End of the global trade order?

One of the pillars of the global trade order, the World Trade Organisation’s (WTO) dispute settlement system is set to collapse quietly this week. Though its demise may not make headlines akin to the US-China trade war, but its demise entails moving further away from multilateral rules, designed to promote global free trade and towards a law of the jungle where the mighty wins.
 
The collapse has been in the making for over two years, driven by a US blockade on appointments to the WTO’s highest court, the Appellate Body. In fact, U.S President Donald Trump has rallied against the WTO, calling it a catastrophe and a disaster, based on the assertion that the United States loses cases due to a skewed proportion and representation of Americans in the court. It is not unknown that Trump faces a barrage of disputes, at the WTO against his trade policies, including global tariffs on steel, and a tariff war with China with no end in sight.
 
Since he came to power, Washington has blocked all appointments to the appeals’ chamber as existing judges’ terms end. Such absence of new appointments, which can only occur by consensus of all WTO members in December, the appellate body will shrink to only one member out of its standard of seven, two less to form a quorum of three necessary to hear appeals and settle trade disputes. In a matter of months, their rotation will become meaningless, placing an impossible workload on the remaining members. The next vacancies for the US and Indian members occur in December 2019, at which point the appeals process would be crippled.
 
Essentially, what is at stake is a unique system that has on balance safeguarded the interests of all WTO members, regardless of their economic size or diplomatic influence. Governments must settle trade disputes through the dispute settlement system, if other diplomatic means are exhausted. The dispute settlement mechanism often referred to as the “crown jewel” of the WTO provides governments the right to appeal decisions and the right to withdraw trade concessions and raise tariffs in the event of an adverse funding. The international legitimacy of the WTO dispute settlement system makes it an indispensable tool that governments can use to hold trading partners accountable and without entering a retaliatory mechanism in tariff escalation in a bid to change behaviour.
 
Without a multilateral architecture to hold rule-breakers accountable, international economic relations would revert to the law of the jungle where countries with economic heft would rule the ground. That reversion definitely sits ill with multinational businesses, the global economic framework and the rule of law, thereby potentially jeopardizing international economic stability.
 
India Outbound
Nov 22, 2019
 
 

source https://indiaoutbound.org/end-of-the-global-trade-order/

The noble fight against poverty

The 2019 Nobel Prize in Economics to Abhijit Banerjee, Esther Duflo and Michael Kremer reaffirms the value of evidence-based policymaking in addressing intractable problems. Even as the pursuit of capital accumulation is underway in the international sphere, the world continues to be plagued with multiple distressing phenomena. Instances such as 700 million people trapped into poverty, or 50% children leaving schools without basic skills in literacy and numeracy are grim reminders of how policymaking at a macro-level could prove inadequate to address such crises.
 
Often, in instances such as global poverty, economists tend to rely on a macro-level understanding to alleviate poverty. Ideas related to immigration and economic growth are recognized as tools to improve the quality of life among the world’s poor. On the contrary, the relative narrowness of the scope of this year’s winner’s work is owed in part to their method of analysis. Mr. Banerjee and Ms. Duflo explicitly reject big thinking about big questions in their 2011 book “Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty.”
 
What is unique about the duo’s work is the employability of the approach; Randomized Control Trial (RCT) has been the buzzword among development economists for almost two decades. Inspired by the impact of the RCTs in medical science, the trio has used this technique to test the effect of small interventions on individual behavior. Such trials involve selecting two sets of individuals at random, out of which one is then exposed to policy intervention. The experiment examines the impact of such interventions, often over long periods of time, to gauge the impact of policy and whether or not, it justifies the costs associated with it.
 
This has proven exemplary in areas such as education and healthcare. For instance, the Nobel Committee highlighted how their “experiment-based approach has transformed development economics over the past decades.” They specifically mentioned the result of one such randomized trial wherein “more than 5 million Indian children have benefited from programmes of remedial tutoring in schools.” Further, the results of another experiment suggest that multi-topic medical training of informal healthcare providers may offer an effective short-run strategy for improved healthcare.
 
Nonetheless, the effect of such rigour in policy analysis is considerable and as a consequence, the RCT approach has taken over the field of development economics. For Duflo and Banerjee, an important part of their work has been ensuring that the agency of the beneficiaries, usually in developing countries such as India, is put at the centre of any policy design. This is a crucial method in which experimental results often provide better outcome than large-scale data-based inference.
 
However, this approach is not without its critics. For instance, Angus Deaton, who won the 2015 Nobel prize in economics noted that while RCTs can play a role in building scientific knowledge, they can do so only as part of a cumulative program. While the approach has enamored a large number of development economists for its simplicity, where inferences of what works or not are drawn from field experiments, it has also been criticized for reducing the study of poverty to small interventions unconnected to the life experiences of the poor. But, despite the conditional nature of these studies, it is difficult to deny that policy interventions require better understanding to ensure efficient outcomes, especially in countries with finite state capacities. Thus, in a country like India, where billions in money goes into formulating policies to help the poor, which are often unaccompanied with the real scenario, such research can be enormously valuable in informing public debate and can thus aid in policy making.
 
India Outbound
october 24, 2019
 
 

source https://indiaoutbound.org/the-noble-fight-against-poverty/

Brexit, deal or no deal?

The fact that even a long gloomy night breaks into dawn is nothing short of a miracle. Although, the word miracle might not sound apt here, but the Brexit conundrum that has been lingering for more than three years seems to have made some sort of a breakthrough. After months of confusion, the negotiating teams of the United Kingdom and the European Union have reached a consensus on what could transpire as a no-deal Brexit if this gets approved. Both the British Prime Minister Boris Johnson and European Commission President Jean Claude-Juncker have announced their mutual agreement over the deal, where Juncker reportedly stated that it is a “fair and balanced agreement for the EU and the UK.”
 
The deal after the announcement still must clear several hurdles, including getting approval from Europe’s leaders and most crucially passage in the British Parliament, where an agreement reached by Johnson’s predecessor May suffered three successive defeats in the Parliament. The Brexit deal comes just ahead of the two-day EU summit starting Thursday and holds the possibility of removing some of the uncertainties that have dogged the EU-UK relationship since 2016.
 
However, the latest onslaught came from the Democratic Unionist Party (DUP) in Ireland who refused to support the deal as “things as stand.”Their concern is over the backstop arrangement, which if made redundant, would establish a hard border between the Northern Ireland (part of the UK) and the Republic of Ireland. Currently, there are no physical borders between the two parts. Johnson, a hard Eurosceptic in a sense, apparently junked the vexed backstop arrangement that had fluttered Brexiters all along. For Tories of that school, the purpose of Brexit is liberation from a regulatory yoke, imposed by the Brussels bureaucracy. Hatred of the backstop has its origin in the ambition to extricate the UK economy from the social protections preferred by many European countries. The theory is that a competitive edge is achieved by reducing the cost of doing business in Britain.
 
Mr. Johnson’s frantic rush to strike a Brexit bargain by October 31 has forced a focus on technicalities of withdrawal, but it also serves his agenda to distract his attention from the bigger picture. Largely, Johnson has portrayed himself as the man who would get Brexit done, a phrase he had often used as a weapon to stir the hysteria of Brexit and play down Theresa May’s deal.
 
But, it is important to remember that Brexit is not a game or a play to advance one man’s ambitions. Though Brexit was conceived and supported by the people who want the EU to fail, a government that seeks to uphold the notions of multilateralism will want the EU to survive. An outcome of the deal will shape the strategic direction of the country for generations and affect millions of livelihoods. What matters is for Johnson and his government to not play poker with the deal and strive towards an outcome that would co-opt both the UK and the EU in a favourable manner.

source https://indiaoutbound.org/brexit-deal-or-no-deal/

Why India needs a female boardroom revolution?

Over the years, the issue of gender diversity in business organizations has become particularly relevant in the international corporate governance arena. For proponents of more women to secure seats at the boardroom table, this marks a remarkable moment of the shattering of the glass ceiling. Here, the glass ceiling is used as a metaphor to represent an invisible barrier that prevents a given demography, in this case women, from rising beyond a certain level of hierarchy.
 
Research on gender diversity has often invoked sundry perspectives on how to efficiently solve problems that companies face. To this end, India had this epiphany only back in 2013 where the 2013 Companies Act made it mandatory for listed companies as well as companies with a turnover of INR 300 crore to appoint atleast one woman director. But often, companies would induct a women member from their promoter families to meet the requirement. This was largely tied to the objective of protecting business interests.
 
While this broadened women’s representation, this also led to a small cohort of women accumulating directorships. So, to ameliorate this concern and to make the boardroom truly diverse, in October 2017, Securities and Exchange Board of India (Sebi) mandated that there should be atleast one independent woman director in all listed companies.
 
Research evinces that companies with truly diverse boards perform better than their peers over a long period of time. So far, the legal provisions have managed to trigger off a right trend where according to Prime Database (which explored and analysed data for the boards of 500 top companies listed on the National Stock Exchange or Nifty500) found that female representation increased to 13.8 % in 2017, from 5% in 2012, indicating a 8.8% increase. However, the gain is not significant as per data shown by the 2019 edition of the Credit Suisse Gender 3000 report wherein Indian female representation in boardrooms has risen to 15.2% in 2019, falling below the global average of 20.6 %.
 
Apart from the normative argument that suggests both men and women should have an equal opportunity to attain leadership positions, what explains the logic of having a gender-diverse boardroom? Simply put, does investment in women actually translate to better financial results for firms? The broad answer is yes. There is a significant body of research, which suggests that gender diversity can have a positive impact on financial performance as well as brand perception.
 
Further research shows that companies with atleast one woman on board have a higher return on equity, higher earnings and stronger growth in stock price than companies with all-male boards. In fact, the evidence abounds. According to a research brief produced by Mckinsey, companies in the top quartile of gender diversity are 15% more likely to financially outperform those in the bottom quartile. Similarly, multiple surveys have also linked companies with more women on their boards to better corporate governance and more ethical behavior.
 
Meanwhile,another survey published in the International Journal of Business Governance and Ethics pointed out that firms with at least one woman on the board have a 20% lower risk of bankruptcy. These stark figures should in themselves serve as an incentive for businesses to see female representation as a commercial imperative.
 
The quota for female representation, albeit motivated by both ethical and social responsibility also produces better economic yields. Since boards appoint and monitor the executive positions such as the Chief Executive Officer (CEO) and guide the firm’s strategy, boardroom composition has a strong impact on firm performance. Naturally, a gender diverse boardroom will positively affect the economic performance of the firm and Indian businesses would do well to co-opt women in boardrooms to ensure a successful business.
 
India Outbound
October 16, 2019
 
 

source https://indiaoutbound.org/why-india-needs-a-female-boardroom-revolution/

What does the FM’s stimulus package indicate?

The Finance Minister’s announcement of a stimulus package harbours well for the economy that has seen a sustained slowdown. Measures to revive growth come at a time when the world economy at large is buffeted by global headwinds and trade slowdown. All of these does indeed impart some sort of stability and underpins a new growth impetus for India.
 
Following the persistent slowdown, there have been widespread demands of a fiscal stimulus package from various quarters since Sitharaman’s budget to spur growth. But given the precarious fiscal situation, as many economists have warned, it had left the FM very little room to offer a package without breaching the fiscal deficit target. However the FM’s announcement made it evident that she has sought to revive the “animal spirits”, a term initially coined by John Maynard Keynes and found several references in the economy. On top of it she has also tried to unclog the liquidity blockages to ensure smoothening of credit flows and has tried to incentivise demand in certain sectors, without the new measures having any broadscale impact on the country’s finances.
 
Decoding some of the moves
 
The Budget proposal to hike surcharge on Foreign Portfolio Investors (FPIs) had spooked foreign investors, which was supposed to impact 40% of the FPIs as per industry estimates. Nonetheless, the present decision to rollback this enhanced surge is indeed a welcome concession, as the massive capital outflows that stemmed because of this decision could be reversed and instead, aid in the rupee’s appreciation.
 
The withdrawal of the surcharge on FPIs would boost a sagging market. However, a sustained rally on the market is only expected when there is a visibility of good earnings growth and a reversal of the slowdown in the economy.
 
Other steps such as infusion of INR 70,000 crore as capital in state-run banks, to smoothen credit flow that will benefit corporate, retail and market segments is another credible move. However, past instances of capital infusion simply have not proven sufficient and addressed banking issues that has prolonged the country’s economic recovery. An example of this is that while the RBI has announced successive rate cuts, it has not simply got transmitted to bank’s lending rates, whereby hitting both the supply and cost of credit. India’s banking industry dominated by PSUs will be competitive, more efficient and profitable only if there is a structural design change, featuring operational interdependence, empowered bank boards, better governance standards and improvement in quality of lending.
 
Meanwhile, withdrawal of the draconian angel tax that tightened the noose around startups dependent on angel investors is a welcome move. For instance, any startup that has registered itself with the Department for Promotion of Industry and Internal Trade (DPIIT) and has completed all the required valuations would not be bothered by tax authorities. This waiver of the angel tax that would subsequently simplify the flow of risk capital for young startups generally spellswell for a thriving ecosystem. But this response to “tax terrorism,” which had somewhat put a dent on the government’s conduct acts as a post-dated cheque. For a tax that has been in operation for seven years and has been responsible for snuffing out nascent startups, its removal should have occurred earlier.
 
Crucially, the automobile sector that has experienced a lackluster growth for a considerable time has also been accorded some attention. An increase in one-time registration fee has been deferred, a depreciation benefit on vehicles has been doubled, a ban on the purchase of vehicles by government departments has been lifted and a renewed emphasis has been laid on helping a supply chain emerge for the local manufacture of electric vehicles. All of these measures help with both the inventory buildup and creating a new market for e-vehicles, but car manufacturers are unlikely to ramp up production until they see a sustainable return to normal volumes.
 
On the whole, Sitharaman’s stimulus package should rein in investor sentiment and create confidence within the market. This in itself could power the growth engine such as India’s long-languishing investment rate. However, what is needed is to sustain the growth and this could only start with driving up consumption levels which implies more money in the hands of people.
 
India Outbound
September 30, 2019
 
 

source https://indiaoutbound.org/what-does-the-fms-stimulus-package-indicate/

The millennial angle in India’s auto sector slump

Finance Minister’s Nirmala Sitharaman’s logic on explaining the slump in the automobile sector has clearly brought much humour on social media platforms. She stirred a hornet’s nest when she attributed the “mindset of millennials,” who prefer to use Ola and Uber, as one of the critical reasons behind the Indian auto sector’s spectacular fall. According to Sitharaman, millennials today would rather opt for Ola, Uber and other ride-hailing services instead of paying monthly installments for a car.
 
Sitharaman’s comments coincidentally come a day after the automobile sector reported its steepest monthly decline in sales since 1997-98. Vehicle sales across categories including passenger vehicles, two-wheelers and commercial vehicles fell 23.5 % year-on-year, according to the industry body Society of Indian Automobile Manufacturers (SIAM).
 
What resulted from Sitharaman’s statement is it set the stage for a debate. While there are some takers to her side of logic, other industry analysts have merely panned it. Obviously, for the sake of a sound argument, what matters is to figure out that if there exists a direct correlation between buying a car and hiring a taxi. In plain terms, what this implies is whether Sitharaman’s comment has substance or was it off the mark?
 
For one, along with passenger cars, the sales of bus and trucks also saw a precipitous 39% fall last month, thereby compounding the auto industry’s travails. Analysts have said that in this case, it would be far-fetched to lump the blame on millennials, since they would rarely own a bus or a truck. What this broadly implies is a general fall in consumer demand within the Indian economy, something that extends far beyond the millennials and their purchasing behavior.
 
Second, cab aggregators like Ola and Uber are largely restricted to metro cities and to some extent tier-2 cities. Sitharaman’s argument does not explain why vehicle sales have slumped in rural India. For instance, two-wheeler sales, a key indicator of demand from rural India, fell 22% year-on-year in August, according to SIAM.
 
Third, according to some analysts, the crisis of non-banking finances companies or shadow banks have also hit car sales. Although the government in recent times has taken measures to ease up the liquidity crunch in the sector by allowing credit flow, but the supply of easy finance has taken a toll where over three-fifth of vehicles sold are financed through loans.
 
Also, for the record, the concept of ride-hailing services such as Ola and Uber have come to India during the last 6-7 years. Thus, it might be premature to blame them for the disruption, given that the sector has seen some rosy years during the time of their existence. On the larger front, the auto slowdown is more a function of the country’s broader economic woes than of any one specific factor. Consumption, the main pillar of the economy is down in the dumps with GDP growth falling to a six-year low. This is playing out in case of consumers who are holding back purchases because of uncertainty.
 
Hence, it would be wrong to construe the mindset of millennials as the factor behind the slowdown. The reasons for the auto-industry’s plunging fortunes are varied and the millennials aversion to owning cars is only miniscule fraction of this complex issue.
 
India Outbound
September 25, 2019
 
 

source https://indiaoutbound.org/the-millennial-angle-in-indias-auto-sector-slump/

Negotiation is the only way forward: drone attack in Saudi Arabia

A weekend drone attack on Saudi Arabia that cut into global energy supplies and has halved the kingdom’s oil production threatened to exacerbate tensions in the already fragile Middle East. The responsibility of the attacks was claimed by the Houthis, a rebel group in Iran, who struck at the world’s biggest petroleum-processing facility. That matters greatly because as a result, the Saudi Aramco, the kingdom’s state–owned oil company was forced to suspend production of 5.7 m barrels a day. It usually produces and exports around 9.8 million barrels of oil (latest OPEC figures) to consumers around the world, primarily in Asia.
 
Naturally, what this means is a strain in the supply security, and its ripple effects were felt in the oil market where the price of Brent crude surged 18 % (on Sunday evening) before pulling back to a 12% increase. Meanwhile, the strikes also expose the vulnerability of Saudi infrastructure to attacks, historically seen as a stable source of crude to the market. Although on a short-term basis, oil from strategic storage to meet demand and temper the impact on prices could help, this attack introduces a new irreversible risk premium into the market.
 
There are two reasons for this risk premium. If the Saudi outrage gets prolonged and oil prices rally significantly, then it is likely that shale producers (primarily the US) will raise output. But there exist constraints on how much the United States can export because oil ports are already near capacity. Second, oil from storage could keep the market supplied for some time, but oil markets will tend to become increasingly volatile if the storage is exhausted and the possibility of a supply crunch arises.
 
While Saudi Arabia had stopped short of blaming Iran for the attacks, the possibility that Iran has a direct linkage with the attacks was made explicit by Mike Pompeo, along with the U.S government’s damage assessment of one of the stricken oil facilities. These developments come at a time of increasing tension between Iran and the United States. Since the Trump administration’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA)- the nuclear deal with Iran and the renewal of its sanctions has led to an eruption of sorts. From the US launching airstrikes against Iran, to the rise of Iran’s provocation in the Gulf and consequently, Iran’s enrichment of uranium, the situation is teetering on the brink of a war.
 
The U.S has also maintained a “maximum pressure” campaign against Iran that is meant to throttle its economy already reeling under severe sanctions. On the other hand, however, Trump has expressed his desire to meet Iranian President Hassan Rouhani with no pre-conditions that has roiled some of his top advisers.
 
Though it would be premature to call the present act of Trump, who had been publicly pining for a meeting with Rouhani, an extension of an olive branch, one should remember that it takes two to tango. And in this, Iran has been vehement in showing its reluctance to come to the negotiating table with him.
 
What is clear is that the recent spike in the US-Iran tension could spell doom for not only the oil market, but for global energy markets where the Strait of Hormuz has become a maritime flash-point in the US-Iran conflict. For a region that is already reeling under multiple conflicts, what is required is stability and for the sake of it, a bilateral meeting is the most optimal shot.
 
India Outbound
September 23, 2019
 
 

source https://indiaoutbound.org/negotiation-is-the-only-way-forward-drone-attack-in-saudi-arabia/