28 November 2019

$543 Billion!



According to India’s Ministry of Finance’s report on external debt, India's external debt was at around $543 billion as at end-March 2019. In terms of external debt ranking, India ranks 24th in the world.

External debt of India is the money owed by India to foreign creditors. In simple words, it is the money we have borrowed which we have to pay back (along with the interest on it).

World’s Most Indebted Nations
With a debt of $20,263 billion, the United States is the world’s most indebted country, i.e., it has the highest external debt. In fact, the U.S.’ external debt is a tad lower than the combined external debt of the three next ranked countries: the United Kingdom (second rank at $8,491 billion), France ($6,470 billion), and Germany ($5,800 billion).



Types of Debts
As you know, based on maturity (when it becomes due for payment), there are two kinds of debts: long-term and short-term.

A loan with a maturity period of more than one year is termed long-term debt.

A loan with a maturity period of less than one year, i.e., this debt would become due for repayment in the next twelve months, is called short-term debt.

Short-term debt includes both the principal and the interest on such loans. In other words, short term external debt includes short term debt by original maturity as well as long term debt (that has become due for maturity).

A government (just about any authority) prefers long-term debt for a fundamental reason: the longer the maturity period of the debt the lower the pressure on repayment.

In this context, it is pertinent to cite the breakdown of India’s external debt by maturity: about 80 per cent of the total external debt is long-term (i.e., about $434 bn of $543 bn). It is a no-brainer to say that the lower short-term debt works in the country’s favour.

Components of External Debt
There are several components of India’s external debt. However, for the common person to understand something as complex as external debt, the following are the main components of India’s external debt:

Multilateral credit – borrowed by the Government of India from institutions like the International Monetary Fund and the World Bank;

Bilateral credit – borrowed by the Government of India from other countries (like Japan);

External commercial borrowings (ECBs) – these are the borrowings of companies like Bharti Airtel from abroad;

Deposits of Non-Resident Indians (NRIs). NRI deposits are treated as liabilities as they have to be repaid to the depositors, and

Foreign Institutional Investment (FII) – investment by foreign fund houses (like mutual funds) in India’s stock markets and government securities.

Sources of the external debt of $543 bn
The Reserve Bank of India has a lowdown on the debt mix of the Government of India.  
 


 As you deduce from the source mix, just about 19 per cent of the total external debt is owed by the Government of India. This government debt is also called ‘Sovereign’ debt. The remaining part of the external debt is non-government debt. 

Vulnerability of the Indian economy
India is not vulnerable to any major or minor problem arising on the external debt front. The World Bank’s SDDS says that there is no vulnerability of the Indian economy to external shocks on the debt front. India’s foreign exchange reserves (of around $447 billion in November 2019) to external debt is around 82 per cent is within manageable limits. 

That's all folks!


25 November 2019

Rising Unemployment in India

The latest data on unemployment in India points to a significant surge. In fact, at 7.5%, the latest unemployment rate is the highest in 38 months, reveals the CMIE data. For calculation of this rate, the base is October–December 2015.

So, what is unemployment rate? 
Unemployment rate is the ratio of the unemployed to the working age population that is willing to work. If therefore considers only a part of the working age population – the part that is willing to work. 

In other words, the ratio of the employed to the working age population is called the employment rate.

India has a total labour force of about 52 crore. A low labour participation rate means fewer people are willing to work. 

In January 2016, the labour participation rate was 47%; it is down to 43% in October 2019, which effectively means that fewer people in the labour force are looking for and participating in work. 

There is a problem here: even though the labour participation rate is down to 43% (i.e., fewer people are participating in work), even these fewer people are not finding jobs (unlike in 2016). 

To put in perspective, of the 43% of the working age population willing to work, 7.5% are unable to find any work.

In light of the global slowdown and the deceleration in the Indian economy, the employment situation is unlikely to improve in the near future.  

06 March 2019

U.S.-China Trade War: A Lowdown


A short explainer on the trade war between the U.S. and China. 

U.S. trade in goods with China 
 
(latest info, as of November 2018, sourced from www.census.gov, a U.S. government website)

  • Imports from China: U.S.$493.49 billion
  • Exports to China: U.S.$111.16 billion
  • Trade Balance: minus (–)U.S.$382 billion

Why
The U.S. accuses China of high tariffs (taxes) on American products, which make them expensive for the Chinese to buy.

Also, Washington has accused Beijing of doing nothing to prevent theft of intellectual property rights (like counterfeit goods and pirated software) and stealing of trade secrets (including through corporate espionage or by breaking into computer systems of American companies to gain access to cutting-edge technologies). The U.S. estimates the damages from China’s bad behaviour at around $600 billion.

Tariffs & Impact
To punish China for its bad behaviour and inaction, the U.S. imposed high tariffs on around Chinese goods (like handbags and heavy machinery) with $250 billion. Tariff increases ranged between 10% and 25%.

China hit back with $110 billion in tariffs on American goods.

The U.S. has postponed imposing another of tariffs on Chinese goods (worth $200 billion) as negotiations are underway to broker a better trade deal.

As of today, the Chinese have agreed to buy more American goods, especially agricultural products (like soybean). Farmers are among the major vote banks of Donald Trump. However, to push Trump to buckle down, China has imposed higher tariffs on goods (like coal and chemicals) made in Republican strongholds.

Beijing has also agreed to reduce tariffs on some American products to help those products gain wider market access.

Tariffs (taxes) on Chinese goods would make American products cheaper (comparatively) in the home market. This would induce Americans to buy more American goods (and not expensive Chinese goods).

China’s exports to the U.S. make for nearly 25% of its total exports. A drop in its exports to the U.S. could harm Beijing a lot more than it is willing to admit; of course, bragging aside, Beijing knows that a drop in exports to the U.S., especially amid a slowdown in its economic growth, could lead to industrial contraction, higher unemployment, and social unrest.

Status today
Both the U.S. and China have dug in their heels, though both countries cannot afford to do that for a long haul. Washington and Beijing are waiting for the other to blink, though both parties are staring at each other.


04 March 2019

Venezuela Crisis in a Nutshell

In this short explainer on the crisis enveloping Venezuela, I have tried to be brief and to the point.


Nicolas Maduro                   Juan Guaido


Who’s Who in Venezuela


President: Nicolas Maduro, a hardcore socialist, anti-U.S., leader of United Socialist Party of Venezuela.   

Who supports Nicolas Maduro:
    (a) Within Venezuela: Supreme Court of Venezuela, Defence Forces of Venezuela, PDVSA (state-owned oil company); 

(b) 
Outside Venezuela: China, Russia, Turkey, Iran, Bolivia, Cuba, Nicaragua  (last three are in the Americas).

Who does Maduro blame for the current crisis
: United States of America.

Challenger: Juan Guaido, self-declared Interim President since January 2019 and leader of Popular Will, a centrist party.

Who supports Juan Guaido
:

(a) Within Venezuela: Low-ranking military officials and huge popular support.
(b) Outside Venezuela: U.S., UK, Argentina, Brazil, Chile, Colombia, Ecuador, Peru, Panama, Costa Rica, Guatemala, and Honduras.

Role of Oil in Venezuelan Economy


  • Oil reserves in Venezuela are said to be among the top 3 in the world.
  • Oil accounts for 98% of export earnings. 
  • Oil accounts for 50% of GDP
  • High global oil supply, falling crude prices, and poor extraction technology have led to a big decline in oil production – all of which have drastically reduced the government’s export earnings, thereby widening revenue deficit. 
  •  In 2018, GDP shrunk by double digits for the third consecutive year. 
  • Government does not have foreign exchange reserves to pay for imports and loans. 
  • Venezuela has been in default since 2017 – meaning, it has not paid back foreign loans and not paid for imports. 
  • U.S. and other countries have a long-running embargo against Venezuela; this has shrunk market for Venezuelan products and reduced avenues for borrowings.

Major Problems

  • Great political and economic instability 
  • Mostly, a result of catastrophic humanitarian emergency. 
  • Severe shortage of food, medicine, & other essentials – mostly because of hoarding, embargo, and hyperinflation. 
    • Hyperinflation, meaning very, very high rate of inflation, is leading to doubling of prices of essential goods every 19 days on average. Current inflation is around 85,000%. Thousands of health professionals have left the country, leading to medical emergency. 
    • Lack of access to food and healthcare have pushed 90% of people below the poverty line.  
    • On average, a Venezuelan has lost around 12 kg of body weight since 2017. 
    • It is believed that some 3 million have already fled Venezuela; the number is likely to rise to 5 million by the end of 2019.

In a nutshell, years of economic mismanagement, misdirected welfare policies (subsidizing almost everything through high revenue earned by oil exports), huge debt, massive shortage of essential stuff, hyperinflation, political instability – have all led to the current catastrophic humanitarian crisis in Venezuela.