Discord and Bailouts
In this week’s
wrapup, we talk about the Saudi Aramco IPO, Yes bank, RCEP agreement, and why
our real estate industry needs rescuing.
BY FINSHOTS | 8 Mins Read
Policy
No such thing as Free Trade
The big story this
week was about the new RCEP agreement and India's decision to walk
out of the deal.
The Story
The Regional Comprehensive Economic
Partnership (RCEP) is a free trade agreement between the 10-member Association
of Southeast Asian Nations (ASEAN), and a few other partner countries. The
agreement seeks to create the world’s largest free-trade bloc by strengthening
ties and reducing trade barriers between the 16 member countries.
It’s all very simple really. With a
free trade agreement in place, Indian manufacturers will be able to ship goods
and sell them elsewhere without having to worry about, say a 30% tariff. This
way prices can remain competitive and Indian manufacturers can actually have a
shot at selling a lot of these goods abroad. On the flip side, India will also
have to open up its borders and that’s a contentious topic. But we will get to
that bit in a while.
Anyway with RCEP, India will have a
new free-trade agreement in place with 15 other countries including the likes
of Malaysia, China & Australia. And considering this little group is
responsible for close to 40% of all international trade, the RCEP agreement is
kind of a big deal.
At least, it would
have been, if India actually went through with it.
At the RCEP summit in Bangkok, Prime
Minister Modi refused to partake in the agreement. His argument was that India
had been proactively contributing to the RCEP discussions in the hope of
pursuing a mutually beneficial outcome. But he felt that the current agreement
did not fully reflect the basic spirit of free trade, and that it did not address
India’s outstanding concerns satisfactorily.
Wait, what concerns?
For one, opening up the country’s
domestic markets has repercussions. Imagine cheap Chinese goods and
agricultural produce from Australia and New Zealand flooding Indian markets. It
would obviously hurt local producers. So India wanted a tariff structure that
wouldn’t exactly open the floodgates.
Yes, we are going
to open up our borders. But the tariffs can’t be too low. That's the mantra
here.
Also, RCEP countries account for
almost 27% of India’s total trade. However, India imports more from
RCEP countries than it exports. Economists call this — “running a trade
deficit”. Ideally, when you open up your borders you would want to reduce
the deficit and help boost the country’s export engine. But here’s the thing,
China alone accounts for over 60% of the deficit and the “Red Dragon” isn’t
like other countries. It’s very hard to export to China, even if you had a free
trade agreement in place. For instance, most of our exports are service-based,
like IT. But services don't factor prominently in these trade agreements. So
how does one expect India to bridge the gap?
And even if it did, how would India
contain the free flow of goods coming in from China. In fact, we already
predicted such an eventuality and wanted safety measures in place. The idea was
to include an auto-trigger mechanism — so when the volume of imports crosses a
certain threshold, safeguard duties would suddenly kick in to contain the dump.
Unfortunately, we couldn’t get the member countries to budge
And finally, even if all our concern
were heard, this would still be a bit of a gamble. If the deal didn’t work
miracles within a year or two, the political repercussion would be
unimaginable. For the BJP, that is.
So we are out of
the deal, at least for now.
But then that begs another question.
If we were relatively certain that we couldn’t negotiate better terms. Why did
we pursue it for so long?
Well, we can’t say for sure. However,
it's possible that India was holding its cards close to its chest in the hope
that other countries would pressurize China into accepting India’s terms. India
is a big market and without India, this whole RCEP thing looks a bit like a
damp squib. So maybe we thought we could get member countries to come around?
It’s possible.
But for now, the remaining 15
countries have concluded text-based negotiations and are ready to sign the pact
(maybe next year). And if India’s issues are resolved at a later date, maybe we
can still be a part of this deal. But until then, we wait and watch from the
sidelines.
Policy
The H1B Visa Denials
So, a recent study found out that
denial rates for H-1B visas have been on a steady rise — from a mere 6% in
2015 to around 24% in recent times. And this has upset thousands of Indian tech
workers.
Why? you ask.
Well, for the uninitiated, the H1B
visa is a golden ticket to paradise. If you’re qualified enough and can get
your hands on one of these bad boys, you can live in America, work in America
and even apply for a green card (permanent residential status). However, of
late, with denial rates picking up, Indian tech workers seem to be left behind.
So, what happened?
In the past, the allocation of H1B
Visas was done based on a lottery system. Meaning if there were 85,000 visas
for the taking, outsourcing companies like Infosys and TCS could theoretically
game the system by flooding the immigration office with hundreds and thousands
of applications on behalf of their employees. This way the odds of receiving a
visa improves drastically and these companies end up taking most of the visas
on offer.
So the US immigration arm tweaked the system to prefer workers with a master's degree or
higher from a US institution. And since most tech companies hire immigrants
with a bachelor's or a master's degree from their country of origin there has
been a dramatic uptick in denial rates.
The idea here is simple. Make it
difficult for tech companies to hire immigrants at lower wages and you’ll
immediately see them hiring more Americans at better wages. This has been a big
campaign promise for Donald Trump i.e. ‘Buy American and Hire American’. And
so, the story goes that there’s been a concerted effort to ensure tech workers
are denied H1B visas without any regulatory change as such.
Anyway, for now, it seems as if we
have to just live with this arrangement. Although I feel for all the people who
are currently in a state of limbo praying for a visa extension.
Markets
The Saudi Aramco IPO and the future of Oil
The world's most
profitable company is going public and we need to talk about Oil
Saudi Aramco is the largest oil producer in the world and it’s on the verge of raising anywhere between $20 Billion to $40 Billion from domestic investors. In exchange, they’ll offer 1–2% of the company and if all goes well, Aramco could be valued at close to $2 Trillion dollars.
Woah!!!
Now, these numbers may look
outrageous. But we are talking about the most profitable company in the world
responsible for about 10% of the global oil production. So it’s not too far
fetched an idea. However, that’s where the story ends. There’s honestly not a
lot happening here. All we can do now is wait and see if investors respond in
kind to the IPO.
So what’s the story
here?
Well, instead of talking about the
future of Saudi Aramco, maybe it’s worth pondering about the future of oil as a
commodity. Maybe talk about the kind of existential things that make you
sit back and go — “Hmmmmm???”
Where are we headed with Oil? What’s
the end game? What does the future hold?
The obvious and perhaps the most
honest answer here is that nobody knows for sure. As of today, there is an
active campaign worldwide urging people to move away from fossil fuels. Climate
Change is real. Global Warming is slowly eating away at coastlines. People
can’t breathe in Delhi. So how can anyone in good conscience continue to use
oil unabated? Well, they can’t and many are having second thoughts now. Also,
you could bet that as time progresses these doubts will slowly morph into
active principles. “Go green” will eventually become a
lifestyle choice.
And oil companies aren’t waiting on
the sidelines here. Many are actively trying to reduce their dependence on oil
(for revenue). Some are looking to diversify operations. Maybe get into making
batteries? How about alternative energy — wind, solar, that kind of stuff. Or
even better, what if you could do something else entirely. Maybe get into the
movie industry? No?
Anyway, there’s a lot of uncertainty
here. In fact, when oil companies were asked to make projections about future
global demand they had a very diverse set of opinions.
Anyway, that’s the demand side of the
equation. But what about the supply side? When will we run out of oil? After
all, we don’t have an endless supply of fossil fuels, right?
Yes, we don’t… But we probably won’t
run out of oil either way.
Okay, hear me out.
Back in the ’50s, there was an
overwhelming consensus that the world would start running out of oil during the
first decade of the 21st century. However, that did not happen. Instead, we saw
the boom of new oil.
When people looked at oil reserves
back in the day they were talking about convention oil — oil that’s easily accessible.
However, as countries began to invest in technology and extract oil from
reservoirs previously thought to be inaccessible, this narrative changed rather
quickly. Granted, this was far more expensive than conventional drilling, but
it did open a whole new realm of possibilities. In fact, researchers today peg
that we’ve only tapped about 5% of all technically recoverable oil. Which means we are not running out
of oil anytime soon.
However, one day digging for oil in
these deep reservoirs will get so expensive that it won’t be worth digging at
all. People will seek other low-cost alternatives. And that’s when oil will
become old fashioned. So maybe we will never truly run out of oil. Maybe Oil
will just price itself out of the market.
As Sheik Ahmed Zahi Yamani, the
longtime Saudi oil minister and a key founder of OPEC, once said, “The stone
age came to an end, not for lack of stones, and the oil age will end, but not
for lack of oil.”
Also, we have relied on this excellent
report from Penn State to put together this story. So if you want a more
elaborate account on whether we are running out of oil, please do read the full
text