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).

Defence And Strategic Affairs Blog

Strategic Uncertainty: Managing Emerging Threats and Challenges

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Though the year gone by was relatively peaceful for India, the security environment in India’s regional neighbourhood has been steadily deteriorating. The greatest causes of regional instability are the strident march of Islamist fundamentalism across the Af-Pak border and the unresolved conflict in Afghanistan. In fact, the scourge of Talibanisation is creeping forward gradually and threatens to cross the Radcliff Line into India if it goes unchecked.

The unstable security situation in Afghanistan continues to be worrisome. The US-led NATO-ISAF troops will soon begin their planned withdrawal even though the Afghan National Security Forces (ANSF) are as yet incapable of taking over independent charge of security, particularly in the districts which are strongholds of the Taliban. The ANSF are too few in number – only 200,000 army and police personnel have been trained so far. They are inadequately trained and ill-equipped and lack the standards of junior leadership that are critical for success in intense counter-insurgency operations.

Since the elimination of Osama bin Laden, the precarious relationship between the Pakistan army and the ISI and their U.S. counterparts – ostensibly major allies in the war against terrorism – has weakened further. The killing of 24 Pakistani soldiers during the bombardment of a border post by NATO-ISAF aircraft in November outraged Pakistan and led to the decision to stop the flow of logistics convoys through Quetta and Peshawar, deny base facilities at Shamsi and demand re-negotiation of the rules of engagement. The worst fallout has been the politico-military standoff within Pakistan that threatens the continuation in office of the fledgling civilian government.

Marked reduction in the levels of infiltration across the LoC into Kashmir over the last few years and the fact that no major terrorist strike has been initiated by ISI-backed organisations like the LeT and JeM since 26/11, convinced India to resume the stalled rapprochement process. However, the two armies continue to face off eyeball-to-eyeball on the LoC and at the Saltoro Ridge west of Siachen Glacier and a small incident could bring the informal cease-fire to an abrupt end. Toning down of the anti-India rhetoric and terrorist strikes is a tactical ploy to tide over internal difficulties, rather than a long-term change in the military strategy designed to bleed India through a thousand cuts. The Pakistan army and the ISI are keeping the machinery for terrorist strikes well oiled so that they can raise the ante in a short time frame whenever they choose to do so.

The Chinese have been aggressively opposing even a non-military Indian presence aimed at prospecting for oil and gas in the South China Sea while themselves seeking naval bases in the Indian Ocean. Chinese scholars have expressed strong reservations against India’s quest to reach out strategically to democracies in East Asia. They have denounced multilateral (Australia, India, Japan and US) naval exercises aimed at enhancing maritime cooperation in the Asia Pacific and the Indian Ocean as being aimed at the strategic encirclement of China.

The Chinese abruptly postponed the 15th round of boundary talks between the special representatives in November 2011 as India refused to relent on the Dalai Lama’s participation in a private conference on Buddhism. Chinese diplomatic, political and military assertiveness at the tactical level is likely to continue into 2012 and beyond. However, at the strategic level the relationship will remain stable.

The government of Sheikh Hasina in Bangladesh has reversed decades old anti-India policies and has begun to cooperate with India in rooting out insurgent groups operating against from its soil. The resolution of the boundary dispute is now being addressed in a friendly manner. Iran’s continuing quest to obtain nuclear weapons may lead to a standoff with the U.S. in the Strait of Hormuz if Iran blocks the flow of oil. India’s relations with Myanmar’s relatively more open Thein Sein regime have been improving steadily, resulting in better security cooperation. However, the Myanmarese government is struggling to bring the Kachin, Karen and Shan insurgencies under control.

Despite many extensions in the deadline, Nepal has failed to frame a new constitution or find an amicable solution to the integration of former Maoist cadres in the army. With the increasingly pervasive Chinese presence in Nepal, resentment against India is growing. Even though the Sri Lankan government has made little effort to successfully address the decades old aspiration of the Tamil people for ‘eelam’, the country has remained free of violent conflict.

The internal security situation in India has shown significant improvement. The army and other security forces have gained ascendancy in Kashmir and the number of incidents of violence has declined sharply. Insurgencies in north-east India have begun to recede and negotiations to resolve the crises are making progress. The areas worst affected by Naxalite or left wing extremism have been fairly quiet and the central police organisations are gradually gaining ground.

Concerted political, diplomatic and military efforts must continue to resolve outstanding disputes and better manage the manifold threats and challenges to national security. The armed forces and the central police and para-military forces must keep their chins up and their powder dry.

India-US Relations Blog

An Immigration Deal with India

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An agreement not only makes sound economic sense, but would also strengthen the foundation of U.S.-India relations.

From the maelstrom of legislative gridlock that is Washington, at least one ray of bipartisan comity has emerged. In a nearly unanimous vote, the House of Representatives has passed a bill to allow more skilled immigrants from India and China to become legal permanent residents. At a time of rising protectionist sentiments, the move is important recognition that U.S. economic vitality requires greater access to the global pool of human capital.

The bill is now being considered by the Senate. Its arrival is particularly timely. The United States has been able to maintain its global preeminence in no small part due to the influx of foreign science and engineering professionals and students. High-skilled immigrants are a significant driving force of American prosperity and innovation, most famously in Silicon Valley. Research indicates, for instance, that Indian immigrant entrepreneurs play a leading role in founding some of the most dynamic high-tech companies.

America’s dependence on foreign-born technology professionals will shortly become all the greater. Since younger native-born workers tend to lack the skill levels of their baby boomer parents now nearing retirement age, the United States could face broad and substantial skill shortages in the coming decade.

But U.S. policymakers should go one step better by signing a bilateral agreement with New Delhi guaranteeing a set number of temporary work visas for high-skill Indian professionals. The U.S. has crafted similar agreements with a select number of other countries, including the TN temporary visa program (created via the North American Free Trade Agreement) that exempts qualified Canadian and Mexican professionals from the annual quota on H-1B work permits.

With India a major source of high-skill professionals and the U.S. needing to draw on foreign talent to fortify its own science and engineering workforce, both countries have a keen mutual interest in cooperating in the area of human capital, the most critical resource in the dawning global innovation economy.

Admittedly, important constituencies in both countries regard the global talent pool as a zero-sum proposition. In the United States, some argue that increased mobility of foreign high-skill workers will displace or depress wages of native professionals. The empirical evidence, however, suggests that greater numbers of talented immigrants actually supports job creation in the United States.

India likewise would stand to benefit from the increased mobility of its technology professionals. Instead of causing “brain drain,” the global innovation economy is actually generating “brain circulation” or a “brain chain,” in which expatriate talent returns home with acquired capital, skills and knowledge, as well as personal links to transnational entrepreneurial and technological networks. Obviously, some of the high-skill Indians who benefit from the bilateral immigration accord will choose to remain permanently in the United States, though they would in time contribute a significant stream of remittance income and serve an important bridging function between Indian innovators and entrepreneurs and those in other countries. But others, empowered by new ideas and experiences, will return in time and play a direct role in the nation’s development.

The United States and India are prime constituents in the brain circulation process. Far from seeing access to the global talent pool as a zero-sum proposition, the interdependency of their skills base requires them to act in a cooperative way. Doing so not only makes sound economic sense, but would also strengthen the foundation of U.S.-India relations.

Immigration Blog

Reforms That Would Help Employer-Sponsored Immigrants

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Indians wait longer than other potential employment-based immigrants. That means reforms to America’s employer-sponsored immigration system are likely to help many Indians, as well other skilled professionals. There are several actions Congress or the executive branch can take that will reduce wait times and provide substantial relief to employers and skilled immigrants.

STEM Exemption for Skilled Immigrants

First, Congress can exempt from the green card quotas immigrants with a master’s degree or higher from a U.S. university in a science, technology, engineering or math (STEM) field. This provision has been included in past legislation by Rep. Zoe Lofgren (D-CA) and some others. Congress could expand this measure to go beyond only degrees in those fields or to include individuals who received a Ph.D. in a technical field from abroad. Research has shown those who receive their degree abroad arrive in the United States with substantial human capital, garnered without any U.S. expense, but also may be among the finest in their fields.

Count Only Principals, Not Dependents, Toward Annual Quota

Second, a new law could count only the principal employment-based immigrants, not their dependents, against the 140,000 annual employment-based quota. One reason for the large green card backlogs is that annual H-1B temporary visa quotas count only the principal recipient of an H-1B visa, whereas about half of the 140,000 quota for employment-based immigrant visas is utilized by the dependents (spouse and/or children) of the sponsored immigrant. In addition, Congress could raise the 140,000 annual quota to a higher level.

Utilize Unused Employment-Based Green Cards

Third, lawmakers could provide additional green card relief by including numbers previously allocated by Congress that were not utilized in prior years, such as due to agency processing delays. The State Department estimates there are more than 300,000 unused employment-based green cards allocated in previous years that have never gone to recipients due to administrative issues.

Eliminate the Per Country Limit

Fourth, Congress could eliminate the per country limit on employment-based immigrants. H.R. 3012 would accomplish this feat over a four-year period. The legislation passed the House and, at least for now, is being delayed by a “hold” on the legislation by Senator Charles Grassley (R-IA). Liberalizing rules for employment-based green cards is less controversial than other proposed immigration reforms, as evidenced by the overwhelming vote in the House of Representatives on H.R. 3012.

Allow Filing of Adjustment of Status Before Priority Date

Fifth, allow individuals to file for Adjustment of Status (Form I-485) prior to when his or her immigrant visa become available. Currently, skilled foreign nationals mired in the employment-based green card backlog are often not able to accept promotions or change jobs without the risk of starting their green card applications again. For those waiting a long time the fear of waiting even longer is significant. That would change if early filing of Adjustment of Status were permitted.

If U.S. Citizenship and Immigration Services were to allow individuals waiting for green cards to file for Adjustment of Status even if their priority date has not been reached it would facilitate a more normal existence for those stuck in the green cad backlog. For example a spouse would likely become eligible to work legally in the United States. Also, it is likely the ability to travel in and out of America would become easier, helping people both personally and professionally.

Implementing any or all of the reforms recommended here would aid U.S. employers, immigrants and the American economy, keeping more talent and resources inside the country.

Immigration Blog

The Contributions of Skilled Immigrants to America

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Venkatraman Ramakrishnan, a naturalized U.S. citizen born in India, shared the 2009 Nobel Prize in Chemistry with American-born Thomas Steitz and Ada Yonoth of Israel. Their work using x-ray crystallography has provided “fundamental information about the workings of the cellular machinery at the atomic level and is already being exploited by pharmaceutical companies working to make new, more effective antibiotics,” according to the Los Angeles Times.

Nobel Prizes

Immigrants to America have a long history of achievement in Nobel Prizes and other forms of international recognition in the sciences. “It is fairly clear that Americans with recent foreign roots are overrepresented in any classification of Americans who have brought honor and recognition to the United States,” concluded the National Research Council, a part of the national Academy of Sciences, in its 1997 report The New Americans. As of 1997, the National Research Council found immigrants made up between one-quarter to one-third of the U.S. Nobel Prize winners: 26 percent in chemistry, 32 percent in physics, 31 percent in physiology medicine, 31 percent in economics and 27 percent in literature.

Some who oppose immigration more generally – or high skill immigration specifically argue they have no problem with America admitting Nobel Prize winners, just not others of lesser distinction. The problem is even America’s recent Nobel Prize winners were often just promising students when they first began the process of immigrating to the United States. For example, Elizabeth Blackburn first came to America in 1975, more than three decades before earning the Nobel Prize in Medicine and 10 years before she published her seminal paper that led to the prize. More generally, there are valuable contributions that can be made to the economy and society that would never be recognized by a Nobel Prize Committee.

Dr. William Ganz developed a “revolutionary catheter to measure blood flow and heart functions” with co-inventor Dr. Jeremy Swan, an immigrant from Ireland. Ganz, a Jew in Czechoslovakia during the Nazi invasion, managed to survive World War II and came to Los Angeles in 1966, no longer wishing to live under a communist regime. The Swan-Ganz device produced “a phenomenal impact on the understanding of cardiovascular disease,” according to Dr. Jeffery W. Moses, director of the Center for Interventional Vascular Therapy at Columbia University Medical Center. In the 1980s, Ganz worked with Dr. P.K. Shah, an immigrant from India and director of cardiology at Cedars-Sinai Heart Institute, in developing clot-dissolving therapies now considered standard for helping victims of heart attacks.

Research on the Contributions of the Foreign-Born

Paula Stephan (Georgia State University) and Sharon G. Levin (University of Missouri-St. Louis) performed extensive research on the contributions of the foreign-born in 6 areas of scientific achievement. Those areas included election to the National Academy of Sciences/National Academy of Engineering, the launching of biotechnology companies and authors of scientific publications. After examining a study group of more than 4,500 scientists and engineers, Stephan and Levin wrote, “Individuals making exceptional contributions to science and engineering in the U.S. are disproportionately drawn from the foreign-born.  We conclude that immigrants have been a source of strength and vitality for U.S. science and, on balance, the U.S. appears to have benefitted from the educational investments made by other countries.”

Among the findings in the Stephan-Levin research were that 19.2 percent of the engineers elected to the National Academy of Engineering are foreign-born, compared to the 13.9 percent of the engineers who were foreign-born in 1980. Also, members of the National Academy of Sciences are “disproportionately foreign-born;” 23.8 percent of the scientists and engineers elected to the National Academy of Sciences (NAS) are foreign-born, compared to 18.3 percent non-natives in the U.S. workforce.

According to Stephan and Levin, “We find the foreign-born to be disproportionately represented among those making exceptional contributions in the physical sciences . . . more than half of the ‘outstanding’ authors in the physical sciences are foreign-born compared to just 20.4 percent of physical scientists who are foreign-born in the scientific labor force as of 1980.”

Conclusion

Stephan and Levin found, “We also find evidence contributions to U.S. science and engineering are disproportionately drawn from the foreign-educated, both at the undergraduate and at the graduate level.”

The research by Stephan and Levin indicate America may be wise to make it easier for those who receive their schooling abroad to immigrate, particularly at the Ph.D. level. But whether we make it easier for those who receive their degrees in America or abroad, it is clear that immigrants make important contributions to science, engineering and related fields in America.