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Former Reserve Bank of India governor Raghuram Rajan has expressed concern over India's employment situation, calling it "really alarming", and said the government must focus on promoting labour-intensive jobs such as those in the services sector.

"I would say we need to do far more. And it's not about bombastic 'oh we have arrived, we are the fifth biggest economy in the world'. It is about doing the hard work that is necessary to support the kind of jobs we need. And the jobs situation, I would say, is really alarming," Rajan said late on Wednesday in a conversation with students of the Indian Institute of Management, Ahmedabad.

Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance at University of Chicago's Booth School of Business, served as the governor of the Reserve Bank for three years starting September 2013.

Rajan said the rise in agriculture and related jobs was unprecedented for a growing economy.

"People leave agriculture for services and manufacturing. Here, over the last couple of years, we have seen people go back to agriculture. So the unemployment numbers are in a sense misleading because they don't account for this effective underemployment of people who have gone back into agriculture," he said.

Under fire for not creating enough jobs, the central government recently launched a nationwide 'Rozgar Mela' with the aim of appointing 10 lakh personnel.

Service-led growth

According to Rajan, the government's approach to boosting growth and increasing employment through a heavy focus on the manufacturing sector is misguided.

"I am not in any way saying that we should not focus also on manufacturing jobs. What I am saying is that the enormous subsidies that are now going into manufacturing, we need to think of whether they would be better employed in creating the underpinnings of strong service jobs, not just in this country but as exports," he said.

The government has widened the scope of its production-linked incentive (PLI) scheme to numerous sectors, under which it provides incentives on incremental sales for locally manufactured products, and is said to be considering its further expansion.

Rajan, however, argued that it may be much easier to increase services exports than manufacturing in the current global environment. Further, service sector jobs are more labour intensive, which would help create more jobs.

"Rather than manufacturing chips, which is a very capital-intensive and low-labour-intensive business, could we instead design chips, which is a very high-value-added business where we have the potential because of our smart engineers and management people."

In April-September, India's services exports amounted to $150 billion, with a trade surplus of $61 billion. Meanwhile, merchandise exports were higher at $232 billion, but India faced a huge trade deficit of $148 billion in the first half of FY23.

Rajan continued his criticism of the PLI scheme, saying that providing a subsidy to the manufacturing sector while raising tariffs on certain products seemed arbitrary.

"How do you expect to have a decent export strategy when in fact you are subsidising arbitrarily, raising tariffs arbitrarily; some bureaucrat decides whom to benefit and whom not to benefit, who knows on what basis… And I don't think we have any idea, despite claims by some of our ministers, that this (PLI scheme) actually works… I worry that we are putting all our eggs in one basket when we should be spending more carefully on other thing also," Rajan said.

Rishi Sunak has made it to 10, Downing Street. This after Liz Truss was forced out of office by the hostile reaction of the markets to the very measures she had campaigned on to win the support of the Conservative Party membership and defeat Sunak to become Britain’s Prime Minister just seven weeks ago.

This article does not discuss the Colony Strikes Back theme that seems to have gripped the imagination of many Indians after Sunak’s rise to the top of the British political establishment. Rather, it is about the implication of the raw deal Truss got for the Indian National Congress.

She got a raw deal: after all, the policies that sent Britain’s bond prices plummeting, yields soaring, and the pound to near parity with the US Dollar, were the policies she had championed during her campaign to replace Boris Johnson as the leader of the ruling Conservative Party and thus become Prime Minister.

In his General Theory, John Maynard Keyes had warned: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

Steel prices fell about 40 per cent to Rs 57,000 a tonne in the domestic market over the last six months on subdued export orders in the wake of the 15 per cent export levy, according to SteelMint.

In early 2022, the prices of hot rolled coil (HRC) started showing an upward trend. It had become a matter of concern for the user industries as movements in steel prices have a direct impact on industries like real estate and housing, infrastructure and construction, automobile and consumer goods.

The steel prices in the domestic market peaked at Rs 78,800 per tonne in April. After 18 per cent GST levy, the price was about Rs 93,000 per tonne, the research firm said.

The prices started to fall from April-end and came down to Rs 60,200 per tonne towards the end of June, according to SteelMint data.

It continued to fall in July and August and came down to Rs 57,000 per tonne by mid-September.

SteelMint cited "government tax on steel products, subdued overseas demand and high inflation and energy costs" as the reasons for the fall in steel prices.

All prices are excluding 18 per cent GST.

On the outlook, it said domestic HRC prices to remain range-bound in the next quarter. As steel exports are likely to remain less than usual and inventory pressure is likely to sustain, mills are unlikely to increase the prices over the next two months.

On May 21, the government hiked the duty on exports of iron ore by up to 50 per cent and a few steel intermediaries to 15 per cent.

It also waived customs duty on the import of some raw materials, including coking coal and ferronickel, used by the steel industry.

The move was aimed at increasing the availability of these raw materials for domestic manufacturers.

President Xi Jinping kicked off the Chinese Communist Party’s (CCP) National Congress, which charts its policy trajectory for the next five years and finalises its future leadership, with an address to the Party faithful for nearly 1 hour and 45 minutes.

This year, the CCP’s leadership conclave comes amidst a major strain on the Chinese economy with important segments like real estate, manufacturing, and retail bleeding either as a result of COVID-19 curbs or policy shifts. The International Monetary Fund’s World Economic Outlook, released in October, estimates China’s GDP growth at 3.2 percent this year; in contrast, India and ASEAN-5 are expected to post 6.8 percent and 5.3 percent growth respectively. There have been sporadic protests against curbs imposed due to the COVID-19 pandemic.

Another worry is China’s relationship with the US, which has deteriorated due to the former’s close ties with Russia, its refusal to criticise Russia’s aggression in Ukraine, and its threat to mount an invasion of Taiwan. Many of these concerns, along with Xi’s “achievements” since he assumed office in 2012, resonated in his speech. In 2021, the Chinese government announced that as many as 100 million had been brought out of poverty, which Xi touted as a major victory. On the issue of Hong Kong, Xi expressed satisfaction that “patriots” were presiding over the island’s affairs, and its diplomatic corps was doing a stellar job of upholding the nation’s dignity.

China’s response to the COVID-19 pandemic was to shutter down cities and initiate mass testing of the population, which has caused some dissent within the population. Liang Wannian, chief of China’s Epidemic Response and Disposal Leading Group—a committee that operates under the National Health Commission—admitted that there was an anticipation of returning to life as it was before the pandemic, but admitted that there was no exit strategy in an interview to the state broadcaster ahead of the Congress.

There have been nearly 1 million COVID cases in China since the start of the pandemic, which is around 0.07 percent of its population. According to China’s health officials, when compared with Western nations, both the rate of infection and total death toll (approximately 5,200) is low, but Liang expressed fears that in the absence of “better means of treatment”, abruptly discontinuing the policy could overwhelm the healthcare system and lead to more deaths. Nearly 90 percent of China’s population has been fully vaccinated against COVID as of mid-October and around 86.3 percent of those in the 60+ age group have also been vaccinated as of early October.

But given the CCP’s penchant of turning an adversity into an opportunity, Xi has sold China’s zero COVID-19 policy as prioritising the protection of lives of citizens. A recent article in People’s Daily, the CCP’s mouthpiece, justified the continuation of the zero COVID-19 policy. The article chided the approach of some nations that have “chosen to live with the virus” despite a huge death toll, contrasting it with China’s approach, which has “saved lives” but caused economic damage.

However, upon closer examination, the gloss around Xi’s accomplishments seems to be wearing off. The abrupt lockdowns necessitated by the zero COVID strategy have hit the poor and threaten to jeopardise the gains of China’s poverty alleviation programme, which the CCP touted as a feat that had “not been accomplished in human history”. The authorities in provincial Jilin recently started doling out 200 yuan (US$31.5) to low-income households and poor residents, along with vegetables and some medical supplies.

In 2022, more than 10 million students will graduate and the race for jobs is likely to get intense. This raises the prospects of high unemployment that may have a bearing on China’s growth in the long run. The findings of a study conducted by academics at Peking University revealed that China’s unemployment rate could reached the levels of 2020 under the pandemic prevention measures that are still in place. The research estimated the number of unemployed Chinese in mid-2020 could have been 92 million, which is nearly 12 percent of the working population. The state media’s portrayal of Xi as leading the campaign to fight the pandemic has tied him closely to China’s COVID-19 control efforts. Thus, any immediate relaxation after the Congress could contradict the claim that China’s stern response is intended at putting people’s lives and health first.

What does the future portend?

The decibel level of the audience applause on Xi’s pronouncements on Taiwan is, perhaps, a pointer to the direction of Cross-Straits relations and Sino-US relations. Xi assured the party and the people that he was up to the challenge of tackling the forces of separatism and foreign interference on the island. The CCP has showcased hard power after a visit to the island by US House Speaker Nancy Pelosi in August; Beijing sees the broadening of contacts between the American and Taiwanese leaderships as a chipping away of the notion of one-China and as a major violation of its sovereignty. Following which, the People’s Liberation Army (PLA) staged military exercises that was tantamount to a partial blockade and flew warships and aircraft with increasing regularity across the de-facto median line in the Taiwan Strait.

In his work report, Xi promised to make utmost efforts to unify Taiwan peacefully, but also reiterated that the Party retains the right to use force to bring it back to the fold. Additionally, Xi has pledged that the complete reunification of China would see fruition soon, and that the Chinese military expedite its efforts to become a superior war machine that has the ability to win regional wars. The rhetoric on Taiwan, in conjunction with the exhortation to the PLA to ramp up its might, presents a possibility that Xi will place Taiwan on the front burner in his third term, which must worry the world community.

Techno-nationalism too featured in Xi’s address. Ahead of the Congress, the Biden administration has upped the ante on two key factors that played a role in China’s rise– capital and technology. It has further restricted China’s access to high-end semiconductors that have application in Artificial Intelligence, and also added more companies to a blacklist that bars US citizens from investing in them. In his address, Xi made repeated references to China’s scientific development in the field of space exploration, nuclear technology, medical  breakthroughs, and ocean exploration China poured a record 2.79 trillion yuan (US$388 billion) into research and development in 2021, a rise of more than 14 percent from 2020. His thrust on China becoming more innovative and self-sufficient in the technological sphere is, thus, a response to the Biden administration’s actions.

To conclude, Xi paints a picture of the future as one replete with opportunity and danger as evidenced from his warning that “external forces” could seek to “blackmail, contain and blockade” China. The sub-text is clear that it is under his stewardship that China has been able to come to grips with the problems and that it is his strong leadership that has been able to made a difference. However, one aspect that Xi has overlooked is the naming of a successor. A large country like China needs a defined line of succession, and any void can risk the chances of political tensions.

(This article first appeared in the ORF.) 

Kalpit A Mankikar is a Fellow with Strategic Studies programme at ORF’s Delhi centre. Views are personal and do not represent the stand of this publication.

India's external finances are becoming "less of a strength" but continue to be sufficient to cushion risks emanating from abroad, Fitch Ratings said on October 19.

"External finances are becoming less of a strength in India's credit profile, but we expect foreign-exchange reserves to remain robust and India's current-account deficit to be contained at a sustainable level," the rating agency said in a note.

The comments by Fitch, which rates India at BBB-with a stable outlook, come amid a sharp decline in the country's foreign exchange reserves, which have been deployed by the Reserve Bank of India (RBI) to stem a rapid fall in the rupee.

According to data released earlier this week, the RBI sold a gross $23.11 billion in August following the record-breaking sale of $38.77 billion in July. However, despite the central bank's intervention in the foreign exchange market, the rupee has continued to weaken against the greenback and crossed the 80-per-dollar mark for the first time in mid-July.

Earlier on October 19, the rupee sank to a new low after it broke past 83 to a dollar.

"The RBI recently reiterated that it does not have a target level for the exchange rate, but we expect the authorities will continue to use reserves to manage exchange-rate volatility. This will probably erode reserve buffers further in the near term, but the impact will depend on the scale and duration of intervention," Fitch said.

Sliding rupee 

So far this calendar year, the rupee has depreciated by over 10 percent against the dollar, while India's foreign exchange reserves have fallen below $550 billion.

On October 7, India's foreign exchange reserves stood at $532.87 billion, down $110 billion from its early September 2021 peak of $642.45 billion.

"Reserve cover remains strong at about 8.9 months of imports in September. This is higher than during the 'taper tantrum' in 2013, when it stood at about 6.5 months, and offers the authorities scope to utilise reserves to smooth periods of external stress. Large reserves also provide reassurance about debt repayment capacity. Short-term external debt due is equivalent to only about 24 percent of total reserves," Fitch noted.

However, it added that public finances continue to be the key driver of India's rating and are only "modestly affected" by current external developments due to the limited exposure to external financing.

"Gross external debt stood at 18.6 percent of GDP in 2Q22 (April-June), which is low compared with the median of 72 percent for 'BBB' rated sovereigns in 2021. Sovereign exposures are small, with only about 4 percent of GDP in primarily multilateral financing," Fitch said.

The rating agency expects India's current account deficit to widen to 3.4 percent of the GDP in FY23, nearly three times the FY22 level of 1.2 percent.

Commenting on the Indian monetary policy, Fitch said there were upside risks to its forecast of the repo rate peaking at 6 percent in FY24 due to a "significant chance" of interest rate hikes in the US exceeding what its forecasts assume.

On September 30, the RBI's Monetary Policy Committee increased the repo rate by 50 basis points to 5.9 percent, taking its cumulative rate hikes since the start of May to 190 basis points in its battle to lower persistently elevated inflation.

In India, political funding and the mechanism to raise monies remain a bone of contention amid arguments over transparency in donations from individuals, groups, and entities, especially the big corporations. The exercise of conducting elections are now a regular feature every year largely on account of elections to the state assemblies that follow different cycles of completion of tenures.

Elections require political parties to spend huge amount of money for a range of activities, from advertising to logistics, and much more. Over the years parties have raised funds through various methods with donations from supporters, party workers, and businesses (small and big) which poured in largely in the form of cash.

In order to address the challenge of cash collection, and to formalise fund raising channelised through the banking system, the then Finance Minister Arun Jaitley during the 2017 Budget mentioned of electoral bonds aimed at cleansing the mechanism and injecting transparency. Nearly a later, the Government of India notified the scheme.

According to reports compiled by the Association of Democratic Reforms, a non-government organisation working for improvement in India’s electoral system, between March 2018 and July 2022, 18,779 electoral bonds worth Rs 10,245.2 crore were sold, and most of it were encashed by political parties. The ADR and two others challenged the electoral bonds in the Supreme Court, which heard the matter recently, and scheduled to take it up further in December.

During debates, several political parties raised objections when relevant laws of income tax, foreign contributions, companies and representation of the people, were amended to incorporate features of the electoral bonds on the grounds that the new mechanism contained opaqueness. The amendments among other features allowed anonymity to the extent that only the donor knows how much has been distributed to a political party. The government defended the provision that past experience showed that donors did not find attractive the scheme where donations were made public, and thus preferred cash donations. The earlier provision required political parties to identify donations over Rs 20,000.

The electoral bond is the method through which a citizen or a body incorporated in India is eligible to purchase the bond, which is issued for any value in the multiples of Rs 1,000, up to Rs 1 crore. These bonds are issued periodically for a limited time by specified branches of the State Bank of India. These instruments in the form of interest-free promissory notes can be purchased by fulfilling KYC norms and through a bank account. The beneficiary political party identified by the purchaser can get the donation only if it is registered, and secured not less than one percent of the votes at the last Lok Sabha or assembly elections.

Explaining the rationale and benefit of the new system of funding envisaged, late Jaitley had said in an article: “…the choice has now to be consciously made between the existing system of substantial cash donations which involves total unclean money and is non-transparent and the new scheme which gives the option to the donors to donate through entirely a transparent method of cheque, online transaction or through electoral bonds.” He then noted that the government was willing to consider all suggestions to further strengthen the cleansing of political funding.

The idea of regulating political donations through regular banking channels introduced an element of transparency, but there is scope to improve and take steps in the direction of increasing reporting and mandatory disclosures.

Indian authorities have asked a court to quash Pernod Ricard's bid to halt proceedings related to a $244 million tax demand, accusing the French spirit giant of being a "habitual litigant" and conspiring to "defraud" the government, legal documents show.

The Oct. 3 Mumbai court filing by India's customs authority, which has not been reported previously, underlines the growing dispute between Prime Minister Narendra Modi's government and Pernod's local unit over how the company valued some of its imports for over a decade.

The customs authority says Pernod did so to evade full payment of import taxes.

The tussle comes when Pernod Ricard is facing business and regulatory stress in India, one of its key growth markets where it accounts for a 17% share. It has previously told Modi that long-running disputes over the valuation of liquor imports had "inhibited fresh investments" in India.

After India demanded back taxes from the maker of Chivas Regal and Absolut vodka in June, Pernod challenged it in court, saying the investigation should be put on hold as it relied on incorrect industry data, and the process was "neither fair nor reasonable."

In the 43-page October filing, India's customs authority said the French company was resorting to "delay tactics" by approaching a court for relief, instead of responding to the government's tax demand notice.

It accused the company of a conspiracy "to defraud the Govt. of India of its legitimate revenue."

Pernod has been "a habitual litigant and always attempts to abuse the due process of law," the filing added, referring to some previous tax demands Pernod challenged in India.

Asked for comment, Pernod referred Reuters to a previously issued statement, which said the company is actively working on demonstrating its position to Indian authorities and has "always endeavoured to act with full transparency and in compliance with customs and regulatory requirements."

It declined further comment due to ongoing litigation and because the filing by the customs authority wasn't public. The court case will next be heard on Oct. 20 in Mumbai.

The Indian investigation assessed Pernod India's import bills of liquor concentrates from a group subsidiary, UK-based Chivas Brothers, and found they were undervalued for years.

To compensate for the undervalued imports, Pernod paid "hefty" dividends to the group's holding company, Pernod Ricard in France, which also owns Chivas Brothers, the investigation found. Import duties on liquor concentrates are 150% while dividends attract lower taxes.

The long-standing tax disputes Pernod faces in India has led to business uncertainty - in July, the company wrote a letter to a federal tax authority saying the company was "facing significant business continuity challenges", asking for a resolution.

Last week, Pernod said its India CEO, Thibault Cuny, had stepped down due to health reasons.