Indians - Go Forth and Mingle

The 2016 Presidential election has been a profoundly disturbing period for most Indians who have made the USA their home.

The great majority of Indians in the USA came here for better economic prospects. Even for those who came here as students (as did I) and decided to stay on, economic opportunity was the critical driver. Overwhelmingly, we were from urban India and had benefited from a strong tradition of educational achievement. Many of us happened to be from the privileged castes and communities, yet were imbued with the ideals of democracy and secularism that were the norm in the first four decades of independent India. For us, USA was a place where one could work hard and by sheer dint of merit rise to the highest echelons of corporate America, or strike out on one's own to build great businesses. The US had what India did not - the unrestrained opportunity to go forth and get rich without many of the overt constraints that the license Raj had imposed on India.

As importantly, America's key attributes - freedom of religion and expression - allowed us to adapt and continue to cherish many of the religious and cultural traditions that we had grown up with. We built temples, gurudwaras and mosques and celebrated events such as India Day in major cities.

We moved from small apartments in urban concentrations and small college towns to leafy and mostly white suburbs as we climbed the economic ladder. We kept up with the Jones in suburbia and our children joined the ranks of the privileged in the USA.

The fact is we led complex double lives. There was the professional aspect of our lives which was all American and all business - setting aggressive goals and achieving them; going out for lunch with colleagues and occasional drinks and dinner and work. Some of these colleagues did become close friends, but this was rare. When it came to social engagement, other than attending children's school concerts, soccer games, and the like, the bulk of socializing involved hanging out with other Indian (and South Asian) families. As our numbers grew, South Asian Associations became Indian Associations and then (multiple) Bengali/Tamil/Marathi Associations.

While this association with people of South Asian ethnicity enabled our children to retain many of our traditional values, it also imposed a considerable burden on them with living with one foot in each culture. Children are very adaptable and they still thrived. However, this article is not about the children.

While we implicitly give back to this country in terms of our professional contributions and businesses that we have created, we really do not interact with a huge chunk of America. We rarely volunteer in soup kitchens, become big brothers and big sisters or after-school tutors in low income neighborhoods, participate in local government, or for that matter encourage our children to join the ROTC.

In short, we live comfortable lives that have been largely unaffected by the currents that have roiled the USA over the last few decades. We are a privileged, highly skilled and highly compensated, "ideal" minority which up until recently has not felt the resentment of the white working class which has seen its own privilege get whittled down over time, or for that matter the resentment of African American and Latino communities who never had many of the advantages that we take for granted. We have been living in social ivory towers.

During the recent presidential campaign, many of us were perturbed by the phenomenon that is Donald Trump. But we never panicked and did little to impact the outcome. After all, America was a land of freedom and opportunity, where all men are born with certain inalienable rights. To us, Trump stood for racially divisive politics, misogyny, intemperate language, and downright lack of civility. It was inconceivable that he could become the President of the USA. We drank from the same fountains as the liberal media and the coastal elites. We were part of the tribe that had a rude awakening this election.

I think it is time for us to reflect on the America that we inhabit, its evolution over the last few decades, and our place in it. Face it, we benefited greatly from the Civil Rights struggle in the 1960's and did not bear any of the costs. Most of us came to this country after the race riots of the 70's and benefited from the newly formulated EEOC rules. We found that we had little in common with the African American community which was largely absent from the leafy high income suburbia and also from the high technology sector. There was limited opportunity to interact, and we made little attempt to seek out opportunities for interaction. In fact, many of us brought with us prejudices grounded in caste and skin color. What we failed to grasp is that without the Civil Rights movement of the '60's, we would have had to live in a very different America. We would have then understood what a toll discrimination can take in sapping the potential of individuals and communities.

With our technical skills and educational backgrounds, we Indians found ourselves perfectly placed to participate in the technological innovation that has led to huge gains in productivity and automation in the last two decades. Immigration of Indians accelerated in the last two decades as US business needed to meet the huge demand for software and engineering talent. There was software needed in every product, including bringing produce to the table!

As trade barriers were dismantled and money sought the highest returns, many manufacturing and services jobs left the USA for more profitable destinations - primarily in Asia. The victim of this massive transformation was the (predominantly) white working class and the white middle class. They say Globalization has winners and losers. Clearly the Indians in the USA were some of the winners.

We live in Trump's America because those who have been disadvantaged by the globalization of trade came out and voted en mass for Trump. We Indians were shocked and bewildered by the fact that a candidate who appeared to seek out and found enthusiastic support from racist fringe elements is now the President elect. While the media is involved in soul searching over how they got this election wrong, we Indians need to treat this as a wake up call.

When the likes of Steve Bannon makes statements about the preponderance of Asians in Silicon Valley, he is not calling us out as a model minority. On the contrary, he is identifying us as an immigrant group that seems to have gained disproportionately from the technology and innovation that has changed the way Americans live and work. This is coming from a place of envy and resentment, and of identifying and stereotyping various ethnic groups. It is part of identity politics which has brought Trump to power.

Indians have to re-engage with America in a very different way. We have to get out of our comfort zones and high rent/value homes and go into (A) disadvantaged urban areas, and (B) rural America. We have to seek out and interact with people that we typically do not encounter socially. We have to volunteer at soup kitchens, we have to join Big Brother & Big Sister, and most importantly we have to start becoming active in local government.

We have to make an impact at the social level, not just as the proverbial IT support geek, the doctor or the convenience store owner. From social engagement comes true assimilation into the mainstream of American life. Our children are already engaged in this. It is we adults who have been in this country for decades and essentially stayed away from engagement who have to change. We have a lot to contribute in terms of helping level the playing field for all Americans for the jobs that will need to be filled in an America that will undergo wrenching changes from AI and Deep Learning. I believe that we have the obligation to do so in our adopted homeland.

We grew up in an India that was culturally, linguistically, and religiously diverse. We know how to deal with diversity. We can help heal the divisions in America, regardless of political affiliation, race, religion, and national origin. We can straddle many of these divisions. It will be a pity if we stay glued to CNN and CNBC and nurture our nest eggs.

Let me even ascribe a selfish motive to this engagement. We will make our kids proud!

This Presidential Election and US Retreat from Globalization

It is easy to get agitated about Donald Trump's crass and insensitive comments and dubious business practices, or for that matter Hillary Clinton's lack of judgement and deviousness, depending on what your political inclinations are. However, I believe that the election is being fought in the context of trends that are inexorable and in the absence of black swan events, irreversible.

Globalization of trade is under a  cloud in the United States and to a smaller extent in Europe. All this while, the biggest proponents of globalization in the US and Europe were those with capital, looking to secure the best possible returns for their investments.

The US embraced Japan and China for strategic reasons to start with. They wanted Japan to stay out of the Soviet orbit following WW II. US mended fences with Communist China in the early '70's to wean China away from being aligned with the USSR.

In order to accelerate the post war recovery in Japan, the US allowed the very same Japanese conglomerates which had armed the Japanese war machine to be lead the Japanese industrial recovery. In addition, the US opened up its market to Japanese goods. The Japanese kept their markets largely closed and ensured that there was fierce domestic competition. Out of this competition arose world class competitors who are now household names. By the time the '80's came around, there was pervasive alarm in the US about the success and domination of Japanese conglomerates. However, Japan's own domestic real estate bubble deflated in the early '80's and this put the Japanese economy in a deflationary/low growth spiral. Add to that the impact of demographic decline, and Japan ceased to be a potential peer competitor to the US. The important thing to realize is that while Japan embraced much of the consumer culture from the US, it never quite lost its mercantile trade zeal. Its manufactured goods are still top notch and it still runs an overall trade surplus.

US multinationals rushed into China for many of the same reasons as European and US traders had two to three hundred years back. They wanted trade access to a huge market. With India under British control and a very fragmented polity in South East Asia, the only real possibility for trade and profits was China. I do not want to repeat the tumultuous history of a declining China's interaction with the West (and Japan) . Turn the clock forward to the '70's when China agreed to normalize relations with the US in return for access to the US market. Basically, China was marching down the well traveled path trodden by Japan and the other Asian tigers. Opening up the Chinese market to multinational investments would bring jobs and raise local incomes. But similar to the Japanese, China was able to keep certain sectors shut to foreign investment. There was no equivalent to the Japanese Zaibatsu, so China nurtured its state owned national "champions". Unique aspect of Chinese development was the role of overseas Chinese investments, including from Taiwan. Over the course of three decades, China has transformed from a mostly agrarian society to being the workshop of the world. US multinationals reaped huge profits from this transformation in China, as they became part of the landscape of the new Chinese society.

What the US and Europe had conveniently chosen to ignore was Napoleon's observation about China being a sleeping giant that should be woken at your own peril. The sheer heft of China's population, economic productivity and manufacturing prowess had a huge impact on industries in the US and Europe. China's top down economic planning and central control meant that China over invested in many sectors such as coal, steel, cement, etc. The glut in these sectors when coupled with a Yuan exchange rate that was kept artificially low, meant that Chinese products enjoyed a huge price advantage in every market in the world. [All this has of course come with a huge debt bubble in China.] Over the last two decades US industries that had been bruised by the Japanese industrial might, were decimated by the onslaught of Chinese products. The giant had awoken and was now moving the world, again harking back to Napoleon!

An important transformation has been underway in the supply chain in China. Despite the development of many major industrial producers in China, there had always been a cadre of products that were pretty much the exclusive domain of Western and Japanese companies. However, this has been changing over the last decade. Now the supply chain is increasingly 100% in Chinese hands and Western and Japanese multinationals are being increasingly squeezed out of the Chinese market. China has also protected its private sector "national champions" in the new economy - Alibaba, Baidu, Didi, Tencent, Weibo, to name just a few. They have complete domination in China and are spreading their wings abroad. Bottom line is that multi-nationals no longer enjoy some of the advantages of the past in China. At this point China needs foreign multinationals less than the multinationals need China!

While Chinese society had liberalized, the Communist Party had kept a stranglehold on political power. The assumption of economic liberalization leading to political liberalization has China as an exception.

All this had taken place under the umbrella of globalization, introduction of NAFTA and the Euro, and the expansion of WTO to include China. Clearly the US miscalculated the trajectory of how China would evolve. As the US found itself mired in unending conflicts in the Middle East, China used the breathing room to emerge as a peer competitor.

The backdrop to the current election is an angst that revolves around the following:

• Wariness with foreign wars and US role as policeman of the world,
• Weariness with being an open market for the entire world's products without corresponding market access for US products
• A revolving door of Democratic and Republican administrations and Congress that have been proponents of globalization, largely ignoring the segments of society which have been devastated by job losses

This is why Bernie Sanders' message had such huge traction with Democratic voters. Donald Trump also tapped into some of the same sentiments as he fought his way to the Republican nomination. In addition, Trump was able to leverage a backlash against the changing demographics of the US. Immigration from Mexico and Central America, as also from Asia, has been changing the face of the country.

All this has clear portents for US foreign and domestic policy.

Regardless of who is elected President, it is likely that the US will increasingly step back from the the mantra of free trade and globalization. As dependence on Middle Eastern oil has declined, the US will expect major consumers - China, India, Japan, South Korea, and Europe to play a greater role in keeping the peace. From patrols to reign in Somali pirates, we will see naval flotillas from diverse countries wearing blue UN helmets stabilizing the fires that will keep on burning in the Middle East. Interestingly, this may well suite the goals of China which has built an impressive domestic defense industry but whose products are largely unproven and the Chinese military has been sorely lacking in combat experience. If China is to become a true peer competitor to the US, it will have to earn its stripes in the Middle East.

A retreat from Globalization also provides China with a perfect opening to move forward and complete its multiple initiatives - One Belt One Road, Maritime One Belt One Road, CPEC, to name just a few. All these initiatives are the perfect outlet for the huge industrial overcapacity in China. Most of these initiatives will involve Chinese construction companies, Chinese power plants, etc., and will serve as a perfect extension of the Chinese economy. What is critical is that this will also allow China to maintain a high rate of growth and more time to transition to a consumer economy from its current orientation as an export powerhouse.

At a megatrend level, the timing for US retreat from globalization works perfectly with the Chinese impulse for growing offshore into in emerging markets. Most global growth scenarios in teh 21st century center around rapid urbanization in South and South East Asia and to a lesser extent in Africa. Faster economic growth is also going to be centered on emerging Asia and Africa as the demographics of these areas are favorable. As the US withdraws, this growth will have Chinese characteristics.

These scenarios are within the realm of possibility. The major wild card is the transition to this scenario. A precipitous retreat from globalization by the US could cause huge economic and financial upheaval. If this happens over a decade or two, the transition can be "managed". And this is where the current election is of great interest. 

Even in a Clinton Presidency, I would expect to see more confrontations with China over trade. As TPP gets put on the back burner, it is quite possible that some aspects of NAFTA will get revised. This will play well to voter anxiety and xenophobia, and will help Hillary to shore up a new and vocal segment of voters. I can see Hillary making a historic trip to Moscow to freeze confrontation in Eastern Europe and allow for a slow draw down of US forces from Europe and the Middle East. Do not be surprised to see US and Russian alignment over keeping the peace in the Middle East by getting the consumers of the oil and gas putting boots on the ground.

A Trump Presidency throws up too many wild cards. It is likely that escalating trade barriers thrown up by the US will be met with similar actions on the part of China. This has implications for the US dollar, as well as the Yuan. With US trade under a cloud, the Chinese are more likely to shift from USD bonds to Euro or Yen denominated bonds, causing a sharp selloff in the USD. This may not be enough to stave off a crisis in the fragile European banking sector. The Yuan is likely to take a hit regardless, and this will be followed by a wave of devaluations in emerging market currencies and defaults on foreign loans. If China is unable to manage its domestic debt bubbles during these crises, the consequences for the Chinese economy and politics are dire. We could be looking at a scenario that is similar to the 30's when trade barriers were thrown up and most world economies were depressed. It was WW II that dragged the world out of the depression, and resulted in a very different world order.

In summary, we are on the cusp of a retreat from globalization on the part of the US. What is up for grabs in this election is whether this decline will be gradual and managed, or if it will be precipitous and potentially risky to the global economy.

Red Lines in in Indian Subcontinent have shifted

Events from the last few weeks have been momentous.

Militants launched an attack on the Indian army base in Uri on September 18, 2016. It was perhaps successful way beyond what the militants may have expected. The Indian Army got a black eye, and India was once more being shown up as being impotent in the face of a low level insurgency.

However, this time India decided to act. The action was labelled "surgical strikes", and took place on September 29th. The scope of the strikes is hotly debated both in India and abroad. Pakistan has flatly denied that there was any significant action by Indian forces. The Indian Government has been loathe to turn over any video or other evidence of the action. All this makes for a very confused picture.

My interpretation is as follows. Indian Army did carry out strikes across the LOC but the scope of the strikes was limited. The camps/staging areas targeted were very close to the LOC. There is no better proof of the limited nature of the strikes than the fact that Indian forces appear to have suffered no casualties, and there were no mishaps and no Indian equipment left behind in POK. Remember despite all the planning and exercises that are supposed to mimic reality, there are unexpected events and it is rare that everything goes smoothly like clockwork. Even well equipped and trained special forces like those of the US have enough examples of covert actions that went wrong.

IMO, the limited nature of the strikes was deliberate. The Indian Army did not wish to embarrass the Pakistani Army and Government such that they would be forced to retaliate in kind and or raise the ante. A limited set of strikes extremely focused on hitting militant launching pads would give enough room for the Pakistani Army to deny that these happened. Unlike Kargil, there would be no/few body bags (unlike those of the NLF during the Kargil episode) going back to their families.

However, I believe that India has changed the "game", if one could call it that. After the Mumbai attacks, India marshaled its forces on the international border and threatened all out conflict. This brought international pressure on Pakistan, and some reigning in of militants bring infiltrated into India. But the respite was temporary. There was no way that Pakistan would dismantle the militant infrastructure in the Pakistani Army and society as a whole. India has chosen to publicize the point that they struck back in POK, since the militants who attacked the Uri camp had come from POK.

What India has established is a precedent for future action. It will reserve the right to strike at militant infrastructure in POK if militants carry out attacks in India. This is a radical departure from the its doctrine which always threatened escalation of conflict in the Punjab and Rajasthan, if Pakistan committed aggression in Kashmir. With Pakistan threatening the use of tactical nuclear weapons, the outcome of all out conflict has become completely unpredictable.

In the past India has resisted the temptation to strike in POK because the militant infrastructure was low value, easily recreated, and would be like playing a game of whack-a-mole. What has changed is the advent of the China Pakistan Economic Corridor (CPEC). CPEC is a potential game changer for the Pakistani economy and there are huge long term implications for India in an evem closer embrace between China and Pakistan.

India's reaction to CPEC has been muted, despite the fact that it passes through POK - strictly speaking an area that is disputed between India and Pakistan. With the precedent of surgical strikes established, India will have the option to strike at militant areas of operations in POK, including those along the Karakorum highway.

This raises the risks to the Karakorum highway and hence to the CPEC. It also brings China out from behind the curtain. I would not be surprised if China attempts to stabilize the situation by bringing both parties to the negotiating table.

A new game is underway, and red lines at the roof of the world have shifted.

Mr. Modi, Winter is Coming

We are all waiting for the consequences of Brexit to unfold. Clearly the vote to "Leave" caught most pundits, media, politicians - the elites - on the wrong foot. What is also clear is that there will be much turbulence in international finance as uncertainty builds.

When the Indian government decided that Dr. Rajan need not stay on for a second term, the conventional wisdom was as follows:

• Energy prices were expected to stay depressed for an extended period of time, and would give India the relief it needed in terms of trade deficits and exchange rates.
• India's reputation had surged over the last 12 months as the lone attractive investment opportunity among the BRICS. This would attract the much needed investment for Make Ind India.
• A "normal" monsoon was expected, which would put a cap on the prices of agricultural commodities and hence inflation.

Dr. Rajan had led RBI creditably, demonstrated political independence, and restored a degree of monetary prudence and credibility to India. Challenges still remained, but India appeared to be on the mend thanks to the steady hand of Rajan, and a pro-business and pro-investment agenda of Modi and the BJP.

I would posit that Brexit has thrown a spanner in the works. I believe that in the coming years there will be remarkable fluctuation in investment flows, exchange rates, and speculators probing the stability of a host of currencies.

As the Brexit drama unfolds with possible "LEAVE UK" initiatives in Scotland and Northern Ireland, a whole host of industries in the UK will see delays in incremental investments. New projects will be put on the back burner. The uncertainty will have a cascading effect in Europe which finds itself in a bear trap of negative rates and perpetually depressed regions of Southern Europe. The engine of European growth - Germany - will oppose large monetary easing and rescue packages. Growth will slow down further in the EU zone. Whether the EU as we know it unfolds, only time will tell.

The impact of slow growth in the EU will be felt most acutely by the global engine of growth - China. With overcapacity in multiple sectors, and a bloated and debt ridden state sector, there are no easy options left for China. Short of a deep devaluation of the Yuan, China is looking at a further slowing of its economy. Devaluation of the Yuan will come at a cost - placing a huge burden on debt servicing denominated in foreign currency. Bankruptcies could happen on a scale that China has never seen. Social upheaval, and the channeling of anger into hyper-nationalist causes is a likely outcome.

A devaluation by China will likely spark a whole host of devaluations by other developing countries to maintain competitiveness. We will also see new protectionist barriers to stem the flood of Chinese goods.

While oil prices are expected to stay low as the world economy slows, terrorist incidents in the Middle East could lead to major spikes. The bonanza from low oil prices could be short lived.

On the local front, a "normal" monsoon in India is far from certain. Inflation has started to rear its ugly head. While India has adequate agricultural stocks, its ability to store and distribute them efficiently has always been a weakness.

Given all this, what India needs is an RBI governor such as Dr. Rajan. He is regarded as one of the most competent central bank governors at the present time. It is a colossal mistake for Dr. Rajan to be allowed to bow out from the scene at this critical juncture.

Mr. Modi, Winter is Coming. You need Dr. Rajan on the India team.