Gurumurthy Kalyanaram on Foreign Direct Investment (FDI) in Retail Business in India: Long-term benefit and Short-term dislocation

Gurumurthy Kalyanaram - Government of India's decision to permit 100 percent foreign direct investment in single-brand retail and a maximum of 51 percent such investment in multi-brand retail business has been received with ferocious opposition from various traders' associations and then entire gamut of political parties.

The proceedings of the Indian Parliament (Lok Sabha and Rajya Sabha) have been stalled, and there is a general strike that has been called by the traders' association. Gurumurthy Kalyanaram Lawsuit

Unfortunately, an important policy decision is lost in lot of noise -- both the proponents and the opponents of the proposal have merit in their arguments but all that is lost in the din.

The American Clean Energy Act, Global Warming and the Position of China and India

The American Clean Energy and Security Act (Waxman-Markey) was recently approved (narrowly) by the U.S. House of Representatives. The bill now goes to the U.S. Senate for consideration.

There are several provisions of the bill -- some are bold and others modest, some progressive and others status quoist. With respect to Global Warming and Carbon emission reduction, the Act mandates, "Starting in 2012, ACES establishes annual tonnage limits on emissions of carbon and other global warming pollutants from large U.S. sources like electric utilities and oil refiners. Under these limits, carbon pollution from large sources must be reduced by 17% below 2005 levels by 2020 and 83% below 2005 levels by 2050. To achieve these limits, ACES establishes a system of tradable permits called “emission allowances” modeled after the successful Clean Air Act program to prevent acid rain. This market-based approach provides economic incentives for industry to reduce carbon emissions at the lowest cost to the economy."

So, per ACES Act, the United States is using 2005 as the benchmark, and hoping to reduce the carbon emissions by about 17 percent in 2020. 

Tough economic times in India in the midst of ferocious Nuclear debate

As the Indian government's energies are absorbed in the debate over India-US Nuclear agreement (123 agreement), the country's economy is showing serious strains. India's economy is now faced with trio challenges -- rising oil prices, worrisome inflation, and depreciation of Indian rupee.

This is not good news for the country, and not for the ruling coalition of parties who have to face the electorate in the next 8-10 months.

Just look at some of the data. Inflation is at an alarming 10-11 percent annual rate corroding the purchasing power of all the citizens. Food and energy prices are skyrocketing. India is seeking a consensus for a regulated bandwidth of price for oil.

The Indian currency -- Rupee -- is depreciating because of the inflationary pressures. The trade deficit is growing.

For example, on Monday, June 30th, the market capitalization of the Indian financial markets was about one trillion dollars. So was the size of the Indian economy. But on Tuesday, July 1st that was not the case.

Bombay Stock Exchange closed on June 30th with a market capitalization of about $1.02 trillion. On Tuesday, a fall of 500 points in the Sensex and a gain of 32 Indian paise (100 paise = 1 Indian rupee) for the dollar against the rupee saw that figure drop to $970 billion.

Similarly, India's Gross Domestic Product for 2007-08, valued at Indian rupees (Rs) 43,02,654 crore, translated into just over $1 trillion as valued at exchange rate on June 30th. With the dollar appreciating against the Indian rupees and crossing the Rs 43 bench mark on July 1st, the India economy was down to $995billion.

High oil prices have seen India’s oil import bill rise to $16.5billion for April-May this year, up 49 percent from the figure for the same months of 2007. As a result, the overall import bill has risen by 32% to $48.8b. Despite the fact that exports have grown at 22%, the trade deficit has risen to $20.6 billion -- up about 48 percent.

The widening trade deficit has added to the demand for dollars as against Indian rupees. So while the U.S. dollar has been generally depreciating against most currencies, it has been appreciating against the Indian rupee. The exchange rate is over 43 Indian rupees.

What is the thinking on Iran-India Gas Pipeline?

For quite sometime now (since 1990), India and Pakistan have been discussing -- on and off -- transporting gas (natural gas) from Iran oilfields to India. The pipeline for such transport from Iran to India will be through Pakistan and even some parts of Afghanistan. That and the enormous estimated cost ($7.5 billion) make the proposition very complicated, if not almost impossible. There are challenging political, economic and diplomatic considerations. Here are just a few --

Assuming that the India-Pakistan political and economic relations are honky-dory, Afghanistan is a mine-field. The political uncertainty and instability in Afghanistan for the last 30 years is evident. So how will the safety of the pipeline be assured? What is the guarantee that the pipeline will not become hostage to political and even religious angst and anger?

Of course, the relations between Pakistan and India is far from reliable. Even as late as in years 1999-2000, India and Pakistan were poised to go to war. Of course, there are constant disagreements over small and big issues -- terrorism, cross-border military incursions, perceptions of slight.

Most difficult of all these challenges is the Kashmir valley. The Kashmir valley issue has no solution at all. Pakistan political leaders are unlikely to ever give up the claim that Kashmir valley should be transferred to Pakistan -- in fact, no Pakistan political leader can afford to do this politically. Of course, India will never let anyone impinge or question its sovereignty -- Kashmir is an integral part of India. If Kashmir valley was not such a narrow and small geographic area, and if there were some natural geographic divides, may be there could have been some give-and-take on the land. But that is not the case.

What if the Iran-Pakistan-India pipeline becomes a reality, and India starts using the enormous amount of natural gas for consumer and industrial purposes, and five years down the road, some political leader in Pakistan or some terrorist in Afghanistan decides to hold the pipeline hostage? India's economy will suffer devastating consequences.

What if Iran decides to raise the price of the natural gas? By supplying such large volumes of natural gas, and with the economic necessity of using the pipeline, Iran will have a near-monopolistic power. Even as the project is on the drawing board, Iran has already demonstrated its unreliability. So what can be of the future?

The pipeline project reached a setback on July 16, 2006 when Iran demanded a price of $7.20 per million British thermal unit ($6.80/GJ) of gas against India's offer of $4.20 per million British thermal unit ($4.00/GJ). The Indian spokesperson then stated that the price demanded by by Iran was more than 50 percent above the prevailing market price in India. India and Pakistan finally agreed in February 2007 to pay Iran $4.93 per million British thermal units ($4.67/GJ) but some details relating to price adjustment remained open to further negotiation.

Finally, the political instability and volatility in Iran is too obvious.

Given all these risks, it is not at all clear why India is investing so much time and effort in exploring this alluring but illusional opportunity.

Added to all these complications are two other elements. First, the United States is stoutly against this project as the U.S. is against any relations with Iran. That political reality may soften but it is not likely to change completely. Both Pakistan and India want the good will of the United States for different reasons -- for security reasons for Pakistan and for aspirational reasons for India. Second, China now wants to be part of this project adding to another level of complexity.

So why this project? It just does not add up.

Background: The project was mooted in 1990 with expectations that it will benefit both India and Pakistan, who do not have sufficient natural gas to meet their rapidly increasing domestic demand for energy. The IPI pipeline is a proposed 2,775-km-long pipeline to deliver natural gas from Iran to Pakistan and India. According to the project proposal, the pipeline will begin from Asalouyeh and stretch over 1,100 km through Iran. In Pakistan, it will pass through Balochistan and Sindh but officials now say the route may be changed if China agrees to the project. The gas will be supplied from the South Pars field. The initial capacity of the pipeline will be 22 billion cubic meter of natural gas per annum, which is expected to be later raised to 55 billion cubic metre. It is expected to cost $7.5 billion.

The state of the US: America is rising or declining?

The size of the Unites States economy is about $13 trillion. Assuming the average annual growth of 2.5 percent (this has been the average since World War II), the U.S. puts. out about $320 billion annually. On the other hand, the sizes of the economies of China and India are estimated t o be about $2.5 trillion and $1 trillion respectively. Assuming a monumental and unsustainable 10 percent average annual growth, China puts out about $250 billion annually and India puts out about $100 billion annually. So every year, the U.S. still adds more to its economy more than China or India does.

In this face of these empirics, it is impossible to argue that either China or India is going to overtake the U.S. in economic superiority.

However, what might change the equation is one of two very discrete and dramatic events. First possibility is a collapse of the U.S. economy triggered by some event or a set of events. But that's unlikely. Even the current oil price increase from about $20 per barrel to about $130 per barrel has had only marginal impact on the larger economy. The U.S. economy has shown remarkable resilience -- the Savings and Loans Industry crisis in 1980s, the dot com bust in the early 2000s, and the housing crisis in the last year or so are troublesome but they have not and cannot break the U.S. economy.

The second possibility is a new innovation or a set of innovations that dramatically alters the way of life. Think of steam engine, or Bessemer process for mass production of steel, or world wide web (WWW) technology. But, here, too the U.S. appears to be, if any thing, poised ahead of other societies -- think of genetics and genome therapy, or genetically modified food, or clean technologies, or nano-technology, and more.

The general argument that the U.S. has borrowed so much from other societies that it has now become a servant of these societies is not compelling – simply put, where are these societies, individuals and organizations going to put their monies? If not the U.S., where else? Of course, there will be some nominal and periodic variations and ups and downs but it is unlikely that there can ever be a run on the U.S. economy because there is no there large-scale alternative.

May be I am missing a new breakthrough -- a new steam engine -- but short of that the U.S. is likely to dominate the world of economy, commerce, and innovations for the next 50 years.