21 NOVEMBER 2018
Give and take
The Centre and the RBI did well at the board meeting to address each other’s concerns
After the heat and dust of the last one month, the board meeting of the Reserve Bank of India on Monday turned out to be muted and professional, as it should have been. Any summary and precipitate action by the Centre to have its way would have created more problems than it solved, apart from it not going down well with the markets. The decisions taken by the board address the concerns of both the Centre and the central bank, though on balance it appears that the RBI carried the day. Two of the biggest concerns of the Centre where it was expecting an immediate resolution — relaxation of the Prompt Corrective Action framework on 11 public sector banks and provision of liquidity for non-banking financial companies — will be addressed at a future date. The first one has been referred to a department of the RBI for examination, while no decision seems to have been taken on the second. In addition, the Centre’s attempt to tap the RBI’s rich reserves has also been staved off for now, with the matter left to be decided by a committee set up exclusively for the purpose. This is as it should be. Given that the membership and terms of reference of the committee will be jointly decided by the Centre and the RBI, there is little scope for either side to complain of bias. The RBI has been transferring all of its surpluses to the Centre in the last five years based on the recommendations of an earlier committee led by Y.H. Malegam. Given this, it is unclear what more the new committee can possibly recommend on future surpluses, unless of course it is allowed to go into sharing of the reserves that now exist on the RBI’s balance sheet.
The central bank partially yielded to the Centre on two other issues — the Basel capital framework for banks and easing credit flow to micro, small and medium enterprises (MSMEs). The RBI didn’t concede the demand for alignment of the capital norms to Basel (they are higher now), but by pushing back the deadline by a year for increasing the capital buffer, it has freed up funds for banks to lend. Again, by permitting debt recast for MSME borrowers of up to Rs. 25 crore, the RBI has attempted to address their credit concerns, which was one of the major demands of the Centre. Clearly, there was enough give-and-take in the meeting that left both sides with the feeling that they had gained something. At Monday’s meeting the board turned hands-on probably for the first time in recent memory, from being just an advisory body. That the meeting went on for over nine hours clearly indicates that there was an intense exchange of views, which is not a bad thing at all. Differences between the Centre and the central bank must be thrashed out in such a setting, rather than in the media or in public speeches.
When giants clash
The U.S.-China discord at APEC highlights the dangers of their tariff war
Breaking with more than a quarter-century of history, the Asia-Pacific Economic Cooperation (APEC) organisation wrapped up its summit with no joint communiqué issued. Its leaders, principally led by the U.S. and China, clashed over the proposed wording of the document. The economic rivalry between Washington and Beijing appeared to fracture the 21-nation summit into two segments. The source of the friction stemmed from the Trump administration’s “America First” policy, under which Washington led the charge on “unfair trade practices”. This was an implicit accusation that China wasn’t levelling the playing field in global trade. The U.S. has been urging China to increase market access and grant intellectual property protections for American corporations, cut back on industrial subsidies and, at a broader level, bring down the $375-billion trade gap. Vice President Mike Pence, who attended on the President’s behalf, also hinted at strategic pushback when he called upon nations to eschew loans that could leave them in a debt trap with Beijing. The Chinese message at the plenary was a strategic one too: President Xi Jinping did not mince words in touting Beijing’s Belt and Road Initiative. The BRI has worried smaller Asian nations and the U.S., particularly given that China views the Asia-Pacific landscape as a means to secure economic predominance worldwide.
To understand what this clash of the global economic titans portends for the world trading system, it is instructive to examine the path of their mutual conflict thus far. The troubles began over the summer when both countries started taxing $50 billion worth of the other’s imports, followed by the U.S. slapping $200 billion of Chinese exports with a 10% tariff, to be ratcheted up to 25% by the year-end. China, unsurprisingly, retaliated with a promise to impose reciprocal taxes to the tune of $60 billion. Already, the tariff war has resulted in the IMF downgrading its global growth outlook for this year and the next to 3.7%, down 0.2 percentage points from an earlier forecast. If this continues, eventually global supply chains may be hit, and shrinking trade volumes may cause companies to seek out new trading routes and partners. Institutionally, multilateral rule-making bodies such as the WTO may lose their authority, and an interlocking system of bilateral trade treaties and punitive sanctions networks may substitute the consensus-based approach that was forged so painstakingly after World War II. Asia will be at the heart of this war of attrition because strategic control of its high-value maritime trading routes is the key to China’s dreams of global trade dominance. After the APEC summit the world is still poised on the edge of the trade war vortex. The forthcoming G20 meeting in Argentina offers an opportunity to pull back from the brink.