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Market Notes: Was the last week a breakout?

October 30, 2011 Leave a comment

Was the last week a breakout?

 

$Index:  From its recent top of 80.4, the $Index has corrected almost 75% of its previous surge. Last week the correction stood at 50%.  While 100% corrections are not ruled out in Forex markets, and the time charts show the correction has a week or so to go, the overall trend has been for the $Index to make higher lows since May 2011.  In all probability the price correction in $Index is over.  Time-wise, the $Index could linger in a trading range testing the 75 region.

 

Spot Gold:  Despite the huge upheaval in the world equity markets, Gold did no more than test it first major overhead resistance at $1750.  Gold’s reaction to the rest of the risk asset markets is instructive.  Firstly, Gold is no longer a hedge of any sort, if ever it was such an asset.  Instead Gold has become positively correlated to other risk asset prices particularly equity markets.  Secondly, even here, Gold underperformed other risk assets in the recent surge by a significant margin achieving only half of what other assets did.  At $1750, Gold has corrected about 60% of its fall from $1916 to $1535.  A 75% correction can’t be ruled out.  Gold is poised at a major overhead resistance level.  Safe to say Gold remains in a primary down trend and within that, it may be at a near term trading top.

 

S&P 500:  The probability that the S&P 500 has completed its correction and broken out for a retest of 1375 and beyond is very high. Having surged past its major overhead resistance at 1220 on 10/21/2011, the Index came back to test the new support 1220 on 10/25 and 10/26, and held well above it on both occasions. Since then it has pierced through another overhead resistance at 1270 and is in the process of confirming the new support.  Barring the usual corrections, the passage 1370 appears safe.  On the time charts we have a failed wave 5 as often happens in bearish corrections.  Usually it reflects an oversold market.  What it portends though is that correction following a test of 1370 or from wherever it tops out, the S&P 500 will correct slowly and retest recent lows.  In short the markets not gonna runaway from here.

NYMEX Crude:  As expected, crude turned around from its major support at 75 and is headed for a retest of its major overhead resistance at 100 that it is unlikely to breach in a hurry.  Nymex crude could mark some more time in the 75-100 trading range before it makes a decisive move either way.  Safe to say $75 is the new floor for crude over the next few years.

 

Sensex:  The Sensex has gapped through its major overhead resistance at 17,500.  Price and time corrections for Sensex were very nearly complete anyway and it preferred to surge up with the world markets.  First major target for the Sensex lies at 19,000 followed by 21,000.  Barring the usual corrections on the way up, there is nothing on the charts to suggest any major hiccup in the march up.  On the other hand, the gap at 17,500 is a huge support and is unlikely to fill up in a hurry.  That suggests, the markets will not be coming back to retest recent lows in this move up and trapped shorts had better cover at prices they can get.

 

NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions

 

 

 

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Market Notes, October 22nd, 2011

October 24, 2011 1 comment

Market Notes, October 22nd, 2011

 

S&P 500:  The critical overhead resistance for S&P 500 lies at 1250.  The Index has made 4 unsuccessful attempts at breaking past that level without success.  Standing at 1219, the Index is poised to test that critical level once again. Going by the time charts and the fact that the Index made lower low in this correction at 1156, the probability of 1250 being taken out in this rally are rather low.  However, this is probably the last dip before an intermediate rally assuming the market does turn down from 1250.

Sensex:  The Sensex has more or less completed its correction that began in January this year in terms of wave counts.  On the time charts, it should complete its corrective course first week of November.  So on price action, wave counts and time charts we have congruence indicating that an intermediate tradable rally should start sometime first week of next month.  In any case, the market is unlikely to breach the 15,500 level in this correction indicating accumulation is in order.  Having said that, the market could dip before November one more time in sympathy with world markets, which in my view, would be a gratuitous buying opportunity.  Overall, a bullish stance on the Index is advisable.

Shanghai Composite:  The Shanghai Composite Index continues to aim for 2300-2350 area in its characteristic manner disregarding news flow.  On the time charts, the Index completes its correction middle of November before a substantial rally ensues.  Note, the Index started its correction much before the Sensex in August 2009, and completes it in November.  That is a 2 year correction as opposed to a little less than a year on the Sensex.  That could indicate the likely strength of the two Indices in the next rally that comes along.

$ Index:  As expected, the $ currently stands 76.5 which is roughly a 50% correction to the sharp run up from 73.5 to 80.1 in the last rally.  It is unlikely that this support will be breached as the overall trend in the $ continues to be bullish.  75% to 100% corrections in Forex markets are common.  However from the nature of the support at 76.5 a deeper correction than already achieved is unlikely.  The $ may linger around these levels for 6 to 8 weeks before rallying further.  Don’t expect tradable rallies or falls.

Gold:  As expected, Gold turned lower from the $1700 level and is tamely headed for a retest of its recent low of $1535.  The market’s reaction to the 1535 price area will give us further clues as to which way Gold is headed.  Safe to say, the price action so far is bearish, and on the time charts, the metal has a long way to traverse.  Long term “buy & hold” bulls in the metal should keep a stop loss of $1500-1525 and prepare themselves mentally for preserving their capital.  On a breach of 1535, the price action in the metal could get ugly.

NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions

 

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How Wall Street discredited Capitalism #OWS

October 23, 2011 Leave a comment

 

Capitalism, not without its flaws, combined with democracy and free trade, has produced unprecedented prosperity and personal freedoms for more people than any other system in recorded history. We often take all three for granted, somehow assuming that the system will continue even as we rail against it when things go wrong. However, history shows that these benign conditions have prevailed but briefly. Much of our time was spent struggling under other dogmas and systems of organising economic and social activities that were sub-optimal if not exploitative and oppressive. We are at the cusp of another crisis caused by several flaws in the system. It is important to be specific in nailing these flaws, even as those responsible do their utmost to obfuscate.
Value creation is central to our notion of economic and social progress. Most of us have an intuitive notion of what value is. Like most other fundamental concepts, it is something intuitive and hard to define but we know it when we see it. So long as an individual, or an institution, adds value its utility increases and we all share the created value in varying measures. Much philosophical argument has centred on how value is created and how the process of value creation is best organised, chief among these being Adam Smith. Others like Karl Marx focused on equitable sharing of the value so created among different actors. In doing so, they largely ignored the fact that creating value is a conscious effort that needs to be incentivised because it is randomly dispersed in the population. Neither argument fully captures the dilemma inherent in the problem. While value creation is at the heart of the crisis we now face, none of the flaws rise to a level that warrants a complete rejection of what has worked so far.
Consider two traders, a bull and a bear, who disagree on the value of an iPad created by Steve Jobs at Apple. The bull bets that the iPad is a revolutionary product that will sell like hot cakes. The bear argues that you are better off with an inexpensive Windows Netbook. How do the two resolve the argument? In our system, the bull buys Apple stock from the bear. If Apple profits, the value of its stock goes up. The bull profits by the number of stocks bought from the bear. The bull’s profit is equal to the bear’s loss. Neither the bull’s profit, nor the bear’s loss, has anything to do with value created by Steve Jobs and his Apple. This is the key confusion in the current crisis.
Value creation by Apple will proceed whether or not the bull and the bear bet on the success of Apple’s effort. Neither the bull nor the bear create any value apart from offsetting each other’s profit and loss. However, investment bankers, who are really the bulls and bears in our system, would have you believe that but for them, there would be no Apple or Steve Jobs! Ergo, the value created by Apple is the same as value created by them. Nothing could be more erroneous but there is simply tonnes of ‘literature’ produced by friendly mathematically inclined economists that is keen to obfuscate the distinction between values created by Apple and that created by simply betting on the success or failure of Apple in doing so. The former adds to the sum total of society’s economic well being while the latter is a zero-sum game among traders and bankers.
Financial markets through their trading activities reflect value created by other economic entities in our system and therefore help measure it. But they do not by themselves create that value. A stock exchange is a poor substitute for a power plant in generating electricity. This is not to argue that there is no value created by liquid and efficient markets of which the bulls and bears are an irreplaceable part. But this value creation is much like that created by any other economic entity in the system and needs to be measured accordingly. One cannot impute all value creation to a mythical market. Yet that is precisely the dogma subtly preached by the clutch of investment bankers that so dominated Wall Street. How and why did this hype rise above the marketing literature of investment banks is a subject for study.
Third world governments, including that in India, are neither known for financial integrity nor fairness. Many have spawned corrupt banking systems. Over and above that, such governments have designed many ways to tax and pre-empt public savings in banks to finance foolhardy welfare schemes. All these practices led to huge capital flight to banking systems abroad that were seen to be better at preserving value for depositors. Often such capital flight was just to escape extortionate hidden taxes by themselves and not so much to earn better returns abroad. International banks mushroomed to capture such flows. These flows formed the nucleus around which private baking began to command a humongous deposit base that could be deployed around the world in financial markets.
Meanwhile, commodity markets were dominated by a few oligarchies based in the former colonial powers. They were partnered by trading desks at the investment banks in Wall Street to gain more pricing power. The whole commodity chain from mining to warehouses to metal exchanges was a closed loop dominated by the Wall Street investment banks that indirectly controlled huge stakes in each of the links in the chain. The commodity boom that began in the 1990s provided the supernormal profits to fuel this conglomeration of interests. The US saw the investment banking interests as one way to consolidate its soft power in world markets in much the same fashion as the British did through London before World War II. From interest rates set by the Federal Reserve System (Fed), to commodity financial asset prices, the whole chain came to be dominated by a clutch of investment bankers that were fully backed by the world’s only superpower.
When the bubble burst in 2008, it turned out that one part of Wall Street — the investment banks — had simply been feeding off another part of the same establishment — the insurance industry. The latter was found owing about $ 100 billion to a clutch of investment bankers. The US was forced to bailout the firms in full because letting the firms go under would have destroyed its domination of the world’s financial markets. Every key player in the system, including the rating agencies that wilfully slept through the crisis, was allowed to continue in US strategic interest rather than go under as capitalism demanded. To finance these system-wide bailouts, the US government had no option but to raid the financial savings of the middle class through zero interest rates. Those savings are now showing up as bank profits while the middle class cries hoarse that it has been robbed blind without being able to articulate just how.
To hide the sins of a few rotten apples on Wall Street, the US government has wrongly chosen to tax middle class savings. The harm that has been done may be difficult to acknowledge, much less reverse. Now there is a bigger danger of capitalism based on free markets itself being called into question. It is high time to for some plain old-fashioned truth telling before people throw the baby out with the bathwater.

The writer is a trader. She can be reached at
sonali.ranade@hotmail.com or @SonaliRanade on Twitter


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Would Indians prefer a theocracy?

October 17, 2011 5 comments

Would Indians prefer a theocracy?

 

India has significant diverse minorities who are indigenous people belonging to different religious faiths, of which Muslims are numerically the most significant. There is little doubt that India’s constitution was deliberately given a secular character to reassure the minorities that they would never be discriminated against in the new republic. It was an assurance enshrined in the chapter on fundamental rights and is a part of the basic social contract embedded in the Indian constitution. But would we be something other than a secular polity if we were 100 percent Hindu? There are two aspects to this fundamental question. First, does our commitment to secularism merely stem from a constitutional obligation to our minorities? Second, why be secular if there is no such obligation to minorities? The answer to the first question lies in the second question.

 
The US gave itself a secular constitution at the time of its independence even though it had no religious minorities to speak of. It did so because no religion, ancient or modern, answers all the questions that we confront in our empirical experience. The Christian world began with the notion of equality of all men and universal brotherhood as opposed to slavery practiced by the Romans. It was the quest for personal freedom that enabled the Christians to overthrow the mighty Roman Empire. However, over time, using the basic tenets laid down by Christ at the inception, the Church’s clergy went on to stitch an elaborate and pervasive doctrine that governed every facet of one’s life. The Christian idea of redemption after life morphed into rejection of life in this world. Negativity reached such proportions that to bathe was a sin since it meant recognising one’s body as important in this world. Such is the power of a doctrine given a free run in the hands of ideologues backed by the coercive power of the state. If absolute power corrupts absolutely then absolute dogma maddens absolutely. It took a revolution spanning over some 300 years to reverse the monstrous dogma that the Church had fashioned out of the teachings of Christ. The sheer power, cruelty, and perversity of state-backed absolutist dogma is unimaginable today.

 
The communists in the 20th century copied the tactics of the Church to create a just society based on the teachings of Karl Marx. Despite land reforms and the like, the communists too ended up with a totalitarian state complete with a secret police that wielded supreme power accountable to no one but itself. The system stifled innovation and creativity and was simply unable to keep pace with the surge of ideas in other contemporary societies. Eventually it collapsed as ordinary people saw through the lies they were being fed by the state. India’s own experience with half-baked socialism in the 70s shows this ubiquitous proclivity of state bureaucracies to run away with the bit of dogma in their mouth given the coercive power of the state to back them.

 
Modern jurisprudence is all about arriving at a minimal set of rules, which enable citizens to live together, collaborate and compete for resources without violent conflict. That being so, even a 100 percent Hindu society would eventually tend towards the secular ideal. It would not matter if it began with religion-based ideology premised on some text or combination of scriptures. No such text exists but that is a different issue intrinsic to Hinduism. Nor does secularism interfere with the practice of any faith. On the contrary, secularism guarantees that the state will never discriminate against you for it. So why is a section of the religious right so vociferous in its rejection of secularism?

 
The reasons for the religious right’s attacks on secularism are more political than ideological. Muslims, who constitute 17 percent of the voters, tend to vote en bloc and do so tactically. This enables them to swing elections their way in a number of constituencies, which are said to number about 150. The Hindu votes are split into roughly four equal caste groups and tend to vote along caste lines. So any constituency may be modelled as a five-player game with equal votes. The political party that wins the support of any three players wins. The religious right has sought to wean away votes from all four castes of the Hindu vote by “othering” the Muslims and painting them as a civilisational threat to Hindus. This discourse uses a number of false but plausible myths to show that the Congress, as a secular party, is in cahoots with the Muslims to the detriment of Hindus. The religious right aims to create six players in the five-player game that draws support from all Hindu caste groups to offset the Muslim vote. The hope is that enough votes can be weaned away to more than offset the Muslim vote. It is a measure of the strategy’s ineffectiveness that it has proved difficult to win and retain even a quarter of the votes in each caste bloc. Worth noting too that in doing so, the Hindu right pits one section of the Hindus against another, the more secular minded being labelled lesser Hindus.

 
To polarise the four Hindu caste blocs along religious lines, a number of emotive issues are kept on the communal backburner to be brought to the fore at election time. These include hoary chestnuts like the Ayodhya temple/mosque issue, Uniform Civil Code, Gujarat and other riots, etc. From the right’s point of view these issues are best left unresolved because resolution robs them of their utility as emotive issues for polarisation. The Congress is too petrified of a backlash to resolve them so as to eliminate them from public discourse. It prefers the known devil to the unknown that might be introduced were the existing issues to be resolved.

 
Our constitutional fathers clearly recognised the need for a secular state but tempered the principle with what could be achieved given the education and socio-economic and political conditions at that time. Thus, in matters of personal laws, they allowed existing customs and practices to prevail over the ideal in order to forge a consensus over larger issues. That was pragmatic. They also made provisions for reservations for lower caste Hindus in education and government jobs in order to integrate them into society quickly. Separate legislation over personal laws for Hindus and Muslims, reservations, etc, were temporary devices but have continued as the consensus needed to eliminate them eludes us. However, that only highlights the pragmatism and foresight of our constitutional fathers who were able to resolve a large number of far more important issues while we cannot resolve a fraction of those even after more than 60 years of independence. It is rather churlish to blame our pragmatic fathers for the mess we subsequently created.

 
Politics must not degenerate into such a cynical game where competition between political parties begins to destroy the very fabric of our polity. Politics is not war by other means within a society. The Hindu right’s willingness to push their polarisation agenda far beyond the limits of sane and constructive politics is a cause for worry. Secularism, and the issues that go with it, are but a pretext for polarisation. There are encouraging signs that identity-based politics has outrun its utility. The younger voters are more concerned about development, jobs and quality of life issues. It is time, therefore, for political parties to move beyond the old school politics of caste and religion.

 

 

The writer is a trader. She can be reached at sonali.ranade@hotmail.com or @SonaliRanade on Twitter

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Have the Markets bottomed out? – 16th October, 2011

October 16, 2011 2 comments

Have the Markets bottomed out?  – 16th October, 2011

$ Index:  As on 14th October, 2011 the $-Index was poised at 76.90 just a touch above 76.5 mark that represents 50% of the move up from 73.7 to its recent top at 80.1.  The pill back from 80 levels has been orderly.  Below 76.5 there is further support at 75.50.  The Intermediate uptrend in the $ Index remains up and we can expect multiple tests of the 80 level before the $ breaks out upwards.  Not bearish on the $ despite the recent sharp sell off from 80 level.  Revise your outlook only if the $ breaks below 75.50.

Gold: Gold has seen a recent low of 1535 after selling off from a double top at 1916.5 level.  The upward bounce from 1535 is of a corrective nature and has barely reached the half way mark between 1535 and 1916.  Gold is unlikely to rally much beyond the 1700 mark in the near term.  One would assume that the bearish trend in Gold continues and further tests of the recent floor at 1535 will happen before Gold makes a move towards it recent double top.  Buying dips in Gold may be hazardous to your wealth especially as Gold is now a risk on asset rather than a hedge against risk.

Shanghai Composite: As anticipated, the Chinese market tested and held the 2300-2350 area making a low of 2315. On the time-price charts, the Index has achieved its target price but the correction has time to run until mid-November.  Since 2300-2350 is a major support level, the market is unlikely to turn higher without testing this area a few more times.  It is highly unlikely that the market will break below this area.  Accumulation may be in order from here till Mid-November.

S&P 500:  The US market was poised for a technical breakout upwards of 1226 at close on Friday.  Despite the bullish technicals that indicate so, the signal is likely a false one  that can be expected at this stage in the correction.  As per my reading the correction in the US markets has some more time to traverse and the recent low at 1075 could come up for testing again.  1226 is the upper edge of the trading channel and only a closing high 2 to 3% above this channel would warrant a revision of the outlook.   Caution is warranted on the buy side for position traders.

Sensex: The Sensex is interestingly poised at 17112, not too far from a major overhead resistance of 17,500.  A decisive break above 17,500 would put the Index in unambiguous bull territory. Until then caution is advisable for position traders. The Sensex is unlikely to make a dash for highs while the world markets are correcting.  As per my time charts the correction in Sensex is over.  Given the conflict between the two, the market could go flat and dead for a while or continue to mark time within existing trading range. Investors can continue to accumulate with stop losses set at 15,500.  Don’t think that level will be taken out barring a catastrophe.

NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions

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Internet Hindu discourse on secularism and economic reforms

October 9, 2011 45 comments

Internet Hindus [IHs] refers to twitter denizens whose main aim in life is to denounce everything “secular” as immoral and unpatriotic. They combine this morbid pastime with an intense devotion to the person of Narendra Modi. In the normal course their rants, coming as they do from a lunatic fringe, would be dismissed as inconsequential. However, they so monopolize the discourse on secularism that it is beginning to echo through the mainstream.  In a recent instance, I ran into somebody who argued that “secularism” was not intrinsic to the Indian Constitution, being a concept inserted into it by Indira Gandhi during the emergency! It did not occur to him that the body of fundamental rights forming the basic structure of our constitution guarantees a secular republic.  We need to worry if our understanding of secularism is this shallow. We have injected far too much partisanship into secularism.

As the ruling party till the 80s, the Congress was under obligation to articulate and establish secularism as a basic tenet of our public life.  Over time, the party learnt to exploit religious and caste fault lines in our polity even as it went about preaching secularism and railing against the evil of casteism.  This basic contradiction between precept and practice was brought to the fore by caste-based politics relating to quotas and reservations. To counter this divisive trend in Hindu society, BJP fired the first salvo against secularism in the late 80s. It began by denouncing Congress praxis as pseudo-secular, as if to distinguish it from the real thing.  BJP went on to win the elections on that slogan, thereby giving anti-secularism a certain electoral validity.  Even so, genuine secularism was never in contention.  In all probability it still isn’t, except to a fanatical group clustered around Modi, especially after the 2002 Gujarat riots.  Modi himself has never questioned the validity of the genuine genre of secularism.  No politician can really afford to do so. However, that has not prevented IHs from projecting both pseudo-secularism and the real thing as evil. BJP’s ambiguity on the issue is also worrisome.

One rarely hears any of the minority groups arguing against secularism. This includes Muslims who may have a doctrinaire objection to secularism according to some extremist interpretations.  The fact is that minorities see India’s secularism as the best guarantee of their fundamental rights. They see it as an acceptance of their distinct identity while still being very much Indian. Indeed, it is their lifeline against what could be an oppressive majority. Lack of sensitivity to their concerns by IHs is fraught with risk.

What have IHs to offer in place of secularism?  Do they demand revocation of fundamental rights guaranteed under the constitution?  Can the Hindus come up with a codified version of Hinduism based on which we could rewrite our constitution?  Would such a faith-based constitution command the consensus needed to make it work? Hinduism is not a revealed religion. It is more a collection of philosophical methods, tools and techniques to study and interpret the empirical world around us, and learn from it. It is the very opposite of doctrinaire certitude. To be Hindu is a mode of being that best blossoms when minimal rules permit maximal creativity. Hindus do not see the world through another’s eyes.  They are required to make sense of it through their own empirical experience. Secularism that empowers empirical study free of state sponsored dogma is the natural environment in which Hinduism flourishes. It therefore comes as no surprise that we take to it like a duck takes to water. Secularism came to us much before the legalistic separation of church from state in the western world. Why then are we trashing the very concept that is our unique contribution to civilization?

Secularism continues to suffer hideous aberrations in implementation. The Congress has a pronounced proclivity to pander to the most obscurantist sections of Muslims and other communities.  To win the Sikh vote in Punjab it chose to pander to Bhindranwale with disastrous consequences.  Likewise, it panders to the hardline Deobandi clerics in the Muslim community to reestablish its credentials as a pro-Muslim party.  These practices are reprehensible and deserve the widest possible condemnation. Trashing secularism however is no answer to communal politics of the Congress.

The debate on secularism tends to be unduly colored by contentious issues of the day including the Ayodhya temple, Gujarat riots and fundamentalist terror in Kashmir and elsewhere.  IH activists seek to deepen the polarization around these issues in an effort to garner political support for their cause, instead of finding common ground that helps resolution. One of the main reasons these issues drag on indefinitely is that they help ease political mobilization by lazy politicians who are loath to fighting elections around real issues of development.  Hate works better at rallying crowds at election time than garbage collection.  However, even the IHs will concede that secularism is the correct ideological response to address minority fundamentalism.  It promotes integration.  But how do you sell secularism to the minorities if the most vocal majority group is busy denouncing that very concept as evil? This contradiction in the IH discourse is obvious to all but the IHs. You cannot fight obscurantism by being antediluvian.

IHs and the wider religious right have often argued that economic reforms are simply too esoteric to serve as a rallying point for the masses. They would rather bait the crowds with rightist rhetoric and switch to economic reforms at a later date. This is patent nonsense. As the experience in South Korea and China shows, successful economic reforms bring about an intense nationalist resurgence. Pride in one’s culture and civilization follows, not precedes, economic reforms. Modi’s own success in sustaining the developmental impulse unleashed in Gujarat by economic reforms and in assimilating that into “Gujarati Asmita” shows India’s path will be no different. So if the rightist idea is to promote their avowed nationalist agenda, the path lies through economic reforms and not mythmaking by playing around with religious and cultural symbols. On the contrary, promoting a religion-based agenda inexorably degenerates into an ideological beauty contest where the ugliest contestant wins. BJP’s own experience on Ayodhya shows how quickly its leadership was overwhelmed by extremists like Singhal and Tagodia.

The Religious Right needs to review its strategy of accentuating polarization along communal fault lines. A preponderance of voters going to the polls in 2014 will be in the 20-to-30 age group, focused on jobs, careers and setting up a home. They won’t be too concerned with identity-based politics.  The old notion of progress coming at the expense of somebody else in the system has given way to the idea that the pie itself can be grown with the right mix of policies. IH identity-based politics pits the younger aspirational sections of the Hindu majority against the older, more conservative, sections of the same community.  In short, it divides itself without gaining anything for the causes it seeks to espouse. On the other hand, it is on the losing side of demographics.  Politics based on identity, whether caste or religion, needs to give way to a focus on development and economic reforms. IHs are the wrong side of history in India’s march towards modernization of its economy.

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The Indian bogey in Afghanistan

October 3, 2011 1 comment

 

Tension between the US and Pakistan has mounted after Admiral Mullen testimony that the Haqqani terrorist network was a veritable arm of Pakistan’s ISI. A flurry of accusations and counter-accusations has obscured the differences that separate the two allies in Afghanistan. It is not clear whether the objectives of the US in Afghanistan are so irreconcilable with those of Pakistan that it would persuade the latter to defy a superpower at great peril to itself. Conversely, given Pakistan’s influence in Afghanistan through its proxies, its geographic position and longstanding trade and cultural links with the latter, what is it that Pakistan seeks in Afghanistan that the US would be loathe to concede to an ally?
A recent exercise by think tanks looked at the possible objectives of Pakistan in Afghanistan as the US winds up its counterinsurgency operations there. These objectives were found to be, inter alia, stability in Afghanistan, representation of Pashtuns in the government and containment of Indian influence in that country. None of these is in any way irreconcilable with those of the US. Parties to a pending negotiation are usually reluctant to disclose their real aims because the party disclosing its cards first usually ends up getting less than the party that conceals its objectives. So it is entirely possible that neither the US nor Pakistan have disclosed their real objectives in Afghanistan and that this process will unfold as we go further into the endgame. Nevertheless, it is pertinent to ask what is it that Pakistan seeks in Afghanistan that cannot be achieved by normal diplomacy. Is a coercive strategy, either through direct confrontation or proxies, really necessary to achieve any of Pakistan’s real objectives in Afghanistan?
On the US side, the Blackwill proposal for sharing of power in Afghanistan is probably what the US is aiming for in Afghanistan. These proposals include handing over of power in southern Afghanistan to the Taliban, Northern Alliance [NA] control of northern districts, and sharing of power at the federal level. Under this arrangement, the US would continue to retain a reduced presence in Afghanistan, pay for the Afghan army and support the federal government, while continuing to deny sanctuaries to al Qaeda or rebel elements. Pakistan of course has reasons to look askance at this configuration. It denies it absolute control of Afghanistan as enjoyed in the 90s. Furthermore, Pashtun unhappiness with their share of power would cause them to demand separation from the NA that could have repercussions for Pakistan’s own Pashtun population. Undeniably, Pakistan would have much less leverage under this configuration. The US would favour such a dispensation as it gives it proximity to Iran, Pakistan, China and Central Asia thus allowing it to keep a watchful eye on a very sensitive neighbourhood.
Much has been made of Chinese support for Pakistan and the Indian opposition to Pakistan in this game. China has crucial interests in the South China Sea and building a navy to counter the US fleet is a full time job. China will not want a confrontation with the US in a place where it has no natural advantage over the latter. So a substantial Chinese involvement in the game can be ruled out. China’s help to Pakistan in past conflicts has been largely moral. Besides, China has shown considerable interest in Afghanistan’s mines and will look to its own interests first. Russia and China will balance their apprehension of Islamist terror with the US presence in Afghanistan. Iran will actually prefer a US presence that is predictable to the armed hordes controlled and paid for by its Sunni adversaries in the Middle East. India’s capacity to influence events in Afghanistan is very limited. So optics apart, it is really a Pakistan versus US situation in Afghanistan.
Pakistan has to balance potential gains in Afghanistan with the cost of confronting the US there. The US will not risk a shooting war. It does not believe in messing with a power that has nukes. On the other hand, it will not be shy of applying the widest array of sanctions it can muster. These include denial of aid, restrictions on trade, and closure of access to markets. China can mitigate these sanctions to a certain extent. Pakistan will have to reconcile itself to a stagnating economy that may set it back for decades. Clearly shorter term issues like logistical routes, etc, are important but Pakistan lacks the ability to compel the US without risking reprisals. So it is the long-term economic costs that must weigh with Pakistan in deciding how far to push the US for the best bargain.
Why is India irrelevant? With nukes, an Indian attack that dismembers Pakistan in an armoured blitz is clearly impossible. So how does the Pakistan army need ‘strategic depth’ to survive such an eventuality? War is not an option for either Pakistan or India. That makes strategic depth irrelevant. Second is competition for influence. In the long run, in a modernising Afghanistan, it will be impossible to shut out India. A stable Afghanistan will invite substantial investment from its neighbours, especially China, Iran, Russia and even the US. India would be just one of the players and not a major one at that. Therefore, Pakistan could counter Indian influence by virtue of its ethnic, cultural and trade ties. Besides, Afghanistan would need access to ports in Pakistan. There is, therefore, little reason for Pakistan to fear being isolated in Afghanistan or being edged out by rival India. With China being the elephant in the room, the Indian ability to influence Afghanistan in a manner calculated to confront Pakistan with a two front situation is simply overstretched. Therefore, the Indian bogey needs to be laid to rest once and for all in Pakistan’s own interest.
That leaves the question of what to do about pipelines that may extend from the Caspian to Karachi or Mumbai? Pipelines are a big issue. They are easily denied but very difficult to build. Minus US support, they cannot be built, not even with China throwing its weight behind them. The right time to put them on the table is now. By playing a spoiler, Pakistan may retain a veto over them but the risk is that they may not get built at all. A bird in hand is worth two in the bush. Geopolitical and geo-economic influence that comes from sitting on important trade routes is of diminishing value unless encashed. What really matters in a knowledge economy is how you educate your citizens. Old mercantilist thinking about territory, trade routes, etc, are insufficient to guide strategy. People who convert these advantages into cash and use the proceeds to invest in education are the ones who have raced ahead. Look at South Korea for instance.
Now may not be the time for Pakistan to seek a confrontation with the world’s lone superpower. Pakistan has already made its point emphatically, which is that its interests in Afghanistan cannot be overlooked. Having done so, it is time for Pakistan to look at the interests of Afghanistan as a polity along with those of its neighbours. Pakistan cannot have peace and prosperity with an unstable Afghanistan to its northwest. A frank dialogue with India on Afghanistan may be one way of laying the Indian bogey to rest.

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