Has Trump done what WTO couldn’t? Financial Express 7th March 2025

 Idiosyncrasy and vicissitude stamp Donald Trump as exceptional. He has been erratic in articulation but consistent in his stance on economic policy, whether the world likes it or not. His recent tirade on customs tariffs is something that has got all nations back to the negotiation table. But, if one reflects, it will appear that his proposed actions would do something that the World Trade Organization (WTO) was unable to accomplish. Will this be a turning point in foreign trade?

The US is the largest importer of goods at around $3.3 trillion, followed by China ($2.6 trillion) and Germany ($1.5 trillion). The next in the top 10 are the Netherlands, UK, France, Japan, India, Hong Kong, and South Korea. These nations have considerable power over imposing tariffs, given the quantum of imports. The US threat to impose reciprocal tariffs on all trading partners may not be feasible, as it imports from almost 180 countries. Besides, the number of products is large, and it would be hard to map commodity- and country-wise tariffs for comparison. While the threat has been on matching tariffs based on commodities, it could practically be applied in generalised terms only. In this context, the average customs tariffs imposed by countries could be looked at, though this may not necessarily match the average that the US faces due to several free trade agreements between countries, including the most favoured nation (MFN) status.

The weighted mean average tariff on commodities imported is relevant here. World Bank data for 2022 throws some light on these rates, which vary from almost nil in Singapore to 29.5% in Bermuda. For India, it was 11.5%, while it was 8.6% in Korea, 7.4% in Brazil, 4.7% in South Africa, 3.1% in China, 3.1% in UK, 1.3% in France and Germany, and 1.5% in the US. These are averages and would have a varied set, depending on the commodities that are imported.

The outcome of the reciprocal tariff policy approach of the US has led to two things. The first is that it has opened the doors for negotiation, and this has meant that countries are talking to the US.

The second fallout is that countries have resumed talking to one another on trade issues. This was abandoned once the WTO concept fizzled out. What this will mean is that more agreements will be forged by like-minded nations on trade, which can be either bilateral or within groups of countries where the MFN-like status would be incorporated. India is already in talks with the UK and the European Union, which too are significant trade partners. The impetus for this will be more on the fear of the US raising its antenna at some point to tax goods from countries that have higher tariffs than it does (currently the number is nearly 100). Over 60 have an average rate of 5% or more.

The US trade policy has become the fulcrum for world economy as the concept of reciprocal tariffs has caught on. It is not certain whether these would be applied across the board. The higher tariffs on steel and aluminium are real and signal to the world that the US means business. Also, given that most of the exporting countries to the US have higher tariffs, non-compliance may not matter if there are no fewer cheaper substitutes. This can hold good in industries like pharmaceutical, where the US has to import because it is a necessity. Even in case of steel and aluminium, the US has to continue importing as it lacks production capabilities within. It will lead to higher prices and inflation in the US and could affect imports only marginally.

It has also been noticed that when tariffs are imposed on specific countries, there is a tendency to reroute goods through a third country. This helps dodge the higher tariffs. Often countries in the Gulf Cooperation Council are used for such routing. However, countries will deliberate whether rates should be rationalised keeping this factor in mind. It can lead to a reduction in tariffs on several product lines, which would be good for global trade, but this would also come in the way of domestic industry, which will see competition increase substantially.

For Indian companies, any reduction or rationalisation in tariffs would mean the doors are open wider for imports, which can affect competition. Therefore, the inherent protection that existed due to tariffs being at relatively higher levels would be withdrawn over time, becoming a major concern for the countries as well as individual industries.

At the policy level, there is always the threat of dumping where lowering of tariffs in general can lead to predatory trade. Other nations may under-price and sell their goods. A good example is China. India has had to apply anti-dumping duties to stem the flow of such goods. Surveillance would have to be increased to watch out for such practices.

The US double-speak is evident as the talk is only on goods and not services, where ambivalence persists. There is stern talk about driving migrants back, with some moves being made already. This will be a concern, given that there will be restrictions on issuing work-related visas. But then, this is the might of the US where the President is calling the shots and has changed the entire discourse of economics, with all countries revisiting their trade and tariff structures. Hence, it can be said that Trump has done what the WTO couldn’t.

Interest Rates Have Definitely Peaked In This Cycle: March 1, 2025

 

Interest Rates Have Definitely Peaked In This Cycle

The repo rate was reduced by 25 bps in the Feb policy, and it is expected there could be two more cuts during the course of the year, though the timing will have to be aligned with the inflation scenarios.

The minutes of the monetary policy committee indicate that there is a majority view that policy, henceforth, will target growth. This means that there will be a tendency for interest rates to come down even further over time. The repo rate was reduced by 25 bps in the Feb policy, and it is expected there could be two more cuts during the course of the year, though the timing will have to be aligned with the inflation scenarios. It has been assumed that inflation will keep trending downwards, and a normal monsoon would be the norm this year too. More importantly, core inflation has been low and stable, which has given more confidence to the committee to take this stance.

But an interesting observation is that post the policy announcement, there have been few moves by banks to lower the deposit rate as well as the MCLR (marginal cost lending rate). The EBLR (external benchmark lending rate), which holds for individual loans as well as those to MSMEs, should ideally have come down by 25 bps. However, this has not necessarily been the case, and several banks have chosen not to do so and increased the mark-up or spread over the repo rate. From the point of view of borrowers, rates have remained virtually unchanged.

The main issue is deposit rates. Banks have already been challenged all through the year in terms of garnering deposits. The relatively better returns in the capital market have caused some migration of savings to mutual funds. Those with higher risk appetites have invested directly in equities. This being the case, banks would be reluctant to lower deposit rates lest households move further away from deposits. This is the puzzle for bankers where liquidity is an issue. The present situation is characterised as one where growth in credit is steady, but the same cannot be said about deposits. The RBI has been using various techniques to infuse liquidity into the system, including VRR (variable rate repos), open market operations (OMO), and forex swaps. Deposits growth is the crux. If they do not grow, then it is hard for banks to lower their deposit rates.

This has affected the MCLR, which is calculated using a formula based on the marginal cost of funds. If the deposit rate does not come down, the average cost of deposits would remain unchanged, in which case the MCLR remains unchanged. This is why few banks have changed their MCLR.

This would be a thought for the Monetary Policy Committee going forward. While there seems to be some ideological consensus on further lowering the repo rate, the transmission would be in the hands of the banks. In fact, it can be said that in case there was stable liquidity in the system, the rate cut would have been translated to deposits and lending rates. The issue in banking is that when the repo rate changes, all loans are to be repriced at a lower or higher rate. However, in the case of deposits, it is only incremental deposits that get re-priced and hence banks do tend to face pressure on margins in a declining interest rate regime. Transmission of policy rates has always been an issue flagged by the RBI even when there was an upward cycle in the repo rate. The RBI had commented that transmission was still not complete and, hence, the stance was unchanged at ‘withdrawal of accommodation’ in successive policies.

In fact, in retrospect, it can be argued that the repo rate cut could have come after the liquidity situation was stabilised in the system. March is a crucial month for banks. There is the last instalment of advance tax payments made by companies, which will peak by the 15^th of the month. Then there are the GST payments which flow post the 20th. And last, the credit growth tends to increase towards the end of the month as banks set about meeting their targets.

Therefore, banks may not be too keen to lower their deposit rates at this point in time. Further, to the extent individuals are following the old tax scheme of taking advantage of exemptions, there would be a year-end rush to save in instruments such as PPF. All this would put some pressure on growth in bank deposits. Any which way, there will be pressure on both deposits and credit. In such a situation, there would be several interventions from the RBI to stabilise liquidity in the normal course of activity.

From the point of view of individuals, however, it can be assumed that interest rates have peaked and there would be few possibilities of banks raising deposit rates. The exceptions could be in certain tenure brackets where banks need to rebalance their portfolio. This could, hence, be the best time to book fixed deposits with banks, depending on the appetite of individuals.

The signalling on lending is also in a single direction. Rates would tend to move southwards in the coming months. As most loans are on floating rates, there would be benefits along the way even though the MCLRs may not have been altered presently. This may not happen immediately and will work through over the next couple of quarters. At any rate, the degree of reduction in bank rates (deposit and lending rates) tends to be lower than that of the repo rate. Therefore, even a 75 bps cut in the repo rate this year would probably lower the deposit rates by around 30-40 bps.

The present ideology of lowering the repo rate is based on an economic theory which says that as interest rates come down, people borrow more to consume more or invest more, which in turn leads to higher growth. The government has already worked its way through the budget to provide an impetus to both consumption (by cutting taxes for individuals) and investment (through higher capex). Monetary policy will now be supporting this effort through the next set of rate cuts.

Liquidity Management, a tightrope walk: Business Line February 28, 2025

 

RBI’s $10 billion swap: What does it hope to achieve: Indian Express 25th February 2025

 The RBI has already started on the path of cutting the repo rate. The assumption is that inflation is very much under control. The repo rate has been cut once in February and it is expected that there could be two more cuts this year. But the problem is of liquidity — the banking system has been in a deficit for a protracted period of time. This situation is likely to persist till the end of March. The challenge really is that interest rate cuts may not lead to easy transmission unless liquidity is normalised. Therefore, simultaneously, the RBI has been focusing on enhancing liquidity in the system.

The framework introduced since 2020 looks at three major instruments for inducing liquidity into the system. These are open market operations, variable rate repo auctions (for different tenures) and forex buy-sell swaps. The first two are well known measures which have been used in the past too. Open market operations involve buying government securities from banks. The VRR auctions give money to banks for fixed tenures on the back of government securities as collateral. The swap is the new concept being used when conditions are quite uncertain in the forex market.

The RBI will be holding a buy-sell swap for $10 billion on February 28 for which dollars would have to be handed over to the RBI on March 6 by successful bidders. The swap is for a period of three years which means that the redemption takes place on March 6, 2028. In simple language, on February 28 there will be an auction for $10 billion where the RBI will buy dollars from banks at a premium to be decided by the market. Under the terms of this bid, banks can sell to the RBI at the prevailing price on the 28th and receive the rupee equivalent on March 6. On March 6, 2028, the banks will have to buy back the dollars from the RBI by paying in rupees along with the premium.

The RBI had conducted one such swap on a similar basis on January 28 for $5 billion. The RBI reference rate was Rs 86.64/$ and the premium was 97 paise. The transaction would be reversed after six months on August 4. Intuitively, if the rupee remains stable during this period, banks will be better off as the cost would work out to just 1.1 per cent.

In the past, the RBI has used swaps mainly for inducing dollars into the system which involved selling dollars and then buying them back after the agreed period. The reverse is now being undertaken as the target is to infuse liquidity against the objective of providing dollars. With these two auctions of $15 billion, the RBI would have induced Rs 1.30 lakh crore into the system. This is quite substantial. This is a third window being used by the RBI which will work out to be cheaper for banks. It is not surprising that in the earlier auction for $5 billion, the bids received were around $26 billion.

The significant part of the $10 billion auction is that the buy-back by banks would take place after three years. Thus, while it has stretched the repayment period, it will again be carried out in March. March is a different kind of month in terms of liquidity as it typically tends to get sticky especially as the advance tax payments are due on March 15 and there is the usual rush to push credit by banks to meet their targets. Besides these two factors, GST payments too would tend to increase. Therefore, paying the RBI the rupee equivalent of $10 billion along with the premium after three years in March would be something to consider for banks.

It can be assumed that the RBI will continue to use all these three windows besides the overnight repo auctions (which were resurrected recently) to provide liquidity. The forex swap would fall between a permanent infusion which is what open market operations do and VRRs which are short term in nature. This is a fine blend.

There is no alternative to the dollar as the world's anchor currency : MInt 20th February 2025

 https://www.livemint.com/opinion/online-views/dedollarization-dollar-assets-forex-reserves-global-trade-currency-renminbi-yuan-yen-pound-euro-imf-donald-trump-trade-11739879691245.html

Is It Time To Have A Luxury Tax In Place? Free Press Journal: 15th February 2025

 

One of the most popular Indian cricketers is said to own 70 bikes and at least a dozen luxury cars. Data from the Federation of Automobiles Dealers Association indicates that around 35,000 luxury cars, costing at least Rs 50 lakhs each, were sold in FY24, including BMWs, Mercedes, and Audis.

One of the most popular Indian cricketers is said to own 70 bikes and at least a dozen luxury cars. Data from the Federation of Automobiles Dealers Association indicates that around 35,000 luxury cars, costing at least Rs 50 lakhs each, were sold in FY24, including BMWs, Mercedes, and Audis. There were around a little less than 1000 Porsches sold in the same year. At an even higher price level, there were over 100 Lamborghinis sold, while the count for Rolls Royce was about 60. Now a Porsche can start at around Rs 1 crore, while a Lamborghini is close to Rs 3 crore. A Rolls Royce can cost upwards of Rs 7 crore.

There was also news of some industrialists buying a series of apartments in Mumbai’s prime locality at over Rs 200 crore. It is not certain if the numbers are true, but there have been similar numbers spoken of celebrities buying homes, which can go up to Rs 100 crore each. Cricketers in categories A and C have done well for the country and purchased multiple homes, which could be costing upwards of Rs 30 crore each in places like Mumbai or Delhi.

For each of these purchases, there is an official trail of the income earned or loan taken with a history of tax returns. Therefore, there can be no issue in terms of capacity to pay for such indulgences. In fact, from a capitalist standpoint, it can be argued that these are the fruits of hard work and business, where money is earned and invested in these luxuries. All such purchases add to the GDP of the country and, hence, are useful. In a way, when the general masses are unable to spend money due to inflation and consumption is down, the premium products have done well due to this class.

Now, the idea for the government should be whether or not to impose a luxury tax on such purchases. There have been talks of a wealth tax being imposed, which has arguments on both sides. Anyone who has accumulated wealth has paid all the taxes that are due, which can be a stamp duty on property or GST on vehicles or capital gains tax on equity gains. Therefore, taxing the same for retaining wealth would not be fair. However, there is scope to revisit the tax rates at the time of purchase.

example, the stamp duty in Maharashtra is fixed at 6%, which does not take into account whether the house costs Rs 1 crore or Rs 100 crore. Here it is assumed that as it is an ad valorem tax, which is on value, it is equitable as higher value homes pay higher duties. But logically, if a person is buying a home for Rs 100 crore, imposing a luxury tax or cess of 20% would be very much in order. The state government can earn substantial revenue as it falls in its jurisdiction.

In the case of automobiles, the GST is 28% at the higher end with a composition cess of 22%, which adds to 50%. But this has not been a deterrent to such purchases, as they are often style or position statements. Based on the sales of cars mentioned above in the starting range of Rs 50 lakhs, the total cost would be around Rs 17,500 crore at the lower end (as often those who can afford such vehicles would purchase higher variants, which can go up to double the price). An additional 10% luxury tax or cess can add Rs 1750 crore as revenue at the lowest end. In fact, in the past, when such luxury cars were imported, the tariff was 100%, which did not really push demand down, given that they were status symbols. Against this background, anything less than 100% is still something that sounds reasonable and will not act as a deterrent. Hence, if the money spent on 60 Rolls Royces amounted to, at least, Rs 420 crore in FY24, imposing another 50% luxury GST over the existing 50% could have garnered another Rs 210 crore.

There is reason for the government to revisit the tax structures for luxury goods, where lines can be drawn on what constitutes the same. A house over Rs 20 crore could get classified as one in a metro city, while a vehicle above Rs 50 lakhs would fall in this category. The same can be extended to even hotel stays, where there is accommodation in the higher price bands. At present, it is capped at 28%. But a room rate of say Rs 50,000 and above can be levied to garner more revenue.

Today, there is skewness when it comes to the distribution of income. While it is true that even those at the bottom levels are witnessing improvements in their standards of living, the growth in wealth at the higher level has been more pronounced. Weddings could involve a large expenditure outlay, which can be taxed, as this could be in various forms such as clothing, jewellery, food and beverages, resorts, decorations, travel, and so on. There is value added as all expenses add to consumer spending, which is based on income earned on which all taxes have been paid. There is, hence, a justification in taxing what can be called ostentatious consumption through a luxury tax or cess. This would help in garnering revenue for the government. In turn, such revenue can be used as part of the resources that are deployed for direct cash transfers to the poor through monthly payouts to women or any other vulnerable section of society.

Intuitively, it can be seen that a lot of the money that is spent on these luxuries is through the sale of securities acquired through stock options or ownership of the same or by leveraging brand value, which holds for sportspeople or film stars. Hence, these incomes may not strictly come from the core profession as salary for those in the corporate world or games for sportspersons. This tax could also serve at the limit to encourage the elites to save money once demand is satiated. Hence, it would be helpful any which way, as such demand is agnostic to price levels.

One earth, one family: Book Review Financial Express: 16th February 2025

 Being in charge of hosting G20 deliberations may sound like routine business for any nation given that this privilege is rotated among member countries. But the conditions under which India had to organise this summit were challenging. Coming close on the back of the pandemic and right in the middle of the Ukraine war, getting countries together to discuss a plethora of issues ranging from global cooperation to climate change was nothing short of an achievement.

This story has been narrated by the Sherpa for this purpose, Amitabh Kant, in this rather comprehensive book on how India successfully managed these challenges by getting everybody on the discussion table. This is why the suffix ‘Mount’ sounds quite appropriate. Kant, who headed the famous NITI Aayog, is known for his prowess in taking on such assignments in the course of his career, being also associated with transforming tourism in Kerala.

The author thanks Prime Minister Narendra Modi for enabling the successful completion of the G20, writing that the PM’s functioning can be a good template for a CEO of an organisation. There are five qualities that need to be mentioned here. The first is taking a long-term perspective of any issue, which means not thinking of today but tomorrow. This quality combines well with empathy for people, which is a potent potion for success.

The second is the art of listening, where leaders need to spend time listening to people. This helps in assimilating multiple views, as a final decision can be taken after weighing all considerations. It reflects humility, because being willing to listen to others requires a different kind of mindset.

The third is remaining calm even under pressure. Losing one’s temper when under pressure can cause hasty decisions to be taken, which is eschewed when one is able to deal with all provocations with equanimity. This is natural in the course of any meeting, especially when there are differing views from countries with varying governance structures. Fourth was the optimistic approach taken, which helped mould mindsets in a positive frame all the time. And last is the emphasis given to physical and mental well-being. These are the lessons in management that the author highlights after successfully completing the assignment as Sherpa for the G20.

The slogan for the G20 meet was ‘one earth, one family, one future’, which is just about what is required to keep global integration alive, such that all can benefit from this collaborative effort. Reiterating this theme throughout the long period of deliberations helped to bring all countries together and there was acceptance that they needed to work together.

The author believes that under the PM’s guidance India was able to position itself as a bridge to promote healing in a world divided by geopolitical differences. This is required to build a more sustainable future. Now strategically the G20 discussions were turned towards the priorities of the global south, which does credit to India. For example, the African Union was given a full membership to the G20, a momentous step in shaping global governance, especially as it covers the voices of 1.4 billion people (which is the size of India).

The author writes that the approach taken by the PM was responsible for building consensus on several issues. One of the examples here is the tryst with creating global climate action. As the world grappled with this subject, we were able to focus on sustainable development and hence strike a balance between economic growth and environmental conundrums. This was necessary because several global agreements put the responsibility on  developing nations, which could involve asymmetric sacrifices.

Kant goes into fairly comprehensive details on how his team went around accomplishing the job, starting from the arrangements to steering discussions in the desired manner so as to optimise the time spent on these deliberations. There was clarity of thought, as there were 15 principles drawn up that were the cornerstones of these meetings. These included a wide array of subjects starting with Ukraine to being consistent with the UN charters to war on food and energy security to peace across the world.

One of the interesting issues covered related to a new look for multilateral institutions for the 21st century. Here he speaks of how the global financial infrastructure needed to be overhauled. In particular, the IMF and World Bank have to probably also incorporate climate change and crossborder issues in their mandates. This forum was also used by India to showcase the resounding success of India’s digital public infrastructure. Here, the success of the famous JAM trinity and use of technology for better delivery of direct benefit transfers was the high point.

So how does multilateralism stand after all these talks? This is surely work in progress as there are several changes in the global economic order over the years. The Ukraine war exposed the limited power of the United Nations Security Council, which was unable to broker any kind of peace. Similarly, the US-China economic conflict is just growing by the day, which has taken a serious tone with the new US President specifically targeting the country. WTO has lost steam with most member countries now having their own regional trade agreements.

In this context he also talks of the most recent COP-29 held in Baku where the issue of climate change was the focus. The global south seems to be bearing the brunt of climate impact even though its contribution to greenhouse gas emissions is the least. The crux, according to Kant, of multilateralism surviving is the existence of political will to stay connected.

This book is quite remarkable as it gives a deep understanding of the way in which the global economic order operates. It is also a help book on how to get different entities onto a common platform for successful deliberations. In the end one would say kudos to Kant for such flawless execution of the project.

Book details:

Title: How India Scaled Mt G20: The Inside Story of the G20 Presidency 

Author: Amitabh Kant

Publisher: Rupa Publications

Number of pages: 256

Price: Rs 595