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India-US Relations Blog

Obama’s opposition to Outsourcing: How are Indian-Americans & U.S. businesses viewing this?

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There is a taste of threat in the air for some and may not be for the rest. President Obama’s opposition to outsourcing has raked enough controversy and a certain note of uncertainty seems to lurk about. He has voiced it time and again that his policy aimed at making the lives of middle-class Americans more secure; thereby ensuring that jobs were not sent overseas. His views have given rise to several perceptions among Indian-Americans.

First and foremost, a lot of individuals believe that due to President Obama’s opposition to outsourcing, several IT professionals lost their jobs in 2009. He had promised at almost eradicating the unemployment problem in the U.S., thereby providing a tax rebate to all those American firms who sought for labor and employment within the country. That was a time when people were grappling with the loss of jobs and the future seemed bleak and Obama felt the need to reinstate the U.S. as the financial superpower. However the intent of the government to recover $ 700 billion went kaput and now the end game with the elections draws close. The entire notion of this opposition to outsourcing appears ‘discriminatory’ to some.

However there are several others who think otherwise. Wipro has reiterated its presence in the U.S. having partnered and collaborated with other businesses. It holds a different view of the outsourcing controversy. Infosys believes in the same. Some have of course dismissed the outsourcing chaos as something that is mere ‘political rhetoric’ and political hogwash. Well, one has reasons to believe so and this is it. While the unemployment rate in the U.S. is at a high, the political leaders also need to ponder about the repercussions in terms of profit that American conglomerates would face if they had no outlet to outsourcing. It is about time for them to think and create and draft ideas that work towards the better of all.

India-US Relations Blog

Bill Clinton Should Come Clean on Donors

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The relationship between the U.S. and the Sheikh states of the Gulf Cooperation Council (GCC) has been close ever since the 1960s, when Washington took over from London as the principal guarantor of the reign of these monarchs. Hence it is no surprise that the U.S. policy in the Mideast has almost invariably been a compound of two interests, which intersect more often than they compete: that of Israel and the other (those of the GCC countries). The State of Israel is core to U.S. strategic interests, and is the Knowledge Superpower of the region, accounting for more than 95% of its hi-technology creations. Were Israel to have normal relations with the Sheikh states, the latter would benefit via the infusion of technology and intellectual resources that the Jewish state would bring to the table. This columnist has never hidden his view – even while in Tehran or Damascus that the Jewish people are as an entirety the most gifted in the world. Although small in number, they have gifted the world numerous technologies and improvements that have made life longer and better for billions.

To go beyond the region to India, were the world’s most populous democracy to spend as much on Israeli agricultural technology (especially dry land farming) as it does on defense equipment; 300 million citizens of India would not need to go to bed hungry each night. However, while defense is attractive to policymakers, agriculture is not. Unhappily for the region, the U.S. has hardly used its influence to nudge the GCC towards more normal ties with Israel. Were this to happen, the benefits from the interaction would soon be so obvious that it would silence the domestic opposition to closer relations with the Jewish state. Instead of seeking to leverage upwards their own skills, the GCC states are focused on propitiating domestic constituencies that are increasingly becoming out of touch with the wishes of youth in their countries. The spread of the internet has combined with better knowledge of the English language to create in young Arabs a desire to compete in the global marketplace on equal terms, and not simply through the sale of a single – and finite – natural resource. However, the school curricula within the GCC remain archaic and unsuited to a modernized economy. Hence there is a growing disconnect between the young and those making decisions for them, a gap that is generating a sense of insecurity in ruling groups across the region.

Instead of improving the educational infrastructure, enhancing language skills, and seeking to diversify away from petro-products, the GCC states are satiating their insecurity by seeking the overthrow of those they see (often correctly) as foes of their continued power. These are the non-monarchist rulers of nearby states. Muammar Gaddafi was one ruler such, as was Saddam Hussein, while Bashar Assad is another. Two out of the three were eliminated, and the attention is now getting concentrated on removing the third.

Neither Iraq nor Syria is any safer for the GCC potentates than they were under the previous management. The processes of democracy have made Iraq the second major Shia-dominated state within the region after Iran. Theology has brought the two together, trumping geopolitical considerations, which mandate that Baghdad ought to leverage its possession of Shia holy sites to take over the international leadership of the Shias from Tehran. Instead, Baghdad has become a contented Avis, which gloried in being second-best to Hertz. Given the challenge that Shia Islam is now facing from the Sunni-controlled GCC (at least two of whose members, Saudi Arabia and Qatar, are not merely Sunni but Wahabbi), it is no surprise that Iraq has resisted the U.S. calls to team up against Iran. As has been mentioned by this analyst in other articles, the members of the NATO seem to have joined with the Wahabbi-Sunni monarchies in the Middle East to battle against the Shia. The U.S., for example, has been vocal about giving a disproportionate share in Iraq’s oil wealth to Sunni Arabs, even while being silent over the far more egregious discrimination meted out to the Shia in Saudi Arabia. Although more than 70% of Saudi oil is in the Shia belt, members of the sect gets less than 2% of the subsidies that go to Sunnis and Wahabbis.

Again, while there has been a rising drumbeat of State Department condemnation of Syria, the response to the repression of the Shia population in Bahrain has been so muted as to be effectively non-existent. As for Iran, although most of the population despises the mullahcracy, the people as a whole are being demonized as a threat to the international order.

Not only in the USINPAC blogs but in other blogs (such as Gatewayhouse.in or the-diplomat.com), this analyst has been critical of the uncritical welcome given to the so-called “Arab Spring”: from the start, forecasting early on that it would end in a “Wahabbi Winter”, which it has. Taking a leaf from the Jihadists in Kashmir, who use the argot of human values and universal right to camouflage their actual intent to set up a Talibanized system of governance, the Wahabbi elements who were assisted by the NATO to overthrow Muammar Gaddafi have now come into the open, imposing their own version of Sharia Law and killing, torturing, and detaining their theological, social and other foes, all this to near-complete silence from Western media or chancelleries. The Libyan example ought to have served as a wake-up call to the U.S., warning policymakers in Washington away from helping the GCC Sheikhs to fulfill their personal goal of removing regional rivals from office and life. Instead, the State Department headed by Hillary Clinton has joined with the rulers of Qatar and Saudi Arabia in calling for the head of Bashar Assad. Muammar Gaddafi, who had surrendered his WMD and his intelligence secrets to the U.S. and to European countries, ought not to have been subjected to the military assault that took place for more than six months, before he was killed like a rodent near a drain. Such an ending suited the interests of the GCC rulers, but not at all NATO, which has today shown to the world that the surrender of WMD is no guarantee for safety. It is a small wonder that Syria, Iran, and North Korea are very unlikely to go the Gaddafi way. And in Egypt, after more than three decades upholding U.S. and Israeli security interests, Hosni Mubarak was abandoned to a Wahabbi mob that hates him for precisely this reason. If the military is now seeking to prosecute American citizens, it is because they know that doing by so is a surefire way of getting the appreciation of the Wahabbis, no matter how sweetly the latter croon to the U.S. and EU policymakers and journalists. Had Mubarak been given the sanctuary that Yemen’s former president has got for the moment, it would have been proof that NATO stands besides its friends rather than feeds them to the wolves once their use gets over.

Although this may not be welcome news to the lynch mob now gathering force inside the State Department, Bashar Assad is far more preferable than the motley crew of Wahabbists that are being backed with weapons and cash by the Sheikhs. The Wahabbi fanatics will cheerfully accept assistance from any quarter. However, once they succeed in ensconcing themselves, they will resist pressure the way the Taliban did after then U.S. Assistant Secretary of State Robin Raphel and then Unocal consultant Zalmay Khalilzad helped it to power during the 1990s.
Today, the warlords roaming across Libya are obedient to no one barring themselves. The GCC Sheikhs have created a monster that will soon turn on them, the way the Taliban did on the U.S. after it came to office in 1996. Adopting a policy towards the region identical to the (flawed and self-defeating) wish list of the GCC sheikhs is a prescription for disaster. And this is where Bill Clinton comes in. The buzz amongst Wahabbis in Qatar, Saudi Arabia, and Kuwait is that they have made munificent donations to the foundations and programs headed or mentored by the former U.S. President, and that it is this money that is proving to be decisive in shaping U.S. policy towards the region, and making it travel in lockstep with the GCC monarchs. Certainly such a smear must be untrue. To prove that it is so, Bill Clinton needs to make transparent the funds and other moneys that his foundations and other institutions have got from sources in the Mideast, whether directly or through fronts based in other countries. Those who claim that the U.S. policy can be purchased, the way they can in some other parts of the world, need to be shown up as being purveyors of falsehood. Come clean, President Clinton. The world knows that Hillary and you are a team. Help her by showing that the charge that you are excessively reliant on funds from Kuwait, Saudi Arabia, and Qatar are wrong.

India-US Relations Blog

U.S.-Iran Imbroglio: India’s Neutral Stance

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India’s stance seems to be that of being sandwiched between a rock and a hard place. While ASSOCHAM (Associated Chambers of Commerce and Industry) states that Iran continues to be a vital business ally as India’s demand for commercial energy including hydrocarbon is increasing. Further the Iran-India trade is expected to hit $30 billion by 2015. Tracing the events heating up over the last couple of months: Iran, Israel, and the U.S., India’s diplomatic position seems be precarious like that of a cat treading on a hot tin roof. Previously, India’s decision to go ahead and continue importing oil from Iran caused a whir in Washington. Nicholas Burns – former Under Secretary of State for Political Affairs wrote in ‘The Diplomat’ stating, “This is bitterly disappointing news for those of us who have championed a close relationship with India. And, it represents a real setback in the attempt by the last three American Presidents to establish a close and strategic partnership with successive Indian governments.” He added, “The Indian government’s ill-advised statement last week that it will continue to purchase oil from Iran is a major setback for the U.S. attempt to isolate the Iranian government over the nuclear issue.” He spoke about India’s reliance on Iran for 12% of the oil imports.

India could be viewed as being on its way to alienation and quagmire with this latest decision with Iran; it’s literally being coerced into choosing between Iran and the U.S. Its diplomatic stance on the current scenario seems to be confusing to most minds. Iran seems recalcitrant and resilient about its intent to go nuclear and the world vehemently feels otherwise. Keeping in mind, what India shares with the U.S. at this juncture, a ‘strategic’ partnership, India cannot let go off its dependence on the import while the U.S. has been anti-Iran due to its theocratic administration.

India’s diplomacy has always been on the mild and sensitized diplomatic route based on progress and peace. It is worth noting that despite its ties with Israel on tourism, agriculture, and technology, it has still been vocal about the Palestinian cause and need for sovereignty. After the thawing of the Cold War phase, India diplomatic relations with the U.S. turned towards progress and headed to the 123 Agreement signing of the US-India civil nuclear cooperation deal in 2005. As a result, India progresses as a paradigm nation of non-ritzy diplomacy keeping its focus on maintaining a common ground for one and all.

India-US Relations Blog

America & India – Political Look Back at 2011 and Ahead to 2012-2020

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This past year has been politically eventful for both and India. Next year promises to be even more so.  While the events might look different, the same macro forces are driving the events in our opinion.

America

As we enter 2012, all eyes are focused on the Iowa Caucus on January 3. This is the first round of the uniquely American game of choosing a nominee to challenge the incumbent for the Presidency of the United States.

Look back to this time last year. The Republican party had won a huge victory in the November 2010 elections and seized political control of the House of Representatives. Their momentum was acknowledged by President Obama who moved to strike a compromise with the Republicans to extend the Bush tax cuts. This mood did not last long.

It was followed by a bruising battle in the summer of 2011 for the extension of the U.S. Debt Ceiling. That process proved so dysfunctional that no one wanted a repeat in the final political battle of 2011, a battle to extend the payroll tax cut for about 160 million Americans.

Unlike a year ago, this time the House Republicans caved in. They had been boxed in by a more confident President who fought and won a tactical battle. The Republican nomination process has been a debacle of sorts, with fatally flawed candidates rising to the top of Republican polls and falling seemingly into political oblivion. With each turn, President Obama looked stronger and more capable.

But all this, we think, is more about optics than reality. The election of 2012 is likely to revolve around the condition of the U.S. economy barring a military conflict between Iran and America. But even the economy and discussion about how to improve it might be more optical and superficial than real. Why?

Because, there is a tectonic shift underway in American society. America used to be a society dominated by taxpayers. Since 1773, taxation and political representation have gone hand in hand in America. American society has been built on the premise of the American Government being responsible and responsive to American citizens about how America’s tax collections are spent. This is the core reason behind the almost uniquely American distrust of big Government.

This America is becoming passe. Today, about 48% of Americans do not pay any income taxes. So about 48% of Americans now take from the American government without contributing to it. Barack Obama is the first American President whose election symbolizes the united efforts of this half of American society. He knows it and that is why his economical policies, right from his inauguration, have been essentially distributive and oriented towards providing government resources to the less advantaged.

The American taxpayers instinctively understood that President Obama was engaged in transferring wealth from taxpayers to non-taxpayers. This realization led to the political explosion we call the Tea Party.  The 1773 Tea Party revolt was against Taxation without Political Representation. The 2010 Tea Party revolt was essentially against Political Representation without Taxation.

The taxpayers won the first battle in November 2010. The next important battle is the Presidential election in November 2012. That may be the last Presidential battle won by taxpayers in this long war. Because, the demographic tide is inexorably moving towards a majority of non-taxpayers in 2020 or perhaps by 2016.

In this setup, we see the Democratic party slowly morphing into a party of the non-taxpayers plus a slice of the very wealthy and the Republican party becoming the voice of the taxpayers who are unwilling to have their earnings taken away from them. The demographic tide, as we said, favors the Democratic party.
So we expect the Republicans, if they win the White House and keep effective control of the Congress, to take steps to build a policy framework for Less Representation for Non-Taxation. These steps might include changing electoral districts, making voting registrations difficult for non-taxpayers and even imposing minimum income tax levels (perhaps like the one already proposed by Congresswoman Michelle Bachman) on all Americans. We might see easier and increased immigration policies for wealthy and highly educated immigrants.

We see this battle shaping up as the central conflict or a civil war within American society during this decade. So any one who pines for a united, ‘can’t- we-all-get-along’ American society may be hoping against hope.

We feel so because we know of a similar battle on the other side of the world, a battle diametrically opposite to the one that will be fought in America. That battle is taking place in India.


India

As 2011 ends, we see Indian society in the grip of its own revolt, a revolt against widespread corruption in the government at all levels. But like in America, this reason is basically optics. The real reason for this revolt is the tectonic shift underway in Indian society, a 180 degree opposite shift to the one occurring in America.

Since its independence in 1947, Indian society has been a society dominated by non-taxpayers. Even today, about 75% of Indians do not pay any income tax at all. As a result, Indian Politics and Indian Government has been dominated by policies that distribute free services and goods, that seek to distribute income and wealth from people who earn to people who need.

The natural result has been corruption, endemic corruption:

  • corruption in the business class that tries to hide much of its income from tax collectors,
  • corruption in the administrative machinery that distributes government goodies to the poor, and
  • above all in the political class that seeks to build great personal wealth while in office after spending a lot to provide free goodies to gain political office.

The patient, quiet sufferers in this machine were and are the helpless middle class – the people who are unable to hide their income, the people who need services from the government – the middle class, especially the salaried middle class. But this hapless middle class has slowly but surely grown in size and confidence.

Today, this group is anywhere between 150-300 million strong, not strong enough to dominate Indian politics electorally but strong enough to create a revolt that can bring the Indian Government to its proverbial knees.  In 2011, this middle class got a leader that it can rally around – a symbol more than an actual leader, a Gandhian figure who lives a simple life and is above personal corruption.

The Congress Party, the party in power, is the leader of traditional Indian politics – giveaway policies and maintenance of vote banks by rural politicians who today are screaming bloody murder of parliamentary democracy by what they term as non-elected civil society.  The opposition parties, especially ones with a more urban political base, are supporting this revolt because it is their best chance to topple the Congress Party from power.

The political players in this war as not as clear cut as the two parties in the battle for political power in America. But the societal shift is the same and the demographic forces are arrayed similarly. The big difference is the direction and relative ascendancy.

There is an inexorable tide in Indian society towards higher income both in the urban and rural segments. Rise in incomes makes people more independent, more demanding of better conditions and prospects for a better future for their children. This is what they called the American Dream for the past century. People who strive for such a dream are willing to contribute to Government as long as their contributions are managed carefully and for the greater good by their chosen Government.

This inexorable tide is also reducing the societal chasm between various social segments or the Portuguese term “castes” imported by the British into India. Read what Lydia Polgreen of the New York Times wrote this week:

  • A recent analysis of government data by economists at the University of British Columbia found that the wage gap between other castes and Dalits has decreased to 21 percent, down from 36 percent in 1983, less than the gap between white male and black male workers in the United States. The education gap has been halved.

The battle we see in the streets of urban India, the battle seemingly against corruption, is really a battle of the rising middle class for greater control of their own tax payments, of greater say in the policies of the  Government elected by the poor rurals. Slowly rising rural incomes will bring in more rural participation in this revolt. So we expect this revolt to broaden out during this decade.

This long battle is the same battle as the one that will rage in America, but one that will look diametrically opposite.


America & India – How will they look in 2020?

India has always had a large, seemingly permanent underclass that dragged down the entire country. India has always seemed a hopeless cause, a society that would one day become great but never does. The precipitous fall in the Indian Rupee has united all the Indo-pessimists and perhaps rightly so. No country in the world seems so utterly dumb and incompetent as India does from time to time.

But we see clear evidence that, underneath the stupidity, the chaotic surface, the utter failure of all Indian Institutions, there is a major shift towards a stronger, richer, smarter and more confident society. And luck favors the diligent. The current collapse of the Indian Rupee may actually be just the medicine India needs to make Indian labor, Indian products, India’s services more competitive. The collapse of the Indian Rupee might be the medicine that forces Indian importers, including the Government, to become more efficient.

Sometimes, we think Chairman Bernanke & Secretary Tim Geithner might be looking at the fall in the Rupee and asking “why can’t the U.S. Dollar fall by 10%”? Not so precipitously of course, but slowly and inexorably. Because a weaker U.S. Dollar is a consummation they devoutly wish for. Because that is the medicine to make America’s underclass competitive in low level manufacturing.

Over the past 20 years, America has built up its own large and seemingly permanent underclass. This was ignored and glossed over in the technology bubble of the 1990s and during the credit bubble in the last decade. Now it cannot be ignored because it is on the verge of gaining long term political power.

In other words, America will begin to deal with the problem India has dealt with for the past 60 years. This may be a tougher problem for America. It never expected to have this problem. And this is a problem that has come about partly due to the best intentions of the American people.

But America will, after much loud and sometimes vitriolic debate, get around to finding solutions to its financial and societal problems. We feel confident that all segments of American society will take steps to get control of America’s debt, to cut down on wanton government spending. As American society again becomes financially lean by the middle of this decade, America, we believe, will once again welcome highly educated immigrants, the type that will tempt companies to move jobs to America.

So we see both America and India taking different looking steps to become stronger politically and economically in this decade. They can learn a great deal from each other. We think they already are and they will continue to do so.

Therefore, we are willing to bet, here and now, that despite their vividly obvious differences today, America and India will look a lot similar in 2020.

 

(This post originally appeared on Macro Viewpoints and has been republished with the approval of the author).

India-US Relations Blog

America & India – Economy & Finance – Look Back at 2011 & Ahead to 2012

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2011 began well for both America and India. The American stock market had closed 2010 with a 20%  rally from the lows of August 2010. The American economy was expected to deliver reasonably good growth of about 3% in 2011. India was, of course, was riding the wave. The Indian Government forecast a growth of 9% in 2011 with a reasonable chance of double digit growth. The Indian stock market was enjoying a boom. Capital around the world was flowing into India and Indian companies were seen looking at or buying corporate assets in Europe & America. Prosperity was all around and Indian society was ebullient.

How did the year end? America still seems fine. The third quarter GDP came in around 2% and the fourth quarter look OK. The stock market closed unchanged for the year despite the massive crisis emanating from Europe. American corporations are in as good a shape as they have ever been. America’s Banking Sector, hard hit in 2008, is now the strongest in the world.

In contrast, India seems to have fallen off a cliff. The Indian stock market is down about 26% this year, one of the worst performances of any country in the world. India saw persistent high inflation all year. This forced the Reserve Bank of India to raise interest rates several times. The Indian economy has already slowed demonstrably.

India’s seemingly sudden fall from grace is evidenced by the precipitous drop in the Indian Rupee against the U.S. Dollar. The Rupee which traded around 43-44 fell in less than two months to 52-53, a 20% drop. This makes the Indian people about 20% poorer than they were just two months ago. This severely damages India’s fiscal condition because India virtually imports all the oil it needs and oil is priced in U.S. Dollars. It also creates severe problems for the Indian Corporations who purchased western assets or borrowed cheaply in U.S. Dollars. In turn, that causes real stress for India’s Banks, the principal lender to these foolhardy Indian corporations.

As 2011 ends, the financial conditions and economic outlook for America & India seem vastly different. America seems to have come out of its 2008 financial crisis and regained its primacy in the world. In contrast, India seems to have entered its own financial crisis, one potentially worse than America’s 2008 crisis.

What happened? Why did it happen? What does this say about the two societies? What lied ahead? In this article, we lay out our views.


So Similar, Yet So Different?

Most people think America and India are very different economies. Financial lingo places America in the DM or Developed Markets category and India in the EM or Emerging Markets category.

But the Indian economy is more akin to the American economy than to the other emerging market economies. The emerging market economies in Asia and in Latin America are primarily export machines that have built fiscal surpluses and large foreign exchange reserves.

In contrast, both American and Indian economy are driven by domestic consumer spending rather than exports. Both economies benefit from free movement of labor within the respective countries from less prosperous states to more prosperous states. Both economies run fiscal and current account deficits. Both therefore are dependent on import of foreign capital to sustain their growth. Both countries have competent Central Banks that operate semi-independently under twin mandates of price stability and economic growth.

If this is the case, why do financial markets treat America and India so differently? Or to put it simply:

  • Why does money run out of India in every crisis and why does money run into America in every crisis?

Look back at America in 2008. At that time, it was a purely American crisis. The entire world recognized it as such. Lehman Brothers, a top tier U.S. Investment Bank, filed for Chapter 11 bankruptcy. The world’s largest insurance company, AIG, had to be bailed out with injection of over $80 billion in capital. The American banking system was in a deep and sorry mess.

Yet, even at the nadir of this American financial crisis, capital from all over the World ran, nay flooded into America. The U.S. Dollar rose in value against the Euro and the Emerging Market Currencies. And yes, the Indian Rupee fell to about 52 against the Dollar in 2008 even though India had no financial or banking problems.

In contrast, today’s Indian financial crisis is seemingly smaller and more contained than the American crisis of 2008. Yet, the Indian Rupee has fallen precipitously, fallen harder and lower than just about any other currency in the world, fallen below the 2008 low of about 52. Chartists now forecast a further fall to the 57-58 level against the U.S. Dollar.

So if the two economies are so similar, why do financial markets treat them so differently?

Difference Between Economics & Finance

This is not just nomenclature. These two disciplines are related but very different. Economics is a science while Finance is a technology. Every country in the world understands economics. It is taught in every university in the world. India has excellent economists. The Prime Minister of India, Dr. Manmohan Singh, is a noted economist. And so is Montek Singh Ahluwalia, the foremost economic bureaucrat in India. These two were the brain trust behind the Indian economic reforms launched in 1990.

Yet, these two noted economists and all their colleagues in India proved inadequate in preventing the recent collapse of the Indian Rupee. It seems that they didn’t even see the approach of this recent crisis. That may be because they completely misunderstood the true nature of America’s 2008 financial crisis.

Think back to the proud proclamation of Sonia Gandhi in 2008 & 2009:

  • “It was my Mother-in-law Indira Gandhi who nationalized India’s Banks. That is what protected India from the global economic crisis”.

This was not just her boast. Every single economist in India and the entire Indian ‘elite’ believed that the American financial crisis of 2008 had demonstrated that the Indian economy was based on sounder economic footing and free of excesses evident in America’s freewheeling financial system.

So the Indian ‘elite’ concurred with Sonia Gandhi and the Indian Government poured economic stimulus into the Indian economy. This runaway spending together with large capital inflows triggered partly by  U.S. Quantitative Easing (engineered by the U.S. Federal Reserve in the Autumn of 2010) created a credit bubble in India in 2011.

This bubble has now burst and we all see the result – massive flight of capital out of India, widening of fiscal and current account deficits, a weak, leveraged corporate sector and India’s nationalized banking sector clogged with poor quality loans.

The American crisis of 2008 was only a banking & financial crisis. The state of the U.S. Government and its Debt market was very sound. That is why the world’s capital rushed into America, to the safety of the U.S. Government Debt. This is why the U.S. Dollar strengthened despite the crisis in America’s banking sector.

In contrast, the Indian crisis of 2011 is much worse. It is a Government-Banking-Corporate crisis all rolled into one. Would you keep your risk capital in India during such a crisis? Of course not. This is why global capital rushed out of India in a financial stampede in November 2011.

The reality is that India’s financial ‘elite’ has never understood the difference between the science of Economics and the technology of Finance. An example might illustrate our meaning:

  • Think back to a comment by an Indian General just before the 1991 Gulf War.  The Iraqi Army of Saddam Hussein was trained by officers of the Indian Army. This General was quoted as saying that the Iraqis would give “a good account of themselves” in the war.  We all know what happened. The Iraqi Army, the fourth largest in the world, was destroyed in a week. The “Shock & Awe” of American military technology converted the huge Iraqi Army into a helpless flock of sitting ducks.

The Indian economy was geared by and towards the science of Economics. The Indian Government, the Indian Banking Sector, the Indian corporate sector had never bothered to build up the financial infrastructure necessary to protect the Indian economy from a financial stampede. The result is what happened in November 2011, what usually happens to a system, a country that does not understand or use modern technology.


Finance as a Central Technology – Difference between America & India

Look at the Indian Government, the Indian Finance Ministry, Indian Financial Markets, Indian Academic Institutions. They are all staffed by Economists, Bureaucrats or Politicians. And none of these have any first hand knowledge, any real experience with financial markets.

In contrast, look at the American Government and its Treasury Department. These are staffed by veteran financial market players who have first hand experience in dealing with financial market panics and liquidations. America was very lucky to have Hank Paulson, ex-CEO of Goldman Sachs, as the Treasury Secretary in 2008. It was he who contained the fallout and rammed the massive TARP program through a Congress that had no clue about the scale or ramifications of the crisis. Today, America has Tim Geithner who managed the 1998 financial crisis and worked with Hank Paulson in October 2008 from his vantage position at the New York Fed.

There is a deep reservoir of financial technology expertise in America’s Wall Street and America’s Academic Institutions. Talent from this reservoir moves to and fro between America’s Government Institutions and Wall Street.

So America and India may have similar economies but their financial markets, their financial technologies are vastly different. This is true of military technologies as well. India’s military generals were stunned by the collapse of the Indian-trained Iraqi military in 1990. It was an important lesson and the Indian military used it to begin a slow but steady modernization drive that continues to this day.

We know that India’s financial generals are stunned by the sudden collapse of the Indian Rupee. We hope they learn the real lesson of this collapse. We hope they begin a slow and steady drive to modernize India’s credit and commodity markets with modern financial ‘technology’.

The United States of America is the world’s foremost leader in the Technology of Finance. This is why America’s Financial Markets are the deepest, most transparent, most liquid and most innovative in the world. This is why the world’s capital runs into America in every financial crisis.

Until India embraces and implements this technology, India’s financial markets will remain puny, illiquid and essentially powerless to protect India’s economy from any financial crisis.  Until this changes, the world’s capital will continue to run out of India in every financial crisis.


A Silver Lining and Pure Luck?

Given the discussion above, our next statement might surprise readers. We suspect America’s financial leaders, Tim Geithner, Ben Bernanke and perhaps even President Obama, might be looking at India with a touch of envy. We believe they would just love it if the U.S. Dollar fell by about 10% from current levels. Instead, they watch with a degree of trepidation as the U.S. Dollar rises against other currencies.

They realize that India, all of a sudden, is far more competitive as a nation. The services of Indian information technology staff, the core of India’s technology exports, are now 20% cheaper than they were just two months ago. The Indian Rupee has not just fallen against the U.S. Dollar, it has also fallen against other emerging market currencies. As a result, India’s manufacturing products are now 10%-20% cheaper than Chinese, Malaysian, Indonesian and Vietnamese products than they were two months ago.

Since India is primarily a domestic consumption economy, the average Indian is relatively unaffected by the fall of the Rupee against foreign currencies. And if the price of Oil falls because of a global slowdown, then India’s inflation might go down and its balance of payments might improve despite the fall in the Rupee.

Indian economy has one advantage that most developed or EM economies don’t – huge, secular, unmet consumer demand for just about every product known to mankind. So once the world economy stabilizes, India will again become a magnet for foreign capital flows, an India that will be 20% cheaper to enter than it was in October 2011.

We see a world in which every major country will try to lower its currency to make itself more competitive. India will not have to try. By sheer dumb luck, India has already achieved in a free market manner what others will try to achieve via government policies. And so India might have the pole position when the race begins for the new growth phase.

This is the silver lining we see in today’s dark cloud that dominates India’s economic sky.

 

(This post originally appeared on Macro Viewpoints and has been republished with the approval of the author).