A route to sell (debt)?

While the world is busy with Islamic terrorism, rising pockets of right wing political confluence, reactions to lopsided economic policies (Trumpism), rising carbon dioxide, green house gases, population pressure on nature and infrastructure, we are hardly realizing the emerging imperialism that will drive the next few decades and the struggle of mankind understanding and dismantling the effect of these economic aggression. This should not be considered as a plunder by any outsider, a third country. These are our own dilemmas that are subjugating us to emerging exploitation. Hambanbtota, CPEC, Africa are all examples of such crisis in making.

Hambantota – A White Elephant on Sri Lanka’s Backyards

NYT Ship Cargo

Sometimes in childhood, our parents always insisted to remain contained within our means. I never realized the importance of this in the context of nation and its economies, until I analyzed the huge infrastructure investments and its negative impact on the economies of Sri Lanka, Kenya, Pakistan and many African nations. The build huge airports, docks, railways etc. that were costlier beyond the business value they provided. Let me take two examples – Sri Lank built their Hambantota ports despite the feasibility studies indicating to the contrary. Only 32 ships docked in an entire year. Such hugely expensive infrastructure became a classic example of a white elephant for not Sri Lanka and all economically poor countries. Sri Lanka was unable to service the debt for this project and the terms of the lease also meant, Sri Lanka to lose the lease to this 15, 000 acre of land for 99 years.

https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html

Nairobi Mombasa Railway – Can Kenya service the loans for a lavish railroad?

Obviously a cash strapped economy such as Kenya has to rely on outside assistance for financing and technology to build this 300 mile long rail line. Does this mean this infrastructure was not required? Time and again, countries have been taking recluse to Keynesian philosophy and fiscal policies. Over the last more than 9 decades, it has provided a solid foundation for decision making in infrastructure investment. However, that does not mean a cash deprived country like Kenya should built one of the most sophisticated railway to breed communication and economy. It simply cannot sustain the financing. A simpler economic model would have been feasible.

https://www.theguardian.com/world/2018/mar/01/kenyan-conservationists-protest-as-chinese-company-starts-work-on-railway

China Pakistan Economic Corridor – A classic case of Conflict of Interest

At least, China should utilize this route through Pakistan built with Chinese financial assistance and with the aid of Chinese companies and man power. It deprived $62 Billion dollars of Pakistan’s precious foreign currency in building this economic passage that passes through complex land and even more complex political corridors.

https://en.wikipedia.org/wiki/China%E2%80%93Pakistan_Economic_Corridor

From Djibouti, Sierra Leone, Ethiopia, Senegal, Rwanda Mauritian, Morocco, Zimbabwe – No shortage of underperforming deals

Consulting firm, McKinsey computed that, Chinese loans accounted for about a third of new debt by African governments. These are not lone countries, the list runs long. Gullible minds were only aware of China as a power house of cheap obsolescent products. However, these infrastructure projects turn out to be not just imperialism but ravaging the countries and its people. In Sierra Leone, the presidential elections are heavily influenced by China. Djibouti has an official military Chinese base. Scores of examples are coming out into the open from such investment decisions that will influence the fate of nations and its people. It isn’t economic imperialism, it is neocolonialism

https://foreignpolicy.com/2018/08/31/chinese-aid-and-investment-are-good-for-africa/

https://thediplomat.com/tag/chinese-investment-in-africa/

https://thediplomat.com/2017/07/china-officially-sets-up-its-first-overseas-base-in-djibouti/

While we resent the devaluation of currency, these are currency raiders. While the West plundered the East, these are times of economic poaching and Neo Colonialism of the poor nations.

Johns Hopkins School of International Studies

Rail roads, ports or expresses way all infrastructure to support China to expand it’s market and sell its products? Or else, China should help build these African nations with factories and manufacturing units that will financially enable these countries to be on their own.

Should the World be worried about China’s Belt and Road Initiative (BRI)?

Policy makers and politician across the World are stunned and watching with consternation, the massive ‘Belt and Road Initiative’ undertaken by China. Is this infrastructure investment project centered on China? Is this similar to nation building foundational utilities for a nation similar to building freeways, electricity and other amenities? Keynesian theory has been underpinning the development of several countries across the world. It has consistently shown results and it is this formulation that scares the policy makers across the world. Should the world not be worried?  https://wp.me/p7XEWW-14k

BRI China

Fundamentally this infrastructure investment cannot be based on flawed interpretation of the vision for the future. However, it assumes a unipolar work wherein, they are extrapolating the analysis of the last 25 – 40 years of fulfilling the global demand for products, especially in Europe and North America. This intelligence is based on few fundamental assumptions that the world will forever be a unipolar manufacturing house, wherein the customers are perpetually based in Europe and North America. As long as the status quo remains, i.e., China is the manufacturing hub and the consumers are the developed world, this assumption provides a competitive advantage by investing in Belt and Road Initiative (BRI). Somewhere, this model emulates how the US-UK controls the Suez or Panama Canal and its impact of the global economic flow. Let us understand the situation other than the happy path.

Increasing competition:

First, in the last few decades, the world has grown more multipolar. There is significant competition amongst the nations for capturing the marketplace. Especially those nations, which were at the precipice, are gradually bouncing back to garner their share in global economy. After their chaotic transition, these nations are gradually stabilizing and as the maturity proceeds, they will enter the fray and be competitive.

Dwindling Customer Base in First World:

Last decade has been a testimony to how several Western European countries are gradually receding economic footprint or into recession. This will eventually erode the customer base from Europe. Overall, the population growth is stabilizing and the median age is rising. That does not mean, the customer base will vanish altogether. However, even a modest erosion of customer base from Europe would wipe the profits to make it uncompetitive.

Does that mean the global demand for consumption will decrease? The answer is obviously no. Where is the consumer base moving? First, the consumption will not decrease; instead, it will increase, as is indicated by several policy planners. This will follow phasic manner – the initial burst and the sustained period. The immediate burst will be centered on China, India and South East Asia and the sustained phase will be around the growing economies from African Nations and Latin America along with the traditional customer base in North America and Europe. South East Asia, China and the Indian peninsula will has a potential future growth due to dual factors – rising income levels and incremental recruitment of the expanding population base to propel the consumer market. The sustainment phase will be due to two major pockets – the traditional consumer base in Europe and North America and the expanding base in rising economies. Irrespective, the consumer base will move and be multipolar.

Transition of Blue Collar to White Collar Workforce in China:

As the population is China evolves makes a transition from blue collar to white collar, it will also see an increase in consumption. This can be very well corroborated with the Maslow’s phases of self-actualization. This transition will not support the earlier model of cheap low cost labor required to support a manufacturing economy. In fact, the white collar will propel consumption and China will move towards a net consumer economy.

Collaborative rather than pugilistic policies:

In the last decade, China has been increasingly assertive, lean heavily towards currency manipulation, disrespect world order and hegemonist in its approach. All these would deter the business environment and move the fulcrum towards unfriendly business environment, not realizing the impact of its short sighted policies at the detriment of its national cause.

Simply following Keynesian theory and investing in infrastructure in unlikely to propel the country in eschewing the benefits of it investment policy. China knows that and it will not be a surprise to see either the partner nations pulling out of such collaborations or China itself pulling out of such investment execution with the resultant fall in those ‘Belt and Road Initiative’ bridges.

The Economist | Planet China

https://www.economist.com/news/leaders/21746901-project-century-may-help-some-economies-political-cost-chinas-belt-and-road?frsc=dg%7Ce

https://www.rand.org/blog/2018/03/one-belt-one-road-one-ruler-china-term-limits-ban-imperils.html

 

GDP Post Demonetization

The impact of demonetization in day to day life are well discussed and evident. Select state elections will reflect people’s verdict as well.

GDP is the barometer and an objective evaluation of the impact. Recent reports on the fourth quarter economic parameters point towards economic compression directly related with demonetization. Despite demonetization being a fundamentally appropriate policy towards containing the unaccounted money within the system, it floundered. It is not a political question – it was a national initiative and a unique opportunity. What went wrong? This is a prelude to an upcoming blog on how change could have been managed properly.

Sometimes, those seating at far off can see things better than those who are seating at the epicenter. This is the case with GDP. I had already prognosticated, that the GDP would suffer setback from 0.5 to 1.25. I also opined that demonetization is good in the long term, GDP effect is a short term disability. Of course, the way demonetization was carried and the way the system defaulted to earlier state, it proved no value overall. In the absence of mid – long term value, we can only focus on the short term impact.

Though arguable, it impacted the GDP. True, it removed all soiled Rs.500 currency from the market, possibly from some black marketers and terrorists. That’s the sum total of Demonetization. Here is my question – Did Modi lacked resources in envisioning, (impact and scenario) analysis, planning and executing or did he not trust folks around him or did he do this in haste? I trust, it was a combination of the first and the last reason.

India is too heterogenous country. A system wide change needs a vision, deep rooted trust in people, a sound understanding of the ground level constraints and a thorough evaluation and impact analysis capturing those into the execution plan. In hindsight – Can we think of how this could have been done better, more surgical? Less traumatic? Possibly, therein lies the solution for Second Generation Demonetization.

‘I have not failed, I have just found 10,000 ways that won’t work’ – Thomas Edison.

That which does not kill us makes us more stronger.


Citations:

Despite demonetisation, India’s GDP growth stays 7 per cent: Govt data

https://www.forbes.com/sites/timworstall/2017/03/07/as-fitch-says-that-7-gdp-growth-for-india-looks-odd-given-demonetisation/#3ac3c61c48ed

http://economictimes.indiatimes.com/news/economy/policy/modis-victory-has-made-a-mockery-of-the-criticism-that-demonetisation-got-christopher-wood/articleshow/57627263.cms

 

Demonetization – A Class Divide?

Demonetization – A Class Divide?

Despite being a tool for fighting corruption, demonetization has polarized us as a society. How do we, as a society, think on a matter of vital national interest? Please see the opinion of the common man at the end of this blog. What should be done to make this a national initiative? Please read http://wp.me/p7XEWW-km

Background

The current demonetization drive for stopping corruption has either become a boon or a bane. Demonetization of currency has strongly opinionated Indian. At the core of our values, we all want corruption to be eradicated. We all differ in our perspective towards how this should be executed. Eradicating corruption is a fundamental initiative that has significant impact to our identity, polity and to the country’s Macroeconomy. Across sections of the society, many are doubtful and cynical. What makes us feel so? Why do we see a class divide and a strong polarization of opinion? What can be done to reduce this gap and drive this initiative as a national cause?

Is this stop gap? Or will it really stop?

Nefarious means are unlikely to change unless we see a substantial change in attitude towards way of living and transacting in our daily life. Whenever radical change is initiated, and if it is unaccompanied by fundamental change, the system is bound to go back to status quo. I already see those signs. So demonetisation will either stall or impede the flow of black money, temporarily but it won’t nix this at the bud.

Who likes or dislikes demonetization?

Service class and Expatriates for sure are supportive of this initiative. Their earnings are all white transactions. Business, Politician, Illegal (drugs, alcohol, nefarious political-business connections and terrorist), those using hawala, are unlikely to accept or adopt this change. Farming community will be neutral. Poor will be swayed by the noise rather than the voices they hear.

What an irony, we haven’t learnt for centuries

Earlier, the Englishman arrived in sixteenth century. They stayed, understood, conquered, consolidated, ruled and looted and deprived this golden land not just materially but made us defunct morally.

We still haven’t changed. We still think our cause above the country, prefer to be blind sighted to others perspective. Seems like, that is within our genome and our destiny or else, why can’t we listen to each other’s perspective, why should we not have a national inclusive dialog?

No, that inclusive dialog won’t happen because somewhere, we deeply trust that ‘My truth is superior than your truth’ and we go a step further, to engross all the credit for this achievement. Collectively, we have forgotten what is best for this country.

We know corruption is a national menace, it’s like an enemy within.  In the best interest of the nation, we should be unified for this national cause, we should come forward and adopt and accept, and provide constructive recommendations, rise above ourselves to let this happen. To some, this may sound hollow, but nations like Japan and several from European Union, have risen because, their constituent decided to adopt that pathway. It is not a utopian principle, it’s realty with pragmatism.

Should Prime Minister Modi be inclusive?

Yes, if this needs to succeed! Do we need to do more than withdrawing old currency and circulating new notes? Do we need this to be backed up with change in our attitude and fundamental way we think and work in our daily life?

Why Presidents Fail And How They Can Succeed Again

Kamarck, a Sr. Fellow at Brookings Institute Governance Studies, argues that presidents spend too little time investing on Governing. She explains the difficulties of governing in our modern political landscape, and offers examples and recommendations of how our next president can not only recreate faith in leadership but also run a competent, successful administration.’ I believe, we can easily extrapolate this to include our administrators as well.

A Kind request

This is a non-partisan exercise, not supported or aligned with any political group. Neither is this supported by any business or vested interest. To many, it is a matter of national importance and I would appreciate your motivation in spreading this message. By spreading this message, you may get to know the perspective of those within your community.

Please share your opinion when you visit the survey on the link below. As always, polls are anonymous. I have enabled single voting per device. If you have a question, kindly use the comment box to submit.

Note: I have disabled advertisements from this site. Despite if you see any advertisements, kindly report to me with a screenshot or time stamp the event. 


Additional Reading

  1. Demonetization and India’s Macroeconomy – Will Rupee Depreciate? Copy paste this link if the above won’t work http://wp.me/p7XEWW-jt
  2. Surgical Demonetization? What Is Good And What Needs To Be Fixed? Copy paste this link if the above won’t work http://wp.me/p7XEWW-eA
  3. Why Presidents Fail And How They Can Succeed Again

Demonetization and India’s Macroeconomy – Will Rupee Depreciate?

Demonetization and India’s Macroeconomy – Will Rupee Depreciate?
After the recent demonetization in India, an event with significant and deep reverberations across its economy, the Indian economy will eventually bounce back in three phase in 1 – 3 quarters, unless accompanied by additional steps to curb the parallel economy under current economic and political environment. Next 1 -3 quarters will report at least a drop by 0.5 to 1.25 percent point in India’s GDP. Despite the economy contracting, this will be similar to deflation. Economic indicators during these phases will differ. Earliest ever blog on India’s Demonetization and its macroeconomic impact. Demonetization and India’s Macroeconomy – Will Rupee Depreciate?

Demonetization – How will it affect the Indian Macroeconomy?

Obviously, the cash financing the legal, semi legal and illegal activities has vanished. Parallel channels, pumping money on the side have suddenly gone dry. Diminution of revenue will have a domino effect in the short term. Diminution of revenue will have a domino effect in the short term. While sparing essential living activities, this will have effects on every aspect of the economy – building, sales, travel, spending etc.

This decrease will eventually, reflect on the overall economy and its growth projections. A significant proportion of free floating cash financing several essential and non-essential daily operations will be strangulated. Cash earned irrespective of means, is an asset and not having an asset or liquidity will have deep impacts. Bloomberg feels it is contraction. To me, its deflation will follow and contraction. Primarily, contraction will be due large volumes of money being sucked out of the parallel (Juggad) economy with accompanying system wide impact. It will change the barometers of all key indices, Irrespective of sectors.

These phases will last 3-4 quarters, unless complemented by addition steps to curb the parallel economy. Next 3-4 quarters will report at least a drop by 0.5 to 1.25 percent point in GDP, at best, definitely risking it from calling it recession. Does that mean inflation and recession? No, despite the economy contracting, this is not recession though it is more similar to deflation. Economic indicators on each of these phases will reflect a different figure.

Now, does that mean I am against Demonetization? Certainly not! No pregnancy is without pain and no delivery is without cry and smile, except when you induce with Cesarean section under anesthesia. However, we are talking about the birth of a new era, and we are trying to understand how this newborn will impact existing earnings and revenue potential of the country in general (the macroeconomic considerations or implications). I see deflation (not recession) with overall contraction in the economy in the immediate future. Mauro Guillen, Director of the School’s Lauder Institute and a Professor at Wharton commented, “In the short term, the move could stifle some businesses that are legal and clean, if they use cash payments. But everyone will adjust. And while it can hurt some small businesses and individuals, it is better to do it than not.”

Three phases of recovery –

Economy will be impacted on several counts from GDP, Per Capita earning, Consumption, Investment, Industrial Production, Fiscal Balance, Public Debt and Unemployment Rates. However, this recovery will be marked by three distinct phases. Each phase demarcated by particular barometer of the economy.

  • Phase One – Lasting until end December, when the last notes would be officially accepted.
  • Phase Two – Deflationary pressure contracts the economy
  • Phase Three – Drop in Interest rates drop to bump up economy

Phase One – The Cash Crunch Phase:

Also the immediate phase succeeding demonetization, marked by severe depletion of cash or cash crunch. Only essential purchase activities will continue. CPI and CFPI will drop during this phase. The manner in which the denominations were retracted created a perceived rather than real loss. Cash spending reduced significantly so also purchase activities. Of course, loss of purchase activities, specifically based on Cash economy, would definitely result in a drop in GDP. Consumer spending activity fell to a near halt. Consumers are refraining from making any purchases except essential items from the consumer staples, healthcare, and energy segments. However, deflation will not be seen until phase 2.

Phase Two – Deflationary Phase:

Though Bank remittances will be high, the system will still be deprived of cash flow. The system has a tendency to bounce back and people will find ways to mobilize cash to support their cash based, if not illegal transactions. This phase will be marked by  liquidity mobilization will see a fall in prices on big ticket items such as real estate, less spending on luxury items etc. Apart from Real Estate, Gold and jewelry will also see diminution in value by approximately 10-15%.The next phase will have a little rebound to the GDP along with CPI but big ticket purchase will still be low.

During this period, real estate is likely to show significant down trend. Home prices may drop significantly, especially where investors have high stakes without support. Tier 1 cities will be most affected, primarily due to real estate activities being funded by investors. Tier 2 and Tier 3 will follow suite. Some reports say, accounts activity in the real estate sector, which includes a lot of cash and undocumented transactions, has already slowed down significantly, Metropolitan and Tier 1 cities reported up to a 30% fall in house prices. Industrial production will slow down on account of decrease appetite for domestic consumption. Rupee will continue depreciation against Green bag and the downward slide will be supported by Central intervention. However, decrease fiscal deficit and public debt will help Rupee from falling further. Also, imports will be impacted negatively and that will retain the value of Rupee in midterm.

Phase Three – Drop in Interest Rate:

Continued economic slowdown will mandate stimulation and the interest rates would drop, possibly by 0.5 to 0.75 percent. Trade deficit will decrease marginally. GDP will still not be back to the Nov 30, 2016 value. CPI and WPI will bounce back but not to the Oct 2016 values. Big Ticket items will continue to reel under the deflationary pressure.

End Note:

In the next 2-3 quarters, it will depreciate but eventually, after 3-5 quarters, it will be the most appreciating currency across the globe, primarily for its intrinsic strength but also secondary politicoeconomic phenomenon across the globe. By than, Trumpism will show its negative impact on dollar, Pound would not be as strong as it was Pre-Brexit, Euro should be sliding or at the most stabilized itself from sliding. Yen and Yuan both won’t show much potential for appreciating. Despite their strength, Canadian and Australian dollars won’t have to much impact.

Several factors will weigh in in favor of Rupee. As mentioned earlier, Rupee will depreciate in the next 2-3 quarters but start appreciating by early 2018. Turnaround in Rupee valuation vis a vis major currency baskets (appreciation), and slide of dollar, will most likely coincide at the same time, given the current political economic situation. Rupee should start appreciating and will dominate overall currency baskets after 3-5 quarters.

I always trust, when the enterprise, entity or a country stands on sound morals and ethical values, its long term outlook is strong. We definitely are moving in a direction towards that needed change. However, as noted earlier, I also feel this pregnancy and delivery is not without pain, cry and smile.

(Published on Dec 5 2016, this blog is still under construction)

Selected Citations:

Surgical Demonetization? What Is Good And What Needs To Be Fixed?

D SubbaRao – ex RBI Governor’s View on Demonetization ( Full Text )

Demonetization Dos and Don’ts (Gita Gopinath, Prof Economics at Harvard)

Reuters poll – Rupee’s slide from outflows, demonetization likely near end

India Rupee Demonetization: A Government Windfall? (Yahoo Finance)

What are the impacts of Demonetisation on Indian Economy? (Indian Economy; Economy & Finance)

THE CASE FOR FINANCIAL INFRASTRUCTURE: RURAL WELFARE AFTER INDIAN DEMONETIZATION (Wharton, Nov 18, 2016)

Impact of Demonetization on Macroeconomic factors (Nov 24, 2016)

Demonetization Will Impact Amazon’s Growth In India (Nov 29, 2016)

Demonetization in India: Who Will Pay the Price? (Wharton, Nov 16, 2016)

How Could Demonetization Impact the Indian Economy?

Demonetization of Rs 500 and Rs 1000: The Ultimate Brahmastra on Parallel Economy –

Macroeconomic implications of the Indian Rupee Demonetization?

India: Demonetization and its Discontents

India: Growth picks up in the second quarter of FY 2016

Inflation India 2016

India: Demonetization and its Discontents

Several Interesting Topics to Read on – FinanceProfessor.com

Macroeconomics (National Institute of Public Finance Policy)

Macroeconomic Policy (Mapping Finance)


Updated link (below) added on Feb 27, 2017 –

http://www.financialexpress.com/economy/brexit-to-demonetisation-why-is-economic-forecasting-so-difficult-asks-meghnad-desai/567674/