Wednesday, June 29, 2016

Brexit in figures

                                                     Brexit in figures

     Great Britain
    European Union
Inflation (CPI) p.a.
             65 million
               508 million
           $ 3 trillion
              $ 18 trillion
Per Capita income
           $ 46,000
              $ 35,000
GDP Growth
Below Poverty Line
Unemployment Rate
Current Account Balance
        Deficit $ 60 billion
         Surplus $ 280 billion
Fiscal Deficit
           $ 503 billion
               $ 3,182 billion
           $ 783 billion
               $ 2,902 billion

India’s exports to
            $ 8.8 billion
                $ 44 billion
India’s imports from
            $ 5.1 billion
                $ 43 billion

Annual trade between GB and UK is $ 575 billion.

BREXIT is in a way a vote against immigration. GB receives immigrants mainly from Romania, Poland, Spain, Portugal, Lithuania and Italy in descending order. There is net immigration from  GB to Austria.

 Per Capita income in Euro
 Unemployment Rate

The table above demonstrates that lower p.c. income and / or higher unemployment rate in other EU countries are causing an exodus into GB. Brexitters want to stop this.
EU started with 6 members, 4 languages, 177 million people and $ 1.6 trillion (2014 prices) GDP. Now it has grown to 28 members speaking 24 languages, 505 million people with $ 19 trillion economy.

USA and EU: American investment in EU is 4 times their investment in entire Asia. EU investment in the USA is 8 times their investment in India and China combined.


1)    Global economy continues to teeter between “Risks Off” and “Risks On” situations. Brexit escalates Risk Aversion and signals the onset of another ‘Risks Off’ position. Investments will seek safer havens like the US $, Japanese Yen, gold and other precious metals. Sterling and Euro will face rough weather. Currencies like the Indian rupee will appreciate vis-à-vis Sterling and Euro and depreciate against the US $.Nearly $30 billion FCNR deposits mobilized with extra incentives to avert the foreign exchange crisis in 2013 are likely to be closed in HY2 of 2016-17 creating additional pressure on the rupee.

2)    Credit Rating institutions have warned that UK’s rating may witness a downward movement. UK is likely to dip into recession. Unemployment position will worsen. This will have a ripple effect all around.

3)     BIS (Bank for International Settlements) forecasts the onset of “Risky Trinity” of low interest rates, heavy debts and low productivity. Bank of England has already announced that it is ready to pump in Sterling 250 bn equivalent to $345 bn to stave off any liquidity problem. Quantitative easing gets longer life.

4)    The much talked about interest rate hikes in the US will continue to be on hold. This will benefit India and other emerging economies because reverse flow of investments to the US will pause for a longer time.

5)    UK’s likely recession and depreciation of its currency will adversely affect Indian exports (and exports from other countries also) to UK.

6)    London City’s significance as a financial centre of the world will get dented. Consequent loss of employment and revenue will ravage Britain.

7)    Brexit is caused by and leads to fiscal problems like expenditure on refugees, subsidies etc. Ability of monetary steps like reduced interest rate to solve what are essentially fiscal issues is suspect. The world is moving into deeper uncharted waters. Unconventional monetary  policies introduced post global crisis 2007-08 seem to be never-ending.

8)    Brexit is likely to cause an Exit Contagion. If some of the remaining 27 economies decide to exit the EU, problems will get compounded. Brexit already leads to 16% drop in the economic size of the EU. Any further emasculation will greatly reduce the significance of the Union as a strong trading bloc. The US economy will become more unipolar.

9)    Growth in emerging economies barring a few exceptions like our country has already slowed down. The uncertainties created by Brexit will slow it down further.

It appears that Great Britain has cut its economic nose to spite its political face.

Thursday, June 23, 2016

Britain emulates India

In its coverage on Brexit referendum, The Economist has noted that Tories and Kippers have urged their supporters to take their pens into the polling booth on June 23rd to prevent the intelligence services from doctoring their votes. Do they suspect that something like what is alleged to have happened in the Rajya Sabha poll in Haryana may be repeated in Britain?

On the quality of debate in Britain, the magazine fears "the currency of facts will be debased, that of stunts inflated, that of conviction sidelined. It will be de rigueur to question an opponent's motives before his arguments, to sneer at experts, prefer volume to accuracy and disparage concession, compromise and moderation."

British politicians are learning fast from their Indian counterparts.

Saturday, June 18, 2016

Raghuram Rajan's departure

"He Came, He Saw, He Conquered" and He Left. He was animated, exuberant, stylish and articulate. He gave expression to his views without reservation and this probably was his undoing also.

Leadership of central banks requires clarity of thought and obfuscation of expression. Raghuram Rajan excelled in the former and was incapable of the latter.

Rajan seems to know when to leave. He has chosen to depart when economic climate is more bright than dark. He has not allowed his admirers to discover his feet of clay. RBI Governor's success depends more on circumstances and less on his / her brilliance. Deciding to leave when circumstances are fairly healthy is a master stroke.

RBI Governors in the past have generally been given two terms. Being restricted to one term with rampant rumours of a conspiracy against him means that Rajan gets sympathy in addition to admiration. This is indeed the Goldilocks time to let go of the Governorship.

Some may call him a quitter. His mom-in-law who wants him to be a karma yogi will not be happy with his decision.

Subramanian Swamy goes about blaming Rajan for his allegedly hawkish stand on interest rates which according to him has distressed many industrial units. But, leaders of industry have almost unanimously regretted his early departure. Swamy's argument flies in the face of empirical evidence.

Rajan's best legacy is what he did to banks' Balance Sheets and wilful defaulters. It is hoped that his successor will emulate him on this. His successor (Rakesh Mohan, Arvind Panagariya, Arvind Subramanian, Arundathi Bhattacharyya or who?) will have a tough time because the benchmark will be Rajan's methodical performance.

In his farewell message to RBI employees, Rajan says he is always available to serve the country. The country needs him now more than ever and he has chosen to walk back into distant academia. Of course, no one is indispensable. We will get over Rajan-mania sooner than expected.

Brexit or Brin ?

Proposed referendum in Britain on exiting or remaining in the European Union has economic and political consequences irrespective of the voters' choice. Current trends are given in the table below.

President Obama favours the status quo whereas Donald Trump has urged the British to walk out. People's preferences appear odd. Conservatives and the poor appear to be on the same side. Interests of Labour party and the rich seem to coincide.

Financial markets which are already in turmoil may undergo more strain post June 23.

Tension created by adversaries in the referendum has already claimed the life of one Labour MP, Jo Cox. If Brexit is favoured, David Cameron will probably resign as prime minister creating political disarray at least for some time.

       Tending towards Remaining
         Tending towards Exiting
               Labour partymen
               Liberal Democrats
                   UK Independent Party

Sunday, June 12, 2016

B.S.Raghavan on Narendra Modi

B.S.Raghavan, one of the oldest former civil servants now amidst us, is an erudite commentator on current happenings, political and others. A clear thinker, his articulation competes with his cogitation. He has worked with three prime ministers and has wide experience  having served in different states and Delhi.

He spoke on Modi's 2-year performance as P.M. and what the future beholds at YMIA, Chennai on June 12. He had fulsome praise for Modi. This is a weighty compliment from a person who admits that he is a fan of Jawaharlal Nehru. In a way, it is most difficult to come across a more incompatible pair than Modi and Nehru. But there you are, Raghavan does not allow his self-diagnosed prejudices to cloud his opinions on men and matters.

BSR said he has become more optimistic about India thanks to Modi's leadership. His comments were on Modi as a person and not as someone belonging to BJP or any other group.

Candid assessment was made on 1)Modi's performance in domestic arena, 2)Modi's phenomenal and unexpected successes in foreign front and 3)what improvements are called for. Jan Dhan Yojana, Skill India, Make-in-India and Clean India projects came in for wholehearted praise. About Modi's misses, he made a few debatable observations.

He wished that Modi, immediately on assumption of power, should have announced a few electrifying steps like "Uniform Civil Code" will be operative from tomorrow" (does our slothful legal system permit this?) and "all non-performing bureaucrats will be sent home forthwith". The Pathankot disaster, in his view, should have let heads like DGP, Army General roll. Modi's tendency to be silent on idiotic comments by some extreme elements was duly disapproved of. Modi ought to learn from Nehru how to squelch rumours and misleading comments firmly and fast. Modi needs to travel more domestically and like Nehru must become visible to all Indians.

BSR felt that Modi should have chosen a more appropriate cabinet of ministers. However, he did not say who could have been included. In his view, some present ministers do not belong to their respective portfolios however capable they are otherwise.

The speaker was sanguine about the future outlook. He hoped that Modi is a learner.

Thursday, June 09, 2016

Modi's mojo

Modi's address to the US Congress has deservedly attracted praise from all directions. As usual, he spoke without the assistance of any notes. He traversed an array of subjects. He stressed the significance of both India and America. His emotional involvement was explicit on his face when he referred to terrorism.

Modi could have been more forthright about Pakistan's perfidy. Pakistan sheltered Osama bin Laden while pretending to be unaware of his whereabouts. This was an affront to America. America somehow chose not to confront Pakistan openly and assiduously on this treachery.

Modi praised the American Senate for imposing conditions on Pakistan if they are to avail military aid. Unfortunately, President Obama is trying to remove these conditions. President's intention is an insult to anti-terrorism forces. It is unthinkable that a Nobel laureate in Peace favours a terrorist nation.

Monday, June 06, 2016

RBI Governor drops a bomb

While addressing the press immediately after announcing the updated monetary policy, Raghuram Rajan made a revelation that should have shocked the audience, but did not. He said that RBI had entered into forward hedge in connection with the FCNR deposits collected by the commercial banks under the liberal scheme formulated by him as soon as he took charge as Governor. It now emerges that some of the counterparties in these hedging contracts have expressed their apprehension about their ability to deliver dollars.

These counterparties account for about $20 billion. If these apprehensions materialise, RBI would be susceptible to unprecedented credit risk. Rajan has warned that RBI would not lend a helping hand to such counterparties. The resultant monetary loss, if any, may be marginal; but, the damage to sentiments would be substantial. Let us wait and watch. There could be some surprises here. Is the Governor only trying to forewarn in order to contain any damage that may occur? Is this a strategy to preempt allegations of inadequate due-diligence?

Added on June 8: Are the views expressed in this post an exaggerated interpretation of what was perhaps an innocuous reference made by the Governor? It would appear so especially since Subramanian Swamy has not reacted so far! As Alan Greenspan would say, "If you think you have understood what the central bank chief says, you have probably not heard correctly."