Economy
India to allow vehicles from neighbouring SAARC members from 2016

As a first step, from 2016, India will start issuing international permits for vehicles entering the country from some of its neighbours, covering both commercial and passenger category, from Bangladesh

During the last summit meeting of South Asian Association for Regional Cooperation (SAARC), India made a commitment that it would issue international permits for vehicles to enter the country from our neighbouring states. This move would enable members from this eight-nation group, such as Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, Sri Lanka and India to be able to extend vehicular traffic into each others' territory. It may be remembered that there is already this facility, on a regular basis, between India and Pakistan, at the Wagah border.

 

Similar arrangements exist with Bangladesh and Myanmar, though operative on a much smaller scale.

 

We are aware of the South Asian Free Trade Area or SAFTA agreement on goods, which came into force from January 2006, involving developing countries, such as India, Pakistan and Sri Lanka to bring down their customs duties to 20% in the first phase of the two-year period ending in 2007 and to zero by 2016 in phases.

 

As a first step, from 2016, India will start issuing international permits for vehicles entering the country from some of its neighbours, covering both commercial and passenger category, from Bangladesh. Later on, this is likely to be extended to Nepal, Bhutan and Myanmar.

 

This arrangement is to coincide with the proposed plan to build a dedicated international highway. When the road permits are issued, these will be included with an IT tracker, which will enable easy location and to keep a watch on the movement of vehicle concerned, if necessary.

 

In the next two years, all the relative arrangements in regard to the introduction of such traffic, including special customs clearance needs, check posts, possibly x-ray or scanning equipments (advanced types) to ensure movement is smooth and without hassle. Yet, at the same time, easy movement does not permit contraband items being brought in or smuggling made easy!

 

It would also follow that when reciprocal arrangements become effective it would help greater movement of vehicular traffic from India too.

 

With a large network of railway system in the country, there is scope for developing this also extensively into Bangladesh, Myanmar and

Sri Lanka.

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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Market impact of Russia's Crimean adventure

If governments are impotent to punish Russia, markets are not. This was best illustrated by the 11% fall in its stock market on the day of invasion. It subsequently rebounded only by 5%.

The editors, who put newspaper or website headlines in huge letters, assume that political events will have a market impact equal to the size of the type. These events are supposed to move markets. The reality is that they don’t. A third of investors don’t care about political risk at all.

 

For example, the last Russian military adventure was the invasion of Georgia by Russia in August 2008. The US market barely budged. The US government shutdown last October, was supposed to be catastrophic and it was, for about a day. The gas attack by Syria last August might have resulted in an armed incursion into Syria, but is was defused. The market fell a few points but not much. Civil unrest has haunted emerging markets including Thailand, Venezuela and Brazil for months. But all the chaos on the streets of Bangkok, Caracas and Rio de Janeiro has had less of an effect than a few off handed remarks by a member of the US Federal Reserve.

 

Now we have seen a brief pull back because of the Russian occupation of the Ukrainian territory in Crimea. The market sprang back to new highs. It would be simple to brush this event off as the market apparently has, but is there something different about the latest crisis that might make the market’s reaction premature? Are investors just careless in dismissing political risk as simply irrelevant?

 

The first difference is size. Russia is the ninth largest country in the world by population. Ukraine is just slightly smaller than Spain. From an economic perspective, Russia is the 8th largest economy in the world. It ranks just behind Brazil and ahead of India. The Ukrainian economy is hardly larges. It ranks about 51st, but there is also location.

 

Ukraine’s capital Kiev, is 200km closer to Berlin than Rome. While not exactly in the heart of Europe, it is certainly part of one of the most important economic regions in the world. As part of Europe it also shares a great deal of its history. For close to four hundred years, Ukraine was either part of or influenced by Poland and Lithuania.

 

The proximity is reinforced by history. The Baltic republics and Finland were once part of Russia. All of Eastern Europe and a large part of Germany were controlled and at times occupied by Russian forces. Many citizens of the present EU were once citizens of either the Soviet Union or one of its satellite countries of the Warsaw Pact. The combination of proximity and a bit of shared history makes what happens in the Ukraine far more important to the EU than anything that goes on in Thailand or Syria.

 

The close connection would seem to indicate that both the Europeans and the Americans might be more inclined to do something to punish Russia, but what? This is the heart of the matter. A military option is definitely off the table, which leaves economic retaliation of some type. But Russia is Europe’s third largest trading partner. It provides 30% of Europe’s energy needs. Any economic sanctions would also hurt Europe, so they won’t be too harsh.

 

But if governments are impotent to punish Russia, markets are not. The Russian economy like other emerging markets, has been weakening. Russia’s actions brought uncertainty to any Russian investment. This was best illustrated by the 11% fall in its stock market on the day of invasion. It did subsequently rebound but only by 5%.

 

Even more damage has been done to Russia’s currency. The ruble has been dropping all year. The process accelerated in December with the announcement of tapering by the Federal Reserve. It is now down 20% in the past 12 months. The invasion didn’t help. It briefly dropped almost 3%. To protect the currency, the Russian central bank hiked interest rates from 5% to 7%.

 

The Russian economy is barely growing at a bit over 1%. Manufacturing has been contracting for the past six months and inflation is stuck at over 6%. The country is also in debt. Consumer lending has increased in Russia by about 40% over 2012, while credit card loans rose by close to 80%. Its companies’ foreign debt was $628.4 billion at the end of the first half of last year. This amount is equal to 30% of Russia’s economic output. It is close to their foreign debt at its peak in 2009. A certain percentage of that debt is undoubtedly in hard currency. Rising interest rates and falling currency is a recipe for default

 

Foreign investment in Russia will fall as risk is reassessed. Russia’s main export, natural gas, will get increased competition. According to the America Energy Information Agency, Europe’s recoverable reserves are on a par with America’s. The very real threat of Russian domination may be sufficient to overcome environmental concerns about fracking.

 

Finally it is not just the Russian economy that is in trouble. The Ukrainian economy is a well-known basket case. The fall of Turkey’s currency last month, caused a major market pull back. Things are hardly better and the political corruptions scandals around Prime Minister Ed Erdogan worsen. Russia is also Turkey’s one of the main trading partners, so a slowdown will hurt both countries to say nothing of contagion to other emerging markets.

 

In 1810, London financier Nathan Rothschild is supposed to have instructed investors to "buy on the cannons, sell on the trumpets". In other words buy when stocks plummet due to threats of violence and sell when the threat is extinguished. The concept has less of an impact today, but it really depends on whose cannons. Autocrats and despots are rarely concerned with economic impacts, but they are more likely to be far more devastating than almost all military actions.  One political risk investors cannot ignore.

 

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)

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Services industry emerges as a strong performer in GDP growth in Q3 FY14

Divergence between the PMI indices for manufacturing and services, and the actual data (growth rates) and IIP figures will continue since the nature of these indicators is different

The Purchasing Managers’ Index (PMI) for manufacturing in the month of February is at a year high of 52.5 compared with 51 in April ‘13. On the other hand, the GDP estimates released last week suggested that the manufacturing industry slowed down by -1.9% in Q3 FY14 compared with the growth of 2.5% in the corresponding quarter of last fiscal.
Likewise, the PMI services index for the month of February stands at a low of 48.8 maintaining its deterioration for the eighth consecutive month. However, the services industry emerged as one of the strong performers in the recent estimate of GDP growth in Q3 FY14, points out a research note.

 

Are we today facing severe stagnation or are we facing a contradiction due to the indicators selected for analysis? This is the dilemma for analysts of the Indian economy. According to CARE Ratings, divergence between the PMI indices for manufacturing and services and the actual data (growth rates) released under the GDP estimates and IIP figures will continue since the nature of these indicators is different. The PMI captures in a way the level of confidence or perception based on a comparison over the immediate previous period, while growth rates are over the same period of the previous year thus adjusting to an extent the seasonal component. Each of these concepts has their own uses but the PMI may not be taken to be reflective of the growth in the concerned sector.

 

Growth in the services sector is high, as revealed in the quarterly estimates of GDP. Please see table below:
 

 

According to the research note, the PMI services index has remained below 50 from July 2013 onwards. The index has fallen from 50.7 in April ’13 to 48.8 in February 2014. The index below 50 indicates that the services sector has witnessed negative growth based on the responses by the private companies. Please see chart below:
 

 

In contrast, there is stagnation in the manufacturing sector, as can be seen from the charts below:


 

 

The sluggish growth in FY14 is a result of weak consumer demand, and low investments partly due to the high interest rates maintained by RBI (Reserve Bank of India) in its bid to fight inflation. Further, manufacturing sector having recorded negative growth for the last three consecutive months vis-à-vis the same time window in FY13 is indicative of the stagnation the manufacturing industry is currently encountering.

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