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October 19, 2017

Narendra Modi’s global reach, Make in India, Skill India and the currency crisis


Lalit Shastri

Modi-UAE

Prime Minister Narendra Modi being received by Vice-President and Prime Minister of UAE, HH Mohammed bin Rashid Al Maktoum on his arrival at Za’abeel Palace, Dubai on August 17, 2015.

The warmth and goodwill generated between India and UAE by Prime Minister Narendra Modi’s just concluded tour of UAE has placed Pakistan in a tight corner and the scenario that would now unfold as a result of the strategic India-UAE partnership would negate much of the role Pakistan must have planned to play in Asia’s geopolitics through its axis with China.

Moreover, the joint statement issued during Modi’s UAE tour, which underscores the resolve by India and UAE to reject extremism and any link between religion and terrorism, does not directly name Pakistan but it goes on to say in unambiguous terms that the two nations have condemned efforts, including by states, to use religion to justify, support and sponsor terrorism against other countries. The statement goes on to add: “They (India and UAE) have also deplored efforts by countries to give religious and sectarian colour to political issues and disputes, including in West and South Asia, and use terrorism to pursue their aims.”

Besides, India’s concern vis-a-vis cross-border terrorism and the use of Pak soil for spreading global terror, the joint statement also should be viewed in the context of growing rift between Pakistan and UAE over the Pak refusal to support the Yemense war against the Houthi rebels.

Now coming to business and economics, notwithstanding the fact that trade between India and the UAE had dipped from about $75 billion to $59 billion recently after curbs imposed by India on gold imports, Modi used his UAE visit to the hilt to woo investors by pegging India’s investment needs at over $1 trillion.

Emphasising India’s tremendous growth potential Modi told the captains of industry and business in UAE that “We want technology, speed and quality construction when it comes to housing.”

The Indian Prime Minister described India as UAE’s second-largest trading partner. He also underscored the fact that UAE is India’s third-largest trading partner after the US and China. To build investor confidence, Modi told them that now there is a decisive government with absolute majority in India. He told investors that India should be treated as a long-term investment destination and gave them the assurance that his Government would simplify the regulatory mechanisms.

Looking closely at this strategic alliance between India and UAE, one cannot ignore the global economic scenario to visualise where India hopes to place itself in coming years.

Sub-prime Mortgage Crisis

We have seen how the world has gone through the sub-prime mortgage crisis in the US, where the fixed-income franchises of Lehman Brothers and Bear Stearns benefited from integrated mortgage origination businesses in 2006. A number of investment banks enthused by these success stories also invested heavily in subprime platforms. During the later part of 2007, a large number of mortgage lending companies went bankrupt when the investors backed out and refused to buy subprime mortgage-backed securities. In subsequent quarters, the US economy was caught in a tail spin after the financial institutions were left with no option but to adjust the value of their mortgaged securities to merely a fraction of their purchased prices.

In recent days, the crashing of the stock and currency markets across the world, left its rumbling impact in India where the sensex dropped 1624 points this Monday. For the present crisis all accusing fingers are pointing towards China where the equity markets started tumbling. To analyse the present crisis, one needs to take a closer look at recent developments in China where Chinese stocks, measured by the Shanghai Composite Index fell 1.2% early February this year. This was linked to the announcement of a 50 basis point reduction in the bank reserve-requirement ratio, lowering the percentage to 19.5%. – the frst general cut by the People’s Bank of China in two-and-half years.

Economists were quick in pointing out that the latest cut in interest rates could be counterproductive. “Reduction would lighten existing debt burdens and could propel greater economic activity due to increased lending but that would also creat the problem of capital outflows.” it was pointed out.

Today, when pressed against the wall, the central bank of China was forced to cut interest rates and lower the amount banks must hold for the second time in two months to pump the economy.

While British Pound, the Japanese Yen and Special Drawing rights (SDRs) play a role in global economy, the fact remains that more than 50 per cent of world’s monetary wealth is held in U.S. dollars and a substantially large portion of it is also held in euros. In 2009, Zhou Xiaochuan, governor of the People’s Bank of China, had proposed a gradual move towards increased use of SDRs, He had also mooted the idea that the national currencies of major economies should back SDRs.

The present squeezing of the Chinese snake oil market due to the consumer withdrawal syndrome across so many countries has dealt a crushing blow to the domestic industry in China that has remained the biggest employment generator and is also the backbone of the consumer goods and the electronic goods manufacturing sector in China.

In the face of increased volatility due to the Chinese melt down, even in the US, where those in authority are talking of the resilience of their economy, pressure is being felt and the business leaders in America have started talking about lack of transparency when it comes to doing business in China. Those in the US are pressing for exchange rate flexibility and asking the Chinese to move rapidly toward a more market determined exchange rate system.

Bretton woods Agreement and the Petrodollar System

In the backdrop of the current crisis, a peep into the genesis of the problem would not be out of place. After Richard Nixon in 1971 had buried the post World war II Bretton woods Agreement that had created the historic international gold-backed monetary standard which relied heavily upon the U.S. Dollar, the petrodollar system came in place. It was the result of a deal between Saudi Arabia and the United States. Under the deal each barrel of oil was to be purchased from the Saudis in U.S. dollars. Hence, any country purchasing oil from Saudi Arabia was required to first exchange their own currency with U.S. dollars. This created an artificial demand for U.S. dollars. This trend got deeply entrenched by 1975 when all the OPEC nations agreed to price their own oil supplies exclusively in U.S. dollars and what they got in exchange were weapons and military protection.However when several nations started moving away from the “dollar for oil” system and began choosing their own currencies for oil like China, and Russia the U.S. economy started feeling the heat of inflationary pressure.

Currency crisis

A currency crisis is linked to a nation’s inability to pay for essential imports and also service its debt liabilities. In a situation like this, there is a rapid decline in the value of the affected nation’s currency. It has been observed that the currency crisis is generally preceded by large capital inflows with visible and rapid economic growth. The problem arisis when overseas investors, concerned about the debt their inbound capital might start generating, start withdrawing their funds. There are three possible methods to combat this crisis. These methods are adjustments of exchange rates, adjustment of a nation’s internal prices along with its levels of demand, and by improving productivity and increasing exports.

As the Indian rupee slipped to 66.74 against the dollar, the Governor of reserve Bank of India yesterday spelt out in categorical terms the measures Government of India and the RBI would be taking to strengthen Indian Economy. He explained in depth the entire stategy. This comes close on the heels of the Prime Minister’s UAE visit and also his visits to other nations to invite investment.

Make in India and Skill India

Modi’s “Make in India” is not just a slogan. If the “Skill India” campaign – also a brainchild of the Prime Minister – gets adequate thrust and momentum and the synergy between the two campaigns helps in creating jobs and providing the necessary manpower to fill them and once we are able to guarantee global quality of output, industrial peace, law and order, probity in public life, transparency in governance and push forward the Swachch Bharat (Clean India) campaign to complement the entire exercise, the country will more or less insulate itself from the currency or the balance of payment crisis. Once the country starts moving in that direction, India’s strategic partnership with UAE and other countries will lead to a new economic order dictated by market forces and not by the US or China. Progress in this direction will also loosen the stranglehold of the US dollar at least on Indian economy.

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