Credit where credit is due

The surprise news on Friday morning was that Moody’s Investor Services upgraded India’s credit rating to Baa2 from Baa3 and changed the outlook to ‘stable’ from ‘positive’. About a year ago, S&P had ruled out an upgrade to India’s sovereign rating for at least two years. Their rating is BBB-, similar to Moody’s pre-upgrade rating of Baa3.

The Government of India and its Chief Economic Advisor have, on several occasions, criticised the rating agencies for their slow response or non-response to India’s improving or sound fundamentals. They may have a point because for foreign investors, the ratings agencies’ decisions are useful signposts, whether correct or not, justified or not. They do not have the time to go into depth. They go by the so-called ‘due diligence’ done by the rating agencies.  To that extent, the optics of a good rating matters.

But, philosophically, the Government is better off doing its job and letting rating agencies arrive at their conclusions at their own will and pleasure. In the long-run, it is only a marginal factor. But, politicians in democracies with regular elections (with elections to States, it is worse, in India) are anything but long-term.

The timing of the Moody’s upgrade is a surprise because the day before, India’s Finance Minister, speaking at a Morgan Stanley forum, had said,

“No pause (on fiscal consolidation) but challenges arising from structural reforms…could change the glide path,” Jaitley said at the annual Asia Pacific meeting organised by Morgan Stanley in Singapore. [Link]

In plain English, the Government of India is all set to miss its fiscal deficit target for 2017-18 and there might well be a slippage in 2018-19 compared to the target set out earlier. Whether it is good or bad and whether it is for the right reasons or wrong reasons are separate debates. But, that is the truth and hence, Moody’s might be a bit embarrassed about its timing.

Further, the Government of India has sought a special dividend from the Reserve Bank of India to pay for its bank recapitalisation. All told, that may not be deemed a credit positive. Employees’ union in the central bank has opposed it.

All that being said, the Government of India deserves praise (I am not being cynical here) for managing the international optics better in recent times. It earned a 30-ranking jump in the ‘Ease of Doing Business’ ranking thanks to the implementation of the Goods and Services Tax (could have been done far better) and Insolvency and Bankruptcy laws. The latter, for all the gaming being attempted by borrowers, is somehow, going well and as one would expect. There is learning and there is a quiet determination on the part of the creditors to use it to bring wilful defaulters-debtors into line.

Whether we are government supporters or not, any observer has to acknowledge that India’s business environment is undergoing a structural transformation, for the better. The big boys are being dragged, ‘kicking and screaming’ into better behaviour and not rely on their connections. Well, some are above the fray, still. That has to wait for some more time, I guess.

So, the government deserves credit for improving the optics. They do matter. Further, India’s credit rating at Baa3 was a bit harsh compared to the single A rating that China enjoys with its own poor public debt and fiscal deficit dynamics. Ask the IMF or check out my brief for the Gateway House published in September.

The relevant tables are worth re-publishing. IMF, in its Article IV consultation report, generated the gross public debt and fiscal deficit dynamics for China up to 2022. Contrast that with what the IMF estimated for these two parameters one year ago. The two tables are reproduced below:

IMF_China public debt and deficit dynamics_2017

Source: * Projected figures | Source: People’s Republic of China 2017 Article IV consultation—press release; staff report; and statement by the executive director for the People’s Republic of China, International Monetary Fund, August 2017 (Table 1, page 43)

IMF_China public debt and deficit dynamics_2016.png

Source: * Projected figures | Source: People’s Republic of China 2016 Article IV consultation—press release; staff report; and statement by the executive director for the People’s Republic of China, International Monetary Fund, August 2016 (Table 1, page 39)

Fiscal deficit minus expected revenue from land sales equals net lending/borrowing in the above tables. In other words, properly accounted fiscal balance and public debt are worse than India’s general government (centre + states) fiscal balance and public debt.

The table below provides corresponding figures for India on general government deficit and debt to facilitate comparison.

IMF_India_public debt and deficit dynamics_2017

* Projected figures | Source: India 2017 Article IV consultation—press release; staff report; and statement by the executive director for India, International Monetary Fund, February 2017 (Table 7, page 62)

Despite the recent downgrade in May this year, China has an A1 credit rating from Moody’s.

As for India, whether it would result in enhanced foreign investor interest in Indian stocks and bonds, I am not so sure. Most of them would be inclined to look through the upgrade in the light of recent data in India. The Indian rupee has strengthened almost a full percentage on the news. It is trading below 65 to a (US) dollar. There is room to think that this is as good as it gets for the Indian rupee.

India’s October inflation and trade data were both disappointing and worrying.

India’s consumer price index (CPI) inflation and wholesale price index (WPI) came in higher than expected. At 3.6%, CPI inflation was slightly higher than  market expectation of 3.5% and vs. 3.3% in September. WPI inflation also recorded an annual percentage change of 3.6% but it was well above  market expectation of 3.0% and 2.6% in September.

India’s trade deficit for October was much higher than expected. Exports at USD233.6bn was 1.6% lower than the level in Oct. 2016. Imports were USD371.2bn in October, about 7.65 higher than it was in October 2016. Oil imports rose sharply in October 2017 over October last year (+27.9%) and oil imports were also higher in the period between April – Oct. 2017 compared to April – Oct. 2016 (+20.2%). It is mainly the oil price effect and there has been no big  change in the volume of import.

Non-oil imports were higher by 2.6% in Oct. 2017 vs. Oct. 2016. But, for the April – Oct. 2017 period, they were sharply higher (22.8%) over the same period last year.

Merchandise trade deficit was USD86.1bn for April – October 2017 vs. USD54.4bn in the same period last year. Including services, the deficit was USD52.6bn vs. USD22.1bn in the same period last year. Source: See the press release from the Ministry of Commerce.

In sum, the quick and sharp jump in WPI and CPI and the Oct. trade numbers show how weak the foundations of the Indian economy are, in terms of productivity. It is an economy that is hemmed in from many sides – production, distribution, infrastructure and governance. Long way to go.

Neelkanth Mishra of Credit Suisse wrote, after seeing the October trade numbers, that, “the fog on the economy now extends to the currency as well.” Oh, well.

So, the Government of India should count November 16 as a lucky day.


Why I don’t agree with Kevin Rudd

Kevin Rudd has a piece on the rise of China for ‘Project Syndicate’. I disagree with him for the following reasons:

(1) I am, by nature, a contrarian.

(2) The current consensus on China being the global model on everything from democracy to market economics to trade openness to gender equality is so risible that it does not behove intelligent people to join the bandwagon.

(3) China has become more indebted than the West before it has become half as prosperous as the West.

(4) Asia is still short of vital resources such as water. China is no exception.

(5) The dominance of the West (in the aggregate) is only 200 years old whereas Asia (India and China) dominated for nearly Eighteen centuries. There is plenty of time for mean reversion to happen.

Trump in Vietnam on India

India is celebrating the 70th anniversary of its independence. It is a sovereign democracy, as well as — think of this — over 1 billion people. It’s the largest democracy in the world. (Applause.) Since India opened its economy, it has achieved astounding growth and a new world of opportunity for its expanding middle class. And Prime Minister Modi has been working to bring that vast country, and all of its people, together as one. And he is working at it very, very successfully, indeed. [Link]

In this context, two tweets by Chris Balding deserve mention.

First tweet:

What do you think China’s model is if not “nationalism, protectionism, unilateralism & xenophobia”?

Caroline Freund @CarolineFreund

If Trump’s retreat into nationalism, protectionism, unilateralism & xenophobia continues, China’s model could win.

This is the second tweet:

I’m not about to say yet that Trump got Beijing to open up bank ownership, but if it comes out Trump admin played a role, will everyone who said he was played please step forward? No one? Anyone at all? [Link]

You have to believe this story because it appeared in ‘South China Morning Post’:

Chinese officials pay homage to tree planted by Xi Jinping as Communist Party chiefs get in touch with their roots.

Let me close with Ely Ratner’s tweet:

I’d like to see more reporting on the absurdity of Xi’s major speeches, contrasting his rhetoric about openness and globalization with the actual situation in China.


China opens financial sector and other links

Bloomberg captions its story on China opening its financial services industry to foreign majority ownership with a mention of banks. But, the details do not mention banks yet. Only security companies, insurance firms and asset management companies. [Link]. Ownership cap of 51% for foreigners will be lifted after a few years. But, one has to watch for conditions and other restrictions.

Ian Bremmer in TIME: ‘How China’s Economy Is Poised to Win the Future’.  A conclusion  that backs China – heavily caveated though. But, I am not sure I still agree. [Link]

The Economist says that the private sector has prospered under Xi. Something that has perhaps not happened under the Indian strongman PM in the last three years. [Link]

A very interesting and important piece by John Pomfret in WaPo on the changing thinking in Washington, D.C. on China.

JAVIER C. HERNÁNDEZ and AUDREY CARLSEN write an interesting piece in NYT on the personality cult that is being built around President Xi.

“China’s planning a 1,000km tunnel to divert water away from one of India’s largest rivers”, says a headline in Quartz. It will be hugely problematic for India and Bangladesh. [Link]

Bloomberg has an interesting story on a note that the Chairman of the People’s Bank of China has penned on the website of the bank. The English version is not out yet. But, one can use ‘Google Translate’ to read it in English. The Bloomberg story is here and the Chinese language page is here.

It would be a mistake not to include the tit-for-tat articles by Joseph Nye on America holding aces in the poker game with China and the retort by Wang Wen that China holds the aces now. The claim by Wang Wen that China holds aloft the banner of free trade is rather amusing. These two articles must be read together with the articles by Ian Bremmer and John Pomfret. Apologies if they are behind paywalls.


(1) If one wanted to stay safe  traveling in dangerous, it is good to carry something to trade, when threatened such as, say Rolex watch. Plus, more tips here.

(2) The contrarian in me is tickled by this long-form article in FT on the travails of the Deutsche Bank. [Link]. Most likely behind a paywall.

Tired, old and unhelpful

Read this Edit in ‘Business Standard’ on how India should be cautious about not ‘irking’ or ‘annoying’ China by joining the Quad – U.S, Australia and Japan with India included.

An unfortunate edit especially the finishing note. What has India got to show for its ‘non-alignment’ with respect to China and for being mindful of its sensitivities? Even as this Edit was being written, China was harping on the lack of consensus in the U.N. Security Council on the lack of consensus in the Security Council on declaring Masood Azhar a ‘Global Terrorist’.

When will we be ready or what would it take – over and beyond what has happened over the years – for us to shed old shibboleths and repeat the tired, old advice that have nothing to show for them in terms of results on enhancing India’s security or standing?

Read Richard McGregor here and here as to what and who is driving China’s (what it sees as its inevitable) quest for dominance. These Edits are pointless.

Watershed Congress

In a brief comment on the National Congress of the Communist Party of China, JP Morgan Asia Chief Economist Jahangir Aziz and Haibin Zhu call the Congress a watershed moment for China. Simply put, they think that China is ready to re-balance because they have re-defined their ‘principal contradiction’. Well, I remain sceptical.

What is, perhaps, missing is the mention that this re-statement of the ‘tension’ will have to stand the test of a true economic slowdown, true de-leveraging from a massively inflated leverage.

It won’t be easy at all because the government itself has encouraged speculation in the stock market, in housing, etc. , with periodic bouts of leveraging.

The jump in leverage since 2015 equity market crash has been almost as dramatic as the one that happened post-2008. The same President has been in office in 2015 too. Reversing any of these will be easy, assuming that they really do want to reverse these.

Not to mention the apparent contradictions in the statement that JP Morgan mentions. In other words, the watershed moment in words might remain just that without being translated into a watershed moment in deed.

That risk is not insubstantial.

Not a speech of isolationism

Two days ago, America’s Secretary of State Rex Tillerson made a very important speech. That it was delivered on the same day that China’s President Xi Jinping delivered his address to the 19th National People’s Congress is, may be, an interesting coincidence. May be not.

The full speech is here. ‘Trust but verify’ AND ‘Verify but trust’ have very different implications. Should India go for the latter with the US now or is it already doing  that? I think India should be inclined towards the second.

The word, ‘responsibly’ used in two different contexts:
“China, while rising alongside India, has done so less responsibly, at times undermining the international, rules-based order even as countries like India operate within a framework that protects other nations’ sovereignty.”
“It is indeed time to double down on a democratic partner that is still rising – and rising responsibly – for the next 100 years.”
“We need to collaborate with India to ensure that the Indo-Pacific is increasingly a place of peace, stability, and growing prosperity – so that it does not become a region of disorder, conflict, and predatory economics.”
“We also must recognize that many Indo-Pacific nations have limited alternatives when it comes to infrastructure investment programs and financing schemes, which often fail to promote jobs or prosperity for the people they claim to help. It’s time to expand transparent, high-standard regional lending mechanisms – tools that will actually help nations instead of saddle them with mounting debt.”
Role in the Regional Architecture
“India and the United States should be in the business of equipping other countries to defend their sovereignty, build greater connectivity, and have a louder voice in a regional architecture that promotes their interests and develops their economies. This is a natural complement to India’s “Act East” policy.”
I doubt if any other Secretary of State has said this as forcefully as before:
“Security issues that concern India are concerns of the United States”
Does this speech sound like the speech of an administration that is isolating itself?
There is lot of ‘breast beating’ about the U.S. withdrawing and isolating itself. Not at all. Whether we agree or not, they have come to the conclusion that the architecture that they created post-WW II is no longer helping them advance  their goals but somebody else’s. Hence, they are walking away from it in order to weaken it. That is strategic withdrawal and not isolation.
Mind you, Reagan took the U.S. out of UNESCO before. I do not think Reagan enfeebled America. No, I am not saying that the outcome would be the same this time too. I have no idea and I avoid getting into the prediction business.
But, I think that the intent is not isolation but re-making, which may not be and is not to the liking of some. But, that is different from calling it ‘isolation’.