India`s new Non -Aligned foreign policy

India`s recent so-called "Non-Aligned Foreign Policy (NAFP)", in the context of the present global turmoil, is completely different from the Non aligned foreign policy propounded by Jawaharlal Nehru and Indira Gandhi in the 1960`s / 1970`s.

1) Previous NAFP was an inward-looking policy that shut India off from global markets and pursued nation-building efforts that bore little fruit.

2) Present NAFP followed by the present NDA government has its tenets on -

(a) Geopolitical issues with neighbors,

(b) Energy security,

(c) Defense security,

(d) India`s trade in the global arena.

3) India's neighbors are a powerful China which is slowing down a bit, Pakistan which is in a political turmoil, Sri Lanka whose economy has collapsed completely and a growing economic star in Bangladesh. It was not very far in the past when the situation was completely different - China with its economic clout, Pakistan with its belligerence towards India and backed by China, and Sri Lanka too backed by China.

4) India`s growing economy needs to secure its energy imports and hence non alignment helps it to get cheap Russian energy as well as other sources from USA, Middle East, etc

5) Russia is India`s major defense supplier. However, India has USA, France and other western majors too as its strategic arms suppliers.

6) India refused to join global trade blocs like RCEP but has signed FTA`s with UAE and Australia and many more to come.

Hence it's a new "Non-Aligned Foreign Policy" embracing India`s needs as well as its external ecosystems.

Invite critical views

Modi 2.0 first budget: Paralleling China`s miraculous growth path

The latest budget presented by the new Modi government has set a very ambitious target for the Indian economy - reach a US $5 trillion GDP figure from the present US$ 2.7 trillion. If the present government targets to achieve this figure by the end of their term in 2024, as proposed, it would mean a real annual GDP growth of a staggering 13%!!!

China growth path, even though not openly admitted by the Indian government, obviously is one of the drivers for this budget. As the saying goes “If you can’t lick them join them “. China`s investment led development model with focus on mega factories, infrastructure, easy access to credit from financial institutions and attracting global investments which was backed by a strong government policy making machinery is evident as one of the key motivators of the Indian government`s initiatives.

Let’s look at some of the intent-based proposals in the budget which are very similar to what China did:

1.    Growth in fixed investment - Mega factories are being encouraged, very similar to the mega SEZ`s that powered China, to boost investment as well as create jobs that will in turn boost consumption. This initiative is also in tune with the “Make in India” initiative of the Prime Minister. However, this initiative is highly dependent upon the private investments which have been facing issues like land acquisition, high interest rates and poor infrastructure issues. External investors, who are being wooed, are still skeptical about investments especially when the global economic front is looking increasingly fragile.

2.    Infrastructure Development - The Indian government wants to give a massive boost to infrastructure - railway sector, roads, ports, airports and power and newly created water distribution. The railway infrastructure, which needs about Rs 50,000Cr, is proposed to be boosted with PPP`s the effectiveness of which however is still under a cloud.  Credit flow from the financial institutions, which are reeling from the excesses post 2009 crisis and the present NBFC crisis, is one of the key determinants for the success of the PPP initiative.

3.    Cheaper credit - China fueled its growth by making its banks lend indiscriminately to the borrowers leading to the wobbly banking sector very similar to what India is also facing now. Hence to bring down the interest rates the government proposes external borrowing by taking advantage of low and negative interest rates in many countries which will help the government to fund its projects at low rates.

4.    Focus on sustainability and green initiatives - Something that China missed and hence paying for its sins with its pollution problems in many cities. The Indian government is incentivizing Electric Vehicles (EV`s) which apart from giving push to the languishing car manufacturing industry will also address the sustainability issues. The government has also proposed a social exchange under SEBI which will address social development issues – something which will ensure a “equitable development” of the society.

5.    Focus on MSME and SME - These sectors are India`s answers to job creation and drive growth especially in the manufacturing sector. The government needs to address the issues of credit flow, labor movement before these sectors can boom.

Challenges that will be faced....

China based on the above model powered itself to the world`s second largest economy by following the above model from the 1980`s which bore fruit from the 2000`s. The Modi government similarly has laid the path for India becoming a $5 trillion economy by taking many cues from China. However, the point to be noted is that China took at least 10-15 years, during which it built its base like infrastructure, before it became a fast-growing economy. Secondly, China was ruthless in implementation of its objectives for which one of the major reasons was the single party rule. India will have its challenges as it’s a full-fledged democracy.

Long time back I came across a saying when I was working with a top-notch consultancy firm – “All strategy documents are a piece of toilet paper unless implemented properly”. The Modi government hence may take cue from it and focus on proper implementation and ground level reach of all its proposals. The ruling party has a majority in the Lower House - Lok Sabha and moving towards one in the Upper House – Rajya Sabha and hence if it has the will, can take India to its cherished dream of $5 trillion economy!

Hope for the best.

China`s oil diplomacy moves to bolster its super power status

China, the world`s largest oil importer, announced recently that it will set up a crude oil futures exchange which will be functional by late March`18. The contracts will be traded in the Chinese local currency Yuan and seeks to establish the Chinese oil futures exchange as a challenge to the traditional oil benchmarks like Brent and Dubai crude and the US benchmark WTI.

China has surpassed the USA in the recent past as the highest oil importing country globally with its 2017 imports of 8.4mn bpd surpassing the US imports at 7.9 mn bpd. The key reasons for China moving to the dominant position in the global oil trade are:

a) Oil demand growing at 11-13% fuelled by its GDP growth at around 7.5% annually.

b) Build up its strategic oil reserves across the country as a buffer against oil price fluctuations

c)Surging shale oil production in USA which has led to reduced imports into USA.

Over the last 15-20 years, the global commodities markets has been driven to  large extent by the Chinese demand due to its explosive GDP growth which in turn fuelled China`s energy demand and infrastructure growth. Apart from oil, other base commodities like iron ore, copper concentrates, bauxite and coal have seen very high demand rates and increased imports into China. 

Futures Exchanges in China

In order to have a relevant pricing mechanism, 4 futures exchanges are functional in China under the tutelage of China Securities Regulatory Commission (CSRC) out of which 3 exchanges deal with commodities and 1 exchange in financial futures. The exchanges are:

1.Zhengzhou Commodity Exchange (ZCE, 1993) – trades in agricultural commodities and PTA.

2. Dalian Commodity Exchange (DCE 1993) – trades in agricultural products and industrial products like PP, LLDPE, iron ore, etc.

3. Shanghai Futures Exchange (SHFE, 1999) -  trades in ferrous, nonferrous and precious metals, chemicals and energy products

4. China Financial Futures Exchange (CFFEX, 2006) – treasury bonds, options and futures.

In the last 5 years, China has witnessed substantial increase in volumes being traded on its exchanges. As reported by the China Futures Association, the turnover of futures contracts has doubled from nearly $15 bn in 2011 to nearly $30 bn in 2016.

Objectives for the oil exchange

The stated objective, for the new oil futures exchange, is to set a regional oil price benchmark as China is the largest oil importer globally. However these moves by China will have to be seen from the perspective of China`s ambition to become a global superpower. Like the US in the 20^th century and Great Britain in the 18^th and 19^th century, one of the steps that China is taking towards its path of superpower status is to control the global trade flows.

China`s global ambitions for a superpower status

As per WTO 2016 figures, China controls 13% of the global trade exports and 10% of global trade imports. With its plans for OBOR, which aims to link China to all major nations China aspires to be trade centre of the world very similar to the old days when the silk route trade was one of the dominant trade routes of the world. In the last few years China has made strategic investments in many parts of the world like in Africa and to support its trade flows, it has bolstered its defence presence in key ports in Pakistan, Sri Lanka, etc.

To support the Chinese trade patterns, China also aspires to make the local currency - Yuan to be a global currency and pose a challenge to the US dollar as a global currency. Since 2016, the Yuan is one of the 5 currencies in Special Drawing Rights (SDR) of the International Monetary Fund (IMF) with a 10% weightage. With trade in Yuan. Thus starting an oil exchange in Yuan, China can increase its stake in the global trade flow as the Brent and West Texas Intermediate are dollar denominated exchanges.

Challenges for the proposed oil exchange

On the other side some of the challenges that the Chinese oil exchange would face are:

·  The Yuan has faced many issues of being manipulated by the Chinese government and hence a big question exists over the currency`s movements. Hence many global players will be skeptical pf playing in a Yuan denominated contract given the forex risks and convertibility issues of the currency.

·  Normally, all the oil benchmarks (Brent, WTI and Dubai) are based in a production center and not in a demand center. Hence the liquidity of the trade in the new exchange can be hampered.

·   Since China is a demand center, freight plays an important role in the pricing and hence freight cost effect in the pricing will be unclear. It can be argued that the London Metal Exchange (LME) is based in London when hardly any metal production occurs in the United Kingdom. However, London being one of the major financial centres of the world coupled with the fact that the LME has physical warehouses in many parts of the world helped LME in becoming the global benchmark for metals trade.

Thus China`s move to setup an oil futures exchange is not only control oil pricing but also in tune with China`s global superpower ambitions of becoming a powerhouse like the USA after WW-2 and Great Britain after the Industrial Revolution. Despite challenges, China has time and again proved that it can move against all odds and succeed. Whether the new oil futures exchange will be a success or not – only time will tell!