When the economic crisis hit Asia in the late 1990s, the prescription given by the International Monetary Fund and the Western countries was to cut deficit, raise rates, devalue currency, raise taxes and open up the economy. This resulted in a lot of pain but Asia restructured and exported itself out of trouble in less than a decade. Today, Asia is an oasis in the global desert in terms of fiscal and current account surplus.
When the Western credit crisis developed in 2008, the prescription was different: Lower rates, higher fiscal deficit, easier monetary policy and a rescue package for any one in trouble with government guarantee. Will this medicine result in a similar or better outcome than the Asian crisis is a question that remains unanswered.
We have seen in the Western world private and consumer debt shifting to banking sector, banking debt shifting to the government's balance sheet and, now, a weak government's debt shifting to a stronger government's balance sheet. This is the last frontier. If it fails, high inflation, social chaos and protectionism will hound the world.
In the Indian context, this crisis is probably going to change the definition of risk. For decades, India was called ‘higher risk country’ for high deficit, high inflation and poor infrastructure. Now, investors will give weight to ‘domestic factors’ — growth, transparency in the budget and a commitment to reduce fiscal deficit. Investors will now appreciate low-cost but high-value labour. Investors will probably see lack of infrastructure as an opportunity rather than an impediment.
The Indian economy, by and large, will withstand the current crisis like it withstood the Asian and Western world credit crises. Notwithstanding the marginal adverse impact of a global slowdown, Indian equity markets will get impacted adversely whenever foreign institutional investors (FIIs) sell to reduce the risk on account of global developments.
However, it will be short-term phenomena. Those corrections will provide the best opportunity to participate in Indian equity markets. If one can take the short-term pain of volatility, every correction induced by a global event will be a great entry point for investors. But, in all likelihood, it will be a journey on a potholed road with lots of bumps too.
With the current crisis, most countries will follow a loose monetary policy and keep interest rates low, pushing global private savings to search for better returns. We have to attract this pool of money to augment our savings and translate the same into higher investments for creating capacities and building infrastructure to pursue higher growth, which will provide employment, cut deficit and will create a virtuous cycle of higher and sustained growth.
Incidentally, it will also reward equity investors. We have to now single-mindedly pursue growth as the wind is blowing in our direction.
The author is Deputy MD of ICICI Prudential Mutual Fund
