXT RECESSION"

Arthur C. Wheaton, Director of Western NY Labor and Environmental Programs at Cornell University talks to The Dollar Business from Buffalo (NY), on matters that could impact a gainful and painful 2016.

Interview by Steven Philip Warner, Editor-in-Chief | The Dollar Business

TDB: Understanding that the world has already started guessing the favourites for the 45th President of The United States of America, how has US’ foreign trade and policy fared under earlier Democratic and Republican Presidents? Can you given an idea of what would be the possible effects on US-India trade with a change in administration?

Arthur C. Wheaton (ACW): The history of trade agreements in US is primarily favored by Republican candidates who claim to be pro-business and less embraced by Democratic candidates who in the past were seen as pro-union or for the worker. That has changed in the years of Bill Clinton signing NAFTA and President Obama attempting to pass the Trans Pacific Partnership. It is a complicated issue with benefits and costs to new trade agreements and foreign trade in general.
An increase in trade with India would be seen as a good thing by both parties if it resulted in more jobs in US and improved the standards of living in India as well. There is a great deal of skepticism these days in the United States about the fairness of trade between countries.

TDB: Commodities – from oil to metals to agri – are presently experiencing unhappy times. It’s a bad time for global commodity traders. Will subdued prices of commodities continue beyond 2016?

ACW: Commodities will recover if and when European and Chinese economies begin to grow at faster rates. There has been an extended period of low growth or even deflation in several key markets with China being one of the most important for commodities. Matters have obviously not been excellent or great at the macroeconomic level in 2015. But there is hope that towards at least the end of 2016, there may be some movement. There are recent signs that things are beginning to turn around in China but it is still a long way from being the dynamic growth engine of the last decade. China will take time to heat up, and with that will commodities – be it oil or agro commodities or even metals – begin their movement upwards.

TDB: But China’s macroeconomic indicators are worse than bad at present. Recent import-export numbers have been discouraging, financial policy of the government isn’t working magic, there is fear in the voice of literally every Chinese exporter (we experienced this at Canton Fair), rise in domestic consumption isn’t too encouraging, and everything from auto to real estate to the consumer goods industry is experiencing stagnant times. How exaggerated are China’s woes?

ACW: It is very difficult to rule out a return to growth in China primarily because it has some economic tools available with fewer political barriers. China has the unique ability to radically change policy without the legislative or judicial balance of power. That is not a degree of freedom that many other First or even Third World nations can boast of. Not that they would choose to have such a political and law-making system in place as China’s. The woes in China are real and the transparency lacking to clearly see how bad things are with the shadow banking sector. Also, it’s worthy to note how even the most dynamic of industries aren’t having a gala time in China. Automobile sector is an example. One industry that’s being blamed for the deteriorating environmental conditions in China – with Beijing declaring a Code Red emergency for air quality for the first time – is the auto industry. It’s not a secret that auto sales in China have been more resilient in recent years with increases in SUVs. So there is much trouble across many areas that is concerning for China, the world’s second largest economy. What is however encouraging to see is that demand for consumer goods continues to be high for millions of Chinese.

TDB: Some say that foreign trade agreements and regional trade agreements are not always conducive for a nation like India. They also claim that FTAs like The Trans-Pacific Partnership (TPP), The Comprehensive Economic Partnership Agreement (CEPA), and others that could see the light of the day in 2016 and beyond, will harm India’s foreign trade community more than they will benefit it. What is your view?

ACW: There are winners and losers in every trade agreement, be it FTA or RTA. There will be some in India that would benefit from having access and open markets due to such deals being signed, and there are many others who would not get advantage and lose out due to such agreements. My fear is that FTAs where India is not a part of, like the TPP could put intense pressure on India. Look, India needs to be able to compete on a global scale and could face intense pressure on traded goods from countries like China, Germany, Japan and US due to highly productive and predatory multinational corporations that can leverage vast resources due to various deals not simply limited to FTAs and RTAs. But if we look to the positive side of affairs, when it comes to India being party to FTAs, some innovative multinational Indian companies may be able to take huge advantage of the arrangements, ones such as Tata Motors and Hero MotoCorp.

TDB: BRICS – do you still hope much from this bloc being the engine of growth in 2016 and the years to come?

ACW: Honestly, I see a great deal of hope for India in terms of growth in 2016 and 2017. I am less bullish on Brazil and Russia. China will continue to be a major player in the global economy. The dramatic growth from previous decades is not likely to return in the short term. India could be seen as a new destination for optimism and investment. There is more room to grow in the Indian economy.

TDB: Most critical question – will global economic slowdown reoccur in 2016? And will America save the world whenever recession strikes next?

ACW: The United States of America will not save the world in the next recession. Rest of the developed world has become too big for any one country to lift them up. I think the Federal Reserve Bank in the United States is feeling more confident in raising interest rates but will be very cautious. The economic growth in US has been slowly and steadily giving the Federal Reserve confidence to gently boost interest rates. There is no expectation that US would be growing at a fast enough pace to help lift many of the other economies. Europe has been facing difficulties and Latin American economies have not been particularly robust. Asian tigers haven’t been roaring too loudly and China is clearly in a state of bother. Those are some worry areas there; enough to make us ask questions about whether we are near the next recession or whether 2016 will be the year when 2008-2009 fiasco comes to hit the world on its head again. I have my doubts that recession will happen as soon as 2016 but whatever be it, US will not save the world if misfortune strikes. But of course, it will hopefully be in a better position to not drag it down in the next recession.

Commodities - Meltdown? - They Will Continue To Defy Gravity

The biggest collapse in commodity prices in a generation is a result of a few bigger trends simultaneously going on across the globe. But then, how long will this continue? Will 2016 bring a shimmer of hope for the global economy? Well, the winter has just begun and we are yet to face those chilly winds!

By TDB Intelligence Unit | January 2016 Issue | The Dollar Business

Commodity markets, across the globe, have been trending pretty consistently – on a downward movement since second half of 2011. A closer look at numbers and you can gauge the seriousness of the situation. The Bloomberg Commodity Index, a benchmark index of 22 exchange-traded futures on physical commodities, is on track for a fifth consecutive annual loss, the longest slide since the data began in 1991. What’s more? The Index is already down about 25.76% year-to-date (December 18, 2015) and 28.72% over the last 12 months. Even the CRB (Commodity Research Bureau) Raw Industrials Spot Price Index is down to its lowest level since November 2009.

While the Brent crude oil prices are at seven-year-low at around $35-a-barrel levels, copper has tumbled to six-and-a-half year low below $4,950 a tonne. Money has been rapidly flowing out of every fund linked to industrial metals and energy among others, while stocks of miners and oil majors are being thrashed by investors. In fact, the prices of almost all commodities, be it base metals, crude oil or gold and silver, have been on a downtrend for quite some time now. So, is it just free market forces of demand and supply that are causing this huge fall in commodity prices? Or is it something which doesn’t meet the eye? 

CHINA GETS THE BLAME

This biggest collapse in commodity prices in a generation is a result of a few bigger trends simultaneously going on across the globe! And, not to say, the Dragon gets the biggest share of the blame. It’s China’s economic slowdown which is playing a major role in slackening the demand for commodities. Raison d’être: China’s consumption of industrial metals had risen from 10% of the world total in 2000 to 50% in 2015 (World Bank data) to feed its manufacturing boom. And then came the tsunami – China slowed down, but production of commodities did not! Chinese growth rates of the last 30 years (till 2012), which averaged 10% a year, are not there anymore. Manufacturing too has slumped to its lowest in six years.

And not just China. Even other emerging markets like Russia and Brazil are slowing down. So are developed economies like US and EU. Poor demand is exacerbated by oversupply! And there is a huge glut. Then there is the greenback, which is running ahead of rival currencies like euro and yen. The upward movement of dollar is only depressing the demand for oil and other commodities further. After all, it’s no secret that commodity prices, generally, are inversely related to the US dollar. For, they are priced in dollar in the international market. And this inverse correlation with the US dollar has also played a big role in the continuation of the downtrend in major commodities in the recent past. Sounds logical! But then, how long will this continue? Is it that we are in a commodity super cycle downtrend and hence, everything is heading lower?

HOW LOW CAN IT GO?

Marc Faber, Editor and Publisher, Gloom, Boom & Doom Report believes it’s a correction which is going to last just for a while. According to him, if one looks at the long term trend in commodities, from a peak in 1980, a downtrend started and lasted till 1999. Since then the uptrend in commodities has started, which should last for 20-25 years. “And so, I can make a case that this decline in commodity prices, essentially, is a correction and not a super cycle on the downside. However, what distorts these super cycles is money printing. It’s very difficult to know where you are in a super cycle because if money printing had pushed commodity prices way higher than what they deserved, then this correction can last for a bit longer. I don’t think copper will go back to 60 cents/lb as was the case in 1998, or oil will go back to $12/bbl and gold will fall below $300/oz as was the case in 1999. I think somewhere around the current levels, commodity prices will make a bottom," he tells The Dollar Business.

Even Harry S. Dent Jr., Founder, Dent Research is of a similar opinion. "There’s a long-term commodity cycle spanning 30 years, which almost works like a clock – from 1920 to 1950, 1950 to 1980 and from 1980 to 2008-2011. Commodity prices peak regularly on a 30-year cycle and then go down. This has been going on for almost 200 years. And this time around, a global slowdown and excess capacity have been the reasons for the fall in prices," says Dent. If this is the case, then an even bigger question is: Have we already seen the commodity bottom or the worst is yet to come?

IT’S NOT OVER YET

According to a recent report by the Economist Intelligence Unit (EIU), commodity prices will continue to fall next year. The report states that prices for industrial raw materials (a price index of nine hard commodities with more than half of the index weighted towards metals) will fall further by 2.6% in 2016 as "production cutbacks are not significant enough to heighten pressure on prices, given weakening demand and persistently high output levels in China (especially of aluminium), and elevated stocks." EIU expects the industrial commodity prices to rebound for the first time in six years in 2017. Even World Bank’s forecast is somewhat similar. “We see a five-year-long slide in most commodity prices continuing through the third quarter of 2015. There are sufficient inventories of oil and other commodities and demand is weak, especially for industrial commodities, which is why prices may stay persistently low,” states John Baffes, Senior Economist in World Bank’s Commodity Markets Outlook.

If trends are something to go by, the new year will not be any different for commodity prices that have been on a rollercoaster ride for the past four years. Economic uncertainty across the globe and supply-side glut means most of the commodities will continue their downward journey in 2016 as well. A case in point could be Dr. Copper – a base metal that has a long history of anticipating economic turns. Its prices have not been doing that great for quite some time now. From the highs of 2011 to the lows of 2015, international copper prices are down close to 48%. Now that copper futures have slumped to six-and-a-half year low, what's next? Since its prices get heavily influenced by China, the world’s top consumer accounting for about 45% of global copper demand, Dr. Copper will continue to trend lower in 2016 as well, at around $4,300-4,500 per tonne. In fact, this will be the case with most industrial metals which rely on Chinese demand including aluminium (48%), zinc (45%), lead (about 50%), iron ore etc. Hence, in a nutshell, only China can save metals from falling further in 2016!

‘Black Gold’ too will continue its downhill journey in 2016. While explaining the reasons for the crash in crude oil prices, the world gets divided into two camps – those who believe it to be a function of market forces, i.e. supply-side glut, and a long overdue correction, and those who believe it to be an attempt by the West to pressurise Russia. We believe both, and as such oil prices in international markets will fall below $30per barrel mark this year What's more? Goldman Sachs is ultra-bearish on crude oil and expects its prices to slump to as low as $20 a barrel in 2016. And there is a major possibility of this being true considering that there is a huge oversupply of oil in the market which will only contract in the latter half of 2016 as supplies outside OPEC decline by the most since 1992 (International Energy Agency).

Precious metals – gold and silver – too are expected to continue losing their preciousness into 2016 before a turnaround seems a likelihood in the second half of the year. Many observers are forecasting the yellow metal to hit a low of around $1,000 in the first half of 2016. Silver is also expected to follow the suit and average $15 an ounce in 2016.

Industry experts are of the opinion that the glut in commodities may still take more than a year or two to clear. Most of them have a less-than-rosy outlook for commodities in the near-term. But then, what happens in the long run? Harry S. Dent Jr. believes that five to eight years from now, the world will see the start of another commodity cycle and that boom would be dominated by countries like India, which have demographics on their side, unlike the West. Now, that’s one good news for now!

 

 

FDI Into India – Outlook - Will The Tiger Continue To Roar?

Being a bright spot in a lacklustre global economy helped India become one of the hottest FDI destinations in 2015. Will the trend continue in 2016?

By Ahmad Shariq Khan | January 2016 Issue | The Dollar Business

Recent trends in India’s foreign direct investment (FDI) are an endorsement of India’s status as a preferred investment destination amongst global investors. Several reports suggest that India is leading from the front when it comes to FDI inflows. It is expected that India’s steady economic climb up and its embracing of the global economy with a slew of reforms will continue to offer compelling opportunities to the global investment community. Further, the election of a pro-reform government and its various initiatives – Make in India, Skill India, Digital India and Smart Cities – have only added to the prevailing pro-investment optimism for the country. And it's showing!

The World Bank has retained the growth forecast for the Indian economy at 7.5% for FY2016, followed by a further acceleration to 7.8% and 7.9% in FY2017 and FY2018 respectively. What's more? IMF has branded India as the brightest spot in the global economy. The result? Consistent double-digit FDI growth over the last several months: Inward FDI into India jumped 30% (y-o-y) to $19.39 billion during January-June 2015 (DIPP, GoI data) indicating the faith that foreign investors are now showing on the country's economy.

NUMERO UNO

Going by a report published by the UK-based Financial Times (FT), which was recently circulated by the Finance Ministry to the media, in the January-June 2015 period, India surpassed US and China as the biggest FDI destination, garnering $31 billion investments compared to $28 billion and $27 billion attracted by China and US respectively. The report’s ranking of the top destinations for greenfield investment (measured by estimated capital expenditure) in the first half of 2015 places India at no.1, having attracted roughly $3 billion more than China and $4 billion more than US. This achievement by India looks particularly significant, considering that 97 of the 154 countries that are counted as emerging markets are witnessing a year-on-year decline in capital spend in greenfield projects. EY's (Ernst & Young) India Attractiveness 2015 survey also gives credence to India’s newly-established strength in the global FDI marketplace. The report states that India is poised to become the world’s fastest growing major economy starting 2015, on back of strong economic fundamentals.

'MAKE IN INDIA' EFFECT?

The investment landscape in India got a boost some 15 months back when Prime Minister Narendra Modi decided to give a serious thought to revamping the National Manufacturing Policy (2011), announced by the then PM Manmohan Singh. 'Make in India' campaign aims to not just make India the manufacturing hub of the world, but also looks to be the first serious attempt by a government to address the concerns of the manufacturing sector in a systematic way. But has anything really changed on the ground is a question that has been doing rounds.

Ever since the mega announcement was made, a lot of water has flown under the Ganges, and in the truest sense, not much has moved at the ground level – at workshops, factories, manufacturing clusters across the country and a lot of uphill tasks still remain for the Modi-led NDA government.

BECOMING FRIENDLIER 

Recently, the government further opened up several key sectors including defence, construction, civil aviation and media to foreign investments, eased norms for single-brand retail and private bankings and authorised the Foreign Investment Promotion Board (FIPB) to clear proposals up to Rs.5,000 crore from Rs.3,000 crore earlier. The move is said to boost India’s business environment and bring in more funds from across the globe.

However, on these FDI-centric developments, Manoj Pant, a member of the government’s consultative group on trade issues and a Professor at Jawaharlal Nehru University Centre for International Trade and Development, feels that "though the country’s FDI policy has progressed as a continuation of past policies of opening up sectors overtime and has ensured the continuity of FDI policy under different political formations, the focus has only been on financial inflows, which is not necessarily a good thing." Proponents of FDI argue that it’s not only capital that foreign investors bring into a country, but also technological knowhow, which is essential for sustainable growth. With one of the highest household savings rates in the world, it is technological knowhow that India should seek via FDI, and not necessarily just capital.

In order to give a boost to manufacturing activity, India, under the recent policy changes, has allowed any company manufacturing goods in India to freely sell online without any restrictions. The move is expected to give an impetus to Modi’s ambitious 'Make in India' initiative, which is aimed at spurring the manufacturing sector, while at the same time attracting FDI. Experts with whom The Dollar Business spoke to are of the view that manufacturers who assemble products in India, such as those in the automobile and telecom sectors, stand to gain most from the new policy changes whereas those who have simply been processing or relabeling products won’t qualify as manufacturers. They believe CKD (completely knocked down) and assembling activities would now benefit the telecom and automobile sectors.

DEFENDING DEFENCE

Under the revised policy, foreign direct investment in defence has also been permitted to 49% under the automatic route, which earlier was under the government approval route. Investments above 49% will also now be cleared by FIPB instead of the Cabinet Committee on Security. Portfolio investors and foreign venture capital firms can also invest up to 49% as against 24% earlier.

Terming the changes as ‘most important and radical’, Pant feels this is important as the current defence offset policy requires that about 30% of total value of imports must be reinvested in India. “With defence imports of as much as $40 billion and a negligent domestic production capacity, it was impossible for defence suppliers to meet these targets. Opening up of defence production to foreign investors makes the development of a domestic manufacturing sector a more likely affair and, given the nature of defence production, also ensures technology acquisition and dissemination in the country”.

TIME TO ACT 'SMART'

Cities are engines of growth for the economy of any country, and India is no exception. As per 2011 Census, nearly 31% of India’s population lives in urban areas and constitutes 63% of India’s GDP. With increasing urbanisation, urban areas are expected to house 40% of India’s population and contribute 75% of India’s GDP by 2030. Considering this, the government's Smart Cities mission is a bold, new initiative and many nations have expressed their interest in helping India realise its mega ambitions in this segment.

While Japan is helping India develop its smart cities by investing $4.5 billion in the first phase of the Delhi-Mumbai Industrial Corridor (DMIC), UK is collaborating with India for developing the Bangalore-Mumbai Economic Corridor project. And then there are a plethora of MNCs from across the globe that are eying India for their phase of growth. And the trend is expected to continue in 2016.

SPEED BREAKERS

Although even India prefers FDI over FPI (foreign portfolio investment), for several reasons, it has been more successful in attracting the latter. The reasons for this are many. Firstly, given where India ranks in the Ease of Doing Business Index, most foreign investors prefer short-term positions in financial assets of Indian companies instead of having to dirty their hands in the difficult business environment in India.

Secondly, given the regular flip-flops in tax laws resulting from changes in guard at the Centre, foreign investors probably want to come in via the financial markets, and keep the option of exit easy alive, than be saddled with billions of dollars of retrospective taxes.

Thirdly, since India is not really known for being a protector of intellectual property rights, many potential investors are wary of transferring their technology to an Indian subsidiary.

All these issues need to be addressed if India wants to maintain the current pace of FDI inflows going forward. The government has already sent the right signals by easing FDI restrictions; it's time to build on the reputation. Further, if India is serious about attracting real FDI and transforming itself into a world-class manufacturing hub, it has to work bottom-up to start strengthening the system from the MSME level.

ARE WE THERE YET?

Of course, India has a long way to go before it catches up with China (the country attracted $129 billion as FDI in CY2014 apart from dislodging US as the highest FDI attracting nation) and a few billion dollars of FDI are just a drop in the ocean for a $2 trillion economy like India, but then a year-on-year jump of 22% and moving 6 ranks up, from 15 to 9, in the list of ‘Top 20 Host Economies’ (in terms of FDI inflows) is something to cheer about. But the question is: how long will this continue?

Structural reforms and focus on economic polices are expected to boost India’s GDP. While World Bank sees Indian economy growing at over 7.5% (one of the highest across the globe) for the next three years, OECD forecasts are more exciting. According to OECD Development Centre, "In 2016, growth in China will continue to slow while growth in India will pick up to one of the highest levels in the region."

This clearly indicates that India will continue to be among the top investment destinations in 2016. FDI inflow into India is projected to trend close to the $35 billion mark in 2020. Investments are bound to rise if India improves its business environment, infrastructure and connectivity, and adopts structural reforms. Setting up the right pace and place on FDI would mean that the tiger’s roar will continue to be heard beyond India's borders in 2016. From $24 billion in 2012 to $34 billion in 2014, if the inflow continues at the rate that we saw in the first half of 2015 ($31 billion), we could see India boast of FDI in excess of $65-$70 billion in 2016. Better global rank in 'Ease of doing business' means more FDI – now you understand why the Indian government is taking this World Bank measure so seriously?

 

 

GST - The Wait Continues - An Obvious Deadline Missed!

Expectations were on a high and markets were optimistic about the passage of the Constitution (122nd) Amendment Bill, 2014, for Goods and Services Tax (GST). Political drama, as expected, has ensured that the reform misses its April Fool's Day deadline in 2016; and the delay has left only a few surprised.

By Satyapal Menon | January 2016 Issue | The Dollar Business

It was the year 2000. The Atal Bihari Vajpayee-led NDA government had set up a committee to design a model for a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India. The idea was lauded by all sections of the economic society, and exactly six years later on February 28, 2006, the idea took the first shape when P. Chidambaram, the then Union Finance Minister (from UPA government), announced that the Goods and Services Tax (GST) would be introduced from April 1, 2010. It was announced that the Empowered Committee of State Finance Ministers would work with the Centre to prepare a roadmap to make GST a reality in India. About a decade has slipped by since the announcement was made, but the future of GST remains unclear.

Though, recently, Indian Prime Minister Narendra Modi, during his visit to Singapore, made clear that GST will roll out in April 2016, the probability of its occurrence remain really low, all thanks to the political tug of war happening over it, both inside and outside the corridors of power.

TUG OF WAR

Given the passage of the Constitution (122nd) Amendment Bill, 2014, for Goods and Services Tax (GST) in the Lok Sabha on May 6, 2015, everyone was hoping that one of the most positive and transformational change in the tax structure of India till date will probably become a reality by April 1, 2016. Two sessions of Parliament have passed since then, but the bill remains to be discussed. The reason is simple. Hectic behind the scene parleys between BJP and the Congress and the face-off between the two parties have paralysed proceedings in the Parliament – on issues not even remotely related to the bill. And then there are many reasons – and all totally political in nature – why the GST bill will continue hitting roadblocks.

The Congress team points to its reluctance in handing over its brainchild – the GST – to NDA and in the process allow the latter to gain political mileage on implementation of the new tax structure, while NDA is hell-bent on the passage of the bill, precisely for the same reason. From BJP's point of view, the introduction of GST would mean entering the pages of history – the party has already started claiming it as a historical achievement. Interestingly, Congress has rather grudgingly indicated a propensity for seeing the bill through, but not without ensuring that the party also scores some brownie points and credit, which in the party’s view, would not be the case, if it assents without making its participation conspicuous and instrumental in shaping GST. This also explains why the Opposition is playing for time and resorting to 'contrived to protract' suggestions for changes in the GST bill. Otherwise, why did the changes take so long in coming? Does it mean that the changes propped up only exactly at a juncture when it was slated to be introduced for passage in the Rajya Sabha?

Even a hint of optimism, if there was any, about the passage of GST vanished with the furore over the National Herald case in Parliament. Political experts believe the case is proving to be a cul-de-sac for the Bill and is ensuring that it remains ‘in limbo’ even going forward. Commenting on the impasse, BJP National Spokesman Nalin Kohli tells The Dollar Business, “BJP is committed to GST along with many other parties and with the repeated disruptions in the Parliament by the Congress, I can say no positive message on a healthy Indian democracy is being projected across the country. It is very much evident that with their disruptive agenda, the Opposition is not achieving anything good for the country”.

DENIALS & CROSSFIRE

The Congress Party vehemently denies these allegations apart from making it clear that its support or non-support to the GST bill has nothing to do with the case. “We are not at all against the good side of GST. How can we be? We were the ones who introduced the Bill in the first place and subsequently made three amendments to it,” Congress spokesman R. P. N. Singh, tells The Dollar Business and adds, “When in power, for four years, we have been trying to get the GST passed, but it was the same Narendra Modi who initially as Gujarat CM opposed it and now as Prime Minister is paying no heed to our recommendations for the bill. The irony is, it’s the same double-faced party that’s now accusing us of sabotaging the nation’s growth.”

Trapped in this crossfire, the big question is: Will the GST bill ever see the light of the day or is it going to be subjected to a political encore, every time it is brought up for passage? “We still believe in dialogue and will continue to do so in future as well, but the crucia decisions relating to the country’s overall growth should not be sabotaged by a few,” says Nalin.

The Congress Party, however, does not seem to be in a hurry to see the bill through. According to Anand Sharma, former Commerce Minister and current Deputy Leader of Opposition in Rajya Sabha, “There have been informal contacts but the government has to give a structured response to Congress’ three demands on GST. There are many issues within GST which have to be brought to an acceptable closure. It is an important bill which requires a consensus. It should not be rushed through.”

The Congress Party during their continued discussions with the NDA has suggested three changes in the Bill, i.e. scrapping of the 1% additional tax on inter-state trade from the bill, 18% cap on the GST rate and dispute resolution mechanism. Of these three suggestions, the NDA seems prepared to concede to the deletion of 1% additional duty. But, R. P. N. Singh justifies the Congress demand on the cap and also points out other recommendations forwarded to the government. “The government has accepted our suggestion to scrap 1% inter-state tax but we also want cap on the upper limit of the tax. At the moment, under the provision, as laid out in the proposed Bill, this upper limit is fluid subject to certain conditions. We want more clarity on this as this will have direct impact on the common man and SMEs. We also want cigarettes, liquors to be included in the ambit of GST. We believe in dialogues but the government has to get rid of its rigid approach.”

The NDA government is neither agreeing to the 18% cap on GST nor to the incorporation of a fixed rate in the GST Bill. It is of the view that while the former would cascade in lowering of taxes, a built-in committed rate would lead to inflexibility in changing the rates.

WHAT’S NEXT?

Is GST fated to be confined on the back burner or will it become a reality by June 2016, as now planned by the NDA government? Even assuming that deadlock ends and the GST bill is passed in the Rajya Sabha and ready to be rolled out in June 2016 – which going by the ongoing political tussle is quite unlikely – its implementation will depend on all the state assemblies endorsing the bill. The journey of the GST bill through the assemblies will not be without jerks and jams, with manufacturing states vociferously rejecting the Bill if the 1% additional tax is scrapped. And, there is no guarantee that all the Congress-run states will follow the Kerala example and support the Bill. Which means, GST has yet to go through the rigmarole of political equations and expediencies at the states’ levels before it becomes a reality.

All these impending complexities and complications would result in probable delay in the implementation of GST by another six months. However, assuming that there is going to be a reconciliation between the Congress and NDA, and the GST would have a smooth passage in both the Rajya Sabha and also state assemblies, the new tax structure is not going to become a reality before the second half of 2016. A report by HSBC Global Research too estimates that “the process for implementing GST has been arduous and much remains to be done: the constitutional amendment bill followed by the GST bills need to be passed through the Parliament and ratified by states. In addition, the GST Council (which will have representation from the states and the Centre) needs to finalise important details such as rates and structure.

All of this makes the tight deadline on April 2016 touch and go; though we continue to believe the tax will eventually get implemented later in the year.”

So, all you can meanwhile do is witness the political circus that would continue to unfold well into the year 2016 as politicos engage in maneuvers to stymie or prop the bill.

 

 

Trade Pacts - Still Far From The Finish Line

Trade pacts have almost always been less about trade and more about geopolitics. And the 2015 tale of India’s trade talks was no different. Even as the signing of TPP made the headlines, India kept itself out of the accord triggering debates over the pros and cons of the move. In 2016, although several negotiations involving India and the world are likely, not many would translate into an accord.

By Sisir Pradhan | January 2016 Issue | The Dollar Business

In October 2015, the world witnessed the signing of the largest regional trade accord called the Trans-Pacific Partnership (TPP), when a dozen of Pacific nations including the United States and Japan, after years of negotiations, reached a long-sought agreement.

And as always happens, this major development in the third quarter of 2015 triggered debates across the globe over the potential influence of TPP on global economy as well as on the economies of the partner countries. In fact, not just TPP, the relevance and potential of various trade pacts and negotiations have been questioned quite often for the reason that the deals don’t live up to the expectations. But that's a topic of debate for another day. So, while 2015 marked an important calendar-period for signing and non-signing of some significant trade deals, it is now to be seen what 2016 would mean for India when it comes to free trade agreements.

ON THE CARDS

The first month of the New Year is likely to open a new chapter for India’s bilateral ties with EU as the two sides would yet again resume talks on the stalled free trade agreement. Eight years, 15 rounds of negotiations, the largest trading partner EU and the result is still inconclusive. And if experts are to be believed, the negoations will maintain the status quo in 2016 as well. The New Year is also expected to bring some major trade developments for India with talks resuming soon with Australia and Chile over FTAs. And if India is lucky, the mega pact with ASEAN nations and an FTA with Canada may too get finalised this year. Then, the Regional Comprehensive Economic Partnership (RCEP) – where China is a party – negotiations are likely to take place for the conclusion of the ambitious accord involving 16 countries. India has already submitted its first round of detailed offers to dismantle tariffs on goods. What happens next, is yet to be seen!

REALITY CHECK

Though free market principles sound great in theory and there’s no dearth of advocates for them, they are a distant mirage in the world of international trade. Several manufacturers to whom The Dollar Business spoke to in the recent past are unhappy with India’s policy visà- vis free trade agreements (FTAs). They strongly feel that India needs to re-think its FTA policy, particularly when it involves a manufacturing superpower like China. And they are completely right. An FTA with, or involving, the dragon would only mean giving up more and getting less. In fact, it would be nothing less than a death-warrant for India’s manufacturing sector that has just started pulling itself up to its feet.

No doubt, the mega trade pact including some fastest growing economies in the world, if implemented, has the potential to create a new paradigm for economic integration across Asia-Pacific region by creating a mega free trade zone. But at what cost? That’s a question, which New Delhi needs to find an answer to before it takes the negotiations to the next round in 2016.

FALSE POSITIVES

Already, there are concerns that the existing trade accords are eating into country’s domestic industry with exports stagnating and imports from trading partner countries rising sharply. However, interestingly, the Commerce Ministry analysis shows that following India’s FTA with Malaysia, Japan and ASEAN, preferential exports to these countries or regions have increased by about 3.5%, 20% and 17% respectively. No doubt these numbers look impressive, but they actually are not, considering that preferential imports from these countries too have increased at an equal pace, if not faster. A testimony to the fact is India’s widening trade deficit. In fact, in the past five years, India’s deficit with its FTA members (ex SAARC) has totalled over $135 billion. The only bloc with which it runs a positive trade is SAFTA – obviously because they are obliged to import from India (nations like Afghanistan, Nepal, Pakistan, Bhutan, etc).

Trade experts and economists too are not happy with India’s policy visà- vis FTAs. They think India trying to sign trade agreements with East Asian countries is illogical. For, since India has higher trade barriers than most East Asian countries, agreements based on just reducing tariff barriers, which has been India’s policy for long, would only mean giving up more and getting less.

TIME TO TAKE A CALL

So far, India’s trade focus has been the developed economies that has, to some extent widened its trade deficit with them. It is time to depart from the old policy of pushing for such accords with developed nations and rather look towards negotiating trade agreements with emerging markets such as Latin America, Africa and West to ensure increased market access of Indian exports and tangible benefits for domestic industry.

Further, years of bland negotiations and taking pride in signing a piece of paper won’t change the trade numbers. And China seems to have sensed this, thereby starting to build new partnerships in African and Latin American countries instead of following the old path. Result: China has become Africa’s biggest trading partner.

DEAL OR NO DEAL?

The New Year will continue to be the year of false hopes for India where talks on trade agreements would just be confined to hosting dinners for diplomats. Be it RCEP, India-EU FTA or India-Australia FTA, most of the trade pacts that India is negotiating currently are not going to become a reality anytime soon, not at least in 2016. The two sides will meet, shake hands and leave room for further discussion for the next year is what it looks as of now from here. 

 

 

BRICS - Losing Momentum - Don't Pull The Brics Off The Wall. [Not Yet!]

The notion that BRICS – the five-nation bloc which accounts for about 50% of the world’s population and more than 25% of global GDP – will serve as an avenue for global expansion may have been shaken up in 2015. But the bloc certainly continues to hold ground and confidence.

By Neha Dewan And Aparna Singh | January 2016 Issue | The Dollar Business

When economist Jim O’ Neill coined the acronym BRIC in 2001, the assumption that these economies – Brazil, Russia, India and China – would bolster the world economy on a growth path gained credence soon enough. South Africa joined the bandwagon in 2010, post which the term BRICS became a part of popular economic parlance. The five-nation bloc (which together accounts for about 50% of the world’s population and more than 25% of global GDP – a percentage that is by no means small enough to be ignored) was hailed as the future of global growth.

Today the fascination with BRICS seems a thing of the past. Neither are the sentiments as bullish in the present times nor is there the exuberance which was once synonymously associated with the five nation group. In fact, four amongst the five BRICS members have had a bad run in the global markets over the last few years. As per a recent World Bank Policy Research Note, emerging markets, with the exception of India, are facing their fifth consecutive year of slowing growth and a possibly longer period of sluggish performance than previously envisioned. The slowdown comes after a golden period of expansion, the report states. Bad news for BRICS, we'd reckon.

TUMBLING DOWNHILL

Emerging market growth has been on a downward spiral since 2010, slipping from an average 7.6% in 2010 to a projected less than 4% this year. China, Russia and South Africa have all clocked three consecutive years of slowing growth. While OECD expects the Indian economy to grow 7.7% in 2015 and 8% in 2016, China is pegged to grow at 7% in both these years. Brazil, on the other hand, would contract 0.5% in 2015. It is also expected that the Latin American nation’s struggle would continue in 2016 with an estimated growth of 1.2% as against a higher forecast that was envisioned earlier. Similar is the case with Russia and South Africa that have been clocking an annual average growth rate of 0.6% and 1.5% respectively over the last five years. “After enjoying years of enviable economic performance, emerging markets are coming under strain, with a marked divergence in growth among them,” Kaushik Basu, Chief Economist and Senior Vice President, World Bank, highlights in the report.

Factors such as weak international trade, slowing capital flows and slumping commodity prices across the globe have added to their woes. In fact, four among the five BRICS member nations have had a bad run in global markets during CY2013 and CY2014. And projections are that exports from BRICS by the end of CY2015, will turn out to be worse than in any of the previous two years. Interestingly, China, which is being viewed as the epicenter for some of the seismic vibrations being experienced in global trade at present, is the only country among the BRICS member states that has managed a growth momentum – though not to its actual potential and track record – with exports recording some semblance of growth, however minimal, during the last two fiscals.

While China is indicating some persistence, despite the turbulence within, exports from other member countries Brazil, Russia, India and South Africa are on a ride downhill, both year-on-year and month-on-month. Brazil’s exports declined by $17 billion during CY2014 over that of CY2013. In CY2014, while Russia’s exports dipped by $29 billion as compared to the previous year, India’s decreased by $19 billion and South Africa’s declined by $4.5 billion. And, the trend is expected to continue in CY2015 with all of them, except China, witnessing a fall in their exports.

PROBLEMS WITHIN

Apart from the cascading effect of the global slowdown, socio-economic and political problems within the BRICS member countries are also scaling down performance levels. A case in point could be Brazil. “Brazil is facing many political problems. Even its neighbours are in trouble. Since, Latin American countries have a history of high inflation, unemployment and under-utilisation of resources, I don’t think Brazil will be insulated in any manner going forward. The Brazilian economy will have to address these issues, otherwise a political upheaval could be a likely occurrence,” Dr. Pankaj K. Jha, Director – Research, Indian Council of World Affairs (ICWA) tells The Dollar Business.

The situation has been no different in some of the other BRICS member countries. Russian Federation has had to contend with sanctions and China’s slowdown has further aggravated its misfortunes. Russia, which accounts for 15% of China’s imported oil is expected to have lower value exports of the commodity in CY2015. Expected. Even India’s exports to China, for instance, declined 20% in FY2015. It is forecasted that these statistics may look worse in FY2016, with the slowdown and devaluation of the yuan contributing to the decline.

Shubh Soni, Researcher at the New Delhi-based think tank Observer Research Foundation (ORF) says that although all BRICS nations are going through interesting economic transitions, China and India are witnessing the maximum change within and without. “China is undergoing a structural re-adjustment and will no longer see consistent double-digit GDP growth rates as it did in the previous decades. The new normal will be between 5% and 7%. The focus of the establishment too has moved from export and domestic infrastructure led growth to domestic consumption and infrastructure investment overseas. India, on the other hand, is aiming to match the Chinese growth rates of the previous two decades.”

The last of the nations to join BRICS, South Africa, has also not been free of economic turmoil that has plagued the rest of the member countries in 2015. Its economy grew lower than expected in the third quarter of CY2015 – GDP expanded by 1% on a y-o-y basis compared with 1.2% last year.

THE ROAD AHEAD

If the objective of countries in coming together on a single platform to form blocs and groups – of which there are many – was to create a mutually beneficial conglomeration for every need and deed, then except for the hand-raising, hand-holding and rhetoric, the convergence is yet to result in the emergence of any strong economic consolidation amongst the BRICS. Economic cooperation is the oft quoted basis of formation of such groups or blocs, but is it genuinely a priority on the agenda?

Viewing it from the perspective of the intra-trade within BRICS, this does not seem to be case. For instance, the intra-trade among BRICS member countries during CY2014 was down by $83.5 billion to $609 billion – a 12% y-o-y fall. This indicates that intra-BRICS trade has not been accorded the importance or focus, which otherwise could have transformed trade equations among member countries.

What then does the road ahead signify for BRICS and its trade prospects in 2016? Is the road to revival set to see some light as we embark on a promising new year or is the proverbial silver lining missing this time?

Jha of The Indian Council of World Affairs, puts a bigger thrust on politics in the new year saying, “2016 is a year of politics which is going to hamper global economics in a big way. Both at the global as well as at regional levels. Maybe the scenario changes after mid-2016 if there is some drastic change in global politics. The fundamentals of economics will try to recuperate given the fact that 2016 will be a year where investment, trade and all the other aspects will try to find a balance and bring about an equilibrium. I see 2017 as a brighter spot because whenever we see any recessionary tendency, it lasts at least two to three years.”

Logical.
But what about the China slowdown phenomenon which is already at work? The efforts made by each BRICS nation to knit their individual economies together are likely to take a toll on the bloc’s future. For instance, China's volatile capital markets and depreciating yuan are wreaking havoc in global markets (including that of its bloc partners).

There are reports that indicate that the bloc will stick together to weather the global slowdown and continue to challenge the world order led by the West [through the New Development Bank, launched by the bloc last year – with a subscribed capital of $50 billion divided equally between its five founders and a $100 billion currency reserve pool – is modelled closely to the World Bank and is a direct challenge to the West’s tight grip over global finances]. But the force seems to be missing given the turbulent economic waters they are currently swimming in. Further, “there is a shift in the drivers of emerging market growth away from most of the BRICS – Brazil, Russia, India, China, South Africa – and toward the next wave of emerging growth economies,” says an A. T. Kearney report titled 'Beyond The New Mediocre?'. “The next wave of growth will not only come from the US recovery, but also from seven key emerging markets – the 2020-Seven comprising China, Malaysia, Chile, Poland, Peru, Mexico and Philippines," it adds.

But then everything doesn’t end here. Even in the present seemingly bleak scenario, hope is alive. The notion that BRICS will serve as an avenue for global expansion may have been shaken up a bit but it continues to hold ground and confidence. India's PM Modi in Antalya (recently BRICS leaders met in Turkey ahead of the G20 Summit) had also spoken of BRICS in the light of ‘Building Responsive, Inclusive and Collective Solutions’, which would be the theme of the five nation group once India assumed its presidency next year. “Despite all the negative sentiment, it will not be prudent to say that it is the end of the road for BRICS. The reason is that BRICS form a sizeable percentage of the global economy. And it is yet to be seen how these countries fare and accommodate their recessionary trends. Though Brazil, South Africa and Russia are not doing great, India and China will drag the composition of BRICS. This grouping is here to stay,” adds Jha with a renewed sense of confidence.

All eyes are now on the 8th BRICS summit with India playing the host in 2016. A multitude of issues are bound to be up for discussion, thereby perhaps creating a better roadmap for the future to make these economies return to the growth path.

BRICS – there is hope yet. A bounceback won't be easy, but the bloc cannot be written off. Not as early as in 2016. 

Economic Slowdown – China - Has The Dragon Started To Cough Already?

China's trade numbers have never appeared so weak in recent years. Its economic slowdown has started taking a toll on world economics. 2015 saw China's exports declining in nine of 11 months, and imports in all 11! Will 2016 mean worse news for China and the world?

By The Dollar Business Intelligence Bureau | January 2016 Issue | The Dollar Business

2015 was a year of tremors – natural, social and economic. Though the slowdown of Chinese economy started in 2011, it only won eyeballs in 2015. While some experts viewed this as the fall of the world’s top exporting country, others saw this as a transition in the economy. With the help of experts around the globe, The Dollar Business tries to decode the slowdown of the Chinese economy and its impact on India and the world in 2016.

ONE SYMPTOM

First question that often comes to mind is – what's that one set of numbers to prove that the dragon has started to cough? Trade indicators – exports and imports. We turn the page to a time not very long back, when the world had just started recovering from the tech bubble shock. Starting early 2002, Chinese exports to the world grew every month on a y-o-y basis for over six-and-a-half years on the trot. Until in November 2008, the crack on the wall first showed. Zero months of exports contraction (y-o-y) in 2006 and 2007 was followed by two months of contraction in 2008 – that was some sign of a problem taking shape. In 2009, out of 12 months, China’s exports shrunk in 11. What followed is common knowledge – China's troubles were adopted (or reflected) by the world and recession struck!
At present, a 2009-like economic hurricane is brewing. From zero months of export contraction in 2010 and 2011, 2012 saw a month when exports growth fell into the negative, 2013 and 2014 saw two each, and 2015 so far has been a ride to hell with exports contracting in nine of 11 months reported! And how about imports? That's been a worse act by China – in all 11 months of 2015 until November, imports have shrunk!

Critics often suggest that judging the world's factory from a consumer angle – imports – isn't right. We question – if it's the world's factory, what will it use as raw materials? You obviously don't expect China to suck in air to produce Gucci imitations, iPhones and Nike shoes! In this regard, that imports have fallen more drastically than exports signal a big problem for China and a bigger one for world's exporting giants, especially commodity exporters like Brazil, Canada, Australia, Chile, South Africa, Peru, Ukraine and many more ore dealers.

China – that 'C' is perhaps the singlemost sizeable problem that is weighing down on the world in the present times. Crude, commodities, currencies and conflicts are of course concerns, but China it seems, is playing trouble child to the world. Or so the world thinks. But the idea that the Chinese contagion will spread faster than imagined, getting all world economies to weep is fairly overhyped. China should be blamed partly for a slowdown that has reduced global demand and trade; that's logical. But to call it the only culprit would be wrong.

TDB Intelligence Unit conducted some analyses and interesting facts emerged about China's impact on world trade slowdown.

First, crude. The reason for oil prices plunging is not China. The country only consumes about 10% of the world’s oil. Actually, US is the largest consumer (11%-plus). Reason for oil hitting record lows was oversupply and obstinacy on the part of producers that led to a supply glut. Since 2010, production of oil in US has increased 100% and all oil supplying countries – like Saudi Arabia, Venezuela, Nigeria, Algeria, etc. – it sourced oil from until the turn of the decade were forced to divert their produce to other emerging economies. Result – higher supply led to lower prices. And China is singled-out!

Second, why should China be blamed for anaemic consumer spending across markets like US, EU and UK? Third, is it completely China’s fault that nations like Greece, Zambia, Venezuela, Peru, Burundi and Guatemala are in financial and political trouble? Fourth, there are a host of nations whose economies have already begun shrinking – Japan, Canada, Brazil, Russia, etc.; should we blame the Chinese government? Fifth, why should China take responsibility for unsubstantial wage-growth since the last meltdown across markets like US, EU, Australia and UK (wage growth in US averaged 6.99% from 1960 until 2007, while between 2009 and today, it’s just under 2.5%)? Sixth, why should China be called names for the fact that Canada and Russia continued to depend on oil, Brazil continued to spend government funds for social reasons and Australia imagined mining to be a glorified strategy to keeping an economy and its currency fortified from external economic terrors? Seventh, why should China be accused for the overdependence of other trading nations on its low-cost competence? Many questions to which there is a simple answer – "Don't throw darts at China only because it's too big to miss".

China is a big, easy target. So the world blames it and imagines that China crashing will mean doomsday for them too. To understand the Chinese phenomenon and its impact, TDB reached out to Raoul Leering, Head of International Trade Research at ING Bank. He is of the opinion that the bad news in China is being taken too seriously by world markets and powers. “There is a slowdown, but the panic in the financial markets was (like in August) and is exaggerated. It was and is based on the assumption that the Chinese economy is about to experience a hard landing. The growth figures for Q3, 2015 (both the official ones and the alternative ones), showed only a small drop in GDP growth, implying rather a gradual slowdown (a trend for some years now),” Leering says.

Leering is not the only one who believes that markets have overreacted. Rajiv Biswas, Chief Economist, Asia-Pacific at IHS Global Insight, Singapore, is more or less on the same page. Biswas tells TDB, “The Chinese economy has grown at an average rate of 10% per year for the last 30 years and has become the world’s second-largest economy, so some moderation in the pace of economic growth is a normal process of transition to a more mature, upper-middle income economy." His reasoning is clear: China is currently making the transition from a low-cost manufacturing and export-driven economy towards an economy which is increasingly driven by domestic consumer demand growth.

Foreign trade in China grew almost four fold between the years 2004 and 2014. China’s total trade volume amounted to $4.3 trillion in 2014, which a decade ago, was just $1.1 trillion. Understandably, the contribution of exports to Chinese GDP has fallen over the years (from 30.6% in 2004 to 22.6% in 2014). Yes, that also means that China is changing colours already, and that this process was in action for the past ten years. From an export-driven GDP growth to a domestic demand-fuelled nation, China is growing into a mature economy, one that's more deserving of being termed the world's second largest economy.

CIRCLE OF TRADE

The Chinese economy has had a phenomenal run in the last decade. According to UNCTAD, during 2004-2011, the GDP growth rate of China ranged between 9-14%. It touched a high 14.2% in 2007 but post-2011 it started to slow down. Since 2012-2014, it grew between 7-8%. For 2016 and 2017, experts believe that China will grow around 6.5% per annum. That's quite a growth for a $10.4 trillion economy. [And some wisemen imagine China to be coming to a halt!] Some quick calculations make us understand that if China grows by even 6.5% in 2016, just its one year of 'GDP added' would equal one-third of India's total GDP for 2014, one-half of South Korea's GDP for 2014, almost equal to GDPs of Switzerland and Saudi Arabia in 2014 and almost three times Greece's total GDP for 2014. Which means, just its growth in 2016 will mean creation of a 2014-version of an oil-rich nation, which is also OPEC's largest crude driller (Saudi Arabia; and understand that in 2014, oil prices were in the $100 per barrel range for nine out of 12 months!).

THE COUNTERVIEW

Some experts are strongly opposed to the idea that deceleration in China is a result of the slowdown in Europe and US. [They perhaps feel that the eurozone, that's been the epicentre of bailout package since 2009 is functioning smoothly and that America's two rounds of QE was just a policy experiment!] They could be right. In 2014, GDP of the eurozone rose by 2.84% to $18.5 trillion – the highest since 2008 (when the bloc's GDP touched $19.0 trillion). US too witnessed a GDP growth of 3.9% y-o-y in 2014 to record the highest ever GDP in its recorded history - $17.4 trillion. Numbers therefore don't show a fall in activities in either EU or US markets. Leering of ING Bank explains, “Actually, there has been no slowdown in the European economy. In the eurozone, growth is twice as high as last year and import demand in volumes is growing at a reasonable pace. What is true, is that the growth of industry is lackluster which holds back imports of natural resources, capital goods and intermediates, thereby preventing an acceleration of European import volumes.” Giving a positive view, Biswas of IHS Global Insight adds, “The outlook for 2016 is for some strengthening of US economic growth, to a pace of 2.9% GDP growth, while eurozone’s GDP growth is expected to continue to expand at around 1.7% y-o-y.” Good tidings therefore for even those who believe that stagnations in consumption levels across EU and US have led to China's slowing performance.

TO WORRY OR NOT TO...

As to the impact of the Chinese slowdown on the Indian economy, there have been mixed messages from India’s top office bearers. While on one hand, Reserve Bank of India’s Governor Raghuram Rajan expressed his concern on the adverse effects of a slowdown in China on the Indian economy, on the other, Finance Minister Arun Jaitley asked everyone to stay calm.

Biswas, concurring with the Finance Minister says, “Indian private consumption accounts for around 60% of GDP, whereas many East Asian economies are heavily dependent on exports as a key growth driver. Therefore the China slowdown is having a bigger impact on such export-dependent economies, including South Korea, Taiwan and Thailand, while India is benefiting from some pick-up in domestic demand due to falling inflation and RBI rate cuts.”

Leering though agrees with the RBI Chief’s comment. He feels that China is the third most important export market for Indian companies, so China is important for the Indian economy. On the import side, it is even more important as China is the number one origin country of Indian imports.

On the brighter side however, it would not be wrong to conclude that a slowdown in China is perhaps making India more self-dependent. If this policy of Import substitution industrialisation (ISI) works for India – be it through 'Make in India' or various other policies of the government – India will be thankful for China slowing down at the right time. A slowing down China will also mean that India will have the upper hand when it comes to becoming the next referred to factory of the world and realising its dream of exports-led GDP growth.

An analysis by TDB Intelligence Unit proves that China's exports to India have already started tumbling. First, at the two-digit HS Code level, there are 46 chapters under which India’s imports from China fell in the first six months of 2015 in terms of quarterly averages (value), as compared to the past three year period (CY2012-2014). The list of items that fall in this group are indicative of the fact that India’s domestic manufacturing may have picked up to the level of self-sufficiency. And if not already, there is a strong chance of that happening in future. Second, there are 33 items (at the HS Code chapter-level), which China exported more of in the first two quarters of 2015, and India imported less of from China. To quote a couple of examples, China exported 4.21% more of articles of iron or steel to the world in 2015 as compared to the past three years. India imported 17.19% less of it. China exported 4.55% more of tools, implements, cutlery, etc., of base metal in 2015, while India imported 11.26% less of the category. Similarly, China exported over 50% more of aircraft and spacecraft parts this year per quarter, while India’s imports from China shrunk by over 80%! Third, TDB has identified 25 products which China exported less of and India exported more of per quarter in the first half of 2015. Machinery, nuclear reactors, boilers, apparel, medical apparatus, footwear, toys, ships, glass and glassware, food preparations, copper articles, clocks and watches, woven fabric, cereals, flour, starch, milk preparations, milling products, malt, arms and ammunition, etc. – almost all these items involve a little or large degree of engineering and manufacturing. That's a sign that India has started making some noise in China’s private, manufacturing fiefdom.

China is making but India is not taking. That's good news for India – whether it means a China in trouble or not, whether it means 2015 or 2016!

THE DRAGON'S STILL RESPONDING...

Even though China may seem to be experiencing a slowdown, it is still growing much faster than most other major economies. Truth be told, many major economies today envy the growth rate that China is still managing to garner. With Russia, Brazil and other stars of the yesteryears fading, the world will still have to bank on China to iron out the wrinkles in a troubled economy. It goes without saying that India, which seems to be gathering speed, by all estimates, would be expected to lend a shoulder.

With debts estimated at about 282% of GDP (estimate by Black Rock Investments) and a gradually slowing economy, China may not have the wherewithal to help the world out of a global meltdown the next time it occurs, but the momentum it has gathered over the last three decades may be enough to keep the world from falling off the ledge. Again, China is too big to be too weak.

Have the doomsayers spoken too soon? We believe so and can guarantee that many eyes will be on China in 2016. In terms of GDP growth, it could range anywhere between 6-7%. And export- import numbers? Positive news should trickle in by the second half of 2016. 

 

Currency Wars - What's Next? - Hype Or Reality?

Yuan's devaluation, in the face of declining exports, seems to have prompted several other central banks, across the globe, to devalue their currencies too. Will the 'race to the bottom" become a reality in 2016? The Dollar Business analyses

By Indranil Das | January 2016 Issue | The Dollar Business

China’s shock devaluation of the yuan against the dollar by nearly 2% in August last year provoked rumours that the world was at the cusp of another currency war. Devaluations by Vietnam and Kazakhstan, two countries with close ties to the Chinese economy, further bolstered this fear. Kazakh President Nursultan Nazarbayev, who earlier last year pledged to avoid any sharp depreciation, said the adjustment was essential to avoid a recession. Within a week currencies across Asia started weakening, signalling that the fears may come true.

BEGGAR THY NEIGHBOUR

While the last half of 2015 did see significant quantitative easing by export oriented economies, and the devaluation of the yuan by the People's Bank of China (PBOC) may have acted as a trigger for some, the weakening of these currencies were possibly both an attempt at countering China as well as keeping their economies competitive in the face of an oil and commodities rout and a drop in demand from a slowing China. China’s demand for Asian imports has been tumbling, having dropped 15% in the third quarter.

The slowdown in China, which is a major importer of commodities, has compelled central banks in many countries to allow a devaluation of their currency through Quantitative Easing or through direct devaluations (as in the case of Kazakhstan). A phenomenon of competitive devaluations to boost exports, that has been frequently described as "beggar thy neighbour" may well have arised in these emerging economies.

RACE TO THE BOTTOM

For central banks trying to boost exports, domestic currency devaluation is an obvious victory. But devaluations can have disastrous effects. Investors feel jittery as currencies fall, and take their funds to more stable economies. As funds move away from a country, currencies tend to plummet, sometimes more than what the central bank intended, leading to a situation where the currency looses credibility and spirals out of the central banks control. Developing and emerging economies are naturally more susceptible to be victims of their own policy.

PRISONERS OF WAR

Economies that are dependent on foreign investments, and are aggressively seeking both FII and FDI and have high foreign currency debts are in a bind. Take the case of Indonesia, which relies on foreign investment inflows to offset its current account deficit and has a high foreign-currency debt. It can’t afford to see investors flee and pull down its rupiah. Indonesian central bank governor Agus Martowardojo held his own benchmark rate steady at 7.5% in the face of the rate hike by the Federal Reserve on the 16th of December 2015. This despite falling exports and a relatively low inflation of 4.8%. But keeping this stance may mean hampering exports and Indonesia may soon have to fall in line with other Asian economies and drop interest rates to stay competitive.

Economists believe Asia’s interest rates will be influenced more now by China than US and China, as the largest importer, will determine exchange rates and the competitiveness of Asian exports. This may mark a clear shift in power in the Asian currency stakes from US to China, and while it presently remains a regional phenomenon specific to Asia, author and financial analyst Peter Schiff believes that China may make a play for being an alternate reserve currency. The yuan's inclusion in the reserve currency basket in November 2015 has given the currency the respect it deserves. Schiff also believes that the dollar is overvalued and that the dollar rally will end soon, giving China the opening it needs to establish the yuan (backed by the gold) as the reserve currency of choice. If that happens it would give a whole new dimension to the term currency wars.

VOLATILE FUTURE

The scenario Schiff describes though is not going to play out in 2016. What we expect in 2016 is more volatility in major currencies. We also expect that there will be divergence in policy between the dollar and other major currencies, as seen in 2015 with the yuan and the euro. While the US Federal Reserve tightened its policy, the ECB in the wake of a weak euro continued quantitative easing, and with the eurozone yet to recover, we expect the trend to continue in 2016.

With Japan, we expect more of the same, as it loosens the yen to stimulate a contracting economy. The ruble has seen considerable volatility and with Russia's geo-political equations undergoing a makeover we expect the Russian currency to remain unpredictable.

While export compulsions will mean that countries will be forced to engage in a limited currency war, most central banks, having wisened up to the dangers of downward spiral, will not engage in brinkmanship. 

 

Terrorism & Conflicts - Economic Impact - Will We Stop 'War' shipping In 2016?

Paris attacks, shooting at San Bernardino, civil wars in over half-a-dozen nations and the ongoing refugee crisis (virtually affecting the world), brought 2015 to a woeful close. Will conflicts continue to harm global trade in 2016?

Manisha Choudhari | January 2016 Issue | The Dollar Business

The 9/11 attacks ushered violence into the 21st century. The attacks killed nearly 3,000 people in America, and about 110,000 in the subsequent Iraq war, apart from setting the tone for America’s military presence in the Middle East for the next decade. Even the Afghanistan War was a direct result of the 9/11 attacks. The argument that US invaded only countries that have oil is oft repeated – and not without reason, as many claim. The other argument being that anyone who has threatened the practice of trading oil for dollars has been cast into oblivion by US. In 2000, Iraqi dictator Saddam Hussein advocated selling oil for euros. By 2001, Iraq had actually dumped the principle of petrodollars. US invaded Iraq in 2003 under the pretense of looking for weapons of mass destruction (WMD). As it turned out later, Iraq did not possess WMD. Similarly, Libya's long-ruling despot Muammar Gaddafi pushed for a pan-African gold-backed currency that he would trade for Libya’s oil, and he was killed by rebels during a US-backed intervention in 2011. The assumption was that US was “fighting for democracy”.

COST OF WAR

The agenda behind US going to war in all these years may be unclear, but the cost of its engagements in conflicts across geographies isn't. We are talking about $2 trillion in direct costs for America in the fourteen years leading to 2014. Petrodollars or not, US supremacy or not, the bigger question here is whether conflicts around the world will continue to rise in 2016 and if this will further lead to international trade weakening.

 

NOBODY WINS

Global trade has little room for conflicts. The two cannot be proportional and complementary. Be it civil wars or cross-border conflicts, there is damage to foreign trade, especially in the land where blood is shed. Researchers have proven this time and over again. "Our analysis of trade patterns finds that border disputes have a significant negative effect on trade between disputing parties," conclude political researchers Ryan Brutger and Austin Wright at the Princeton University, in a July 2015 paper titled, 'The Costs of Conflict: Border Disputes and Trade Diversion'.

 

 

 

To quote findings of another study titled, 'Make trade not war?' by Philippe Martin, Thierry Mayer and Mathias Thoenig of University of Paris: "Military conflicts reduce trade." That's as direct as one can get to appeal to foreign leaders to think of alternatives beyond conflicts to resolve disagreements, and for United Nations to intervene most strongly in scenarios that even appear to be transforming into another ugly Arab Spring!

Civil wars damage economies. They destroy trade relations and economics for even intervening third parties! In an analysis of 120 countries over a period of 43 years, researchers Bayer and Rupert of Pennsylvania State University (paper titled, 'Effects of Civil Wars on International Trade, 1950-92') reported that civil wars reduce the value of bilateral trade between nations by 33.3%! What was more interesting about their findings was their conclusion on how even intervening third-parties are affected by conflicts and wars. The researcher-duo called such nations "joiners".

The negative effects of conflicts and civil wars are even observed outside the time frames of events. Mere expectations of intra or interstate conflict(s) – that could include anything from a nationwide revolt to cross-border shellings – are negatively correlated with bilateral trade levels. Also, in many cases (like in Afghanistan or Sierra Leone) it has been observed that only many years after the dust of conflict has settled, do foreign investors begin expressing interest in asset investments in the affected nation(s).

STOP 'WAR'SHIPPING!

It is quite logical that profit-expecting organisations will not bet their investments (call it FDI or FII) on weakwilled government structures and conflict- struck geographies. Look at Syria, Libya, Sudan, Iraq, and many other such once conflict-struck nations – their forex reserves have dwindled, their GDPs sit crying, their international relations are weaker and their international trade growth isn't worth a word of praise!

There is much hope that 2016 will be a year far more peaceful than what went by. Reality however, appears packed with more dynamite.

Plans of France, UK, Australia and Russia to increase their engagement in Syria, fears of a civil war in Burundi, acts of terrorism in Thailand and Paris, Sunni-Shi’ite face-off in Iraq, bombings and government attacks in Nigeria, killings on both sides of the Sudan-South Sudan border, ongoing civil wars (in Yemen, Colombia, Uganda, Libya, etc.), Al-Shabaab militants disturbing peace in Somalia, and many such violent occurrences around the world make this new year too a globalised-yet-less safer a calendar period – for lives, for trade.

The sad truth is, despite local and international conflicts being detrimental to world trade, they will continue to make headlines in 2016.

 

 

E-Commerce - A Growing Trend - Rapid Growth Is the New Normal

As technology improves and more people around the world have access to the Internet, the role of e-commerce is bound to grow in international trade and commerce. It's rapid growth will not only lead to the emergence of global platform providers that will serve as a link between sellers and buyers, but will also drive the development of international trade patterns and relationships going forward.

Shivani Kapoor | January 2016 Issue | The Dollar Business

While there has been a lot of hype over Amazon's Prime Air drone deliveries as the new frontier for e-commerce retailers, Korea Post has stolen Amazon's thunder and announced that they will start drone deliveries in 2016. What sounds like science fiction today is tomorrow's reality. The e-commerce of yesterday is evolving into an altogether new animal with multiple channels of user interaction.

The all pervasive Internet has transformed the way we shop and do business today – buying, selling, trade, transactions and services – not just within in a country but across borders. Online platforms like eBay, Amazon and Alibaba are turning out to be the linchpins of global e-commerce, facilitating exports. For instance, over 90% of eBay commercial sellers export to other countries, compared with an average of less than 25% of traditional small businesses (McKinsey Global Institute). And it's a big number i.e. over 1,90,000 firms. In fact, the e-commerce trend is growing really fast across the globe with India being no exception. According to rough industry estimates, exports from India through the e-commerce route too have grown over 400% over the past five years and the trend will continue for the next 3-4 years. Even India's Foreign Trade Policy (FTP) 2015-2020 seems to realise this growing trend and as such provides incentives under Merchandise Exports from India Scheme (MEIS) to e-commerce companies (though only to some labour-intensive sectors as of now) that export goods from India.

The pace of the global growth of the industry can be gauged from the fact that global retail e-commerce sales are expected to touch $1.9 trillion in CY2016, up from $1.7 trillion in CY2015, according to eMarketer. Driven by increased digital access and fueled by new horizons of technology, the e-commerce industry continues to grow and evolve and how! According to London-based Euromonitor International, “Both fixed and mobile Internet penetration are rising rapidly, especially in emerging markets. In markets where e-commerce is relatively new, consumers are starting to understand the value, cost savings and speed of purchase available to them.”

GROWTH DRIVERS

Having already matured across advanced economies, the e-commerce sector has a lot of scope for expansion in the emerging countries. And, with many developing economies like China and India offering attractive growth rates, global e-commerce players are vying for a larger market share in these economies. In fact, the Chinese e-commerce market is forecast to undergo substantial growth in the next few years, growing from about 500 billion yuan in to over of 3 trillion yuan by 2017. When it comes to India, it is projected to be the fastest growing e-commerce market in the BRIC countries – Brazil, Russia, India, and China – in the next five years.

Various factors have been driving this trend: convenience of shopping online – easy and quick, and a plethora of offers which the traditional retail cannot offer. As James Storie-Pugh, Head of E-commerce, Global Brands Group (a member of the Fung Group), London, puts it, “Growing Internet penetration on the back of cheaper digital devices has been one of the major factor of e-commerce growth in the emerging economies.”

A research paper titled 'The impact of e-commerce on international trade and employment' by Nuray Terzi, Faculty of Development Economics, Risk Management and Insurance, Financial Economics at Marmara University, Istanbul too states that "The Internet is dramatically expanding opportunities for business-to-business (B2B) and business-to-consumer (B2C) e-commerce transactions across borders. For business to consumer transactions especially, the Internet sets up a potential revolution in global commerce i.e. the individualisation of trade. It gives consumers the ability to conduct a transaction directly with a foreign seller without traveling to the seller’s country."

A LEAP OF GROWTH

When we talk about India, the e-commerce market has enjoyed a phenomenal growth, thanks to the lowering of the broadband tariff rates, launch of 4G services and rising number of 'apps' that help make life easy for the average user.

A joint study by Assocham and Grant Thornton reveals “a significantly low but fast-growing Internet population as an indicator of the sector’s huge growth potential in India.” If numbers are something to go by, India, in 2016, will become the second largest country in the world in terms of the number of Internet users, behind China. And that's one of the many reasons why the e-commerce sector is being considered a new-sun rise sector that has taken the Indian business by storm. The scope and potential of growth of e-commerce can be seen in the numbers. While a joint study by Assocham-Deloitte estimates the e-commerce to cross revenues worth $16 billion by the end of 2015 on the back of increased online shoppers, a PwC report expects the Indian e-commerce industry to touch $22 billion mark in 2015.

Although market analysts still see India’s e-commerce industry to be in its infancy compared to the West, India is on route to becoming the world’s fastest growing e-commerce market, if current projections are anything to go by. As London-based market research firm Euromonitor International puts it: “The world’s second most populous country has all the characteristics of an e-commerce growth spot: low Internet penetration on the rise, giant urban centres and localized IT clusters.” A joint study by Assocham-PWC too predicts, “India’s e-commerce sector to log a compound annual growth rate of 35% and cross the $100-billion mark in value by 2019.”

As Indian e-commerce industry gains further ground, 2016 looks set to be a big year, witnessing greater heights on the back of increasing Internet population and changing dynamics of supporting economic ecosystems.

WHAT’S TRENDING

With new year bringing more hopes for the e-commerce industry, it’s time to take a look at trends on the horizon for 2016 and beyond. According to Holman Fenwick Willan, the London based law firm specilising in international commerce, "it appears that, increasingly, large commercial transactions will be conducted on an almost exclusively e-commerce basis, for instance from the negotiation and agreement of contracts by email to the conclusion of the transaction and the delivery of the goods under the agreement by the presentation of an electronic Bill of Lading."

As technology improves and more people around the world have access to the Internet, the role of e-commerce is bound to grow in international trade, both in size and importance. According to research conducted by the US-based International Data Corporation (IDC), it is estimated that "global B2B and B2C e-commerce transactions will account for about 5% of all inter-company transactions and retail sales by 2017."

Further, a lot of the innovation today are being driven by countries like India. COD (Cash on Delivery), for instance, was a godsent for etailers in India, where trust on online payments remain low. In 2016 we can expect to see more country and category specific 'apps', while at the same time see consolidation through M&As in an industry that is burning cash. Having said that, going forward, the growth of e-commerce will be an important factor that will drive the development of international trade patterns and relationships over the coming years.

So, will a drone deliver your morning cuppa from your favourite coffee shop? Nah, not in 2016. But we will be happy to be proven wrong!

 

Export Target – Missed Opportunity - Of High Ambitions And Misplaced Priorities

The decline in exports from the country isn’t just another cyclical phenomenon. There are structural factors at play as well. And unless these factors are addressed, the $900-billion a year exports goal set by the new Foreign Trade Policy, will remain just that – a goal.

Satyapal Menon | January 2016 Issue | The Dollar Business

India’s export story presents a picture of missed and deprived opportunities worth billions of dollars caused by misplaced priorities and policies. India continues to depend on imports for even the simplest of products like nail cutters, base metal padlocks, clasps and door hinges. From pins, needles, nuts and bolts to miscellaneous articles of base metal and iron & steel, cumulative value of India’s imports in these categories is valued in billions of dollars. Now, cracks have started showing on the scoreboard too.

For the first time in close to 59 years, in November 2015, India's monthly merchandise exports recorded a 12th straight month of y-o-y fall (analysis by TDB Intelligence Unit). Expectations are, India will end 2015 with 12 straight months of fall in exports y-o-y – the first time this would have happened in its recorded history since 1957! The worst that India's exports had performed until 2015, was way back in 1958, when except for the month of October 1958 (when India's exports grew by 4.7% y-o-y), trade during all other months showed a y-o-y decrease. [Interestingly, in the past 60 years, there have been only two recorded instances of Indian merchandise exports recording a negative monthly growth for 10 months or more in a calendar year – in 1958 and 1985.]

A QUESTION OF VALUE

Many blame the fall in global demand for India's dampened performance at the ports. But that India isn't considered yet a hub of value addition is also to blame. Asian economies like China, South Korea, Malaysia, Philippines, Indonesia and even a far less popular one (in manufacturing) to the south of India, i.e. Sri Lanka, are considered places where value is created in greater proportion (as % of GDP) at the factory level. As per World Bank and OECD, for 2014, the Manufacturing Value Added (MVA) of China was reported at 36, South Korea – 30, Malaysia – 23, Philippines – 21, Indonesia – 21, and Sri Lanka – 19. And India? It's at par with nations like Bangladesh and Vietnam at 17, and better than Pakistan (14)!

To give you an idea of how India's manufacturing capabilities have evolved with the times, one year before liberalisation (in 1990), India's MVA stood at 16; an MVA of 17 today therefore means the nation's factories have hardly evolved. Want to know how others have made progress? While Bangladesh's MVA was 13 in 1990, Vietnam's was 12! It's clear as to which market is taking its respective PM's "Make in ____" war cry more seriously. [Of course, Pakistan is a special case – its MVA has fallen from 17 in 1990 to 14 today!] Bottomline: India still relies largely on raw material exports instead of value-added factory outputs.

What's also clear from this situation is that over the years, there have been less than few cerebral and committed strategies implemented to enable and equip the micro sector through initiatives for not just capacity and capability addition, but more importantly, market accessibility. Of course, certain segments of the industry are equally responsible for choosing to isolate themselves from evolution and reluctant to innovate and value-add as per the ever-growing demands of a dynamic global market.

STAGNANCY PREVAILS

The 2015 tale of India's merchandise exports was dismal. And this isn't a heartening indicator of what may unfold in 2016. Exports from India in the current fiscal, i.e. FY2016, will in all probability witness a negative growth. Secondly, the possibility of being anywhere near the annual exports target of $900 billion (as set by the new FTP) five years down the line, is quite remote. Thirdly, all those tried and tasted wines in new bottles like MEIS, SEIS, Duty Drawback and a plethora of concoctions in the forms of schemes and incentives in the new FTP have simply failed to enthuse and rev up exports (as clearly observed during the months leading to FY2015; not a single month of exports growth ever since the FTP was announced is a shocker!). There are of course those who argue that three quarters is far too early for any conclusion when a macroeconomic indicator is being tested. But an extrapolation after 12 months of back to back negative news cannot result in a curve shooting upwards, out of the paper. Can it?

In fact, India’s export-import story has been a narrative of little progression and a considerable regression. The country’s total exports have experienced fluctuating trends during the five year period from FY2011 to FY2015. One very conspicuous aspect that emerges is that merchandise exports values have remained near stagnant levels – except in FY2011 and FY2012, which also means that India has failed to either make any gain in its existing markets or capture new markets. From a high of 39.75%, during FY2011 (over that of the previous year), exports growth nosedived to -1.29% in FY2015. On the way down, it declined to 22.47% in FY2012 and -1.8% in FY2013, before gaining some ground and growing by a small 4.6% during FY2014. If we consider the five year period as a single patch, we are talking about a high-growth economy whose merchandise exports grew at a CAGR of just 5.5% during a time when the world had begun its recovery from recession and China and Germany, besides other economies in Asia were on fire! Common macroeconomic logic (which has been tested across research papers till date), is that for a high growth economy whose motive is to achieve export-led growth, more of the produce each year should be exported. Hence, with India's annual GDP growth averaging anywhere between 7-8% between FY2011 and FY2015, export-led growth hypothesis (ELGH) suggests that exports growth should have exceeded GDP growth by a fair margin. [Export-led GDP growth is what China followed in the last two decades.] That was not to be seen.

THE SLIDE CONTINUES

As per DGCIS data, for the first seven months of FY2016 (April-October), 17 out of 30 reported commodities experienced degrowth. For the seven month period ending October 31, 2015, exports of iron ore and petroleum products fell alarmingly by 72.82% and 49.16% y-o-y respectively. Although there is a possibil- ity of the two commodities picking up in the first three months of 2016 (considering the fact that iron ore had been subjected to restrictive mining and petroleum products were being impacted by a softening of prices), the growth would not be considerable enough to repair damages done and match even the modest achievements of the previous fiscal.

A MISSED TARGET?

India, in all probability, will miss its overambitious exports target. Going by what has been reported for the first eleven months of 2015 so far, India will end the year with merchandise exports in the range of $260 billion-$270 billion, marking a change of negative 17% y-o-y in total value of exports.
So, the question now is: Is a reversal of fortunes and consolidation possible? “The slowdown in global growth will prove a major headwind for Indian exporters. India, although a relatively small trade partner to China, will nonetheless be hurt by a drop in regional sentiment. The slower than expected US growth trajectory and a sluggish eurozone will prove a drag on external demand. Thus, the precipitous fall in exports from 2015 is expected to continue in 2016,” says Faraz Syed, a Sydney-based economist at Moody’s Analytics.

Further, “the decline isn’t merely cyclical – there are structural elements at play as well. The cyclical component of exports will move up when cyclical factors (world GDP growth, commodity prices, etc.) turn favourable, but structural factors, if not addressed, will continue to pull back India’s export performance,” adds Dharmakirti Joshi, Chief Economist, CRISIL Ltd. This also means a turnaround will not turn out to be a distant possibility if aggressive and pragmatic strategies are implemented by policymakers to regain lost ground.

WHAT NOW?

India’s trade deficit (minus invisible balance) was a whopping $142 billion during CY2014 (and it ranged between $120 billion to $200 billion in the past five years). Does it mean that there is absolute absence of any appropriate policy or measure to minimise the heavy reliance on import of commodities, except platitudes? Does it also mean that India lacks the capabilities to produce commodities that are being imported?

Revival and rejuvenation of India’s exports require substantive reorientation India's policymakers' thought processes. One of such strategies could be triggering growth among MSMEs which will account for a sizeable contribution to import substitution and also increase exports. The reason why this has never happened is the entrenched misconception amongst policymakers that sops and loans are 'the' solution to oil India's industrial machine.

Truth is that despite thousands of crores in the form of loans and incentives poured into industries, a lot many of them are neck-deep in debts and have either declared insolvency or have applied for a bailout by the government. Reason – there is no effective policy to guarantee accountability or performance targets attached to the largesse extended by the government. And here is something that is not a well-guarded secret – most of the allocated funds are being pumped into unviable industries.
India also needs to undertake massive investments in vocational ecosystems and infrastructure development to become a world-class exports hub.

Instead of attempting to plug loopholes and develop a sense of direction, the government has often demonstrated a propensity to paint a rosy picture. The export target envisaged in the new FTP is one classic case in point. It would have taken an enormous routine of calisthenics on the part of the central think-tank to arrive at a target of $900 billion by 2020, which from a rational point of view is simply...irrational. To achieve this target, a CAGR of 19.97% has to be maintained. Considering the current scenario the target is nothing but overambitious!

In CY2016, TDB Intelligence Unit forecasts that total exports will range between $510 billion to $530 billion. [See chart titled, ' India's export forecast using regression analysis'; total exports equalled $473 billion in CY2014.] And the target for FY2019? $600-$650 billion appears more practical when we factor-in the current global economic condition, India's yet-to-be-realised manufacturing dream, and of course, luck.

American Elections - 2016 - The Race Begins!

With a fragmented Republican camp, led by the predictably unpredictable Donald Trump on the one side and, for all practical purposes, a two horse Democratic race between Hillary Clinton and Bernie Sanders on the other, the 2016 US Presidential Election has already generated a bewildering array of possibilities for the future of the federal republic of 50 states and, of course, the world. The Dollar Business tries to separate the wheat from the chaff.

Manisha Choudhari | January 2016 Issue | The Dollar Business

The world’s only surviving superpower, the United States of America will be electing a new President and perhaps one of the most powerful man in the world in November 2016. US, inarguably has been an influential and important part of world affairs, and much of the world probably looks towards it for leadership and direction; not just in terms of trade and geo-politics, but also for technology, culture, the war on terror, the refugee crisis, and wide spectrum of issues that impact the denizens of this planet. As for citizen of US are concerned, a study by Pew Research Centre says that public trust in the President has gone down steadily since October 2001, and it may well be time for the next President to change this. However, the question remains, can he change the game?

SUPER POWER

Despite the founding fathers of America advocating a non-interventionist policy, USA has a presence everywhere. Being the only super power that can project its influence on a global scale has its own burden. Whether it be the Middle East crisis or the civil war in Somalia, US is expected to intervene – regardless of its stance. Given that the dollar has a reserve currency status, with at least 67% of the world's forex reserves in dollars, it is little difficult for Uncle Sam to not get involved in all matters financial.

Following the 1973 energy crisis, USA and Saudi Arabia signed a deal – if Saudi Arabia sells oil in US dollars, America would defend the latter. Following this, all other oil producing countries also adopted the dollar as the conventional medium of exchange. Demand for the dollar went up all over the world, and soon it had a new name: the petrodollar. If oil starts to be traded in other currencies in yuan or ruble, that demand for US dollars will decline, which could potentially ruin America. If the new President wants to see America as a superpower, he (or as most polls suggest, she) will have to find a way to stop that.

PAST & THE PRESENT...

Despite his time in the Office being embroiled in violence and controversy – starting from the September 11 attacks on the World Trade Centre, to the Iraq and Afghanistan wars – when George W. Bush (a Republican) came to power in 2001, he had the same hopes as his predecessor – to improve America’s relations with the rest of the world, starting with trade. In fact, under Bush, the number of free trade agreements (FTAs) increased from 3 to 16. It was under Bush that the CAFTA-DR (The Dominican Republic–Central American Free Trade Agreement) came into effect. However, the progress in terms of trade liberalisation was minimal. This was attributed to the strong Congress, which shot down many multilateral FTAs, forcing Bush to focus more on bilateral agreements.

Bush, recognising India as a growing power, was keen to mend relations, and so, in September 2001, he lifted the sanctions his predecessor Bill Clinton (a Democrat) had placed on India. It was under the Bush administration, that the historic India-US Civil Nuclear Agreement was signed in 2005. Bush’s focus on improving foreign relations with India was a huge success and improved public opinion of the country – in 2008, the then Indian Prime Minister Manmohan Singh told him, “The people of India deeply love you”. Bush gave India a high amount of attention, seeing it as a promising partner; he made India the country’s ally in the face of China’s rise. And under Bush, while imports from India increased, the growth of exports to India was a lot more drastic – the recovering relations had helped both nations.

The Barak Obama era ushered America back into the way of the Democrats. As Obama was keen on an ‘interconnected world’, he knew that leaving India out of this equation was out of the question. Perhaps, a reason why US imports from India doubled after Obama took charge of the Oval Office in 2009.

In fact, two of the most significant deals of the Obama administration are the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), both of which are expected to bring in a major change in its trade with the world. The mega accord has also been perceived as a major snub to China, which has its own deal – the Regional Comprehensive Economic Partnership (RCEP), with 16 countries, including ASEAN nations, India and Australia – in the works.
Obama, however, has been pushing for the TPP deal with good reason. As it says on the White House’s website, “The more we sell abroad, the more higher-paying jobs we support here at home”. According to research by the Peterson Institute in 2012, United States stands to gain $78 billion every year through TPP, and $267 billion with region-wide free trade.

Interestingly, India is not a part of TPP, which means that it may have a difficult time gaining access to markets abroad, which will be effectively free for their competitors from this trade bloc.

...AND THE FUTURE

Bernie Sanders, a Democrat and Senator from Vermont, who according to all polls is trailing Hillary Clinton (again a Democrat) by miles, has based his campaign mostly on domestic affairs, and to make America strong from within. Clinton who looks to be the most probable Democrat nominee, and is presently leading all Republican candidates in a poll conducted by Quinnipiac University after the Paris attacks (a word of caution here – a week is a long time in politics, and we have more than ten months to go before the first vote is cast) has a highly interventionist policy, with a focus on America flexing its muscles wherever and whenever needed. This puts both Democrat candidates on the opposite sides of the spectrum, but they share the same views on one issue – the TPP. And they oppose it. Clinton, who was once a strong advocate for the trade deal, is now unsure how the TPP can end currency manipulation and worries how consumers can be protected from increasing drug prices. For Bernie Sanders, the TPP poses a threat to the working class of America. In fact, the protection of the working class is what leads him to express his displeasure with trade with China and agreements like NAFTA, which according to him do not help American workers, and instead benefit multinational corporations.

Out of the favoured Republican candidates – Donald Trump, Ted Cruz and Marco Rubio, Trump and Cruz oppose the TPP. Trump believes that the TPP is a “disaster”, citing currency manipulation as a problem, and Ted Cruz has called it “deeply concerning”. Rubio, who has been called GOP’s “foreign policy candidate” by the New Republic is though a supporter of the TPP. Interestingly, Trump loves to use China as a punching bag. He believes US can defeat China in trade, and also believes that China is attacking US through currency manipulation via the TPP. And let us not forget his thoughts on Mexico, which could potentially cost a bomb to companies outsourcing to their neighbor – Trump wants to slap a 35% import tax on the country!

Rubio, on the other hand, has an interventionist policy – he wants to develop policies that sync with globalisation and spread not only economic but also political freedom. The core of his foreign policy focuses on higher spending on military, protection of the American economy via free trade, and making US the foremost champion of human rights.

Ted Cruz doesn’t support TPP because he believes it may pave the way for lenient immigration laws. However, let us not forget that this is the same person who wrote in the Wall Street Journal that the TPA (Trade Promotion Authority) was what would help Congress pass the “historic” TPP deal. Cruz has always irked isolationists, but keep in mind that this is the man who believes that aligning with Israel is in USA’s “national security interests”. Cruz plans to implement a simple Business Flat Tax at a single 16% rate, instead of a corporate tax, and the current seven rates of personal income tax will collapse into a single low rate of 10%.

WHAT'S IN IT FOR INDIA?

So, what should India expect? Well, if Clinton comes to power, we may see India and US strengthening their economic ties. But under Sanders, do not expect to gain any bilateral trade deals.

If Trump wins, one can expect cordial ties with India (especially given his hatred for China), but expecting surging levels of trade might be dreaming a bit too big. Of all Republican candidates, it is no surprise that Marco Rubio is the one who understands how important India could be to US. He wants to increase the limit on H1-B visas, thereby potentially increasing the chances of Indian workers to enter USA, and hopefully improving services trade. While Cruz called Narendra Modi India’s “new hope and aspiration", he called for the suspension of the H1-B visa for at least half a year to look into the abuse of the same in November.

A MARATHON

With US Presidential Elections just 10 months away, anticipation levels are rising. Everyone wants to know what the future holds, and pollsters and experts are spouting new numbers and factors every single day. Demographic analysis indicates that the Democrats have the votes of non-white and educated young people, whereas Republican candidates’ biggest supporting demographic is the non-college educated white voters. This means that while the Democrats’ voter base is rapidly expanding, the Republicans need to start aiming to please other American voters.

Of course, another vital factor is the turnout of the voters. Given that the participation of Latino and African-American voters is increasing, it is decidedly good news for Democrats, who get a major share of their votes. Not surprisingly, Republicans don’t really do well with minorities.

Recent polls suggest a match-up between the present frontrunners of the two parties – Clinton and Trump – will end up in a victory for Clinton. A technical analysis by Reuters though says “we can say, with reasonable confidence, that a Republican will be moving into the White House in 2017”. This conclusion is based on the results of a data model they created, and is primarily the result of two factors, both related to the challenges faced by “successor” candidates – candidates from the same party as the incumbent. First, a Republican will win because voters typically shy away from the party currently in power when an incumbent isn’t running. In fact, a successor candidate is three times less likely to win. Second, President Barack Obama’s approval ratings are too low to suggest a successor candidate will take the White House. However, according to author, financial analyst and onetime Republican candidate for the Senate Peter Schiff, a Clinton administration is on the cards unless there is a major terror attack or a financial meltdown.

US Presidential Elections in the past have thrown up many surprises (who can forget Kennedy or for that matter Reagan’s first candidacy?) and it may be too early to bet on the right horse. Be Ready For A Marathon Run!