Sunday, 1 September 2013

Changing Political dynamic


The Afghan-Pakistan political dynamic is fast changing as the US has decided to pull back its army from Afghanistan back i.e. on account of spending cuts and fiscal consolidation. Also, Ben Bernanke's signal to cut back or completely stop the Quantitative easing program is turning a bitter pill to swallow for the emerging economies like India, Indonesia etc.  With US president Barack Obama signaling to strike Syria to take down on Bashar al’ Assad is not receiving enough go ahead from the Americans, let alone Russia, China or the international community. Because, a strike against Syria in the present circumstances remind us of the Gulf War of the 1990s when oil prices shot up amidst growing speculations. In such a situation, India and other emerging Asian economies that run high current account deficit, will find it hard to finance the high priced oil imports which are threatening to cross the $120/barrel mark.

The need of the hour  for the American President is to order restraint and continue with the process of dialogue i.e. bring Assad and the rebel  forces to the negotiating table instead of sending in the military in the country which has already witnessed the horror of losing over 1 million people. What happened in Libya could fail in Syria because of the paucity of public backing. Moreover, Americans don’t want a repeat of what happened in Iraq. Further, meddling with Syria might not go well with Iran which the international community believes has WMDs in its stockpile. Another country is Egypt where President Morsi has been ousted in a coup yet, the US rubbishes the claims of a clue since a Congressional law prohibits aid to any country where military coup has taken place. The US military has always been friends with Egpyt since the Nasser era and has recently sanctioned F-16 fighter jets to the Egypt military.

In India, the rupee has depreciated close to 25% in 2 months  which resulted out of alleged investor frenzy due to high capital outflows following the Fed’s decision of ‘the taper’.After the Global Financial crisis of 2008, the Fed inorder to kickstart the economy, resorted to Quantitative easing. As a result, easy and hot speculative money entered into emerging economies esp India. Some experts believe, that the crisis is more due to domestic factors. The country is said to have relied more on hot speculative FII money more than FDI. Hence, After Fed's signal, money started going out signalling horror for the policymakers in the country.  Another problem is that of Gold imports.India's annual bill on gold imports amounts to $60 billion dollars making it difficult for the government to check the CAD. The country has approximately 31000 tonnes of gold with its people while the Reserve bank of India has a partly figure of 557 tonnes. So, immediate monetization measures and reforms in the gold deposit schemes is the need of the hour. Also, schemes like Food security  and the Land acquisition (Rehabilitation and resettlement) bill will further worsen the investor sentiment as land prices will shot up and fiscal deficit will widen.


1 comment:

Unknown said...

Excellent analysis of current economic situation. Completely agree on gold, why do we need gold? I don't think young generation cares about how much gold they have.