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The Khaleej and India

How will the instability in the Gulf impact India’s economy?

Political instability in the Middle East will likely have an impact on India.  We have already seen how the uprisings in Egypt and Libya have affected the lives of the over 18,000 Indians living in that part of the world.  The potential impact of the deteriorating situation in Bahrain will be far greater, where about 300,000 Indian expatriates live.  GCC countries today are home to about 4.3 million Indians.  This, of course, does not include the many undocumented (mostly blue collar) Indian workers in the region.  In some cases (as in Dubai, which experienced an influx of workers in the last decade), the number of undocumented workers as a percentage of the total population of expatriate Indians will be considerable.

But beyond the potential effects to the lives of Indian citizens, political disturbances in the region will also have an impact on India’s economy.  Today, remittances account for about 4% of India’s GDP (considerable, but not as high as other countries in the subcontinent).  Remittances to India as a percentage of GDP have also (somewhat interestingly) increased over time, and with the liberalization of India’s economy (from 1.1% in 1985, 2.8% in 2000 to about 4% in 2008).  As of 2008, the Gulf was the largest source of remittances to India at about 40%:

(Source of data: Reserve Bank of India)

Two important points need to be made here: first, while we already know that India leads other nations in terms of total dollar remittances ($46 billion, 2008), it does not include remittances made via hawala transactions.  Since the September 11 attacks, the U.S. has worked with Gulf countries to strengthen their finance and banking regulations to ensure control over hawala transactions (which, by their very nature, have been helpful to terrorists to finance attacks against the U.S. and India).  However, according to some estimates, hawala remittances to India from the Gulf are still pegged at about 30-40% of legal remittances.  That would effectively put total remittances from the Gulf to India at at least $60 billion.

Second, when one considers remittances as a percentage of net state domestic product (NSDP), some states will likely be far more vulnerable to political uncertainties in the Gulf than others.  According to a study published by the Centre for Development Studies, remittances to Kerala as a percentage of the state’s economy was at 30%.  Further, per data published in the same report, it can be inferred that remittances from the Gulf alone can be pegged at about 28% of the Kerala’s economy.

While the most immediate impact of the repatriation of Indian citizens from a worsening situation in Bahrain could result in a momentary spike in remittances, as some suggest was the case during the first Gulf War, it will undoubtedly have a medium- to long-term impact on the economies of states in India that depend heavily on them.

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Indonesia’s tsunami

India must respond and assist Indonesia in its time of need.

Prime Minister Manmohan Singh is on a three-nation tour of Japan, Malaysia and Vietnam, attempting to give impetus to India’s “Look East” policy.  The tour culminates with the 8th India-ASEAN summit in Hanoi.  Earlier this month, the defense ministers of the ADMM Plus members met, again in Hanoi, to continue dialog on multilateral security and cooperation in the region. And in an effort to underscore India’s view of Indonesia as an important strategic partner, New Delhi will host President Yudhyono as chief guest at next year’s Republic Day.

In recent days, an earthquake and tsunami have wreaked havoc in Indonesia.  Over 300 are confirmed dead, with about 500 are missing.  The Christian Science Monitor reports:

The Indonesian government and a host of relief agencies scrambled to pull supplies together Wednesday before making the 12-hour journey from Sumatra to the Mentawai Islands, where more than 150 people were killed after a powerful earthquake sparked a tsunami that struck the remote region on Monday.

Two days after the 7.7-magnitude quake struck, little aid has reached the islands due to rough seas and stormy weather. The few reports trickling in have come mainly from survivors, and a few surf charters that were out on the water when the tsunami hit. [Christian Science Monitor]

When the 2004 Indian Ocean tsunami struck the region, India distinguished itself at not only being able to provide critical assistance to its own citizens, but also assisted its neighbors as well.  As part of Operation Gambhir, the Indian Navy responded to aid Indonesia, by deploying a hospital ship, providing relief supplies and setting up medical camps to aid disaster victims at Meulaboh, where over 1,800 patients were treated.

Though the present disaster is of a smaller scale than the 2004 tsunami, Indonesia requires assistance, and India, as an ally that shares historic cultural ties with the Great Archipelago, must respond with conviction. The Indian Navy is experienced and well equipped to respond to disaster relief and rehabilitation efforts.  The time for pretty speeches was last week; India must offer to assist Indonesia in its time of need.

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In Pragati: The Cameron Opening

Mr Cameron’s austerity measures may provide a mutually beneficial opportunity to both India and UK.

In this month’s Pragati, I argue that a real opportunity for India and the U.K. to forge the bonds of an important strategic relationship exists.  In order to do this, India and the U.K. first need to get past curry and cricket and focus on issues of strategic importance to each other, and the world.  Three such issues stand out: security, energy and climate change.

The first pertains to what C Raja Mohan calls “keeping the global commons open and secure for all.” The security and safety of vital commodities in transit is critical to any economy; more so to one growing at such a rapid pace as India’s. The growth of India and China, and the Southeast Asian economies will increase competition for resources and further underscore the vitality of Indian Ocean trade routes to their economic growth. Today, India is already engaged with like-minded countries such the United States in securing these high traffic energy and trade routes, from the Horn of Africa to the Straits of Malacca. An India-UK collaboration on maritime security in the Indian Ocean and beyond can significantly transform the nature of this bilateral relationship.

A related aspect involves opportunities for qualitative defence transactions between the two countries. During Mr Cameron’s visit to Bangalore, the much awaited $800 million contract for 57 advanced jet trainers was signed between BAE Systems and Hindustan Aeronautics Ltd.

Read more about it in this month’s Pragati. (PDF ; or  HTML)

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End of Story, Morning Glory?

The United Arab Emirates (UAE) is experiencing the antithesis of the “Dubai Chalo” mantra of the ’60s and ’70s.  Dubai is likely the shed 10% of its population over the next two years, as a result of unmanageable debt, failing businesses and shrinkage of property values.   This is only to be expected —  unsound economics have driven Dubai’s growth in recent years.  Unlike other states in the Arabian Peninsula, Dubai has no oil of its own.  Indeed, from the emirati pearl merchants of the early 1900s to the establishment of the Jebel Ali Port in the 1970s, its historic strength has been trade.

However, the single minded pursuit of turning this free-trade town into a megacity rivaling New York or Los Angeles is as bad an idea today as it was when it was conceived.  And now, conservative but oil-rich Abu Dhabi, who many said was slow off the mark in this maddening real estate circus, is having the last laugh.  The Maktoums of Dubai have had to had to swallow their pride and approach Abu Dhabi to bail them out.  But even Abu Dhabi’s bailout of Dubai comes with strings attached:

[T]he rapid deceleration had given rise to speculation that Abu Dhabi, the richest member of the UAE, might have to bail out its flashier neighbour. Rumours spread that Abu Dhabi would only stump up the cash if Dubai ceded control of its successful airline, Emirates.

Federal support has come through folding Dubai’s troubled mortgage companies into well-capitalised Abu Dhabi banks. There have been other direct discussions between Dubai and Abu Dhabi state companies, although none has reached agreement.

Sheikh Mohammed’s Dubai International Capital fund, whose assets have shrunk sharply, briefly courted investment from Mubadala, the Abu Dhabi investment arm. No substantive discussions ensued, people close to the matter say, but the incident fuelled rumours of a bail-out. Well before the credit crisis raised questions about Dubai’s solvency, Mubadala and Dubai Aluminium had been discussing equity restructuring of their joint venture, Emirates Aluminium, a vast smelter on the Abu Dhabi/Dubai border.

What Dubai needs to do now is to rightsize.  New York City was not built overnight.  Even if NYC’s economy relies heavily on financial markets, these markets trade against tangible products — from the pharmaceuticals of New Jersey, to the automobiles of Detroit.  Dubai’s financial markets trade in recycled financial instruments, which have a tendency to flourish during the good times, and falter during the bad.  This blogger also feels that Dubai (and the UAE as a whole) needs to address debt insolvency.  Given that foreigners and foreign owned entities form the majority of Dubai’s demographic and economic footprint, a credit history check system such as the one in the United States would be ineffective.  Yet, there is an urgent need to address the frequency with which expatriates and foreign-owned companies run up substantial debt and abscond from the country.  The current economic crisis in Dubai is as much a result of a nonexistent debt reconciliation system, as it is due to building artificial islands, skyscrapers and magical kingdoms that no one could afford.

The one benefit of an Abu Dhabi bailout might be that the UAE would start functioning more like a federation with a visible nucleus (Abu Dhabi) than the disagreegated collection of city-states that it now is.

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