Dr. Susmit Kumar, Ph.D.

Please click here for its Part I: Niti Aayog Is Missing Its Number One Objective – Trade Balance and Self-Sufficiency of Essential Mass Consumption Items - Part I

As I have written in my recent articles, even before thinking to become a super-power, a country needs to generate trade surplus, which the US did for more than 30 years after World War II, China since early 2000s, and both Japan and Germany in recent decades. The last two countries are economic super-powers but are too small to be military super-powers. Without having trade surplus and becoming self-sufficient in essential mass consumer items, India has no hope of becoming a super-power. Please read my article for details: Is "Make In India" Theme Helping Indian Economy? – Part II

The Americans do not care for their trade deficit, which they have generated for more than 40 years now, because the US can just print its currency, which happens to be the global currency, to pay for its trade deficit (and also for its budget deficit) (read my article: The US Dollar – A Ponzi Scheme). That’s why top US economists also do not give importance to it. If they would give importance to trade deficit and discuss about its debilitating effects on the nation’s economy, it would alarm the Americans. In an op-ed article, published in New York Times, William Grieder, a bestselling author, wrote (“America's Truth Deficit,” New York Times, July 18, 2005):

 

“DURING the cold war, as the Soviet economic system slowly unraveled, internal reform was impossible because highly placed officials who recognized the systemic disorders could not talk about them honestly. The United States is now in an equivalent predicament. Its weakening position in the global trading system is obvious and ominous, yet leaders in politics, business, finance and the news media are not willing to discuss candidly what is happening and why. Instead, they recycle the usual bromides about the benefits of free trade and assurances that everything will work out for the best.

 

Much like Soviet leaders, the American establishment is enthralled by utopian convictions -- the market orthodoxy of free trade globalization. The United States is heading for yet another record trade deficit in 2005, possibly 25 percent larger than last year's. Our economy's international debt position -- accumulated from many years of tolerating larger and larger trade deficits -- began compounding ferociously in the last five years. Our net foreign indebtedness is now more than 25 percent of gross domestic product and at the current pace will reach 50 percent in four or five years.

 

For years, elite opinion dismissed the buildup of foreign indebtedness as a trivial issue. Now that it is too large to deny, they concede the trend is "unsustainable." That's an economist's euphemism which means: things cannot go on like this, not without ugly consequences for American living standards. But why alarm the public?”

 

It is worth noting that the US economy blew up within three years, i.e. in 2008, of Mr. Grieder’s article. Since then the Bush administration (and later the Obama administration) had to spend trillions of dollars to prop-up banking and real estate sectors. During the early 1990s and 2000s US economic recessions, the Fed could counter those setbacks by lowering interest rates, as shown in Chart 1 below. Once low interest rate was able to kick-start the economy, US Fed used to raise the rate within couple of years. But the same treatment by the Fed is not working now despite interest rates having been kept to a historic zero level after the 2008 Great Recession. The US economy has a deadly cancer (massive loss of good paying jobs) and the zero-interest rate is just a pain-killer. The low interest rate is not the cure this time (read my article for details: Two Competing Models in the Global Economy)

The Current Account Deficit (CAD) crisis of India during 2011-13, due to high crude oil price, has given a warning to India; the country might face a similar and graver crisis in future. Crude oil is the country’s biggest import ticket and hence any rise in its price can play havoc with the Indian economy. There can be several scenarios in which it can happen:

  1. Any turmoil (economic or military) in Middle East would result in higher crude oil price and consequently lower NRI remittances (as nearly half of the NRI remittances come from Middle East). Already the NRI remittances dropped by nearly 9 percent last year, from $68.9 billion in 2015 to $62.7 billion in 2016 (“Remittances to India dropped by nearly 9 per cent in 2016: World Bank,” PTI, April 21, 2017, accessed at http://economictimes.indiatimes.com/nri/forex-and-remittance/remittances-to-india-dropped-by-nearly-9-per-cent-in-2016-world-bank/articleshow/58302935.cms).

  2. Following the H-1B visa restriction in the US, the UK and Australia have also started the process to restrict Indian IT professionals. It is going to significantly reduce the current $100 billion IT export sector, making a hole in the CAD.

  3. An accidental shootout between Taiwan and China, bringing the US in the mini-war. This is a scenario when the US might witness its own “Suez fiasco” that caused the United Kingdom and France to lose their superpower status. Describing the stranglehold of China over the US economy, Richard Haass, President on Council of Foreign Relations, a premier US think tank, said (“Don't be distracted by Greece: Americans must also face financial facts,” The Telegraph (UK), Justin Webb, June 25, 2011),

    “Essentially the U.S. took advantage of Britain’s Sterling problem to exercise economic leverage over the British government, and that led to a hasty retreat in the 1956 Suez War (despite defeating the primitive Egyptian army on all the fronts, the invading forces had to withdraw). So one can imagine a situation nowadays, where, say, there is a crisis over Taiwan between the U.S. and China—which holds a significant number of dollars—and one can imagine the Chinese might be prepared to threaten the dollar, make some comments to weaken it unless the U.S. backs off some of its support of Taiwan.”

    If the US dollar goes down, India’s FOREX of hundreds of billions of dollars would drastically lose its value as the Yuan would become the de facto global currency, creating a huge turmoil in the global economy.

  4. A mini-war between the US and China over South China Sea islands. Trump is an unpredictable person and he himself does not know what he would do tomorrow. This is another scenario of America’s “Suez Fiasco.”

  5. A mini-war in Middle East between Iran and Saudi Arabia; crude oil price would go through the roof and NRI remittance would go down drastically.

  6. Accidental war between Russia and US over Syria in Middle East; crude oil price would go through the roof and NRI remittance would go down drastically.

  7. Large scale Islamic terrorist incidents in Middle East; crude oil price would go through the roof and NRI remittance would go down drastically.

  8. Islamic fundamentalists take over in Saudi Arabia; crude oil price would go through the roof and NRI remittance would go down drastically.

  9. Suppose Trump attacks North Korea: It is certain that the present North Korean regime would implode, causing China to send its troops marching inside the North Korea as it would not like an anti-China regime there. Due to same reason, China sent its troops in 1950 and several hundred thousand Chinese lost their lives fighting the UN forces led by the US. If there is miscommunication between the US and Chinese leadership, it may result in a shootout between these two countries. This is another scenario of America’s “Suez fiasco.”

It is difficult to understand that in an ambitious country like India, which aspires to become a super-power, Niti Aayog, the nation’s premier agency for economic development, does not have “Trade Balance” and “Self-sufficiency of Essential Mass Consumer Items” as its top priorities. One reason for this missing priority may be due to Niti Aayog being exceedingly dependent on the calculations of US economists.

Chart 1. US Fed Rate
(Source: http://www.macrotrends.net/2015/fed-funds-rate-historical-chart)