Amazon vs Walmart in India

The war for the future of the retail trade in the world is going to be fought in India. It has happened by default, but happen it nevertheless has. The irony hasn't struck the policymakers in India as yet - they of the medieval dinosaur disposition of still not allowing foreign companies into the retail sector in India. If that makes your head reel, then this is India, true to its form.

Globally, Walmart (the old incumbent) and Amazon ( the not so new disruptor) have been itching for a gigantic fight for a long time. In the US, Walmart dominates in store and Amazon dominates online. There it is a fight between one form of retail trade and another. Not a headlong fight. In China, which would have been the logical war zone, both have failed against domestic competition - not least because the playing field is not level (actually tilted a full 90 deg). Hence India, by default, has become the battlefield.

It actually is peculiar that India is the chosen fighting arena. This is a country where foreign firms are still not allowed to open a store in India. You need domestic partners. Every rabble rousing politician has demonstrated and agitated in the past against allowing wicked foreigners into the retail trade. Most of India's retail trade continues to be the mom and pop store. 

Amazon was the first to enter. Amazon.in is now globally second (distantly) only to Amazon.com in the Amazon universe. E Commerce is still minuscule in India but given India's size , even minuscule is big. Amazon has been pouring money into India, adopting the time tested formula from the US. Their competition was Flipkart, a local E Commerce provider. Now Walmart is acquiring Flipkart. This will now become an all out battle between the two for the online market . Right now Flipkart and Amazon.in are close in India with Flipkart being the marginal leader. With the acquisition, Walmart will now be bigger online than Amazon in at least one country.

I wonder what the other global majors are thinking about all this. Carrefour and Tesco, the old European giants, are not present here at all.  OK Tesco is , via a joint venture, but you would be hard pressed to find a store. The newer European upstarts Aldi, Lidl, et al, can't point to India on a map and so, have not come. The Chinese, notably Tmall and JD seem to be interested only in slugging it out in home territory. Alibaba is of course more global in outlook, but they are  in the B2B space. So its just the Americans wanting to fight in India.

Where is the famous Ramamritham in all this. How come none of the rabble rousers are yelling their heads off against evil Americans ? The truth is that both Ramamritham and the political worthies are old foggies. Neither know how to switch on a computer, let alone how to buy anything online. Events have overtaken these dinosaurs before they have realised what's happening. The same thing happened with the Indian IT industry a couple of decades ago. The only way to beat Ramamritham is with something he does not understand.

So now the war will begin. This blogger is salivating at the prospect. You see, he is a piddling customer of both Amazon and Flipkart. "When elephants fight, it is the grass that suffers",  goes the old saying. I beg to differ. When these two elephants fight, it will be the grass that will flourish. I am looking forward to all the lovely deals and freebies !

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Learn from history - Steel tariffs don't help

The US has been there before many times. And yet they do it again and again. Granted that logic and thoughtful action is not a feature of the current US administration. But still, you would have thought they would have read up what happened when they tried it last time.

I am referring to the announcement today that the US plans to impose a tariff of 25% on steel imports.

George W Bush tried the same tactics in 2002, with an eye on the same political prize - voters in Pennsylvania and West Virginia.  He imposed 8-30% tariffs on imported steel . At that time the target was European steel. Europe promptly took the US to the WTO and won sanctions of  some $2 billion. More tellingly, the politically astute European Union threatened retaliatory tariffs on oranges (goodbye Florida votes) and cars (ta ta Michigan votes).  Meanwhile steel prices in the US surged, screwing industries that buy steel. A later study concluded that 200,000 jobs were lost in the US as a result.  Bush retreated and called off the tariffs in 2003.

His father George HW Bush , and his predecessor Ronald Reagan tried various forms of it too. Reagan famously tried quotas on cars (at that time the target was Japan). The end result of that was that car prices went up by $1000 between 1982 and 1984 and the auto industry actually lost 60,000 jobs as a result of the quotas.

Obama indulged in steel tariffs too. His target was China. But that administration did it selectively - huge tariffs, selectively on products and against companies from China that were dumping.

It is not clear what the current administration is trying to achieve. Presumably their target is China , the current bogeyman and indisputably the cause of depressed world steel prices because of overcapacity. But China exports not much steel to the US possibly as a result of the Obama era actions. It is the 11th largest exporter to the US occupying a small portion of US imports - even India is above it in the rankings. The biggest exporter of steel to the US is Canada, followed by Brazil. Is the US trying to screw Canada ?

Why pick a trade war with Canada of all the countries. The US has a  deficit of $ 12 bn in goods and a surplus of $24 bn in services on a $ 700 bn two way trade. Overall the US has a surplus with Canada. And you want to provoke a war with them ? Yes, the current administration has launched a war on NAFTA, but even by that perverted logic, the target must be Mexico and not Canada.  Canadians are not fools . Selected tariffs from Canada  on Vehicles (bye Michigan) and Agricultural Produce ( adieu Ohio) and we are back to reliving the George Bush experience.

Albert Einstein is famously quoted to have said " The definition of insanity is doing the same thing over and over again, but expecting different results.” But to avoid that, you have to read history to determine what has been done before. Well, in the current administration, reading history is too much to ask. They would make a "yuuge" improvement if they could just begin with reading !

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In defence of TPP - Secrecy in Negotiations

One of the biggest criticisms of the TPP in the US has been that the negotiations with other countries have been carried on in secrecy by the US government. US politicians have been falling over to yell themselves hoarse against this. When Wikileaks published confidential negotiation documents in their expose, there was much ballyhoo of how evil the government was.

Stuff and Nonsense. (The Queen would appreciate this remark !!)

I have not read Wikileaks and the very fact that I, an outsider sitting a million miles away with no access to any negotiating document, is able to write this series should be ample evidence that there is no Fort Knox secrecy. The principles with which the US (and every other country) are negotiating are well known and have been well known for years. None of the contentious issues are any different from what the US has been stating and signing in bilateral agreements for the last 20 years. Neither is any of this different from the positions the countries took in the Doha round of  the WTO. The arbitration clause I referred to three posts ago has been touted as a major googly being slipped in secretly through the back door. Bullshit. It has been there in every US bilateral agreement for years. The principles and the US stand have all been open and perfectly well known. You may agree or disagree with them, but you can't say they are secret.

What has certainly been kept secret are the details, the fine print and the negotiating documents. Yes, I know, the devil is in the details. In fact there is an unprecedented levels of security including telling pompous US Senators that they can't take notes - a tactic designed to exploit their infantile memory. You can disagree with this level of secrecy, but it is at least understandable. Negotiations involve give and take and involve messy compromises. When they are made in the glare of publicity, no agreement can be reached at all. Nobody negotiates under the glare of television cameras. Single issue activists and voluble gassy politicians (you know who I am referring to) will pump money lobbying and make so much noise that no agreement is ever possible.  For example the US is currently leaning towards accepting agricultural tariffs being retained in Japan with a quid pro quo that tariffs on Japanese automobiles will also remain in the US. This is an ugly compromise, but there is no way any deal is possible without bowing at the sacred altar of Japanese rice. As it stands the American sugar producers are vigorously lobbying for TPP (since it will protect their domestic subsidies), while the US Chamber of Commerce is furiously lobbying against and are being egged on by Australian sugar exporters. This is just on one minor item - sugar. Imagine the chaos and cacophony if every lobby group were to be shouting at 10000 decibels on Clause 4a, subsection ii of a negotiating document. We might as well not attempt any agreement at all. Anybody who wants negotiations in the full glare of publicity is either a cynical manipulator with a huge self interest or has never done a negotiation in her life (notice the gender).

The second big  controversy is the granting of fast track authority to the President to negotiate trade deals. Fast track gives authority to the President to negotiate a trade deal which Congress cannot subsequently amend or filibuster - they can either approve in toto or reject in toto. Predictably, the biggest noise on this is coming from the good lady. Of all the self serving and pompous stands, this takes the cake.

Firstly the fast track procedure is nothing new. It has been in existence since 1975. Successive Republican and Democrat presidents have been granted this power. This is not some Obama evil invention.

Secondly how, and with who, does any other country negotiate with the US ? You only negotiate with somebody who has the power to negotiate. Who is that person in the US ? What is the use of spending 3 years negotiating with the President when after a deal has been reached, 100 Senators and 435 Representatives can then amend at their will. This is the US Congress which can attach completely unrelated amendments to any bill - they of the crowning glory of killing a human trafficking bill by attaching a clause on abortion. So if the President cannot make a commitment on behalf of the US, then who can ? Does Japan have to negotiate with 535 Congressmen ? Or with a committee of Congressmen ? - imagine negotiating with an American team comprising of Elizabeth Warren, Ted Cruz,  Bernie Sanders and Eric Cantor !!!!!! There is no greater laughable concept than that.

I will conclude this series with an appeal to the Americans I know. You have elected a President. Give him some credit - he is not a traitor selling off Mom and Apple Pie. Sure, disagree with any policy, but be prepared to negotiate and make compromises with the rest of the world . Do not listen to Elizabeth Warren and Ted Cruz - both the loony left and the rabid right will lead you to a hell hole. Not only are they unhinged, they act with zero responsibility. Weigh the pros and cons of any policy in total - there are always positives and negatives. It is easy to throw out any initiative simply because you strongly disagree to a single clause.

The TPP may not be the best deal ever. It is however not a bad deal. It is to America's benefit. You have been the champion of free trade in the world. Your own prosperity arose because of your commitment to enterprise and trade. The world has grown following your footsteps. Do not kill your greatest strength.

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In defence of TPP - Environment and Intellectual property

In this post I'll tackle the  issues raised against the TPP in the areas of environment and intellectual property.

The opposition to the TPP from environmental activists comes from two contradictory positions - one is that any promotion of trade and economic activity leads to degradation of the environment and therefore must be stopped. The second argument is that the TPP does not go far enough to make environmental and climate change issues at the heart of any trade deal.

The first argument is not worth debating, for it is a loony left idea that deserves contempt. Denying the opportunity of economic advancement to the world's poor should be treated as a crime; for that is what it is. It would be far better if these activists were to specify how growth can happen with minimum effects on the environment (for eg what energy sources could be acceptable) and what the trade offs and choices should be. This they do not do and simply oppose everything. Such a position is not worth a shouting match.

The second argument is worth serious consideration. The US over many bilateral trade agreements has been pushing the following principles

* A binding agreement that countries would not lower their environmental standards in order to attract investment

* That their obligations under other multilateral climate control agreements would override any provisions of the Free Trade Agreement

* A long list of prohibited activities - like logging, deforestation, trade in wildlife, etc

In the TPP negotiations, the US is actually on the defensive as internally the Republicans will block any deal that contains significant provisions on climate change. Countries like New Zealand and Australia which are far more advanced on climate change issues are pushing for tighter provisions. These will have to be negotiated through, but given that the US is such an important player, it is unlikely that they would be able to do much progress. The activists are right to push for greater environmental standards. But the TPP is the wrong place to fight this. They should force the US, which single handedly screwed up the Kyoto Protocol, to come with an alternative.

I approach the second issue of intellectual property rights with some trepidation as that would mean arguing with Medicines Sans Frontiers (MSF) , a saintly organisation, which I am neither competent nor entitled to do. The issue is primarily of patent protection to pharmaceuticals. The US would like patent protection similar to what it has inside its own country. This would mean high prices for drugs for a long time in other countries and inhibition of development of far cheaper generic drugs. As this would disproportionately hurt the poor, MSF has been objecting to patent advancement through Free Trade Agreements. It is a difficult and thorny issue on which there are no easy answers . I am ducking this issue as this is not a big issue with the opposition to the TPP in the US, which is the prime theme of this series of posts. To its credit, the US negotiating team is trying to promote the principle  of "active window" - a period of time which would be longer for developed countries and shorter for developing countries when patent protection would exist and after that the country would be free to promote generics. That might be the best compromise.

This is probably an easy post - neither of these issues are ones on which US politicians should  kill the TPP. Despite the lunacy of a not insubstantial number of US politicians, this is unlikely to happen.

Tomorrow I will conclude this series with examining the secrecy surrounding the negotiations which is common cause made both by my good friend and Elizabeth Warren !!

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In defence of TPP - the arbitration clause

One of the big issues in a trade relationship involving multiple countries is what happens if a country unilaterally decides to ban a product, or raise import duties astronomically, or take a similar form of unilateral action that dramatically affects the viability of a foreign investor's project. This might go against something that the government itself contractually agreed with the investor. What does the investor do.

The investor can take the government of that country to court, but in many countries of the world  there is no hope of winning, or it would take years in court. After all a government can simply change laws retrospectively (as India often does) and the courts can do little else but enforce them. It is precisely for this reason that the United States for many years has been insisting on independent forums for resolving Investor-State Disputes (ISDs). The US position has been that the legal system of every country outside the US cannot be trusted and therefore there must be an independent mechanism for resolving disputes. In current bilateral trade agreements with 5 of the 12 countries in TPP, the US already has ISD clauses.  In recent years the US has an ISD mechanism in every trade agreement it has signed, bar the US-Australia one. In fact the biggest opponent of the ISD clause has been Australia, rather than the US. In a blatant double facedness, Australia has ISD clauses in trade agreements with developing countries, but refuses with developed countries.

The principle is not new either in the commercial arena or in governmental ones. Every commercial contract has arbitration clauses - parties submit to the jurisdiction of arbitrators rather than courts. This is both cost effective as well as time saving and is universally used in commercial contracts. There are well established global rules governing arbitration - the "capitals" of arbitration being London, New York and Singapore. If each commercial dispute came to the courts, the judicial system in every country in the world will come to a grinding halt - it is partly for this reason that courts themselves encourage arbitration.

It is therefore rich for US politicians, and especially Elizabeth Warren to argue against the ISD clause on grounds of loss of sovereignty. Firstly it is the US itself over successive Republican and Democrat administrations that has championed this principle. Secondly it the US which is usually the gainer in such matters - for example it prevents countries from outrightly nationalising companies and industries, as say for example, Argentina is wont to do. 

Two cases are often used to illustrate how "greedy companies are milking countries" - the Veolia Egypt case and the Philip Morris Uruguay case.

Veolia , a French firm was executing a project to reduce greenhouse gases in Alexandria in Egypt. The firm executed a contract with the government whereby the government would compensate the company for cost increases because of governmental action. Egypt then raised the minimum wages in the country and Veolia then took the Alexandria authorities to arbitration for compensation for rising costs. The matter is in dispute and has not yet been decided. This is a contractual matter and the spin that Warren & Co are mouthing that this is a corporation suppressing minimum wages in a poor country is pure balderdash.

The Philip Morris case is more nuanced. Uruguay passed laws requiring that 80% of the pack contain graphic images and the risks of smoking. It raised taxes, banned advertising, and sponsorships. Philip Morris took this to arbitration on the grounds that this makes it virtually impossible to do business. The matter is yet to be decided. Uruguay is a signatory to an ISD arbitration and hence this came up before the arbitration panel rather than the courts in Uruguay. There  is no evidence that just because it has gone to arbitration  the ruling would be "unfair" or "unjust".

As a consequence of this case, in the TPP negotiations, the US has sought to prevent misuse of the arbitration clause by recognizing each country’s “inherent right” to regulate for health and safety. This will probably get incorporated into the final deal so that unilateral action by governments on grounds of health or safety  cannot be legally challenged.

As far as the US is concerned, the TPP provisions are no different from the existing situation it already has in some 50 odd agreements.  So why all this noise from Warren ? The noise is not because she has a better mechanism for dealing with an investor government dispute. It is in reality because she is against globalisation & trade. That is a different argument and battle.

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How about a WTO deal inside India

If you can get 159 people to agree to anything, you must be a magician. Well, Roberto Azevêdo, did just that. The Brazilian is the Director General of the World Trade Organisation and today 159 countries agreed to a treaty. For years and years, nothing but bickering has the been the result - in Geneva, in Seattle, in Cancun, in Doha.  But at last in Bali today, something has been signed. Modest it may be, that will set common customs standards and ease the flow of goods through borders around the world. But to get all 159 countries to sign up (even one could scuttle any deal), is a major achievement.

They almost didn't. The chief spoiler was India - at the end of the negotiations, virtually every country was pissed off with India. India was threatening to veto the deal on the issue of its programme to feed 75% of its population at subsidised rates (the unfortunate Right to Food Programme).  India's stand in most multilateral forums is to shout loudly, be a spoiler, pontificate, and in general be a nuisance. Such a position was usually the role of the United States, which remains very good in pontificating. But in the last decade, the developing countries have been big noise makers - none more so than India. At the end of the Bali round, Anand Sharma, India's Commerce Minister is not going to be very welcome in most parts of the world. But finally he did relent and India signed too.

A global free trade agreement is in everybody's interests, although the loony left usually rail against any form of globalisation. Most countries have come to realise the value of free trade, except for the problem that they want it to be free when it suits them and want to shamelessly protect when they encounter some lobby or the other. One of the chief culprits is the self appointed bastion of free trade , the United States. It champions free trade to other countries, but has horrible market distorting subsidies in a wide range of industries - chiefly farming. So does the EU. Both of them want free trade, but do everything in their power to stop free movement of services - the draconian visa restrictions is as trade blocking a move as any customs barrier. India wants the US and everybody else to let it freely export IT services (the one thing it is good at), but refuses to import say wheat or onions . China wants to export to the world, but will not allow foreigners anywhere near banking, insurance, etc. Everybody is protecting special lobbies and screwing the consumers in the bargain - the consumer has a right to the best and cheapest product, wherever it may originate from and yet governments do their best to block this, citing the need to protect some powerful lobby, usually of the rich.

It is not this blog's intention to make the case for free trade - it has been well made by far more illustrious men and women.  In any case, no rational argument is going to convince the loony left and the rabid right - so why even try ? This post instead is going to plead for a "National Trade Organisation" inside India itself. If you thought there is free trade inside India, you are grossly mistaken. Each state draws it boundaries, and the sight of the long queue of trucks on the state border is enough to tell you that every possible block is made on the free movement of goods. The honourable lady in charge of one of our Eastern states went even to the extent of banning the movement of potatoes from her state to the North East recently, ostensibly to reduce potato prices in her state. She was literally playing with a nuclear bomb - first of all her act was grossly unconstitutional and secondly if every state decided to copy her, what will become of India.

For years, India has been trying to implement the Goods and Services Tax - a common indirect tax regime across the country.  Nobody can get the States to agree (although I am sure none of the honourable finance ministers of any state can cogently argue why he is opposing this ). BJP Chief Ministers are the chief blockers although the idea itself came about when Vajpayee was the Prime Minister and the move was a BJP brain child. Freeing up the state borders will do wonders to India's economy. The only person it will hurt is Ramamritham - and he along with his political masters are doing their best to block this.

Mr Anand Sharma is not going to be very welcome outside India. Maybe he may want to sit in Delhi and try and get a national treaty signed by all states. After all, there are only 35 states and union territories. And if 159 countries can agree to a treaty, surely 35 states  can. Oh I forgot. In the WTO, there is only 1 India - Inside,  there are 35 India types, each worse than the other. Fat chance of a deal.

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Blimey ; what a spectacular trade deal

The sight of David Cameron, prostrating himself flat at the feet of the Chinese "emperors" is a beautiful reminder of the state of affairs of the British Empire. To understand the context, about a year or so ago, David Cameron had the temerity to meet with the Dalai Lama. Now anybody who even smiles at the Dalai Lama is a pariah  as far as the Chinese government is concerned. David Cameron committed the unpardonable sin of actually shaking His Holiness's hand. China promptly condemned UK to the doghouse - no meetings, no trade deals, no investments, etc etc. For one year, the naughty schoolboy was made to stand outside the class.  After a year of punishment, he has been allowed inside again.

Promptly the Rt Hon'ble Prime Minister has taken a big delegation and gone straight to Beijing, to do Shashtang Namaskar (Indian way of prostrating at one's feet). It is as yet unclear as to whether he did "Abhivadiye" as well :) No less than 130 other luminaries accompanied the Prime Minister , no doubt to clinch innumerable trade deals (rumours to the effect that they have gone there to sample Peking Duck are strictly untrue).

I have been scouring the newspapers as to what sort of trade deals these worthy leaders of the British Empire have struck. Only one real deal has been reported so far. Britain will now be able to export pig semen to China.

Until now, Britain was unable to export pig semen to China, because apparently Chinese sows had concluded that their would be British  suitors, er, rather smelled. China did not want its dainty damsel sows, "polluted" by laowais.. The British Prime Minister and his 130 strong entourage succeeded, after marathon negotiations, to convince the Chinese that British pigs did not smell. The clincher was achieved when it was pointed out that suitors would not travel to China, but instead, er, only the manifestation of their manhood, would .

Animal Rights activists perhaps protested that it was unfair that Romeos and Juliets were not allowed to coo sweet nothings personally, before being asked to maximise "production". Such protests were firmly quelched - on the Chinese side, by rounding up the entire lot and sending them to the 114th People's Prison in Hohhot, Inner Mongolia, and on the British side by Sir Humphrey Appleby proclaiming that for services to country and Her Majesty, the aforesaid love deprived pigs would be awarded the Order of the Thistle and Garter (2nd grade).

It is  well known in knowledgeable circles the the male species amongst China's various living organisms are rather less well endowed than their counterparts from the West. Now it has been expertly opined that British pigs were capable of producing 30 piglets a year, whereas the Chinese cousin could only manage 16. Pork is the staple food of the Chinese, and the fact that the Chinese were prepared to overlook the insult to their manhood to satisfy their bellies, is proof that the stomach is mightier than the organs further south.

The British are crowing about this trade deal saying that it will generate some £45m. It is unclear as to whether the great and mighty British empire has fallen to such levels where the aforementioned sum is considered "big". I suspect it is the affirmation of the superiority of British manhood , albeit of the porcine variety, that has made the British crow about the deal. Well, it wouldn't be cricket to boast about the size of the matter in question (deal I mean), but in the pubs across Westminster, after a few pints, that is precisely the boast being made !

What a spectacular, almighty, game changing deal that the Prime Minister of the United Kingdom of Great Britain and Northern Ireland has achieved along with 130 illustrious subjects of Her Majesty, the Queen, traveling halfway around the world.

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The French are, well ...., crazy !

The French have an advanced case of obsession with "culture". At least the French government does - the French people are probably as willing to dance Gangnam style or shop at Walmart as ogle at the impossibly unaffordable haute couture ! The French government doesn't like American soap, doesn't like English words stealing into French, doesn't even like their steel company to be bought by foreigners. Now they are picking up a new fight. They want to protect French book stores against  big bad Amazon.

The fight goes somewhat like this. Apparently small book stores are an integral part of French culture ! As with everywhere else, small bookshops are going out of business. The first threat came some 20 years ago with the arrival of the supermarket chains selling books. Promptly the French parliament passed a law "limiting discounts that can be given on books".  This was to protect the 2000 odd book shops in France so that they can continue to charge high prices and the supermarkets could not go below them. Then came online retailing. Everywhere else in the world books are largely being bought, if at all, online. France is no exception. Enter the chivalrous MPs in the French Parliament. They are now decreeing that online retailers (read Amazon) cannot offer free delivery - they have to charge so that they can be conveniently more expensive than the local book store.

In a mind boggling assertion, Christian Kert, the parliamentarian who sponsored this bill asserted that "The (book pricing) law is part of our cultural heritage" !!! The bill passed unanimously - now anybody who knows France's politics knows that nothing can ever be unanimous - not even free sex. But the "Screw you Amazon" bill passed unanimously. Wow !

Economics is not necessarily the strong point of French law makers as has been amply demonstrated over the years. It is not even their weak point - it simply does not come into thought at all. To protect 2000 geriatric stores, the lawmakers are willing to piss on millions of consumers. Governments are supposed to protect consumers, not mollycoddle long in the tooth producers. 

Notice how the "culture" that the government wants to protect is often what the French people themselves don't care about. French food, French wine, French fashion,  are all conquering the world with no assistance needed from the government, thank you very much. But French pop  music sucks; so mademoiselle dutifully listen to One Direction ! The government is outraged and passes quixotic laws unanimously.

The French deserve better. Their entrepreneurs, businessmen, workers are amongst the best in the world. There are great aspects of French culture (including shutting everything down in August !) that will thrive , not because governments are protecting it, but simply because people like it. There are other aspects of the culture, that should die, because they don't appeal to people anymore. There is no such thing as a static culture. Cultures evolve and so they should.

Thankfully, I never go to  a bookstore in France to buy books. For that matter, I am willing to bet, neither does M Christian Kert. Some smart TV reporter should ask him when he last bought a book and what the title was. His response may put the redoubtable Sarah Palin to shame !

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Grow, baby, grow - all the guar you can

I don't know what to make of this story. An economics soap opera ? How the most unexpected things can happen  ? How sometimes prosperity can hit you from the strangest of directions ? Read on - judge for yourself.

The story starts in a very boring manner. Everybody knows Americans guzzle gas. With the Sheikhs turning the screws, Americans are feeling the pinch. Ouch - the price of oil is hurting. Drill baby drill, is fine, but oil is, alas, not to be found. Need new forms of cheap energy so that Americans can continue to guzzle away. Suddenly they discovered a new "source" - Shale gas.  Apparently natural gas is  found in rocks called shales. And apparently shale gas is rather plentiful in the US. Wonder of wonders, use of shale gas even releases lower greenhouse gases than evil Oil.. Voila, the new gold rush is on. 

All very good. What's new. This sort of thing happens all the time. The real interesting bit is that, in order to extract this gas, you have to do "hydraulic fracturing" or "fracking". Without getting too technical, an essential ingredient in this process is an obscure agricultural product called guar gum. You simply can't extract the gas without guar gum ! Guar gum is derived from the , rather ordinary, guar bean.

Cut to Basni, on the outskirts of Jodhpur in Rajasthan state in India. This is a drought prone area, near the desert. The sight of fat , sweaty Americans is not new in this area as they come to tour the Thar desert and see the palaces and forts of Rajasthan. But suddenly the villagers started to see far more Americans than usual. This lot was different. They did not want to see forts or palaces. They wanted to buy all the guar you had !

You see, Rajasthan is the guar producing capital of the world. The farmers here are mostly poor - this is after all desert area. They have been cultivating guar for centuries to feed their cattle. For some strange reason guar doesn't grow well anywhere else in the world. 90% of guar is grown in India - the balance 10% in neighbouring Pakistan. Some 70-80% of guar in India is grown in Rajasthan.

It was, as if, money was raining from the sky. Guar used to sell at Rs 10 a kilo. At Rs 40, the farmer made a nice profit.  In December last year it touched Rs 70. And in March, this year,  it touched an impossible Rs 300 !!

Farmers who were in debt , or dirt poor, are suddenly seeing untold riches.  They've built a house. They've bought colour TVs. Two wheelers are plentiful - even the odd car is seen. Thousands of farmers have suddenly been lifted out of poverty into, what for them, is a quality of life they could not have even dreamt about. Guar gum is suddenly, back gold. The largest Indian agricultural export last year by far, more than basmati, more than cotton, was guar gum !

Of course, it has all the makings of a stampede. Everybody, man, woman and dog, is trying to grow guar.  Factories have sprouted adding crazy capacity to extract gum from the guar beans. Traders, middlemen and the usual scoundrels have descended to trade on the guar market - there was so much of the Wild Wild West going on that the government has banned the futures market in guar.  There has also been much stockpiling by the energy firms that the next season demand for guar might plummet. Lots of punters will burn their hands.

But for the next few years at least, the trend is inexorable. Shale Gas will be an important source of energy in the future. The largest reserves are in China, another energy guzzling economy. Nobody has yet found a way to extract this gas without guar gum. Nobody has also found a way to grow this economically outside of Rajasthan. So there is much prosperity waiting in store for the agriculturists of Rajasthan. Its a great story - those hardy souls deserve every bit of it. However you could be forgiven for some rather puzzled faces as to how come money is raining from the sky when even water doesn't. And the even more puzzled stare of their cow which is wondering, whatever happened to the guar bean it used to chew contentedly, not so long ago.

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Ramamritham rules

Alas, Ramamritham is alive , well and strong and he rules upon all that he surveys (pun intended).  The Indian Government will announce today in parliament that it would open up the retail sector to foreign investment. No doubt the Left will organise some bandhs, yell at 10,000 decibels in the Lok Sabha, and then this law will be passed while the opposition will walk out en masse.

Ostensibly, this is economic reform. Its a pathetic, 15cms of reform after a decade of nothing happening, but we'll reserve that criticism for another day. What has got my goat is Ramamritham's dirty footprint all across this move.

Firstly foreign investment of 100% will be allowed in Single Brand Retail, but only 51% in multi brand retail. Therefore a Marks & Spencer store can be 100% foreign owned, but Carrefour can't. Even though they may both sell precisely the same things (M&S does sell a lot of food). Pray why ??

Secondly Ramamritham has excelled himself in drafting a series of conditions for allowing  even this. Look at some of them

• The minimum investment is $100 m. Where he got this figure is unclear. Why not $82.5 m? But at least we can live with this
• 50% of this $100 m has to be invested in "back end". Then our venerable hero has gone on to clarify that land, rentals and front end stores will not count as back end. No doubt detailed rules on what is back and what is front will be framed. (here is conclusive proof at last that Ramamritham doesn't know his front side from his back side) Lobbyists will work very hard to get IT systems included in back end. But R will qualify that Microsoft Office will not count as back end. Many months of fruitful work and litigation awaits.
• 30% has to be sourced by these companies from small scale (completely irrelevant if the product is rubbish and the consumer does not want it) No doubt a front small scale company will be set up who will buy the stuff from a big company and then sell it to the retailer to fulfill this quota. R being very smart will then draft rules to stop this. The retailer being equally smart will get a small scale company to buy from a small scale company to buy from a big company ....... and so on.
• Stores can be set up only in cities with 1 million population. Lobbyists will work to reduce this number to half a million. They will then lobby that last year Gummidipoondi crossed 1 million population and that R should not wait for another 10 years for the next census but instead pass an interim order allowing the store to be opened there.

How can we get this into Ramamritham's thick skull that we don't want him deciding what is good or bad for us as consumers.  Or for the small Indian retailer who he is trying to protect with such quixotic rules. The Indian retailer needs no protection. He is quite a formidable force. Its by no means certain that small retailers will vanish just because Walmart came in - in India the economics of the retail industry, especially the relative high cost of real estate,  is such that this is very unlikely.

In any case, how about letting the consumer choose. Rajalakshmi will vote with her feet and purse. She will buy where something is cheaper, better and where she likes to go. She deserves that freedom. Ramamritham should be booted from blocking the way.

PS : For those new to this space, Ramaritham is the mythical, fictional bureaucrat who takes orgasmic pleasure in framing complex, unnecessary and useless rules in order to make lives miserable for ordinary members of the homo sapiens species.

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Fairer trade or freer trade ?

“This house believes that making trade fairer is more important than making it freer” – this is the current live debate hosted by The Economist here. This blogger is a complete and unabashed fan of The Economist and subscribes to the view that it is the best publication in the world. The Economist debates are a fascinating discussion of very relevant issues and it would be difficult to find as interesting a debate on economics as between fair trade and free trade.

The context must be clearly understood. Despite all the tall claims made, the world is nowhere close to free trade of an acceptable sort. The bastions of free trade are all fiercely protectionists in their own areas – agriculture in both Europe and the US, and pretty much everywhere else in the developing world. Everybody wants free trade in other’s homes, but not in their own backyard. Tariff and non tariff barriers abound. The crawling pace of the WTO talks, which go on for decades is testimony to this, although it has to be said much has indeed been achieved.

Ranged against free trade is an assortment of all sorts of constituencies, ranging from noble social organizations to bleeding heart socialists. Their noise making capability being much higher, free trade is being tainted as a four letter word and blamed as the originator of much misery. Arguments against free trade range from exploitation of workers in the poor countries, loss of jobs in rich, threat to way of life in all sorts of places, inequality, etc etc. There is some merit and much bunk in these arguments.

What is fair trade anyway ? Fair to whom ? Fair to the producer or fair to the consumer ?

The value free trade has brought to so many millions of people is often not given the credit it deserves. Prices of almost every good or service is lower because of free trade and competition. Producing something in the best place it ought to be produced, makes both quality and price better. While the opponents of free trade propagate the cause of the producer (the poor French farmer who will lose his French way of life if the big bad beast of free trade is unleashed), nobody propagates the right of the consumer ; why should the average Pierre on the streets in Marseilles pay more to keep the French farmer in Brittany in cosy comfort ?

Think about this. All arguments of protectionism are made by people unable to compete. If they could compete and win, they would not be scared of free trade. They are scared of free trade because they do not offer the best cost quality equation. Therefore they want the guy who offers the best deal to be kept out because only then can they survive. So they want some poor sod of a consumer to subsidise them. For every compromise somebody makes on free trade, it is the consumer who is jacked.

This is an opinionated blog, of course. This blogger believes that the only fair trade is free trade.

But read The Economist's debate. The excellent Ngaire Woods makes a powerful argument for fairer trade. As does Prof Jagdish Bhagwati for free trade. I am delighted to say that at the time of writing this piece, 52% of those voting agreed with me. But it is indeed true that the Economist reader is no average Joe Public. If there was an open vote amongst the population, I am sad to say that not even 5% is likely to take this view.

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