So what’s Mallika got to do with RBI?
It’s time RBI resorts to a logical, rational & neutral monetary policy stance

(column by Asif Ahmed)

As the top brass of the Indian economic brigade ramble on the rhetoric rhymes of the performance of Indian economy, one must not forget that in the current global scenario, the fundamentals of the Indian economy are as temporary, as Mr. Chidambaram’s and Mr. Reddy’s existence. It is very likely that the same ‘story’ on which the Finance Minister asks us to believe in, might become a ‘fable’ for future policy makers’ references as to how building ‘stories’ in air could be suicidal to an economy.

As evils like spiraling inflation, tumbling rupee, parched stock markets & unfathomable deficits were back in business, B&E had been continuously warning the RBI against its ridiculous moves to hike interest rates across the board; and had alternatively suggested sector specific credit flow controls. As if to vindicate our stand, on July 21, 2006, the Finance Minister finally gave a statement forecasting that interest rates will soften in the future.

Though Chidambaram claims that this is because inflation has fallen down to 4.68%, what he conveniently forgets to mention is that in April 2006, the comparative inflation figure was just 3.5%; a figure that was thrown away to the wind with the illogical interest rate hikes in the same very months of low inflation. Of late, even the rupee depreciation has made it to headlines, falling to a 3-year low of Rs.46.99/47.00 per dollar. Any further decline will surely discourage invisible capital inflows that were made purely on the basis of forex rate strength.

This clearly signifies that we cannot depend on such kind of invisibles (which restricted current account def cit in FY 2006 to $10 billion, in spite of a monstrous $50 billion trade deficit) to bail out India in the future as well. Clearly, unless RBI follows a neutral monetary policy stance, the way the Indian cookie crumbles would be very similar to Ms. Shehrawat’s clothes! Thankfully, that’s all that Mallika has got to do with RBI.

When Rome was burning, SEBI was...
New products can wait; fundamentals need an immediate attention

There are three kinds of people in Indian financial markets – first, who make things happen (alright, you’ve heard this before) and massively profit due to such happenings; second, like us, who keep garbling away to acerbic glory about all happenings that are going wrong with the financial world (you’ve surely not heard this before); and the third, who never even tried to wonder what was happening all along. And to this benign third category belongs our tried and trusted SEBI.

The markets were witnessing never before seen FII-profiting volatilies, B&E and the likes kept shouting hoarse on control measures, and guess what SEBI was busy implementing? In a move akin to Nero’s famed violin skills, in July, SEBI introduced the historic “Real Estate Mutual Fund” (applause!). The ostensible objective behind the launch was to enable small investors to participate and gain from the ongoing real estate boom. Real estate boom?!?! And retail investors?!?!!

As Amit Saxena, all India Head, Planman Financials, snappily pronounces, “The whole idea of MFs was about channelising housing savings to stock markets, fetching retail investors above normal returns with relatively less volatility. But forget introducing newer types of ostensible MFs, the Indian government has comprehensively failed in even mobilizing a minority of retail investors.” Noted expert Prithvi Haldea acknowledges, “Unlike the US where 47% of the households have their savings invested in MFs, India has a pathetic 1.4%.”

Sadly, the true beneficiary of even the most recent Real Estate Mutual Fund brain-wave would be corporations, rather than retail investors. SEBI has to stop fiddling, and start pro-actively undertaking the most cliched advice even a novice would know with clarity; and that is – encourage retail investors!

(End of Asif Ahmed column)

We want everything you cannot provide!
US exposing double standards again, not sparing even the poorest countries

As the current “development round” of trade talks moves into its final stages, it is becoming increasingly clear that the goal of promoting development will not be served, and that the multilateral trade system will be undermined. Nowhere is this clearer than in a provision that is supposed to give the least developed countries almost duty free access to the markets of the developed countries.

A year ago, the leaders of the world’s richest countries committed themselves to alleviating the plight of the poorest. At Doha in November 2001, they pledged to give something more valuable than money: the opportunity for poor countries to sell their goods and earn their way out of poverty. With great fanfare, developed countries seemed for a while to be making good on their promise, as Europe extended the “Everything but Arms” initiative (EBA), under which it was unilaterally to open its markets to the poorest countries of the world.

The opening was less than it seemed. The devil is in the details, as many less developed countries discovered that EBA’s complicated rules of origin, together with supply-side constraints, meant that there was little chance for poor countries to export their newly liberalized products.

But the coup de grace was delivered by the world’s richest country, the United States, which once again decided to demonstrate its hypocrisy. The US ostensibly agreed to a 97% opening of its markets to the poorest countries. The developing countries were disappointed with the results of Europe’s EBA initiative, and Europe has responded by committing itself to dealing with at least part of the problem that arises from the rules of origin tests. America’s intention was, to the contrary, to seem to be opening up its markets, while doing nothing of the sort, for it appears to allow the US to select a different 3% for each country. The result is what is mockingly coming to be called the EBP initiative: developing countries will be allowed freely to export everything but what they produce. They can export jet engines, supercomputers, airplanes, computer chips of all kinds – just not textiles, agricultural products, or processed foods, the goods they can and do produce. Consider Bangladesh. If we go by the most widely used six-digit tariff lines, Bangladesh exported 409 tariff lines to the US in 2004, from which it earned about $2.3 billion. But its top 12 tariff lines – 3% of all tariff lines – accounted for 59.7% of the total value of its exports to the US. This means that the US could erect barriers to almost three-fifths of Bangladeshi exports. For Cambodia, the figure would be about 62%.

The situation is no better if the 3% rule applies to the tariff lines that the US imports from the rest of the world (rather than to the lines individual poor countries export to the US), for then the US can exclude roughly 300 tariff lines from duty-free and quota-free treatment. For Bangladesh, this implies that 75% of the tariff lines, accounting for more than 90% of the value of its exports to the US, could be excluded from duty-free treatment. Exclusion from duty-free treatment could reach 100% for Cambodia, which exported only 277 tariff lines to the US in 2004.

The official argument for the 3% exclusion is that it affects “sensitive products.” In other words, while the US lectures developing countries on the need to face the pain of rapid adjustment to liberalization, it refuses to do the same. (Indeed, it has already had more than 11 years to adjust to liberalization of textiles). But the real problem is far worse, because the 3% exclusion raises the spectre of an odious policy of divide and conquer, as developing countries are invited to vie with each other to make sure that America does not exclude their vital products under the 3%. The whole exclusion simply undermines the multilateral trading system.

Indeed, there may be a further hidden agenda behind the 97% proposal. At the World Trade Organization’s meeting Cancun in 2003, the developing countries stood together and blocked efforts to forge a trade agreement that was almost as unfair as the previous Uruguay round, under which the poorest countries actually became worse off . It was imperative that such unity be destroyed. America’s strategy of bilateral trade agreements was aimed at precisely that, but it enlisted only a few countries, representing a fraction of global trade. The 97% formula holds open the possibility of extending that fragmentation into the WTO itself.

The US has already had some success in pitting the poor against each other. Preferential access for African countries, under the African Growth and Opportunity Act (AGOA) and more recent initiatives, seems to be largely a matter of trade diversion – taking trade from some poor countries and giving it to others. For example, Bangladesh's share in US clothing markets declined from 4.6% in 2001 to 3.9% in 2004. During the same period, AGOA countries’ market share in the US clothing sector increased from 1.6% to 2.6%, and it is likely to increase further when AGOA countries start to take full advantage of duty-free access.

AGOA had a sunset clause, but if the duty-free access becomes permanent for less developed countries in Africa – as stipulated in Hong Kong – then poor Asian countries will continue to lose US market share. The WTO is supposed to prevent such agreements, but so far no case has been successfully brought.

Even if America succeeds in dividing the developing countries, however, it may inspire a degree of unity elsewhere. Both those committed to trade liberalization within a multilateral system and those committed to helping developing countries will look at America's new strategy with abhorrence.