Sunday, July 18, 2010

Barbarism of our times

On April 19 this year, the 62nd Independence Day of Israel, US President Barack Obama reiterated his country’s “commitment” to protecting Israeli’s security. The US, Obama said in a White House statement, shared an “unbreakable bond” with Tel Aviv and was confident that the ties “will only be strengthened into the future”. This Bush-style statement came from a President who had promised a “new beginning” for the Muslims amid reports that Israel’s blockade of Gaza had caused a humanitarian catastrophe. Barely one-and-a-half months later, Israel stormed a convoy of ships carrying aid to the Gaza strip, killing at least nine people. President Obama called the incident “tragic”, but stopped there.

Even while expressing concern over the “loss of lives” in Israeli raid on May 31 of the aid ships in international waters in the Mediterranean Sea, the President was cautious to avoid any harsh words against Israel. No direct criticism, no moral outrage!

What Obama said was that such acts (read killing of those who want to help the Gazans) would not serve the long term security interests of Israel. He further said Israel has “legitimate security concerns” as it’s living under the “threat” of missiles from Gaza (fired by Hamas). In the UN Security Council, the US blocked an anti-Israel resolution and helped the passage of another that doesn’t even name Israel, but just condemns the “acts that led to the nine deaths”. Going a step further, Vice President Joe Biden defended Israeli Premier Binyamin Netanyahu, who supported outright the military onslaught against the aid workers. Israel has “absolute right” to defend its security interests, Biden said on June 2. “It's legitimate for Israel to say, ‘I don't know what's on that ship. These guys are dropping eight – 3,000 rockets on my people,’” he added.

If the US can’t condemn Israel now, then when will it do? One might ask after seeing these direct and indirect efforts the Obama administration has taken in defence of Israel. Most of the world leaders came strongly against Israel’s “act of war” against the six-ship flotilla – three cargo and three passenger ships. The ships, sent by the Free Gaza Movement, an international coalition of activist groups, carried tonnes of cement and other aid materials for the blockade-hit Gaza.

The blockade imposed by Israel doesn’t allow any ships to reach the Gaza coast. Israeli troops have also sealed all entry points of the Gaza, a small strip of land that houses around 1.5 million people. Israeli forces even restrict the movement of people to and from Gaza. Israel’s point is that the Hamas is posing a serious threat to Israeli’s as the Islamic resistance movement fires rockets and short range missiles into the Israeli territory. The international community (read the US) failed miserably to persuade Israel to lift the blockade. Instead, the top administration officials of Obama repeated time and again about the so called security concerns of the Jewish state. Even Obama, who pressed Netanyahu for a freeze of new settlement activities in the West Bank, did not annoy Israel by raising the Gaza blockade issue.

Gaza is now more or less a prison camp, or the world’s largest concentration camp. The Israeli Defence Forces (IDF) launched a lethal offensive against the Gazans in George W Bush’s last days in office in January 2009. Obama was the president-elect. He did not utter a word when Israeli forces massacred around 1,500 Palestinians. Since then, Israel turned Gaza into a hell on the earth. Since the blockade started in 2007, the economic infrastructure has been virtually dismantled. “Mass unemployment, extreme poverty and food price rises caused by shortages have left four in five Gazans dependent on humanitarian aid,” says a report published by the Amnesty International on June 1, 2010. According to the United Nations Relief and Works Agency, the number of refugees living in abject poverty in the Gaza Strip has tripled since the blockade began. It adds that more than 60 percent of households are currently “food insecure”. A veteran Indian diplomat, who had lived almost three decades in the Middle East, told this author last month that even the science labs of all colleges in Gaza have been shut as no chemical is available in the strip due to the blockade. “The science students are nowhere. They can’t continue even their studies,” he said.

Is it this Gaza that poses a “genuine security threat” to the mighty Israel? Bibi Netanyahu might say yes. So does the powerful Jewish lobby in Washington. The Obama administration, which invoked hope at its early days in office, has disappointed all peace loving minds in the world. President Obama doesn’t have the strength at least to criticize Israel even after such a horrible act. The international community never goes beyond issuing statements when it comes to Israel. The UNSC is dysfunctional whenever Israel mocks at the international law. It seems peace is a strange word in the Middle East. The barbarism is set to rule forever. And the US interests, irrespective of who is sitting in the White House, will never antagonize that barbarism. (Zeenews, June 7, 2010)

A year marred by inflation

Prime Minister Manmohan Singh, while addressing reporters in New Delhi to mark the completion of one year in office of the second UPA government, was overtly cautious. His answers were brief and he did not make any tall claims about the government’s performance.

"I believe that the record of our first year of UPA-II is a record of reasonable achievement. I am the first person to admit that we could have done more," the Prime Minister told reporters in his first national press conference since the UPA was re-elected in May last year.

What made the Prime Minister take such a cautious if not critical path while talking about his own government? Perhaps, the first question he faced at the conference could clarify this. “Why is the Prime Minister, himself a well-known economist, not able to manage the country’s food economy properly?” asked a journalist opening the press conference.

One year into the second UPA government, this could well be the core question or challenge the ruling coalition faces. Despite the government’s achievements on maintaining high economic growth, it failed miserably to contain high prices. The Prime Minister knows price rice is a highly sensitive issue in a poor country like India. So he blamed international factors for the problems in the domestic economy and repeated the government’s view that the prices are falling and inflation would be contained by year-end.

Growth without Equity?
The UPA was re-elected in 2009 May at a time when the country was still under the clouds of the worst economic crisis in decades. The country’s financial industry was battered by the global crisis and the economy was slowing down. The growth rate fell sharply from around 9 percent to 6.7 percent in 2008-09. Most of the advanced economies were still in recession.

The main promise of the UPA was growth with equity, or simply put, “inclusive growth”. Finance Minister Pranab Mukherjee presented the first budget of the UPA-II by giving importance to public spending and domestic demand. The Reserve Bank of India (RBI) cut down key interest rates to ensure credit flow did not get hit. These combined efforts by the government as well as the apex bank, meant to take the economy back to the growth track, seem to have paid off.

The economy, as the key government officials predicted, fast returned to high growth rates even as the equity markets returned to healthy levels. Against an IMF forecast of only 5.1 percent GDP growth in 2009, actual growth was 7.2 percent, despite a major drought. The Sensex rose from 14,000 points to 16,875 in 12 months. But is that enough?

Though growth is back, it’s not yet clear whether the country’s economy is totally out of woods. The global economy still faces risks. Nobody has a clear idea about how much India will be affected if the Eurozone debt crisis spawns another global debt squeeze. The markets still stand vulnerable. And above all, inflation is hanging like a Sword of Damocles over the economy.

India has one of the highest inflation rates among the major economies of the world: Wholesale price-based inflation is close to 10 percent and consumer price inflation is an astronomical 17 percent. In many other countries, inflation is just 0-3 percent.

According to many economists, the government should have given utmost importance to curbing prices as it affects the daily lives of millions of poor Indians. Instead, the second budget of the UPA put more focus on financial discipline. The government cut down fuel and fertiliser subsidies to reduce the fiscal deficit. It increased fuel prices several times to help the oil marketing companies overcome under-recoveries. This was a double blow to the common man who was already hit by high prices.

The Agriculture Minister could not come up with effective steps to tackle prices. Neither could the Finance Minister keep the headline inflation under check. They also failed to keep their promise on tax reforms. It postponed the implementation of the Goods and Services Tax (GST) from April 2010 to next year. Even telecom reforms were moving at snails pace. It was after a long wait, the auction of third generation (3G) airwaves finally took place in May.
Whither roadmap?
It’s true that the government has four more years in office. Ample time to correct wrong policies and initiate new projects. But as the Prime Minister himself said the government could have done more in the first year. Singh expressed hope that inflation would come down to 5-6 percent by December this year. Even the most optimistic economist would say this is an ambitious target. But what options that the government has to tackle inflation is still unclear. Neither the Prime Minister nor his Finance Minister has spoken about it yet, though both claim that inflation would fall.

Singh appeared convinced of what should be done to accelerate inclusive growth. “We have to invest more in infrastructure, take bold steps to remove chronic poverty and increase the productivity and efficiency of our agriculture sector,” he told reporters. Well said. But where is the roadmap? On the first anniversary, the government looks clueless on how to take ahead its inclusive agenda? It should first come up with a roadmap by clearly identifying its thrust areas like the first UPA government did. There has to be a better coordination between the Congress party and the government. And above all, the Prime Minister should lead from the front.

(Written for Zeenews, May 27, 2010)

Saturday, July 3, 2010

Single-Pointed Khomeinism

Ayatollah Khomeini was one of the most influential political personalities of the past century. His interpretation of political Islam had the revolutionary zeal to topple a regime which enjoyed unequivocal support of the American empire. After three decades of the revolution, Khomeini’s legacy still lives in Iran and beyond. Con Coughlin, the best selling author of “Saddam: His Secret Life”, is taking a detailed effort to understand this legacy in his latest book, “Khomeini’s Ghost”.

What legacy did Khomeini bequeath to his heirs? For an independent historian, this is a complicated question as the ayatollah still remains perplexing subject. He was a puritan, but an anti-imperialist to the core. At the same time, he stood for empowering his people, and built a comparatively stable political system and undertook radical income distribution. For Coughlin, however, Khomeini’s legacy is single pointed. “Following his death in 1989, Khomeini bequeathed a legacy to his heirs, a legacy of militant Islam that is the cause of so many of the challenges the world faces today, whether it is the potential threat posed by Iran’s nuclear programme or Iranian funded and trained Islamist groups in Iraq and Afghanistan, Lebanon and Gaza.” He says even Iran’s quest for atom bomb was the “central part of Khomeini’s legacy.”

Through this biographical work of Imam Khomeini, Coughlin is actually trying to understand ideological underpinnings of the Iranian regime and how it’s related with Khomeinism. The ayatollah “accomplished his lifelong ambition of creating an Islamic state based on the strict interpretation of Shariah law,” writes Coughlin in an apparent effort to portray Iran as a conservative, rigid religious state. Despite being a theocratic state, it should not be forgotten that the Iranian constitution provides for an elected legislature and declares that the country should be run on the basis of “public opinion”.

The book is divided into two parts – Origins and Legacy. In the first part, Coughlin discusses Khomeini’s early life, his rise as a major critic of the unpopular Shah regime, life in exile and the eventful return to Tehran in 1979 February. It’s in the second part, Coughlin tries to define Iran black-and-white terms, saying it’s a rogue sate still led by the fundamentalist ideas of Imam Khomeini.

For the author, Iran is a state which helped al-Qaeda, trained terrorists in Iraq and militants in Lebanon and Palestine. Coughlin writes that Tehran masterminded the escape of operatives fleeing from Afghanistan, including Osama bin Laden’s son Saad, and provided them safe haven. “The presence of such prominent Al Qaeda militants in Iran . . . was yet another issue that would undermine Khatami’s attempts to improve relations with the West,” he says. But he forgets to write that Iran offered help to the US during the Afghan war and the Khatami government actually hunted down Taliban operatives escaped from Afghanistan.

Khomeini’s Ghosts is an easy read. It is rich with historical facts and discusses the nuances of the Islamic revolution in detail. But it looks a one-sided anaylysis of Imam Khomeini, one of the most influential personalities on the Islamic street. Coughlin’s key argument that Khomeini’s doctrine “has made to the radicalization of the Muslim world” is untenable. There are different streams of Islamic radicalism in the world. Well before the Islamic revolution, the Brotherhood had inspired millions of Muslim youth across the MENA (Middle East and North Africa) to organize on religious lines. Khomeini’s principles were based on the Shiite world view, while most of the Islamic radical groups of present era are Sunnis. So, Khomeini’s ghosts do not seem to be as dangerous as Coughlin says.

Con Coughlin, “Khomeini’s Ghosts”, Pan Books, 2009 (Reviewed for Purple Beret)

Saturday, June 5, 2010

War and Peace in Asia

Doest the 21st century belong to Asia? Many economists, strategic experts and world leaders think so. The growing clout of Asian countries in the present international system, the strategic importance of Asia to the super powers and the relative escape of China and India from the global financial crisis have emboldened the view that Asia holds the key in an evolving multi-polar world in the new century. But at the same time, Asia faces several security challenges – both inter and intra-state challenges. “The Future of War and Peace in Asia”, a compilation of essays edited by N.S. Sisodia and S. Kalyanaraman, is looking into this strategic dimension of an emerging Asia.

As Sisodia, the director of the Institute for Defence Studies and Analysis (IDSA), India’s premier strategic research think tank, notes in the preface, the impact of the global slowdown on Asian economies has “accelerated the shift of economic power to Asia”. The coming decade will see Asia becoming a principal theatre of international politics and security. One of the major challenges Asia will face in its rise, according to the book, will be intra-state conflicts. “Asia is the main theatre of action for jihadist groups, which among others, include the al-Qaeda and its franchises, Afghan and Pakistani Taliban, Pakistani groups like the Lashkar-e-Taiba, the Jamaat ul-Mujahideen and Harkat-ul-Jihad-al-Islami in Bangladesh, Jemaah Islamiyah in the Southeast Asian countries, the Abu Sayyaf group in the Philippines, and the Islamic Movement of Uzbekistan,” writes Kalyanaraman, a research fellow at the IDSA, in the introduction.

But the “security problematique” is not limited to intra-state conflicts. There are multiple actors -- Asian and non-Asian – who have security and economic interests in the region. Apart from India and China, the two countries often dubbed as key Asian powers in the coming decades, the US, Russia and Japan also have interests in the continent. The roles these five major and emerging powers play in the continent are crucial for “ensuring and maintaining long-term peace, stable balance of power, economic growth and security in Asia”.

The 18 chapters of “The Future of War and Peace in Asia”, divided into five key parts, discuss the changing face of war in the region and its geopolitical implications. The first part, “The Changing Face of War”, addresses the issue of “irregular warfare”, its manifestations in the Af-Pak region and West Asia and the challenges it poses to modern states. The second part, “Preparing for War”, explores how militaries in the region are modernizing themselves and preparing to face the existing and forthcoming security challenges. Will the technological advancements change the nature of war in Asia? What changes the space technology and missile defence are going to bring in the military doctrines of major Asian powers? Part three of the book, “Star Wars in Asia”, addresses these issues. The last two parts, “Asian Geopolitics” and “The Emerging Asian Order”, are mainly focused on the geopolitical angle. It also discusses the interests and interventions of big powers like the US and Russia in the Asian continent.

It is now a widely accepted view that the East is rising. Its economic clout is fast increasing in a world shaken by the collapse of western capitalism. But this rise could not be sustained unless the East prepares itself to face up to the security challenges. “The Future of War and Peace in Asia” brilliantly analyses the security dilemma of Asia countries and the geopolitical implications of the emerging Asian order. The editors have cautiously selected chapters so that the book can give a comprehensive understanding of conflicts and tensions in Asia and also the dynamics of power shift.

N.S. Sisodia and S. Kalyanaraman (Eds) (2010), “The Future of War and Peace in Asia”, New Delhi: Magnum Books. (Reviewed for Purple Beret)

Wednesday, May 26, 2010

Taliban’s Chaos Theory

“You need three qualities today if you want to fight the terrorists. Number one, you must have the military with you… Number two, you shouldn’t be seen by the entire religious lobby to be alien. The third element: don’t be seen as an extension of the United States.” These words of Parvez Musharraf, uttered a few weeks after the death of Benazir Bhutto in January 2008, show the kind of politics he espoused during his tenure as Pakistan’s president. Musharraf was a man who knew the presence of jihadist outfits in his country could be used to enhance Pakistan’s “strategic importance in Western eyes”, writes Ahmed Rashid in “Descent into Chaos”. And the General did the same, like other allies of the US in the “region” (Pakistan, Afghanistan and the five Central Asian Republics). For Rashid, author of the best selling “Taliban”, the region is “vital for global stability”. But the misguided “war on terror” of the US and the inability of the Western powers to contribute to nation building in these countries, particularly in the post-9/11 Afghanistan has created nothing but chaos.

Who made things worse? Rashid says even the Clinton administration bears some responsibility for the present chaos. It was during the Clinton presidency, the Taliban mobilized resources, consolidated power in Afghanistan and grew in strength in the region. But the Clinton administration failed to foresee the lurking dangers and come up with a vision to fight Taliban. George Bush, who actually started a war against Taliban, eventually played it into the hands of the same Islamic fundamentalists, thanks to the strategies of Defence Secretary Ronald Rumsfeld. It was Rumsfeld who insisted the inclusion of tribal warlords in the Afghan cabinet, says Rashid. Moreover, Bush’s defence secretary was against the idea of expanding the western-backed security system beyond Kabul, a strategy which later proved to be a blunder.
President Bush, who opened another war front in Iraq before accomplishing his “mission” in Afghanistan, made things complicated. The mounting military challenge in Iraq diluted the US engagement in Afghanistan, which eventually helped the Taliban regroup with the help of ISI. Though Pakistan, which supported the Taliban when it was in power, had to change its position in the wake of the 9/11 attacks, the country’s controversial spy agency, the Inter Service Intelligence, continued its dubious policies, writes Rashid. President Bush thought Musharraf was “indispensable” in his war on terror. This was a strategic limitation for the US. The Bush administration, finding itself in a catch-22 situation, completely gave up its efforts to push for political reforms in the military-ruled Pakistan and the Central Asian dictatorships and continued to pumping millions of dollars to support these regimes in the name of the alliance against terror.

What should have been down? “Afghanistan had to be rescued from itself. Autocratic regimes in Pakistan and Central Asia had to change their repressive ways sand listen to their alienated and poverty-stricken citizens…The West had to wake up to the realities and responsibilities of injustice, poverty, lack of education, which it ignored for too long,” writes Rashid. But nothing of these happened. The al-Qaueda and Taliban became more powerful, Afghanistan fell into deeper chaos, Pakistan, though the military rule came to an end, is now fighting itself and the Central Asian republics are as bloody as ever. Understanding the existing complexities and dangers, Rashid urges the international community to “face up to our collective future”.
“Descent into Chaos” is a well-written, detailed description of what happened to the War on Terror in the South-Central Asia. The analysis of Rashid, who has covered the region extensively as a reporter, looks stunningly authentic and his style of writing ensures an enjoyable reading. Still, it lacks the in-depth analysis of an academic. Rashid’s admiration for leaders like Hamid Karzai and Benazir Bhutto may not go down well with many readers. Blaming only Musharraf for Pakistan’s problems may not a proper diagnosis.

Ahmed Rashid (2008), “Descent into Chaos: How the war against Islamic extremism is being lost in Pakistan, Afghanistan and Central Asia”, Penguin: London. (Reviewed for Purple Beret)

Sunday, April 18, 2010

The Great RBI Tightrope-Walk

It’s a difficult time for central bankers across the world. They need to be extremely vigilant and take visionary policy decisions, so that the gradual but still fragile recovery of the global economy doesn’t get derailed. During boom years, the central bankers would have the freedom to take risks to ensure high growth rate. During crises, they would not have many options but to adopt non-conventional policies to pump prime the crippling economies. But the recovery period is different. Any monetary or fiscal mis-step could undermine everything.

The Reserve Bank of India Governor, D Subbarao, who will announce the central bank’s annual monetary policy on April 20, also faces the same challenge. While formulating the monetary policy, the RBI chief will have to give utmost importance to at least two things – the government’s growth expectations and the rising inflationary monster.

Beware excess liquidity
The RBI has taken several bold decisions in the past. It is not an institution which shies away from taking risks that might disrupt the status quo. When the economy was in perils following the collapse of Lehman Brothers and recession in the advanced economies, the RBI stepped in with radical measures to stimulate domestic demand and ensure cash flow through the financial system. It had lowered the reverse repo rate, at which it absorbs excess cash from the banking system, by 275 basis points and repo rate, at which the RBI lends to banks, by 425 basis points since the global financial crisis broke. It had also lowered the cash reserve ratio by 400 basis points.

These moves were widely appreciated by economists in India. Lower rates encouraged banks to lend more to consumers, who kept the domestic demand steady. This was the growth mantra during the crisis period, which proved to be a huge success.

But excess breeds collapse. One of the key reasons for the fall of the US financial market, according to many liberal critics, was the cheap monetary policy of Alan Greenspan during the boom years. His decision to keep Fed rates at record lows spawned excess, which developed into asset bubbles only to bring down the entire financial industry eventually. Moreover, excess liquidity will also send inflation northwards, which is a nightmare for every government. So, what will Subbarao likely do on April 20?

Given his credentials as an orthodox economist and an interfering central bank head, the last thing Subbarao will prefer would be to don the mantle of Greenspan. He has made it clear earlier that he would not support long lasting cheap money policy. This was evident when the RBI sprung a surprise in the last week of March by announcing a 25 basis point each hike in both reverse repo and repo rates. The apex bank had started tightening liquidity earlier by raising the cash reserve ratio, the portion of deposits banks are required to park with the RBI, by an unexpected 75 basis points to 5.75 percent. The message was clear – excess liquidity should be sucked out of the system for its financial health.

Who will tame inflation?
Now, when Subbarao reviews RBI’s monetary policy, the macro economy is better placed. Most of the top government officials are optimistic that the economy would grow over 8 percent in the current fiscal. Industrial production is also growing steadily, indicating that the economy is on a firm track. IIP expanded by 15.1 percent in February.

On the other hand, inflation is soaring. Food inflation has been hovering around 17 percent for quite some time now. Despite the government’s promise to remove supply side bottlenecks, food prices are still high. The headline inflation in March rose to 9.90 percent from 9.89 percent in February, higher than the RBI’s projection of 8.5 percent.

The RBI cannot turn a blind eye towards this reality. If inflation is not bridled, it will put down growing demand and endanger even the recovery. But a sharp rise in interest rates will prompt banks to increase lending rates which could squeeze credit flow and cripple the purchasing capacity of domestic consumers.

So, many expect the RBI to increase the repo and reverse repo rates by 25 basis points each. The reverse repo rate is now at 3.5 percent while the repo rate is at 5 percent. A hike in these rates of a quarter of a percentage point each and 50 basis points rise in the cash reserve ration would suck out roughly Rs 23,000 crore from the system. This, according to financial experts, would rein in the inflationary expectations.

A higher hike in rates is unlikely given the fragility of the global economic recovery. The economies outside Asia are still struggling with several challenges. Moreover, the debt crisis in Greece is threatening the new normal prevailing across Europe. If it spills over to other economies, a new wave of crisis will emerge. So, dangers are still lurking. The RBI Governor should keep that in mind.

Friday, April 16, 2010

The Race in the East

China and India, according to many, are two major pillars of the global market economy and potential “trade super powers”. Once enemies, these Asian giants that house two-fifth of the world’s population turned to economic reforms almost at the same time, though the pace of its implementation was not same. However, these reforms, writes Jonathan Holslag in his recent book, ‘China and India: Prospects for Peace’, changed the contours of the bilateral relationship between the two countries. The transformation from closed socialist economies to liberal market economies also marked the transformation of India and China from enemy states to “trading states”, argues Holslag.

This change is a radical departure from the “zero-sum thinking that was predominant during the cold war” and led to “new opportunities for cooperation” between the two countries, which had fought a bloody war in 1962 and seen near-war scenarios at least five times ever since. In China, the post-Mao leadership was conscious not to repeat the “failures of the Great Leader”, while in India a reform-minded prime minister, Rajiv Gandhi, laid the foundations for “constructive nationalism”, rejecting his mother’s and grand father’s “negative nationalism”. This shift is what set the stage for India and China to emerge as trading states and to enhance cooperation.

Since the opening up of the economies, there is a remarkable improvement in the bilateral cooperation between India and China – trade boomed over the last three decades, the number of top level visits rose, discussions on contentious border issues have been held frequently and cooperation at the global level, bet it WTO or climate talks, also strengthened. The talk of war has been “put to one side”. Euphoric Western liberals lost no time to praise free market economics, claiming more trade will spawn more interest groups, which will lobby for “broader and deeper relations” with other trading states. Did that really happen in Indo-China relations?

Holslag agrees that there are visible changes. But did the enhanced economic cooperation helped India and China put aside the historic rivalry and become ideal trading states? Like many other rational India-China watchers Holslag retains his apprehensions about the claims of “neofunctionalist liberalism”. He discusses in detail why these steps toward a comprehensive partnership between India and China “will not succeed”. According to him, the existing “complementarity between India and China will disappear once they achieve their economic ambitions”. The traditional rivalry will likely spread to the economic sphere as well, challenging the concept of “Chindia”. The still unresolved border issues, the military security dilemma and the suspicion in public perceptions about the “other” power are the other major impediments India-China ties face with. The economic drivers are too weak to reverse these challenges. “In the short-term, we will therefore observe a continuation of the great power contest,” writes Holslag.

The 234-page book is rich with historical facts, economic data and diverse perceptions of experts from India and China. The 13-page bibliography underlines the authenticity and seriousness of the research Holslag undertook to write this comparatively small book. His key argument that strategic rivalry would continue to dominate Indo-China relations irrespective of the improvement in economic cooperation looks rational given the complex history of bilateral ties between the two countries. Holslag could have placed this hypothesis in the larger geopolitical context. The race for influence in Asia is going to be the race for world domination in a changing world. How the love-hate diplomacy of India and China is going to influence international politics? Unfortunately, Holslag leaves this untouched.

Jonathan Holslag (2010), “China + India: Prospects for Peace, Columbia University Press: New York (Reviewed for Business World)

Friday, March 19, 2010

Is Google Greater than God?

It is difficult for 81 million web-browsing Indians even to imagine a life without Google. Indians, like billions of other web users around the world, are so addicted to Google that it is actually difficult for them to replace the search engine giant in their online expeditions. If John Lennon, who unleashed an uproar by saying, “Beatles are more popular than Jesus”, was alive today, he would have sung ‘Google is Greater than God’. But for the godless Chinese, Google is just a search engine.

Now it’s almost certain that the US Internet giant will shut its Chinese search engine, Though the company has not confirmed its pullout from the world’s largest Internet market, China’s state-controlled official media have reported that it will happen in April. Whether Google will shut its entire China operations or just pull the plug on and let its other operations continue is not yet clear. The search engine is expected to unveil its plans on March 22.

The crisis started two months back when Google threatened to pull out of China, a market of around 400 million web users, accusing Chinese hackers backed by the government of attacking its email system. The US internet giant, which launched to provide censored search services for Chinese users in 2006 said it detected “highly sophisticated” attack on its email services originating from China. These attacks and the Chinese government’s attempts to “limit freedom of speech on Internet” led Google to adopt a “new approach” to the Dragon, the company’s chief legal officer David Drummond wrote on his blog on January 12.

China rejected the allegations, but defended its censoring, saying Google has to obey the rules of the land. The US soon seized the opportunity to score against its global rival and asked Google to refuse “politically motivated” censoring. Rights groups around the world once again deplored the “Great Firewall of China”. Well, what will happen if Google pulls out?

Lose-lose scenario
According to analysts, it would be a lose-lose scenario. "If Google leaves, it`s a lose-lose scenario, instead of Google loses and others gain," Edward Yu, president of Analysys International, a Beijing research firm, told Associated Press. China sans Google will stand increasingly isolated in a rapidly expanding web world. Popular social networking sites like Facebook and Twitter, and Google’s Youtube are already banned in China. It’s still unclear how China’s educated, outward looking middle class youth would respond to the disappearance of the “all-loving” Google in their web space.

Google’s withdrawal will also hit the Chinese mobile market, which is highly dependent on the search engine. China Mobile Ltd, the world’s largest telecom service provider with 527 million subscribers, uses Google for mobile search and maps. Google’s android operating system is also popular among mobile phone users in China.

So what will China do? Despite this expected setback, the Chinese authorities appear to be defiant in dealing with Google. The reason, many think, is the (over)confidence that the local search engine, Baidu, would be able to rise up to the occasion if Google leaves. China has developed domestic equivalents of all the major popular internet companies -- Baidu for Google, Taobao for eBay, Renren for Facebook, QQ for instant messaging, games and social networking. The Economist magazine, a severe critic of China’s web censoring policies, admits these companies “are doing well”.

On the other hand, the end of operations in China will lead to a sharp fall in Google’s net revenue. Therefore, according to reports, Google will likely shut only its Chinese search portal and continue other services, leaving some options on the table for a possible future reconciliation. Apart from its search and mobile phone applications, the US firm has two research and development facilities in China and is running a popular music portal.

The Chinese government’s tough stand vis-à-vis Google is also a strong message to other companies operating in the country. If the Communist Party-led government is not ready for an inch of compromise on “sensitive issues” like censoring with a giant like Google, other companies will be thrown out of the mainland even without a negotiation if they avoid Beijing’s diktats. Most of them are more interested in the vast potential of Chinese market than the so-called liberal principles. Google was also not different till January 12, 2010.

Will China survive the departure of Google, the God of the Web World? Well, that could be the most interesting question of coming years.

Friday, March 12, 2010

Consistent Inconsistency

The Suez crisis of 1957 marked the beginning of a new era in the US’ Middle East policy. The British debacle in the Suez and President Dwight Eisenhower’s decision to have deeper engagement with the Middle East seemed to bring in changes in the political landscape of the region. However, that did never happen. Despite being the largest power in the post-war world, the US has never shown strong will to bring in peace into the region even as the policy makers in Washington seemed to have obsessed with the security fears of Israel, the most reliable Middle Eastern ally of the US, writes Patrick Tyler in his book, “A World of Trouble: America in the Middle East”. Tyler, an experienced journalist, who has covered the Middle East politics for years for the New York Times and Washington Post, writes in rich details in the over 600-page book how the “inconsistent” US policy in the Middle East was caught between Washington’s aspirations for a higher position in the Muslim World and its ideological commitment towards the Zionist state.

The book covers the US involvement in the Middle East during 10 presidents – from Eisenhower to George W Bush. According to Tyler, Washington’s policy towards the Middle East, a strategically important region for the superpower, was “consistently inconsistent”. President Eisenhower had pragmatic vision about the region. He wanted peace between the Arabs and the Israelis and more prosperity and development in the region. But he could not make any effective move towards those goals after an intelligent intervention during the Suez crisis. But the successive presidents did not share this vision. President Lyndon Johnson did not do anything when Israeli’s occupied Palestinian land during the Six-Day war and Henry Kissinger’s pro-Israeli policies did harm in the long term to the US interests in the region. During the Yom Kippur war, President Nixon sent Kissinger to Soviet leader Brezhnev with a message, calling for a joint super power action to end the war and find a “just” settlement for the Palestinian issue. However, Kissinger, in pursuit of an entirely different outcome to the Middle East conflict, dumped his president’s message. A joint super powers’ intervention, writes Tyler , would have left Israel with a less powerful position, making it easier for world powers to seek peace in the region. However, Kissinger tactfully undermined this move and even encouraged the Israeli leadership to violate the ceasefire terms to better its military position. Nixon’s statesmanship was further battered by the Watergate scandal.

Jimmy Carter’s Middle East policy was more peace-oriented than his predecessors. He even secured peace between Israel and Egypt. But the Iranian revolution and the subsequent US embassy siege destroyed the Middle East policy of the Carter administration. In a radically changing Middle East, Washington had to make policy priorities to secure its own interests. Iran, one of its trusted allies in the region till the other day, turned out to be the worst enemy. When Iran-Iraq war broke out, Reagan supported Iraq, a country against which his successor George Bush launched a major offensive. President Clinton tried for peace in the Middle East, but he lost focus after the Levinsky incident and did not use his firm hand to make the Israelis compromise. And George W Bush made everything worse.

Tyler says Washington was not singlemindedly supporting the Israeli lobby always. There were clashes of interests and hard maneuvers within administrations. It was this contradiction that made the Middle East policy of the US inconsistent. If the occupants of the White House could think beyond Israel while taking key policy decisions, the US’ position in the Muslim world would have been better.

Tyler version of history is largely based on personal interviews and declassified documents. While Tyler keeps the sharpness of a journalist in narrating incidents that shaped the US Middle East policy in the post-war world, the in depth analyses of an academic is missing. Though the security of Israel is one of the key driving factors of the US foreign policy, from the US’ point of view, the strategic importance of the Middle East is beyond Israel. All presidents except Bush Junior gave utmost importance for America’s relationship with the friendly countries like the Gulf monarchies and there was a continuity in this “friendship”. Above all, the civilisational angle plays a key role in the estranged relationship between the Middle East and the US. This was evident during the George Bush II presidency.

The book ends abruptly. The last chapter deals with the policies of Bush II, whose unwise and unimaginative moves made the US-Middle East relationship complicated than ever. The fact that President Obama had to start his Middle East venture with a confidence building speech in Cairo underscores Tyler’s analysis that Washington has to seek a new paradigm and build trust to deal with a changing Middle East. More errors will make things more complicated. Good luck, President Obama.

Patrick Tyler (2009), “A World of Trouble: America in the Middle East”, London: Portobello Books, Pages: 638 (Reviewed for Purple Beret)

Wednesday, March 10, 2010

China: The new economic hegemon

When it comes to economics, the last thing the Chinese rulers will do is boasting. They usually avoid rhetoric while making key policy announcements, and set lower-than-expected targets for coming years. Prime Minister Wen Jiabao’s annual speech in the Great Hall of the People Friday was not different. "We must not interpret the economic turnaround as a fundamental improvement in the economic situation," said a cautious Wen to nearly 3,000 party-appointed members of the National People’s Congress (NPC). He further set a target of 8 percent growth rate for the current year.

Many experts feel Chinese economy can grow much faster than the government projection. Contrary to what Wen told the NPC, there are fundamental improvements in the Chinese economy. The country has seen 8.7 percent growth in 2009, a rate beyond the imagination of many advanced developed countries. According to most analyses, the unique economic model of China has helped the country weather the global economic crisis effectively and it is set to become the second largest economy in 2010 surpassing the crisis-struck Japan. Its exports, after 13 straight months of fall, started growing again from December, making the country the world’s second largest exporter.

Beijing Consensus
China is among a few countries that weathered the global economic meltdown. Despite embracing free market policies three decades earlier, the unconventional approach of the state towards the economy helped country decouple itself from the great collapse of the global finances. Joshua Cooper Ramo, the former editor of Time Magazine, calls this unconventional policy making “Beijing Consensus” -- a combination of mixed ownership, basic property rights, and heavy government intervention.

Will the Beijing Consensus prevail? The history of China’s economic expansion shows this approach has had astonishing results. Ever since China started opening up its Socialist economy in 1978, it has grown at nearly 10 percent every year. China’s per-capita GDP is now 12 times greater than it was three decades ago. It’s now the world`s second-largest recipient of foreign direct investment. According to Goldman Sachs, China will overtake the US as the largest economy in the world by 2027. Renowned British thinker Martin Jacques writes in his latest book, ‘When China Rules the World’, China is on its way to replace the US as the world’s greatest super power. Robert Fogel, recipient of the Nobel Memorial Price for Economics in 1993, recently wrote in Foreign Policy magazine that China “goes from a poor country in 2000 to a super rich country in 2040”.

It seems everybody except the Chinese leadership is busy forecasting where China would stand some 20-30 years from now. China’s speedy recovery from the Great Recession even when the entire Europe is still battling has prompted many to rethink about the prospects of the Dragon. The crisis has indeed left China more powerful and relatively stronger than many other Western powers, which till the other day were considered key players in global politics. It may be ironic that China, a country ruled by Communist dictatorship, stands tall in a world where Communism’s death was celebrated years ago.

The Bliss is missing
But the bliss is missing in Beijing. The policy makers remain wary even when the whole world says China is rising. It’s true that Chinese economy has spawned miracles, set new standards and proved many predictions wrong. But it all came with riders. The Chinese Communist Party is still suffering from a “deficit of legitimacy” in a world where liberal democracy is considered the ideal governing system. The Beijing Consensus has been under attack from within as the social balance of Mao’s China was disrupted with the rise of a new super rich class in the supposedly socialist society. China is now a country with the largest rural-urban income disparities.

This is one of the utmost concerns of the government, which still claims to be Socialist. If the rich-poor divide gets widened, the very claims of socialism from which the state draws legitimacy will be in trouble. The government’s efforts to spread the fruits of development to inner areas were hit by several limitations. Moreover, China’s decision to keep its currency’s rate fixed against US dollar – a move to help its crisis-hit exporting community -- has drawn flak from many quarters. This has prompted Paul Krugman, a severe critic of neoliberal economics, to write that “China is not behaving as a great power”.

So far the coastal areas are the most developed regions in the mainland China. Many fear one of the end results of the Beijing Consensus is this widening disparity. Stratfor founder George Freedman writes in his latest book, ‘The Next 100 Years’, that this widening contradiction will lead to the eventual collapse of the Chinese state in 2020s.

So, there’s no cakewalk for China, as many of us think, to the super power’s slot. Of course the Dragon is rising, but its challenges are too.

Friday, March 5, 2010

Politics, Populism and Partnership

Sachin Tendulkar’s legendary innings against South Africa might have occupied most of the front-page space of every newspaper Thursday, leaving Mamata Banerjee’s Rail Budget to a corner, but the celebratory mood over the maestro’s iconic double century should not discourage us from taking a critical look at the Budget Banerjee presented in Parliament.

Now that the proposals and the minister’s future plans for the Railways are out in the open, as a routine the Congress, the ruling party, has welcomed the Budget, while the Left, Mamata’s bête noire, and the BJP, her former ally but now opposition, have criticised it. The key feature of the Budget, as the media have already reported, is the minister’s decision to hold the fares and freight charges. She even cut the freight rate of some essential commodities -- grains and kerosene – keeping in mind the rising food inflation.

This was widely expected. Though the Planning Commission had recommended a revision of the fares to streamline the railway’s revenues, Banerjee, already in an election- mood for the Left-controlled West Bengal, avoided biting the bullet. Speaking to reporters at the Rail Bhavan before the Budget presentation, Banerjee used the famous Lincoln quote to express her “generosity” towards the public: “Railways is of the people, by the people and for the people,” said an upbeat Banerjee, dressed in white cotton sari and with a cream shawl over her shoulders.

Did she keep her promises? From a common man’s point of view, the minister’s decision to leave the fares untouched is a great relief. Furthermore, the cut in freight rates on essential commodities will likely lead to an ease in the food inflation, which is hovering around 18 percent now. Banerjee has also announced 52 new long distance trains and most of the new trains she announced in her last budget will be flagged off by March this year. Moreover, the Railways plans to add 1,000 km of tracks every year (pretty ambitious, isn’t it considering the current average of 180kms?) and 25,000 km by 2020.

Where’s the fund?
So far so good. But what about the Railway’s modernization? From where will the ministry mobilize resources to expand the world’s second largest rail network? What plans does Banerjee have to stabilise the finances of the public sector undertaking, the largest employer in the country? Sorry to say that Banerjee left many key questions unanswered. “In China, the railway system becomes bigger every year, in India, Railways Minister’s speeches become longer by the year,” writes a Business daily in its editorial on Banerjee’s budget, painting the grim picture of the Indian Railways.

It’s worth noting that the Budget comes almost three months after China, the largest Asian economy and a potential competitor for India in many fields, launched the world’s fastest train. Though Banerjee has announced 10 more Durontos, she failed to roll out any massive plan to modernise the railways and improve the security of the passengers. Instead of focusing the security issue, he’s proposed to spend massively on non-core areas like setting up sports academies, cultural centres and bottling water plants. Banerjee’s decision to slash the Railway Safety Fund by Rs 597 crore from last year has also drawn flak from political quarters.

Moreover, several of the key infrastructure projects the minister announced are for West Bengal – over half a dozen factories and workshops, two museums, and one cultural centre among others. In a bid to keep the Congress leadership in good rapport, Banerjee has proposed a coach factory in Rae Bareli, the Lok Sabha constituency of the UPA chairperson Sonia Gandhi and a drinking water plant in Amethi, which the Congress heir apparent Rahul Gandhi represents in the House.

Financial mismatch
The financials are also not so promising. The Railway’s net revenue after dividend is expected to fall to a mere Rs 951 crore this fiscal from the earlier budget estimation of Rs 2,642 crore and from Rs 4456 crore during Lalu’s time. The operating ratio (working expenses as a portion of traffic receipts) for 2009-10 is 94.7 percent, up from 92.5 percent projected earlier. This stands is in sharp contrast to 75.9 percent in 2007-08.

Her tilt towards public-private partnerships and appeal to the private sector to come forward to make investments expose the financial limitations of the railways. But how is Banerjee going to woo them is still not clear.

In summary, Banerjee appears to have failed to walk a tight rope. And the problem of falling revenues and the challenge of modernisation of the Railways, which according to her own words is the “lifeline of the country’s economy”, will continue to haunt Banerjee and her successors. It’s high time the ministry came out with the strategic plan to make over the railways.

Saturday, February 20, 2010

Budget 2010: Return of rectitude

So, the countdown has begun. What remains to be seen is how Pranab Mukherjee, the crisis manager of the ruling dispensation, is going to manage the post-crisis situation. As he`s set to present his second full budget as UPA`s finance minister on February 26, the key question would be whether he will start phasing out the stimulus measures, announced to help the collapsing economy recover on a fast pitch. And now it`s official -- the stimuli have worked and the growth is back. Citing the rapid rebound in industrial production and changing macro economic outlook, a section of the industry, academia and even the government has urged the finance ministry to put fiscal discipline at top of its agenda and start withdrawing stimulus. Widening fiscal deficit, as a result of the government`s increasing public spending, is a symptom of an unhealthy economy, say the fiscal disciplinists.

2010 is not 2009
Presenting his first full budget of the UPA government in July 2009, the options before Mukherjee were limited and challenges galore. The global economy was still struggling with the Great Recession and India`s economic output was steadily falling. The economic expansion shrank to 6.7 percent in 2008-09 from 9 percent the fiscal before, and industrial production as well as exports was plummeting. The RBI had cut down rates and the government had already announced fiscal measures to boost demand and production. Mukherjee presented a cautious budget -- put the proposed financial reforms on the back burner, increased public spending, retained stimulus measures and avoided introducing any drastic changes in the tax structure. But in 2010, the green shoots offer opportunity for the finance minister to take imaginative policy actions. The fear mongers in the academia think the government should grab this opportunity to cut spending and bring down deficit. How sustainable would be such a move?

Let`s now look at some figures. The fiscal deficit for 2009-10 is estimated to be 6.8 percent of the gross domestic product (GDP), up from 6.2 percent in 2008-09 and 3.1 percent the year before. Deficit has started widening in 2008, the year global economy was hit by recession, as the government`s revenue reduced sharply on slowdown and expenditure grew on stimulus. Many analysts compare this situation with early 1990s when India was struggling with the twin problems of slowdown and deficit. When Manmohan Singh presented his first budget as finance minister in 1991, one of his key focuses was to bring in fiscal rectitude. The gap between the government`s revenues and expenditure shot up to 8.4 percent of GDP during Madhu Dandavate, the predecessor of Singh. In his budget speech for 1991-92, Singh proposed to bring down deficit to 5.78 percent. To achieve this, he had two options – increase the government`s revenues through liberalisation policies and cutting down subsidies.

2010 is not 1991 either
India is now a liberalised economy, but the very course of liberalisation is under strain as the western economies, including the US, the Mecca of free market capitalism, are turning towards higher regulation and intervention. There are limitations for Mukherjee to expect rapid increase in revenues as the industry is not yet fully out of the woods. Cutting subsidies is also not a desirable option at this time as such a move would force consumers to cut down on their expenditure, resulting in a slump in demand in the domestic economy. In this recovery time, anything but a demand slump could be tolerated. After all, the policy options of the government are almost used up. It has already pumped in millions of rupees into the financial system through stimulus and has kept the interest rate at record low for over a year. So, another financial shock will leave the government defenceless. That’s why many say, the trouble shooter is in a fix. What can Mukherjee possibly do?

Excess breeds collapse
According to many economists, including Nobel Laureate Paul Krugman, the administrations committed to fighting crisis should not give in to “fear mongering” on fiscal deficit. Krugman says deficit itself is a symptom of slowdown. Any policy action to bring down deficit when the economy was still in sort of a slowdown would be counter productive, he writes in his blog. Though Indian and Chinese economies seem to have overcome the worst, the prevailing crisis in Europe and the possibility of it spreading across the Atlantic still make many scared. The capital markets are still shaky and have plummeted recently on Euro-collapse fears. ‘The Economist’ magazine writes if 2009 was a crisis year for the financial sector, 2010 could be crisis time for the economy as a whole. And Europe indicates just that.

So, it`s not the time to play to the gallery. Mukherjee needs to be imaginative while formulating policies for the difficult times. He has to keep the growth rate steady without letting excess liquidity build more bubbles. Excess breeds collapse and that needs to be kept under constant check. A difficult task, indeed.

Saturday, February 13, 2010

Eastern Dominance

Economic freedom creates habits of liberty. And habits of liberty create expectations of democracy… Trade freely with China and the time is on our side," said George W. Bush in November 1999, a year before he was elected the 43rd president of the United States. Economic relations with between China and the United States zoomed to new highs during the Bush presidency as the Asian giant accelerated its market reforms. Thanks to those reform initiatives, China emerged as the third largest economy in the world and, according to Goldman Sachs, is set to overtake the biggest economy, the United States, in 2027. Will this economic transformation bring in changes in China's Communist Party-ruled system as many Western liberals predicted? Most unlikely, says Martin Jacques, a well-known journalist and once the editor of Marxism Today, in his new book, "When China Rules the World: The Rise of the Middle Kingdom and the End of the Western World".

China's economic liberalisation was hailed by many in the West. The disciples of liberal political scientist Francis Fukuyama strongly believed that the world has been converging on Western liberal democracy ever since the collapse of the Soviet bloc. The neoliberal economic development would accelerate this transformation, they argued for decades. So, China would either end up opening up its polity for a more participative system or collapse due to its internal contradictions like what happened to the Soviet Union. But Jacques challenges both these claims in his book. "Economic change, fundamental as it may be, can only be part of the picture," he writes.

The post-1978 reforms, initiated by President Deng Xiaoping, helped China modernise itself at a greater pace than many western countries did in the 18th and 19th centuries. But China's modernisation, according to Jacques, is not western. It is distinctive and "rooted and shaped by its own history and culture". Therefore, expecting China to follow the western political and cultural values would be erroneous. China is not a conventional nation-state, an ideal unit in the post-Westphalia international order. Rather, it is a "civilisation state" that kept the "essence" of Chineseness unbroken over millennia despite undergoing several political and economic transformations. "It is this civilisation dimension that gives China its special unique character." When it was down, a pragmatic China was ready to get integrated into the international system and reconcile itself to being a nation state. "It was a compromise borne of expediency and necessity," writes Jacques. "But as China arrives at modernity, and emerges as the most powerful country in the world, it will no longer be bound by such constraints and will in time be in a position to set its own terms and conditions."

When that time will come? Jacques believes the West is in the decline. The credit crunch that started in the United States in 2007 followed by the collapse of the Wall Street investment firms including the Lehman Brothers in September 2008, marks the beginning of the end of the deregulated neoliberal capitalism. The distinctive Chinese economy, in which state plays a major role and controls the flow of capital, which is an antithesis to the very concept of neoliberalism, weathered the crisis. China's relative power is rising post-meltdown at a time when the United States and other western economic power houses are struggling to manage their respective economies.

Such a rise would bring in a politico-cultural shift in international politics. For over five centuries, western values were global values. When the United States became the super power after the Second World War, only the power centre shifted from Europe to across the Atlantic. The values, ideas and culture remained the same. But the rise of China does not provide any such opportunity to the West, according to Jacques. "China will act as an alternative model to the West, embodying a very different kind of political tradition - a post colonial developing country, a Communist regime, a highly sophisticated statecraft and an authoritarian, Confucian rather than democratic polity".

Jacques presents his arguments after a detailed analysis of Chinese history and civilisation and connects them to the present-day developments in international politics. China's triumph as a non-capitalist market economy and its rising cultural "smart power" persuade us to believe Jacques' claims. But the author, seems obsessed with the rise-of-civilisation idea, fails discuss the strategic angle in detail. The hard power had played a crucial role in the ascendancy of both Britain and the United States. But how strong is China vis-a-vis the present-day hegemony the United States? How the hard power is going to help China in its quest to transform the world? That link is missing in Jacques' otherwise brilliantly written book.

Author Profile: Martin Jacques is a journalist and academic. He is currently a visiting fellow at the London School of Economics Asia Research Centre and at the National University of Singapore. Jacques previously edited Marxism Today and co-founded the think-tank Demos in 1993. He also writes columns for the New Statesman and Guardian. (Reviewed for Business World)

Saturday, January 30, 2010

End of Cheap Money Policy

It was an expected move. Well before the Reserve Bank of India reviewed its quarterly monetary policy, many analysts and reports had predicted that the central bank would start tightening money supply. Changing the course of the RBI’s one-year old money policy without affecting the growth sentiments and disrupting the equity markets was an uphill task. But the RBI seemed to have done that, perfectly.

Though a hike in the CRR, or the portion of deposits banks are required to park with the RBI, was expected, the actual rise is higher than what many market analysts and industrialists forecast. D Subbarao, the RBI Governor who believes the central bank has an active role to play in reining in prices, hiked the CRR by 75 basis points to 5.75 percent, higher than the expected 50 basis points or 0.5 percentage points.

"As a result of this increase in the CRR, about Rs 36,000 crore of excess liquidity will be absorbed from the system," Subbarao told the chief executives of commercial banks in New Delhi on Friday.

The initial reaction to the CRR-hike was slightly overheated. The Sensex, the benchmark index of the Bombay Stock Exchange, which was trading in the red since Friday morning on fears of interest rate hike, crashed over 250 points soon after the RBI Governor announced the latest review of its monetary policy. Market analysts and economists called it an “aggressive” move of the central bank.

“The market was expecting a 0.50 percent hike in CRR -- I feel the 0.75 percent is slightly aggressive. It is more a pre-emptive move to control inflationary expectations," Bank of Baroda's chief economist Rupa Rege-Nitsure said.

But for Subbarao, the priorities were different. When there’s a credit crisis and bear run, cheap money policy is the best instrument to stimulate demand and cushion growth. But when the speculators are making handsome gains and inflation was pushing the lives of millions into perils, it’s a capital error not to give up that policy.

RBI did just that in an aggressive move to tame inflation. The country’s headline inflation jumped to 7.31 percent in December 2009 from 4.78 percent in November, mainly driven by high food prices.

Food price inflation rose to 17.4 percent for the week ended January 16 from 16.81 percent the week before.

The RBI has revised the inflation forecast for fiscal-end to 8.5 percent from 6.5 percent earlier.

On the other side, the economy was slowly returning to higher growth trajectory, giving enough space for the central bank to act. India’s GDP had expanded a surprising 7.9 percent in the second quarter this fiscal and is expected to grow as much in the third quarter as well.

The RBI has also revised the growth outlook to 7.5 percent for the current fiscal from 6 percent earlier, thanks to the fast-recovering industrial and services sector. The rebound of the equity markets in Friday afternoon shows that Subbarao’s move was in the right direction. If he had bowed down to the initial market pressure, that would have left the government in a sticky wicket to fight prices.

Cheap money will always lead to building bubbles, be it on commodities or stocks. But on the other side, costly cash will squeeze credit flow, putting the industrial expansion under risk. Subbarao chose the mid way. He raised the CRR by an unexpected 75 basis points to absorb the excess liquidity, but left the key rates – repo and reverse repo -- unchanged to help the macro economy. If the economic output continues to grow in the third and fourth quarters this fiscal, the central bank will most likely raise key rates in the next policy review.

Tuesday, January 26, 2010

Time to tighten the monetary policy?

With the Reserve bank of India (RBI) gearing up to review its monetary policy later this month, the key question doing the rounds in the financial market is whether the country’s central bank would give up its one-year old cheap money policy.

Many analysts think the apex bank would start tightening monetary policy this month as the overall economic situation has improved and inflation is rising. The bank has reiterated its commitment to controlling prices as well as fuelling growth.

India’s headline inflation for December jumped to 7.31 percent from 4.78 percent the month before, mainly due to high prices for food articles. Food inflation had reached nearly 20 percent last month and then slightly moderated to settle at 17.28 for the week ended January 8.

According to the government, food inflation is a result of supply constraints, thanks to drought and flood in many parts of the country, as also black marketing and has nothing to do with the monetary policy. But, the huge jump in the Wholesale Price Index (WPI) in December will put the government and the RBI under pressure to revise the monetary policy as cheap money would make it difficult for the government.

It’s in this context the RBI is reviewing its policy on January 29. Investors are keen to know the outcome as higher rates would suck out some cash from the financial system, putting the equity markets under some pressure.

The RBI started loosening its grip over money supply in January2009 by announcing a sharp cut in key interest rates in a move to help the battered financial market and struggling economy. At that time, the equity markets were collapsing, the industrial production was plummeting, a credit crisis was looming large and exporters were in complete disarray.

The RBI stepped in to help the government in its efforts to minimise the effects of the worst global economic crisis since the Great Depression of 1930s by cutting 100 basis points each in the repo and reverse repo rates to 5.5 percent and 4 percent respectively.

The repo rate is the interest charged by the RBI on borrowings by commercial banks. A reduction in it lowers the cost of borrowings for commercial banks. The reverse repo rate is the rate at which the central bank borrows money from commercial banks. A lowering of this rate makes it less lucrative for banks to park funds with the central bank.

The intention was clear – make money cheaper at a time of crisis. RBI has maintained this policy all through 2009. Without waiting for the next quarterly review of the monetary policy, the apex bank cut both repo and reverse repo rates again on March 4.

The rates were slashed by 50 basis points each to 5 percent and 3.5 percent respectively.

In the monetary policy for this fiscal announced on April 21, both rates were again cut by 25 points each, even as cash reserve ratio and the statutory liquidity ratio were left untouched at 5 percent and 24 percent respectively.

The repo rate is currently at 4.75 percent while the reverse repo rate is at 3.25 percent.

The RBI’s decision to keep the cost of money cheap has had its positive impact on the macro economy. India could effectively tide over the credit squeeze that nearly destroyed financial markets in the advanced capitalist countries.

The benchmark index of the Bombay Stock Exchange (BSE), Sensex, which snapped six consecutive year’s rise in 2008 by registering around 53 percent annual loss, moved back into the green in 2009. Backed by the government stimulus, cheap money policy of the central bank and the improvements in global markets, Sensex ended 2009 with 81 percent gain, its best since 1991.

The real economy is also on a somewhat firm recovery path. India’s economic output expanded 7.9 percent in the second quarter this fiscal and the government expects the GDP to expand over 7 percent in 2009-10, much higher than the initial forecast.

The industrial production grew at a two-year high 11.7 percent in November, rekindling hopes that the economy would soon reach 8-9 percent growth path.

According to many analysts, the stage is set for the RBI to act. In its October review, the bank had raised the statutory liquidity ratio by 100 basis points, indicating that it would not sit idle if inflation or other threats begin to loom.

A hike in SLR makes it mandatory for the banks to invest more funds in specified securities, against their deposits, and removes some liquid cash from the financial system.

In the January review, it was expected that the RBI would raise the cash reserve ratio (CRR) at least by 50 basis points. But higher-than-expected rise in inflation may force the central bank to revise other rates also upwards. How the industry and markets will respond to such a move is the key question.

The economic recovery is still fragile and mostly backed by public spending. Credit growth is still far below from the pre-crisis levels and the private sector demand is yet to pick up. In such a scenario, costly cash can even endanger the growth. The RBI will have to walk a tight rope.

Friday, January 22, 2010

In praise of the Americentric world

At the beginning of the century, everything looked fine for the United States. Its economy was booming, the American style finance capitalism was tightening its grip over world economies, its military operation in Yugoslavia, co-sponsored by the Nato, was a success and the world had more or less come to terms with the new political order emerged after the collapse of the Soviet Union. If somebody predicted that the 21st century would be an Americentric period, it would have been hailed by many.

But the world has changed dramatically over the past 10 years. And when the US is facing one of its worst crises – both militarily and economically – George Freidman, the best selling author of “America’s Secret War”, forecasts that the US would remain the world’s “pre-eminent” power for the next 100 years. Friedman, the founder and chief executive of the US-based private intelligence agency Stratfor, makes some brilliant but strange predictions in his new book, “The Next 100 Years: A Forecast for the 21st Century”. If somebody thought, the US Empire is on the decline, or the Communist China is on the rise to become the next super power, or the present century will belong to the emerging nations like India, Brazil and South Africa, he or she could be wrong, according to Friedman. He says Turkey, Poland and Japan would emerge as great powers of the century. Stunned by the prognosis? Well, “the most practical way to imagine future is to question the unexpected”, says Freidman. He argues his predictions are simple efforts to read history geopolitically. “It’s Geography which defines power”. The geopolitical locations of Japan, Turkey and Poland and the changing contours of global politics would help these countries emerge as great powers.

So what about China, an emerging power billed by many analysts as the next super power? Freidman believes China would be fragmented by 2020 due to internal contradictions. When its coastal regions will get richer and richer, the interior parts will plunge into acute poverty. On the global scene, China would fail to extend its influence as it’s not a major geopolitical force. The US will continue its technological, economical and military dominance and will be challenged by an ambitious Japan and its ally Turkey in 2050. Turkey, the largest Islamic economy, would emerge as the greatest power in the region as Russia would weaken by middle of the century. Poland, on the other side, will align with the US like what Israel and South Korea did in the post-war world. “In the emerging competition between the US and Russia, Poland represents the geographical frontier between Europe and Russia and the geographical foundation of any attempts to defend the Baltics,” writes Friedman.

Unlike the previous world wars, the war between the US and Japan would not be fought as the first two were. It will begin with attacks on American military space stations and the US and its Polish ally will eventually emerge victorious.

The victory will further strengthen the US power and it will start another major technological surge similar to that of its post-war policy. BY the end of the century, America’s neighbour Mexico will emerge another great power and a potential threat to the US influence on the earth. That conflict will be one of the defining developments of the 22nd century.

Reading Freidman’s book is an enjoyable exercise, though it’s biter to swallow most of his arguments. The US as a whole -- its capitalism, its military power and its unipolar world – is undergoing the worst crises in decades. It’s president himself has hinted the changing role of the US in an unfolding multilateral world order in which both China and India are set to have higher stakes. China, the fastest growing economy in the world, is likely to overtake Japan as the second largest economy in 2010. Friedman seems to be sidestepping these facts, while most of his forecasts looked based on certain fixed notions like the “immunity” of the US and the role of naval power and global trade in defining the greatness of countries. However, it remains to be seen how much the Stratfor founder is correct in imagining the world ahead.

The Next 100 Years: A Forecast for the 21st Century”, George Friedman, Doubleday: 2009 (Reviewed for Purple Beret)

Thursday, January 7, 2010

A Decade of Wars, Crises and Rises

In international politics, decades are important tools that help us understand and interpret history better. The major developments in the past often come to our mind with tags of decades -- the economic crisis of 1920’s, the wars of 1930’s, the reconstruction of 1950’s, the Lost Decade, and so on. Now, standing at the starting point of a new decade, how do we analyse the bygone one (2000-10)?

According to British historian Andrew Roberts, the first ten years of the new century, or the Noughties, were full of troubles. It witnessed two major wars, one of the gravest financial crises in decades, a number of natural disasters including Tsunami, and changes in global power dynamics. At the beginning of the century, not many might have forecast such a troublesome first decade.

The Noughties followed a decade that the saw the collapse of the Soviet Union, and the subsequent emergence of the US as the sole super power in the world. The successful tests of American hard power in the Balkan and the Middle East in the late 1990’s underscored the opinion that the new century would be an American century. President George W. Bush, who assumed office in 2001, vowed to accelerate American style free market capitalism and expand the military capabilities of the country. Everything looked set for paving the way for the US to reshape and lead the global order without major hindrances. But the path of history often lies beyond the scope of prediction.

The beginning of sweeping changes of the decade started on September 11, 2001, when the World Trade Centre, the tall symbols of America’s economic might, was attacked by a few terrorists. The attack became a reference point of the decade, if not of the century. In the same month, president Bush declared America’s “war on terror” and the US started this war on October 7 by bombing Taliban-ruled Afghanistan.

The US could drive the Taliban out of Kabul within weeks of bombing, and set up a puppet government of Hamid Karzai in the capital city. But the war did have ripple- effect across the Muslim Middle East. The war on terror was interpreted by many political Islamists as an “imperial crusade” of the West against Islam. This notion gained currency when Bush opened another war front in the Islamic world in 2003. Accusing the Saddam Hussein regime in Iraq of supporting al-Qaeda in the region and mobilising weapons of mass destruction, the US declared war on the Baathist country in March 2003.

Two months later, president Bush declared victory in Iraq. Saddam Hussein went absconding, the regime was toppled and a provincial government was established, which was followed by a bloody resistance by Iraqis against the occupation. Saddam was captured in December 2003 and hanged on December 30, 2006.

According to many reports, the neoconservatives in the Bush administration wanted to expand the war to Iran, and further to Syria as part of their plans to reinforce America’s hegemony on the entire Middle East. But the Iraqi resistance bogged America down for years. When things started returning to a new normal in Iraq, the economic catastrophe limited America’s military possibilities.

If America’s hard power faced fresh challenges in the first half of the decade, its unique economic model was nearly destroyed in the second half. The unregulated capitalism, which the US championed for years, drew flak from all corners when Wall Street investment banking giants like Lehman Brothers collapsed in 2008, plunging the entire world into an unprecedented liquidity crisis. The woes of the financial sector soon expanded to the real economy, leaving most of the advanced developed countries in recession.

The new president of the US, Barack Obama, in complete realisation that his country was not in an advanced position to cope with the world’s problems, came forward to formulate a new cooperation mechanism with the emerging economies including China and India. Many countries, including the US, put caps on the flow of capital, implemented fresh regulations and expanded the scope the government to fight the crisis.

The Rise of China
Another major twist of the decade is the rise of emerging powers, including China, India and Brazil, onto the global stage. Of these, China stands out. According to many analysts, the this century is China’s. British academic Martin Jaques says the stage is set for China to rise as a counter power to the US and radically overhaul the international system. China’s escape from the global slowdown nearly unhurt has forced many analysts to take a more positive view vis-à-vis the Asian giant. China is the fastest growing economy in the world and is set to overtake Japan as the second largest economy in 2010. It is also a fast rising military power and a regional hegemonic state in Asia.

The new decade will see China further expanding its economic influence and making efforts to convert that into political clout. According to Goldman Sachs, China will move past the US as the largest economy by 2027. If the trend of Noughties continues in the new decade, it will have radical effect on the existing global order, so far dominated by the West. So, gear up to live in a rapidly changing world.

Saturday, January 2, 2010

Is the government too optimistic?

While addressing a crowd of industrialists and mediapersons in the national capital last week, Finance Minister Pranab Mukherjee was upbeat about the country’s economy. Taking even the most optimistic observers by surprise, the minister said that the economic output would expand 7.5-8 percent in 2009-10, a far higher expectation than the initial forecast of 6.7 percent. He didn’t stop even there. The growth rate, according to Mukherjee, will return to 9 percent in two to three years!

The finance minister’s optimism soon reflected in the equities markets. The benchmark index of the Bombay Stock Exchange, Sensex, soared 539 points the same day and a further 129 points on the next day i.e. Thursday to close at a 19-month high of 17,360.61 points. The Nifty of the National Stock Exchange also rose to close at 5,178.40 points, its highest since May 5, 2008.

This turnaround story was surprising given the predicted impact of the global financial crisis. At the beginning of 2009, market analysts across the world had warned of a sharp erosion of capital in equity markets that could leave the real economy in perils.

Contrary to these claims, Sensex surged nearly 113 percent from its year’s low of 8,069 points, outperforming most of its peers.

The recent indications show that the real economy is also recovering from the effects of the global slowdown. Indian economy grew 7.9 percent in the second quarter this fiscal, the fastest pace in six quarters, as against 7.7 percent in the like period last year. The GDP growth in the April-June quarter was 6.1 percent.

The growth in the second quarter was mainly powered by a surge in the industrial production. The factory output expanded 9.2 percent year-on-year, signalling a strong recovery in one of the worst-hit segments of the slowdown.

Foreign direct investment (FDI) flow into the country also jumped 60 percent in the first eight months this fiscal, while exports, the worst-hit sector by the slowdown, registered 18.2 percent positive growth for the first time after 13 months in November.

The Other Side of Recovery
Good signs galore. But are they enough to claim that the recovery is sustainable? According to the government’s critics, it is a “stimulus-powered” recovery. Since the collapse of US investment giant Lehman Brothers in September 2008, the government has announced three stimulus packages to help the industry to weather the downturn. Besides, the Reserve Bank of India (RBI) slashed key rates to pump liquidity into the financial system and strengthen the credit flow to industries.

Moreover, the government’s decision to implement the Pay Commission recommendations has boosted domestic demand, which got a further fillip during the Lok Sabha elections.

The key question is, what will happen to the economy if the government withdraws the stimuli? The ruling class will have to take some brave decisions in the new year which may have far reaching implications on the economy. The biggest challenge before the government is to put a cap on the runaway food prices without jeopardising the growth sentiments.

Though the finance minister and Planning Commission Deputy Chairman Montek Singh Ahluwalia have reiterated many times that high food inflation is a result of supply constraints, it’s still not clear whether the RBI would hike rates when it reviews the monetary policy next month.

If the central bank decides to give up its cheap money policy, it will certainly have an impact on the industrial sector as banks may turn reluctant to lend more. If the central bank retains the low rates, the government will have to look for alternatives to contain inflation.

Another major concern is the performance of the global economy. Unless the global economy stabilises, exports from the emerging countries would not pick up. Although the exports registered positive growth for November, it’s mainly due to the low-base effect of the year-ago period.

Exports declined 22.3 percent to $104.2 billion during April-November this year from $134.2 billion in the corresponding period last fiscal.

Planning Commission deputy chief had last week said exports were unlikely to return to the pre-crisis levels unless there’s a robust recovery in the advanced developed countries. Even the most optimistic forecasters say it will take at least five years for the industrialised economies to return to the pre-crisis growth rates.

So what can India do? According to Ahluwalia and many other like-minded optimists, the fundamentals of the Indian economy are strong and the government should take measures to stimulate domestic demand to make up for the losses caused by the exports decline. Will that be possible without breaching the fiscal rectitude? Well, one has to wait and see.

India entered 2009 with little hope and many apprehensions. At the beginning of the year, equity markets were down, industrial and agricultural output was plummeting and the money supply was facing constraints. In sharp contrast, when we are set to welcome 2010, the macro economy is better placed. But it still remains to be seen whether the recovery is sustainable or not.