Review of the US Economy: Yield Curve Inversion, Trade-War and more

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he most preferred indicator of the world’s top economists and analysts: the yield curve has shown an inversion in the past few days. The dark clouds start to hover over the economy of the United States and the global financial markets as question looms in every investor’s mine: Are we approaching the moment of a recession? This post attempts to review the different facets of the US economy and whether or not it will add up to the recessionary pressure.

First, let me set the table by diving into the basics. The yield refers to the returns the investors will make over the bond on its maturity. The yield curve is a graphical representation of the bond returns at different points of time; its inversion is when the yields of long term bond fall below the short term bond yields. This phenomenon referred to as the yield curve inversion is the harbinger to evaluate the economic performance of the country. Investors flock to long term bonds in fear of a recession and push the bond prices upwards, thereby reflecting the investor sentiment. It has generally preceded all the recessions since 1950. As per leading investment bank, Credit Suisse, recession generally occurs post 14-34 months of the yield curve inversion. However, it cannot be refuted that not all yield curve inversions point towards a possible recession.

The claims of an impending recession cannot be neglected with overwhelming threat of the effects of the ongoing trade tussle with China which has pushed the commodity prices upwards and increased the inability of companies to make the right hiring decisions. The investor sentiment is very low with the Fed expected to go in for more rate cuts in order to simulate growth.  The orders for durable goods have declined by 2.1 % from the month of April and housing market too has suffered serious drop in market rates. The signs for recession are present. However, it is necessary to look at other economic indicators too. The US has reported robust GDP growth of 2.1 % in Q2 supported by strong economic indicators. The Gross Domestic Product is an aggregation of the government spending, consumption, exports and investment activity. The Government spending is increasing faster than expected as budget deficit is expected to hit $960 billion mark in 2019. With Trump’s belligerent stand on the amplifying trade war and increased government spending, United States of America is forced to borrow excessive sums of money. This ballooning deficit can be contained with the low jobless rate as per historical trends. However, deficit is expanding despite record economic expansion and low unemployment rate in past 50 years. The consumption data is robust with an increase in retail sales and consumer confidence. Personal income increased $83.6 billion (0.4 percent) in June according to the Bureau of Economic Analysis whereas the personal consumption expenditures (PCE) increased $41.0 billion (0.3 percent). However, with effects of trade war pushing prices upwards, consumer confidence is expected to develop cracks in the near future. The only force which can keep recession at bay is an increased consumption rate. Retail sales rose 0.4% last month supported by spending on motor vehicles, materials and healthcare. However, future numbers remain dubious given the current circumstances.  On the trade front, as per the revised estimates of the Census data, the trade deficit in goods and services decreased to $54.0 billion in July from $55.5 billion in June indicating a stronger export-driven growth.

Manufacturing sector in the United States is undergoing serious contractions in both the quarters of 2019. The uncertainties rising from the trade war is raising the costs of doing business for the corporate. The country’s manufacturing has been hit on multiple fronts by the Trump administration’s aggressive decisions on the trade war.  As quoted by Fed Chair Jerome Powell, trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States.  However, despite some serious injuries to the American economic structure, the idea of recession still can be averted. Going back in time, in the case of 2008 sub-prime crisis, the loans increased by 8.6% with only 4.7% corresponding increase in liquid assets. The ratio of liquid assets against the loans was 23% before the Great Depression. Currently, this figure stands at 45% in 2019. This is a strong indication of the economy having an arsenal of shock absorbers to evade the recessionary forces. But at the end, it all boils down to see how the Federal Reserve will hit the targets with its next monetary policy meeting in order to curb the rapid slowdown. 

* The opinions expressed in the article are personal and do not represent the opinions of the organization I work for * 

Economic Update 2019: The Sinking Ship Needs Desperate Saving

This post I decided to look at the economic machine of India and try to build a story around it. The growth of economic system in India is sluggish at the moment. The economists speculate the future trends, opposition parties play blame-game and the markets react to every bit of news that is thrown in the ring. As a disclaimer I would mention that the post neither aims to support any authority nor does point fingers at them. However, it does try to state what is in store for the economy and the investors for the current fiscal. 

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ndian economy is observing a sluggish period of growth. There is a serious distress in some of the well known sectors of the economy. The rural demand has taken a huge hit as consumer durable sales have reported 5.9% growth (10.3% lower than the figure reported in 2018). Automobile sector is observing a slowdown too with huge inventory levels after models transition to BS VI norms. The slowdown points to the direction of high GST rates, liquidity issues in NBFC sector and stagnant wages. The corporate earnings are not in best shape and the Union Budget has failed its expectations earning the wrath of the investor community. The mess is too deep to be sorted so easily and for this post, I will try to hit on few data points which need the most focus for the Indian economy to realise its $5 trillion mark.

One of the important parameters to push the economy upwards is trade. History has examples of countries who have stepped out of poverty zone by pushing up their exports. However, to hike the exports, India should have requisite strength in its manufacturing prowess. To put some numbers to make the picture clear, India’s trade deficit narrowed from $ 16.60 billion in June 2018 to $ 15.28 billion in June 2019. It is a strong sign for economic growth and is mainly related to the slump in global crude oil prices. However, if we dig deeper, exports have declined by 9.71% with majority of the problem emerging from the petroleum production and rice exports which collapsed by 32.85% and 28.05% respectively. Crude oil production has stagnated from the past decade and Government has pinned its hopes on the Hydrocarbon Exploration and Licensing Policy (HELP). HELP policy gives hydrocarbon explorers to select the exploration blocks without waiting for the Government’s auction. The Indian Government believes that the HELP will usher in more investment, thereby pumping up the production activity. Rice exports have declined due to a weak demand coming from the African countries. The slump in demand is primarily stocking of inventories in Africa and which has led to a big diversion of Indian rice demand in Myanmar and China. In terms of rice exports particularly, India needs to gain a competitive edge against Vietnam who is now expected to grab the opportunity and raise its rice exports.

Another essential pillar for India’s progress is agriculture. Being an agri-based country, India is one of major exporters of agricultural commodities as they have slowly diversified towards high value pulses, fruits, vegetables & livestock. The way I see it, I see tremendous opportunity for India in agricultural domain. Start-ups and technology firms have started to explore avenues to use technology to support agricultural growth. The Government has started to use Artificial Intelligence on pilot basis for crop cutting and yield estimation under its flagship scheme Pradhan Mantri Fasal Bima Yojana. One of main problems in traditional agriculture is its excessive dependency on monsoons. AI is expected to help farmers to choose right crop for the right weather conditions and thus minimize the risk. The Government has also promised to double the farmer’s income by 2022 which will require a significant policy support. With 80% of farmers residing in rural areas, Government should set its focus on bringing in food security and sustainability.

The corporate numbers are showing weak signals which are still leaving their imprints on stock market (The markets have reported losses worth $20 bn in July 2019). The net profit of 281 BSE companies grew at 8.49 % in Q2 2019 till now. Compared to Q2 2018 growth of 23.8% and previous quarter growth of 5.67%, the numbers are quite alarming. (Take a note that the sample of 281 BSE companies excludes banks, financial institutions and oil & gas companies who follow a different revenue structure.) Manufacturing sector is also suffering from anomalies when it comes down to numbers. Since, it contributes 16% to the GDP, it is imperative to put manufacturing under the magnifying glass to understand the decline in corporate profits. The April-June quarter , the core sectors ( namely electricity , steel, refinery products, crude oil, coal, cement, natural gas and fertilisers)  grew 3.5 % as compared to 5.5% in same quarter for 2018. The core sector contributes 40% to index of industrial production and does have a timely impact on manufacturing sector as a whole. Crude oil output declined by 6.8 % in the June quarter. Also, steel and electricity collapsed by 6.9% and 7.3% respectively. The coal output grew by 3.2 % which was much less compared to the 11.5% figure reported last year. Cement and natural gas productions also ended in red territory. The code red situation in the sector has also laid its icy hands on employment situation too. As per the National Sample Survey Organization, manufacturing jobs have declined from 474 million in 2011-12 to 465 million in 2017-18. The unemployment rate has increased from 2.2% in 2011-12 to 6.1 % in 2017-18. Of these, unemployment amongst youth has soared from 6.1% to 17.8% with huge contributions coming from educated dissatisfied youths. With job market turning adverse, the Government has to focus not just on the quantity of jobs but also enhance it qualitatively. The authorities should also revisit the National Manufacturing policy drafted in 2011 which never stretched its wings to take the required flight. The policy formulated a strategy to enhance manufacturing to 25% of GDP which should be the ideal scenario if sinking sheep needs to be saved.  
To boost growth, RBI has cut rates for fourth consecutive time with current repo rate at 5.4%. Majority of banks have promised to link their deposits to the repo rate rather than relying on the MCLR. After a slew of negative performances, it is expected that the rate cut will usher in the required growth in performances.

The Venezuelan Narrative: A Journey from Boon to Bane

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ince, its unstoppable progress after the discovery of oil to the burning of its economic framework to the ground, Venezuela has a moving yet an interesting story. Since its inception of the oil industry back in 1922, the country has made several mistakes to finally lead to a tremendous resource curse. This post tries to relook at the narrative of Venezuela and analyze its mistakes in the past.

 It was 1922 and the oil well was called Barossa 2.  The geyser shot up 130 feet in the air and 100,000 barrels of oils rained on the inhabitants for a week. This was the time when Venezuela realized that they had found the goose who lays golden eggs. It was game-changing event for the country. In 20^th century, Venezula predominantly relied on coffee and cocoa to fuel their exports and the discovery of oil led to a huge transformation of the economy as a whole. This was a utopian world for Venezuela when foreign companies started to take notice and expressed their interests to set their operations in Venezuela. In 1928, the de-facto ruler of Venezuela, Gen. Juan Vincent Gomez allowed 100 foreign companies to leverage the benefits of booming economy. Towards 1940s, oil behemoths like Exxon Mobil, BP, Chevron and ConocoPhillips started setting up their businesses in Venezuela. With this, oil infrastructure in the country transformed dramatically as country observed a huge inflow of investments across the frontiers. The country’s leadership passed laws that foreign entities should turn over half their profits to Venezuela. This step worked fine because companies were looking to explore different avenues in oil industry & Venezuela did provide them the required platform.

 By 1958, Romulo Betancourt, the man who engineered the Venezuelan democracy, took control of government machinery and military support and consolidated all the oil revenues in the hands of the government. The year 1973 was a very significant year for oil lobby. The embargo by OPEC countries on United States of America led to oil prices to quadruple. In 1971, President Nixon removed United States off the gold started as he halted the Bretton Woods agreement. This sudden decision eroded the value of dollar considerably and sent the gold prices skyrocketing. The depreciating value of dollar impacted OPEC countries as majorly all the oil transactions were dominated in the dollar terms. United States of America landed in bad books of the OPEC countries as USA extended its support to Israel against Egypt in 1973 Yom Kippur War. Although, the embargo ended in March 1974, Venezuela had observed tremendous capital inflow in the country and the economy boomed like never before. In 1975, Venezuelan President Carlos Andres Perez nationalized the oil industry and created a government-owned oil company Petroleos de Venezuela, S.A (PDVSA). The government then seeked 60 percent ownership in the oil projects from the foreign firms.

Eventually, the macroeconomic parameters tripped the running Venezuelan economy when the 1980 oil glut and reducing oil demand led to a sustained collapse in the oil prices. To stitch some numbers to the fact, oil production in 1985 fell below 2 million barrels per day, which was almost 50 percent lesser than the utopian era pre-nationalization era.  Perez took to a huge foreign debt (USD 33 billion to be exact) in order to fuel the slowing economic engine. The debts kept piling up to an extent that International Monetary Fund (IMF) had to impose austerity measures and grant a bailout in order to rescue the sinking ship. This entire mishap resulted in huge oil price fluctuations.

The populist leader Hugo Chavez, former lieutenant colonel in the army, was elected as President in the year 1998. He vowed to assuage Venezuela from its ballooning resource curse. However, his strategy did not hit the required targets and situation gradually went out of control. He wanted to exert Venezuelan influence over Cuba and hence provided subsidized oil to Cuba in return for its medical and academic professionals. He also sold oil to South American counterparts at rates below market prices. His agenda was to quell poverty, however he failed to decrease the dependence on oil which he promised to do. Chavez also deferred from spending on maintaining the oil production facilities and with this the oil production in Venezuela took a nosedive. Hugo Chavez passed a law that all the oil projects in Venezuela would be led by the PDVSA and not by an outside company. He played with PDVSA’s internal senior management by firing employees, who acted against his interests, by replacing them with the political hacks. PDVSA’s output collapsed as the discontented workers refused to pump oil, halting the company’s operations. The injury done to PDVSA was so magnified that it was estimated that PDVSA would need longer than a decade to rebuild its technical prowess.

Venezuela was a affluent country in mid-1990s. It produced more than 10 percent of world’s crude and was not far behind the global power, USA. Venezuela never had an outside threat. All the wounds came from the internal mismanagement and their inability to diversify. By end of 2015, oil from Venezuela was selling at 30 USD per barrel whereas the market rates were around 60. Venezuela, at this juncture, made 95 percent of its export revenues from oil and after its failure to diversify had absolutely no cards up its sleeve. Chavez’s successor Nicolas Maduro added the final nail to the coffin. He changed the political structure and established a dictatorial rule, averse to the discontent expressed by the United Nations. The economy has spiralled into a hyperinflation (about to reach 1,000,000 % mark) following years of mismanagement and ignorance. The country that once reaped rich benefits from the oil bonanza has to now turn to outside investment to secure the burning economy.

The solutions are pretty obvious and when the end is in sight, it is imperative to execute them faster. Venezuela needs a regime makeover. It needs a leadership who can make the right decisions at right time. The international community should collaborate with democratic forces in Venezuela to enable a smooth transition from the current toxic leadership. Venezuela should also allow investments from foreign companies. However, this will come at a sacrifice. Venezuela should give up its regulations of maximum ownership stake  and allow foreign companies to have the greater share of the pie. Lastly, Venezuela needs a reliable currency exchange rate with respect to dollar to get out of the hyper inflationary quagmire.

China: A Growth Story

I admit China has always fascinated me as a superpower. From being a famine-inflicted country half a decade ago to being the second largest economy in the world and technological epicenter, China has carved out an enlightened growth strategy which can be a lesson for many. This post tries to look at China’s growth story analyzing the factors which led to its progress and current scenario playing out amidst the ballooning trade war

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ifty years ago, China was a poor country inflicted with growing famine. At that point, no one would have possibly said that this nation would eventually end up at the top of the hill However, if we were to look at China closely, they were blessed with one growth factor: an increasing population expanse. It was a god-send opportunity for rapid industrialization and China used it wisely. Their primary focus was agriculture since it was intense yet very low skilled. China slowly started to add more skills to the growing population as the workforce started to move from farms to factories. The Chinese corporate started following a 9-9-6 approach under a stringent monitoring and control of the higher management. The strict work environment was essential to compete against cheap labour intensive products in South East Asia, Latin America & Africa. Manufacturing sector boomed but China had restricted itself to follow imitation policy as developed countries started outsourcing their business processes to China. Gradually the economy transitioned into technology and services following giant footsteps of Japan and South Korea. To understand the economic growth of any country, an appropriate indicator is the per capita GDP. The average annual per capita GDP since 1978 for China surpassed the World Bank estimates of 2% to record a whopping 9%. China realized that innovation is imperative to attract more attention and investments in the technology sector. They followed a unique model where the foreign companies had to give up their technical know-how to carry their projects on Chinese soil. Whether this model was ethical or not is up for a debate and I would rather not jump to hasty conclusions. However, China did attract heavy foreign direct investments eventually with immense debt piling up the financial statements.

If we take a look at the Chinese historical timeline, we get few solid evidences of how they had carved a strategy to be a superpower. The first two decades following the establishment of People’s Republic of China in 1949 observed the period of growth in per-capita GDP. After the first Five-Year Plan, foreign countries started taking active interest in developing quality projects in China. For instance, 6000 Soviet advisors helped establish 156 large scale projects leading the way towards a rapid industrialization. China reported massive industrial transformation between 1962 and 1966 before advent of Cultural Revolution brought the economy to a standstill. Cultural Revolution was a socio-political movement launched by Mao Zedong which pitted the strikers against government authorities and brought the economy to its knees.  The economy eventually picked up when government introduced various reforms to sell agricultural produce in the open markets. The Government also launched Chinese Foreign Equity Joint Venture which allowed smooth flow of foreign capital in country. Gradually by mid-1980s, Chinese government arranged for ease in pricing and allowed companies to set their own wage structures. Market liberalization led to reopening of Shanghai stock exchange after a gap of 40 years and eventually helped China to accede to the World Trade Organization.

China growth story is phenomenal in all aspects and acts as a learning platform to many nations who are struggling to rise. However, current trade war with United States of America looks awful for Chinese economy and other emerging markets as no headways in resolution are made so far by both warring nations. China is showing no signs of changing as per USA’s demands. USA has demanded a transparency in heavy subsidization by China to target companies and strong rules in protection of intellectual property rights. Trade war is expected to have a negative impact on China’s growth fabric as it has sent shockwaves across financial markets. Two important facets of Chinese economy: industrial output and retail sales have cooled indicating a softer demand. National Bureau of Statistics has reported alarming numbers wherein industrial output increased by 5.4% in April as against 8.5% in March. Retail sales have grown by 7.2% not adhering to forecast of 8.6% by the analysts. Exports have shrunk with decreasing factory orders and it is a dangerous situation to be in since China is an export-driven economy with huge economies of scale. Fixed asset investment also fell to 6.1% of GDP as against expected 6.4%. In a dire need for comeback, China has to slash taxes and increase its spending on infrastructure.    

Trade war is detrimental across emerging markets with Chinese yuan losing its value against dollar. It is suggested that China will resort to more devaluation of yuan as well as observe the trends across global financial markets. With devaluation of currency, they have to boost their exports in order to realize the gain. However, it is for the investors and economists to see how other currencies and stock markets will respond to this action. 

The ‘Brexit’ Impact on Businesses & Investments

I will make a confession. I never really understood Brexit in full. I thought I had the right picture in my mind but looks like I was wrong. This post is my honest attempt to add colour and shape to the theory of Brexit. I am not going to delve in the political aspects of Brexit however I am going to set the table for its business and the economic impact.

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ritish Prime Minister Theresa May might ask for an extension to finalize on Brexit. She hopes that she can bring a turnaround by convincing the MPs that Brexit is altogether a great idea. Nevertheless, this action did portray her to be an unstable leader with a majority which is dangerously at risk. Her constant efforts towards the appeasement of the right wing failed and the nearest alternative she can lay her hands on is soft Brexit. Soft Brexit is the option which makes United Kingdom leave European Union but it has to stay within EU’s custom union and single market norms. Britain will not get a say in formulating the trade norms and policies and has to adhere to the ones created by EU. The soft version of Brexit is still a better alternative than a no-deal Brexit since the latter is expected to devastate jobs, adversely impact tens of thousands of people and cause a serious economic disruption.

The idea for Brexit started three years back when EU failed to address the wider economic problems plaguing Europe; For instance, 20 percent rising unemployment in Southern Europe. The alternatives formulated were sheer disaster. The real problem started when EU started throwing trade barriers which caused United Kingdom a discomfort. This led to UK to consider the decision of leaving the EU and formulating its own trade policy. As I mentioned, I won’t delve into the political happenings of the topic, however the decision did cause some impact on corporate environment in UK.

To understand this better, I took the help of a Decision Maker Panel(DMP), which is a survey initiated by Bank of England in collaboration with University of Nottingham and Stanford University. The respondents of the survey are 7,500 business executives in UK who helm the small, medium & large enterprises. The survey mainly covers operational aspects of a business, possible effect of Brexit on generating revenues, impact on prices, investment philosophies and employment numbers.

Figure 1: Brexit as a source of uncertainty (Source: Bank of England)

As per Figure 1, it is evident that close to 32 percent of respondents view Brexit as one of top sources of uncertainty and 37 percent view it as one of many sources in November 2018. 17 percent respondents feel Brexit as the largest source of uncertainty. These numbers fluctuate through different time periods but latest data reveals an impending risk. This uncertainty can very well set its footprints on investments in UK as you observe greater risk averseness. More statistical scrutiny on DMP data revealed alarming umbers suggesting 6 percent reduction in investment, 1.5 percent lower employment and productivity collapsing to 50 percent.

To look at the future investment environment of UK, it is imperative to consider European Structural Investment. European Structural Investment (ESI) Program was an EU initiative which was swept under the carpet when 2016 referendum was discussed. 2.5 billion euro was infused by ESI fund on average from 2014 to 2016 as per Government numbers. These funds support the SMEs and provide the requisite funding to support operational efficiency and foster innovation in business environment. The infusion of these funds creates a sense of confidence among the budding angel investors for investing in young companies. In wake of referendum, EIS froze this cash and the companies have to look in different direction for funds. Apart from lack of funding, the export industry could potentially be hit due to the departure from the European Union.  Britain has free trade with members of the European Union; however, when exporting in the future, British producers may be subjected to tariffs. These tariffs will unavoidably push prices higher.

UK is a financial epicentre of the world and to help businesses flourish on British soil, political decisions should be influenced by a strong forward-planning taking into view financial and business repercussions of Brexit. I strongly feel UK financial markets should keep building and innovating to support the global economy and be resilient to the outside shocks.

Journey of Electric Vehicles : A Global Perspective

I will start by revisiting the history of the automobile industry and I will dive right in. 20th century saw horse-run carriages as the only means of transport. However with the advent of industrial revolution, people began to experiment with newer forms of transport. Petrol, steam and electric versions of transport began to compete fiercely with each other. Nicholas James Cugnot was the one to invent vehicles run by steam-engines. He invented steam tricycle which sowed the seeds for revolution of the automobile industry. However, his inventions saw a slight turbulence as steam vehicles required a long start up time and had a limited range. It was practically impossible to use them for a long distance travel. This was overcome by the vehicles fuelled by internal combustion engines (ICE) which were invented by Siegfried Marcus in 1870. Incremental developments were made to the model later by many engineers and scientists including Karl Benz, Nikolaus Otto and Rudolph Diesel. However, the first electric vehicle was invented in the year 1884 by an engineer named Thomas Parker. The concept of electric vehicles is not a newfound one. It had its roots way back in 19th century. However, their viability was questionable then. The roads outside the cities were of extremely poor quality which made commuting by an electric vehicle difficult (The rockier the road gets, more power the vehicle consumes). However, Henry Ford brought in huge obstacles to electric vehicle industry. Ford’s Model T costed $650 in 1912 whereas the price of electric vehicle amounted to a $1750. The consumers were more averse in buying electrically powered automobile as they were extremely high priced. Nevertheless, the discovery of abundant crude and faster developments in gasoline engines wiped out the electric vehicles completely from the face of the earth. However, in today’s times, looking at the deteriorating air quality and depleting oil reserves, it has become imperative for us to repaint the picture of electric vehicles with a much broader brush.

Electric vehicles incurred a very high cost primarily because of its increasing battery costs. However, over time battery costs have declined 80% which has given many automobile manufactures the incentive to venture into electric vehicles. Some of leading bigwigs in the business are Beijing Auto Industry Corporation, Zhidou, General Motors, Tesla, Kiah Motors and many more. However, with respect to batteries, there is still an unexplored area; the environmental issue concerning waste management of electric batteries. International Energy Agency estimates there will be 140 million electric cars globally by 2030 if countries adhere to the Paris climate agreement targets. This could leave 11 million tonnes of lithium-ion batteries to be recycled between now and 2030. Lithium ion when burnt can emit toxic gases and can have enormous environmental repercussions. Europe has therefore expressed serious concerns in venturing into the domain of electric vehicles. In fact the growth in terms of registration for electric vehicles is just 7% in Europe whereas United States of America and China have 37% and 70% growth respectively. In terms of climate change, Japan is moving on right course. After 50 nuclear power plants were shut down in the wake of the Fukushima accident, Electric vehicles are expected to significantly contribute to climate change. The situation in China is exactly opposite. With coal comprising approximately 70% of China’s electricity generation, the carbon intensity of the grid is high.

However, China has done exceedingly well in the commercial aspect of electric vehicles. Their primary motive was to reduce dependency on fuel imports and improve air quality (The air quality improvement is far from being realized considering the huge dependency on coal for electricity generation).  59 % of global sales of electric vehicles originate from China. The reason for this massive number is declining costs of batteries. With decreasing battery costs and a revised subsidy scheme, production has scaled up considerably in China. Chinese Government has planned to install 4.5 million units of charging posts by the year 2020 and also convert public transport buses to electric vehicles (at least 30 % by 2020). On the flip side, India needs to reduce air pollution at the earliest. However, simply introducing electric vehicles won’t do the trick. In India, coal is used majorly to produce electricity. More electricity being produced, more coal is burnt to degrade the air quality. Therefore, India should focus on bringing in renewables as a major energy producer and reduce its reliance on coal. Electric vehicles should be the logical next step after this change is implemented on a large scale. 

As per report by J.P.Morgan, electric vehicles contribute 30 % of vehicle sales worldwide. This figure is expected to increase by 7.7 % by 2025. By 2030, 60 percent of the vehicle sales will be attributable to electric vehicles.

USA-China Trade-Wars and Beyond

 This post I decided to have a global perspective. One of brewing topics of international relevance was that of the trade wars. USA and China have locked horns in an inevitable trade war for large period of time and both the economies have felt the immense turbulence emerging from it. This post tries to look at how Trump’s ideologies (good, bad or ugly?) have shaped into a massive trade war which can send ripples across global market.

Post World War II, United States of America established an open rule trade systems and reduced protectionist barriers to trade. The years following the war observed tremendous inflow of investments and a growing American economy. However, in current times, President Donald Trump has a diametrically opposite view. His firm belief in America First has given him the unspoken mandate to impose tariffs on steel and aluminium so as to create more employment opportunities in America. The tariffs did create 33,400 American jobs simultaneously destroying 1, 80,000 jobs across other economies. As on November 2^nd, 2018, steel prices have risen 33.14% YoY.  The corporate numbers have suffered with American companies using steel & aluminium as raw materials reporting weaker profit margins and lesser sales. Trump cited reasons of national security for imposing steel tariffs. However, US defence resorts to just 8.5 percent of total steel consumption and this reason looks far from being genuine. It has taken a toll on automobile companies (who are one of major buyers for steel) wherein there was a sharp 4% rise in automobile costs as predicted by the economists. Trump’s protectionist quagmire has slowly led to an outbreak of a trade war with China. In one of his speeches, Trump clearly reprimanded the leadership in earlier years who allowed US wealth to flow towards Chinese economy through massive reliance on imports. Former President George Bush had imposed 8-30% tariffs on steel to create more jobs; however as trade tensions were sighted, he quickly abandoned the tariffs. With alleged Chinese misuse of intellectual property rights, Trump along with his advisors used an arsenal of tariffs on China to discourage imports. China was closely looking at the Midterm elections wherein a Democrat win could have proven to be a helping hand.  However, even if the outcome was as expected and it challenged Trump on military spending and international business dealing. However, Trump still enjoys executive power on USA’s trade policy and can emphasize on his own terms.

China’s Made in China 2025 policy plans to replace imports with local products as the Government plans to build on existing infrastructure and technology so that Chinese champion companies can take on Western World in terms of domestic production. Trump may have sighted this policy’s adverse repercussions on the American economy as USA exports sizeable amount of goods to China (130.37 billion as on 31^st December 2017). The antagonistic attitude of Trump towards China appears to have stemmed from this foresight. Trade wars have led to a rise in the consumer price index to 2.7% with USA reporting good employment numbers without subsequent rise in productivity as stated by Former Chairman of Federal Reserve Alan Greenspan. This appears to be extremely unsustainable looking at the future growth.

Chinese economy will also suffer implications of growing trade war with China’s fixed asset investment slowing down to a record low in August 2018. China has tremendous debt/GDP ratio of about 250% as China has rising expenditures from debt (12.5% of the GDP) which are used to simulate the economy. These solutions are extremely unsustainable for long term as warned by the International Monetary Fund.