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Economic Slowdown: India critical in global deflationary ecosystem

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By Gaurav Sharma

As the global headwinds gather speed, India, a major emerging market economy finds itself at a crucial juncture. The global economy is in a state of flux, even as the world currencies tumble to record levels against the US dollar and the brick wall of China devalues the Yuan in the face of an escalating slowdown in growth.

money-bag-400301_1280How will the Indian economy hold up in the midst of falling commodity and currency prices? Will it plunge as China has or does India have the firepower to withstand, or better still, translate the global crisis into a growth opportunity?

The macro numbers present signs of an impending danger to the Indian economy. After the BSE Sensex, the benchmark stock market index, crashed a whopping 1,624 point last week (the fourth largest in the market’s history), Prime Minister Narendra Modi had to call a meeting between bankers, economists and industry behemoths in order to urge them to jump-start the domestic investment and thereby calm down the declining temper of the market.

The Prime Minister had to intervene to stall the spiralling damage is proof enough of the urgency to protect and rekindle the economic fire.

Declining currency prices pose a challenge to Indian exports as international goods and services become cheaper and Indian exports become dearer. However, the damage has been negated somewhat due to the fall down in rupee vis-a-vis the US dollar. The decline in oil prices, on the other hand, should bring much cheer to policy-makers as India imports as much as 75 per cent of its total oil requirements.

This means the current account deficit (imports–exports or net imports) can be bridged further from its already negative figure of 0.3 per cent. The additional revenues also provide a leeway to the government to plug the structural deficits in the infrastructure sector

Meanwhile, the low inflation rate of 3.8 per cent has raised clamours for an interest rate cut from RBI chief Raghuram Rajan but the Governor has stuck to his dovish stance by arguing that the prediction of inflation target is looked upon by RBI at an approximate time span of one year before it takes a call on slashing interest rates.

Moreover, with the anticipated hike in US Fed Reserve interest rates, Rajan finds himself in a quandary as foreign institutional (FII) flows begin to taper-off from the emerging economies in the wake of improving unemployment data and pick-up in growth in the United States.

If the Governor succumbs to the clarion calls for reduction in interest rates, there is the risk of a further pull down in the foreign inflows which have already touched the $ 3.25 billion mark in the Indian equity and debt market. In addition to that the dismal monsoon season and the rising food prices and the Governor have every reason not to hold the interest rates at the current level.

Furthermore, the banking industry is in a mess as non-performing assets (NPA’s) or bad loans begin to take a toll on the banks’ finances. The increased debt burden implies a reduction in the already flagging credit growth in the country.

In this regard, the RBI has taken a step in the right direction by making the requisite regulatory changes (increased pre and post sanction due diligence) in the wake of an Ernst & Young report highlighting the misuse of borrowed funds which added to the woes stifling the banking industry.

On the part of the government, the failure to pass the much-anticipated Goods & Service tax (GST) bill along with the stalling of the land acquisition bill has raised much concern. The lack of a coherent tax structure and clear-cut investment rules will further drive the foreign inflows away from India.

However, steps such as financial inclusion (Jan Dhan Yojna), digitisation and skill development will add to the labour productivity and therefore contribute positively to the economic growth. RBI has extended a helping hand by allowing payment banks and small development banks to set up shop in the country. As many as 11 entities have already been granted license.

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The pertinent reason why the RBI is persisting with the watchdog mode is because it is guided by inflation as measured by the Consumer Price Index (CPI). With the gloomy monsoon season affecting the kharif output and the inherent high weightage given to food in the index, the current 3.8 per cent figure is bound to go up.

However, with the precocious bent towards CPI, one wonders whether a more cumulative benchmark such as the Wholesale Price Index (WPI) and the GDP deflator can be kept out of the scope for long. With a discriminatory inflation index, the RBI can easily lose sight of the overall deflationary trend afflicting India.

Hence, NewsGram urges the honourable Governor to take stock of the situation and include an all encompassing measuring of inflationary rate which is so critical in guiding the monetary policy of the Central bank. A cogent monetary policy is in-turn the key to attracting the ebbing foreign flows in the country, and therefore, at the heart of the current nosedive in the markets.

With the Organisation for Economic Co-operation and Development (OECD), a Paris-based think tank, predicting “firming growth” for India amidst the unpredictable global trends, the RBI can do much by giving the initial boost through revamping of the inflation index.

Besides, the top leadership of any central banking institution is hired for making the right judgement call and providing the requisite thrust during seemingly difficult and confusing economic environment, and not merely being a passive observer to the swinging tides.

Here’s hoping that Rajan makes the choice, soon.

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As Huawei CFO Gets Released On a Bail, Trump Suggests a Trade Deal With China

China's Foreign Ministry spokesman Lu Kang suggested Kovrig’s employer is not properly registered as a non-governmental organization in China.

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huawei, Trump
People are escorted out of the court registry by a B.C. sheriff after the B.C. Supreme Court bail hearing of Huawei CFO Meng Wanzhou, who was released on a $10 million bail in Vancouver, British Columbia, Canada. VOA

A court in Canada has released tech giant Huawei’s chief financial officer Meng Wanzhou on bail as she awaits possible extradition to the United States over bank fraud allegations linked to Iran sanctions.However, in a new twist to the case that has quickly mushroomed far beyond its initial scope, U.S. President Donald Trump has said that he might intervene.

“Whatever’s good for the country, I would do,” Trump told Reuters in an interview, shortly after the ruling. “If I think it’s good for what will certainly be the largest trade deal ever made, which is a very important thing. What’s good for national security, I would certainly intervene if I thought it was necessary.”

 

Huawei, China, Trump
Meng Wanzhou, Huawei Technologies Co. Ltd.’s chief financial officer, is seen in this undated handout photo obtained by Reuters. VOA

The United States has 60 days from the day of Meng’s arrest to issue a formal extradition request and provide Canadian courts with evidence. Meng, the daughter of Huawei’s founder, was taken into custody on December 1 while transiting planes in Canada.

 

While her legal fate is worked out, Meng agreed to post $7.5 million in bail, hand over her passports and remain in British Columbia. She will also wear an ankle bracelet and be under 24-hour surveillance, barred from leaving a home she owns in Vancouver between 11 at night and six in the morning.

Huawei Technologies is one of the world’s biggest manufacturers of mobile phones. The case against Meng is not only about violations of U.S. sanctions against Iran but deep suspicions about the company and its connections to Chinese authorities, allegations Huawei has both repeatedly denied.

 

Huawei, Trump
People walk past an advertisement for Huawei at a subway station in Hong Kong. VOA

 

Suspected intel links 

National security experts have raised concerns that data on Huawei devices could be made available to China’s intelligence services. The company is also a key global competitor in the ongoing race to roll out fifth generation or 5G mobile networks.

U.S. officials say Meng lied to banks about Huawei’s control of Hong Kong-based Skycom — a company that allegedly sold U.S. goods to Iran in violation of U.S. sanctions against Tehran.

If convicted in the United States, she could face up to 30 years in prison. Meng maintains she is innocent and some argue that U.S. authorities have a lot to prove in their case against Meng.

Zhao Zhanling, a researcher at the Intellectual Property Center of China University of Political Science and Law, argues that the United States cannot apply its local laws to a foreign company or one of its top executives.

And that is just one of many uncertainties in the case, Zhao said.

Trump
U.S. President Donald Trump sits for an exclusive interview with Reuters journalists in the Oval Office at the White House in Washington. VOA

“This is a case that is politically complicated, that has diplomatic elements and is linked to the U.S.-China trade war,” Zhao said. “And under those circumstances, whether the extradition is approved or whether the U.S. will press ahead with extradition remains to be seen.”

Trump intervention 

Zhao believes there’s a good chance that Washington will give up the extradition request in exchange for a better trade deal with China.

At a regular briefing Wednesday, China Foreign Ministry spokesman Lu Kang said Meng’s arrest was a mistake from the “start,” but welcomed Trump’s remarks.

“Any person, especially if it is a leader of the United States or a high-level figure who is willing to make positive efforts to push this situation in the right direction, then that of course, deserves to be well received,” Lu said.

Julian Ku, a professor of law at Hofstra University in New York, said that while President Trump can instruct the attorney general to withdraw an extradition request, “it doesn’t sound like he has been fully briefed on the charges against Meng and its legal basis.”

That or the “complexities of making these comments during an extradition proceeding,” he adds.

Huawei, China, Canada, Trump
The exterior of the Alouette Correctional Center for Women, where Huawei CFO Meng Wanzhou was being held on an extradition warrant, is seen in Maple Ridge, British Columbia, Canada

For now, Ku said it is his impression that Trump does not have any plans to act one way or the other, just that he didn’t want to rule anything out.

China has argued that the case against Meng is politically motivated and the president’s comments will go a long way to bolstering that view. Some analysts also worry that it sets a dangerous precedent, putting Americans at risk and undercutting rule of law.

Beijing retaliation likely 

China has already lashed out at both Canada and the United States over her arrest, warning Ottawa of severe consequences. There are already signs that both governments may be preparing to issue travel warnings to their citizens traveling to China.

And analysts have said retaliation from Beijing is likely.

Just prior to Meng’s final day in court, Canada confirmed Chinese authorities have detained Canadian Michael Kovrig, a former diplomat who is currently a senior adviser at the International Crisis Group.

Hong Kong, Trump
In this image made from a video taken on March 28, 2018, North East Asia senior adviser Michael Kovrig speaks during an interview in Hong Kong. VOA

The Canadian government voiced its “deep concern” but said it sees no explicit connection between Kovrig’s arrest and the Meng case.

Others disagree.

“We are doing everything possible to secure additional information on Michael’s whereabouts as well as his prompt and safe release,” the group said in an earlier statement.

Also Read: China Warns Canada Against Severe Consequences If Huawei CFO Isn’t Released

On Wednesday, China’s Foreign Ministry spokesman Lu Kang suggested Kovrig’s employer is not properly registered as a non-governmental organization in China.

“If they are not registered and their workers are in China undertaking activities, then that’s already outside of, and breaking, the law, revised just last year, on the management of overseas non-governmental organizations operating in China,” Lu said.

ICG could not be reached for further comment. (VOA)