IASbaba’s Daily Current Affairs – 12th August, 2016

IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs Aug 2016, International, UPSC

IASbaba’s Daily Current Affairs – 12th August, 2016

ECONOMY/INTERNATIONAL

TOPIC:

General Studies 2

Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests
Effect of policies and politics of developed and developing countries on India’s interests

General Studies 3

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

TPP threat looms over Indian textiles

India Textile Stats

Textile and clothing sector accounts for approx. 5% of India’s GDP
It accounts 15% of its industrial output and export earnings
Employment to 55-60 million directly or indirectly
Achieved a per capita GNP of $1000 at 1990 prices
Global export share- 3.25%

Textile and TPP

India is not a party to TPP, i.e. Transpacific Partnership Pact involving 13 countries
They are: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the US.
US is major export destination of Indian textile and clothing sector
- It accounts for 30% of India’s total export
Post Brexit, India will more depend on the US markets

Not a good pact for India

Or all other non-TPP member countries like Brazil and China
It will affect textile and clothing sector in India in two ways
1. Exporters from TPP countries will get preferential access in US market than the non-TPP countries like India
  - This will be a disadvantage to India’s apparel exports to US as à US import duties on apparels are very high
  - The average duty ranges around 7.9% and duties on many clothing items can go as high as 32% (WTO database)
2. Yarn forward ruleà a key feature of TPP
  - To avail duty preferences, it is mandatory to source yarn and fabrics used in clothes from any or combination of TPP countries
  - The YFR will induce garment manufacturers to source their raw materials from TPP countries at the cost of non-TPP countries like India and China, even if the suppliers in the region are not least cost.
  - Trade diversionàmoving trade away from more efficient producers to least efficient producers
  - This is likely to disrupt regional and global supply chain in textile and clothing

Existing pressure on India

Textile and clothing sector is in pressure due to
- slowing demand in key export markets
- backdoor entry of Chinese goods via Bangladesh under SAFTA
- other LDCs under DFQF schemeà allow duty free import of garments from Bangladesh and other least developed countries such as Myanmar into India
- Exclusion of India’s clothing products from US GSP benefits
To add salt to wound, India will have to comply with WTO commitments and soon phase out the export incentives—latest by 2018
- Reason: India’s has crossed the global export share of 3.25% in textile and clothing
- This is WTO’s requirement to be termed as ‘export competitive with obligation to phase out export subsidies’

DFQF- Duty Free, Quota Freeà

In Hongkong in 2005, the LDCs managed to get duty-free quota-free market access (DFQFMA) with WTO negotiations
The developed countries has to provide DFQFMA to 97% of the products originating from LDCs by 2008
The developing countries were given flexibility for DFQF as per their position

GSP- Generalized System of Preferencesà

Least developed countries (LDCs) have been granted preferential tariff treatment in the markets of developed and developing countries under a number of schemes and arrangements.
Its objectives are increase in export earnings, promote industrialisation and accelerate economic growth.
The concept of GSP was adopted in Delhi in 1968 in the context of UNCTAD II

Hard-hit retailers

Only 17% of textile and clothing exports under NAFTA and Central American Free Trade (CAFTA) have gone through yarn forward rule
Yet, the US trade negotiators have incorporated it in the TPP
This shows the intentions of protectionists to revive American indigenous textile industry at the cost of foreigners
However, if there is too much YFR insistence, the clothing retailer will have limited freedom in choosing suppliers and minimising source cost
Clothing retailers (Levis, GAP) and their associations (TPP Apparel Coalition) have opposed the YFR
As a possible remedy to it, the US trade negotiators came up with ‘short supply list’.
- It will give some flexibility to clothing retailers in sourcing their inputs (which are not available in TPP region) from non-TPP countries either temporarily or on long term basis
This does not seem to be a sufficient relaxation

Identifying India’s options

It is difficult for India to ignore the $3.5-4 billion (one-fourth) apparel exports marketà The USA
The exports picked up only 1.27%, though since last 18 months, the merchandise exports have been declining continuously
The textile exports dominate India’s total merchandise exports. Hence, to revive exports, it is necessary to revive textile and clothing exports
India’s best betà multilateral trade liberalisation of heavily protected textile and clothing sector
- However, not much scope is visible in it too as US is disinterested in WTO and current sentiments in most developed countries are against any more trade liberalisations.
A catch 22 situation?
- India’s joining TPP will benefit the textile and clothing sector
- But, accepting WTO proposals on intellectual property, investment protection, services and state owned enterprises (SOE) as envisaged under TPP will not find support in policy makers or the Indian industries.
Going round about?
- Relocate part of India’s textile production to countries like Vietnam which is a TPP member or
- Go to Least Developed African countries like Ethiopia which has duty free market access to USA
- Limitation: These options means relocating jobs to Vietnam or Ethiopia, risking investments outside India and this would be against the Make in India spirit
The loss in textile exports to TPP countries will have to be compensated by gains in other markets
- It can be done by changing rules of originà using yarns and fabric of Indian origin
- This precondition to allow duty free import of garments from Bangladesh and other LDCs to stimulate India’s apparel exports
- It will also check backdoor entry of Chinese fabric into India via Bangladesh

Conclusion

Safeguarding Indian market

Inclusion of textiles under India- Mercosur PTA
- Textile and clothing sector is heavily protected in Mercosur countries
- Import duties as high as 35per cent is imposed on many textile items
- An FTA with it will increase access to Latin American markets
- It will somewhat compensate for loss making export market because of TPP
RCEP
- India should push for Chinese import duties reduction on apparel
- It can be a high potential export destination for India’s apparel items
- It will give rise in wages and per capita income despite growth slowdown.
- Can be used to access Australian apparel import markets
Product differentiation
- It is the marketing of generally similar products with minor variations that are used by consumers when making a choice
- It will protect textile and apparel export to US despite TPP cost disadvantage
- Product differentiation example- voluntary carbon labelling

Connecting the dots:

India’s textile industry is one of the largest employers in India. Analyse the scope and challenges faced by Indian textile industry post neo-development of regional FTAs

ECONOMY

TOPIC: General Studies 3

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Effects of liberalization on the economy, changes in FDI policy and their effects on economic growth.

Investment models

Make in India, Finance in the UK

In the words of the IMF, India is the “bright spot” in the global economy: the fastest growing G20 country, with a reforming Prime Minister who is determined that India will fulfil its potential.

But what are the raw ingredients needed for this growth and does India have them?

Adam Smith, father of economics, in his work “An Inquiry into the Nature and Causes of the Wealth of Nations”, 1776 had identified three basic factors of production:

Land
Labour and
Capital

Some 240 years later, these three factors are still central elements to any growth story.

In other words, India should excel in all the above mentioned basic factors of production to continue its economic growth.

The NDA government, under PM Modi, has firmly focused on – bringing in the necessary land reforms and technology to exploit India’s natural resources.

Likewise, the Skill India programme focuses to improve labour productivity and manufacturing.

In this regard, India and UK, are also working extensively on both these agendas but it is the third area, capital, that is essential to really propel growth.

Where is the money going to come from to invest in technology, skills and infrastructure?

Building Capital through Bonds

The World Bank estimates that – ‘By the end of the decade, India’s infrastructure alone will need $1.7 trillion of capital investment. India, arguably no country, would be able to finance this level of investment purely on its own’.

The UK’s response has been swift, significant and is already making a difference to this challenge.

When Prime Minister Modi visited UK last year, he was not just looking for British investors but looking to London to act as a funnel for the world’s capital.

Bond for India’s development

In his speech at Wembley, UK, PM Modi announced issuance of Rupee Bond. Since then the UK, working with Indian partners, has helped to deliver on this end.

Two months ago Axis Bank launched India’s first internationally-listed certified green bond on the London Stock Exchange (LSE) and raised $500 million.
Last month, HDFC announced the world’s first ever Masala Bond by an Indian entity; it was also listed on the London Stock Exchange (LSE) and raised ?30 billion ($450 million).
And just last week, the world’s first ever Masala Bond by an Indian PSU was also listed on the London Stock Exchange by the National Thermal Power Corporation (NTPC) – a ?20-billion ($300 million) green Masala Bond to be used to help generate 175GW of renewable energy by 2022.

This is the size, scale and pace of investment that India needs to build on to fulfil its potential.

Friendly market

The last two of these issuances came after the UK’s referendum on EU membership and shows quite clearly that irrespective of EU membership, London is still a world leading financial market and is in pole position to funnel the world’s capital to invest in India.

London has become the Masala Bond capital of the world and a market that understands India, not least because of the prevalence of the Indian diaspora working in it. But it understands the risks and the returns of investing in India and can pull in investors from the Far East just as easily as it can the asset managers of North America, and the wealth funds of West Asia.

With sluggish growth across all major countries, making India an even brighter spot in the global economy is good news for everyone, not least for the one-sixth of the world’s humanity that lives here. Make in India, Finance in the UK is no longer a catchy mantra — it has become a reality!

What is Masala Bond?

The term is used to refer to rupee-denominated borrowings by Indian entities in overseas markets.
The International Finance Corporation (IFC), the investment arm of the World Bank, last November, issued a ?1,000 crore bond to fund infrastructure projects in India. These bonds were listed on the London Stock Exchange (LSE).
IFC then named them Masala bonds to give a local flavour by calling to mind Indian culture and cuisine.

Why is it important?

Masala bonds, if they take off, can be quite a significant plus for the Indian economy.
They are issued to foreign investors and settled in US dollars. Hence the currency risk lies with the investor and not the issuer, unlike external commercial borrowings (ECBs), where Indian companies raise money in foreign currency loans.
While ECBs help companies take advantage of the lower interest rates in international markets, the cost of hedging the currency risk can be significant. If unhedged, adverse exchange rate movements can come back to bite the borrower.
But in the case of Masala bonds, the cost of borrowing can work out much lower. The RBI in its April policy said that it would issue guidelines for allowing corporates to issue rupee bonds in overseas markets.
Globally, there is ample liquidity thanks to lower interest rates in developed markets, but there are very few investment options due to weak economic conditions globally. India is that rare fast-growing large economy, and masala bonds are one way for investors to take advantage of this.

About IFC

The International Finance Corporation (IFC) is an international financial institution that offers investment, advisory, and asset management services to encourage private sector development in developing countries.
It is a member of the World Bank Group and is headquartered in Washington, D.C., United States.
It was established in 1956 as the private sector arm of the World Bank Group to advance economic development by investing in strictly for-profit and commercial projects that purport to reduce poverty and promote development.
The IFC is owned and governed by its member countries, but has its own executive leadership and staff that conduct its normal business operations.
It is a corporation whose shareholders are member governments that provide paid-in capital and which have the right to vote on its matters.

IFC’s functions:

It offers an array of debt and equity financing services and helps companies face their risk exposures, while refraining from participating in a management capacity.
The corporation also offers advice to companies on making decisions, evaluating their impact on the environment and society, and being responsible.
It advises governments on building infrastructure and partnerships to further support private sector development.

Connecting the dots:

The World Bank estimates that – ‘By the end of the decade, India’s infrastructure alone will need $1.7 trillion of capital investment’. Can India be able to finance this level of investment purely on its own? Elucidate your opinion.
Recently rupee denominated bonds is often in news. What is a Rupee Denominated Bond? What are the differences between a rupee bond and a masala bond?
What is a Masala Bond? Why is it important for India?