Saturday, November 26, 2011

>DIFFERENT TRACK: India's unique rise

India never fails to confound, amaze or disappoint

India is a country with multiple personalities within each of its social, political
and economic layers. The palpable extreme contrasts, and the day-to-day
decision making and outcomes often appear to challenge logic, but never fail
to confound, amaze or disappoint - sometimes all in a single snapshot. Even
on a good day, there seems to be crisis somewhere in the folds of this chaotic
democracy. On a bad day, one often wonders how it functions at all, let alone
how it evolved to be Asia’s second-fastest growing economy.

Economic rise has been uneven

But despite its multinational character and the baggage of vast size of
uneducated and poor population, India has defied doomsday predictions.
However, its economic rise has been far from smooth or even, and continues
to have its share of uncertainties. This has more to do with the evolving local
endogenous political cross-currents than with the country’s democratic
foundation. The irony that the world’s largest democracy has a selected - not
popularly elected - prime minister should not be overlooked.

India is following a different economic path

A late bloomer, India’s economic evolution is following a different path
compared to other Asian economies. The differences are underappreciated
and often misinterpreted. Unlike the Asian authoritarian political regimes that
favoured political openness after becoming economically open, India is
moving ahead with the reverse combination, and with the additional liability
of weak coalition governments. To be sure, unlike Deng Xiaoping in China,
Lee Kuan Yew in Singapore or Mahathir Mohamad in Malaysia, India has no
effective visionary reformist-politicians who can ably negotiate political
consensus on reforms. Prime Minister Manmohan Singh, who is in office but
does not seem to be in power, is an accidental reformer at best.

Product markets reformed before factor markets

Still, trend economic growth has accelerated despite a lethargic reform
agenda since 2004, when the Congress-led UPA-1 came to power. UPA-II has
been embroiled in corruption scandals and is balancing the trade-off between
environment issues, corruption, growth and vote-bank politics. Admittedly,
the government’s policy paralysis in the last year has added to the cyclical
slowdown, but the attractiveness of a strong structural story does not
eliminate cyclical headwinds. The current challenges with land and labour are
another rude reminder that India’s topsy-turvy approach to reforms has
reformed product markets before fixing its factor markets. It appears ironic
that land and labour, which are both in surplus in India, have become
liabilities for growth but capital, which is scarce, has had a smoother ride.

Global export share has risen despite low reliance on FDI

Unlike other Asian economies, India’s global merchandise export share has
been rising without a comparable jump in FDI, without the aid of a superundervalued
currency, and despite the embarrassing infrastructure deficit.
Living with chronic twin deficits will remain challenging but globalisation is
also forcing Indian governments to do some right things, eventually.

There is nothing preordained about India’s economic rise

There is nothing pre-ordained about India’s economic rise, despite the scope
for unlocking of the structural tailwinds, which will be affected by the pace
and nature of reforms. The evolving demographic dividend, which has already
been contributing to economic growth, is also fuelling rising aspirations across
rural and urban areas and calls for greater accountability. Governments will
have little choice but to attempt better delivery, or Indians will vote with their
feet. In the final tally, India remains a glass half-full story that cannot be fully
appreciated by assessing it through the lens used for other Asian economies.

To read the full report: DIFFERENT TRACK

>Euro-zone Debt Crisis: Is It Spreading To Germany?

  • Germany’s failure to find buyers for 35% of its EUR 6bn 10-year bunds sparked concerns that the sovereign debt contagion may be spreading to the strongest of euro zone’s core economies
  • Market reaction was naturally negative for the Euro and risky assets but very positive for the US dollar and US Treasuries
  • Ironically, the spread of contagion to Germany could be the last straw to “force” ECB assume the role as the savior for the Euro-zone debt crisis but there is a risk that ECB only moves into the role after a credit event has occur
The European sovereign debt situation continued to dominate headlines with Germany failing to get bids for 35% of its EUR 6bn of 10-year bunds being offered on 23 November. Is Germany next?

The sovereign debt market mayhem that began more than two years ago in Greece and infected Ireland, Portugal, Italy and Spain, is now threatening France and Belgium and risks spreading to Germany, the euro zone’s biggest economy and the widely regarded back-stop to the European debt crisis. German 10-year bond yield surged 22.9bps to 2.148% (the highest in nearly a month).

Market Reaction Very Positive to US Treasuries and US Dollar, But Negative For Risky Assets Like Euro, Equity and Commodities
US dollar appreciated broadly against the rest of the major currencies on Wednesday (23 Nov) and the euro was put under significant pressure as Germany, the economically strongest market within the euro zone, came under contagion risk. The EUR/USD pair plummeted lower to 1.3343 (from previous session close of 1.3505).

USD Funding Pressures Increase Again For European Banks – Watch This Space
The cost for European banks to fund in USD reached the highest levels since December 2008. The three-month EUR cross-currency basis swap, the rate banks pay to convert euro payments into dollars, widened to 138 basis points below the euro interbank offered rate (Chart 1).