2016_03_16 NIT

oping to jump-start its "Make in India" manufacturing push, India's government has rolled out the welcome mat for foreign in- vestors. It should consider doing the same for global bond buyers. Indian bonds are, at the moment, suffering a full-scale rout. OnMonday, yields on bench- mark 10-year government debt -- called the "G-sec" rate in India -- continued their slow creep upward to 7.78 percent. Many expect them to cross 8 percent at some point in the next fewmonths. How swiftly have things turned bad?Well, as recently as last August, G-Sec yields were south of 6.5 percent. By the end of February, bond prices had fallen for seven successive months, the longest decline in two decades. The market's gloom reflects how badly India's macroeconomic fundamentals have weakened. Last year, the economy seemed to have vanquished the threat of constantly ris- ing prices; markets nowworry that inflation is back. The Reserve Bank of India sounds distinctly hawkish. Over the past year or so, there's been a flood of new bond issues from India's states. Most importantly, the federal government, faced with a difficult political situation and looming elections, has abandoned its hard- won reputation for fiscal restraint. In its last federal budget, India missed its fiscal deficit target.Worse, the budget math looks dis- tinctly dicey, which suggests the government is going to be evenmore profligate next fi- nancial year. The ruling party is trying hard to woo angry Indian farmers through enhanced price supports for grains. That would be a pretty nasty one-two punch for the bond markets: It would both weaken government finances and drive up inflation expectations. High yields have complicated things for the government. It isn't just that its borrow- ing costs are going up; the yields also threaten India's already stressed state banks. In January, the RBI's deputy governor warned that Indian banks were sitting on toomany government bonds and thus taking on too much interest-rate risk.What he was actually telling banks was that they shouldn't expect any help from the RBI inmoderating that risk: "Interest-rate risk of banks cannot be managed over and over again by their regula- tor," he said. Indian banks are holding far more govern- ment securities than they're required by law, so their profits have been hit particularly hard by the bond rout. Of course, now they're trying to sell off the excess, which has only pushed up yields even further. This comes at precisely the time when banks are facing extra provisioning requirements to address their giant bad-asset problem. Meanwhile, their principal shareholder, the government, is pushing them to lendmore to companies to revive private investment. Can India's government do anything about this, or must it simply push through the pain?Well, if you're worried about the price of something falling, you can either in- crease demand for it or reduce the supply. Certainly, given the government's spending and borrowing plans, there doesn't seem to be much that can be done about the excess supply of bonds. What about demand? Perhaps there was a time when the government could have sim- ply ordered state-owned banks tomop up the extra paper. But that, given the banks' parlous state, is no longer an option. At the same time, the government seems to be shrinking the market for corporate bonds. A recent report suggested that India's state-owned pension fund could lower the number of corporate bonds it holds from 35 percent of its portfolio to 20 percent. India's corporate bondmarket is already massively underdeveloped; it's only 15 percent of bank credit to industry. If you really want it to grow, you have to increase the number of buyers and deepen state institutions' appetite for risk. There is one thing the government and the RBI can do to stabilize the bondmarket -- re- think India's habitual paranoia about "for- eign" money. In September 2015, the amount of rupee-denominated government debt that foreigners could buy was raised -- but still limited to five percent. Investors are also con- strained by a $51-billion limit on foreign in- vestment in Indian corporate bonds. The RBI adjusts the G-Sec ceiling every now and then, but usually only to try and attract "long- term" investors. This paranoia is inexplicable. There's a fear of instability, of foreign investors forcing a crisis. But that is something that usually happens in countries that have sold too much dollar-denominated debt to outsiders. It's difficult to see how rupee-denominated debt would have the same problem. If the government wants to expand com- panies' access to funds, deepen the bond market, increase risk appetite andmanage the effect of government borrowing, it will have to abandon its fear of global capital. Let foreign buyers eat their fill of Indian debt. After all, that's the basic engine of capitalism: India is where the growth opportunities are and it should andmust attract capital from places with less-inspiring returns. By keeping foreigners from lending us money, we're hurting ourselves most of all. - BloombergView News India Times March 16, 2018 2 Opinion H Publishedweekly,Founded in1975. Theviewsexpressedon theopinionpagesare thoseof thewritersanddo notnecessarily reflect thoseof News IndiaTimes. Copyright©2017,News IndiaTimes News IndiaTimes (ISSN0199-901X) is publishedeveryFridaybyParikhWorldwideMediaLLC., I15West30thStreet,Suite1206,NewYork,NY10001. 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Road, 29 Adarsh Society Ahmedabad 380009 Tel. 26446947 F ax. 26565596 Mihir Sharma Columnist IndiaShouldOpenDoorWiderTo Global BondBuyers I n early 1951, federal authorities removed 11 Chinese students in handcuffs from the campus of the University of Illinois at Urbana-Champaign and locked them in a Chicago jail. As I wrote in my book, ulti- mately, they (along with five other students) were deported because they belonged to a Chinese Christian group that authorities be- lieved had been infiltrated by the Chinese Communist Party. In response to the expulsions, Arthur Hamilton, who supervised foreign students at Illinois, made a simple observation to The NewYork Times: "We are making a gift to our enemies, the present Government of China, of trained technicians, steeped in American know-how," he said. Hamilton called the de- portations "criminal." Flash forward almost 70 years, and federal authorities appear to be repeating the same mistake. In their eagerness to stem signifi- cant intelligence losses to Chinese spies, law enforcement officials in the United States are frantically prosecuting Chinese scientists, and again making a gift to China of "trained technicians, steeped in American know- how." FBI Director ChristopherWray re- cently told Congress that dealing with Chinese espionage with America demanded a "whole-of-society" response - an unwitting throwback to the Red Scare days of the 1950s. Exhibit A in prosecutorial overreach is the case of ChunzaiWang. One of the world's leading experts on climate change,Wang worked for 17 years for the National Oceanic and Atmospheric Administration. His pa- pers, some of which focused on the interplay of El Nino and global warming, have been cited thousands of times. In 2012,Wang won NOAA's Research Employee of theYear Award for "personal and professional excel- lence," followed in 2013 by its Scientific Em- ployee of theYear Award, for "professional excellence and exceptional productivity." He was indisputably the most prolific scientist on NOAA's staff. In 2016, agents from the Commerce De- partment executed a search warrant at Wang's home and office in Florida. Over the course of the next fewmonths,Wang was in- terrogated 47 times, according to his lawyer Peter Zeidenberg. The focus of the probe was the belief that Chinese organizations had paidWang while he was on vacation in China. Hounded by the Commerce Department, Wang left the United States in 2016 and got a job as a research professor at the Chinese Academy of Sciences. His wife and children, however, remained in the United States. Re- turning to the United States on a family visit in September 2017,Wang was arrested and charged with eight felonies that basically ac- cused him of double dipping. In all, it ap- pears that Chinese institutions paidWang $2,100 over the course of three years for helping students there on research involving climate change. In some ways,Wang's activities in China actually fell neatly within the purview of NOAA's mission which is, according to NOAA's official website, "to understand and predict changes in climate, weather, oceans and coasts" and "to share that knowledge and information with others." [italics mine] Last week,Wang agreed to a deal with fed- eral prosecutors. In exchange for pleading guilty to one felony charge of accepting pay- ment by someone other than his employer, he would be allowed to go free and avoid an expensive trial. He has since returned to China and was unavailable for comment. - Special toTheWashington Post America'sNew- AndSenseless - RedScare By John Pomfret

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