Markets around the world are in turmoil. Metals prices have fallen by between 15 per cent and 30 per cent this calendar year. Brent crude oil is back to $46, about the same level as in January but down 54 per cent on a year ago. Currencies are falling sharply in places as seemingly unconnected as Malaysia and Kazakhstan, having collapsed over the past year in Russia (by 88 per cent against the dollar) and Brazil (down 54 per cent). Stock markets everywhere are nervous, while the Shanghai Composite is some 25 per cent below its peak (though twice the level of a year ago).
Much of the turmoil originates in China, whose slowdown is what has turned commodity markets on their heads. Anyone who thought that China’s long-term slowdown and its concomitant internal economic adjustments would be a smooth process had better think again, especially about knock-on effects — on smaller economies in East Asia that are tied to the Chinese manufacturing-export machine, on exports of Swiss watches (Chinese sales are down 40 per cent) and sales of Jaguars and Land Rovers, and on commodities producers like Balco which says it is shutting down an aluminium plant in the face of lower prices and imported competition. Beijing’s recent actions relating to its stock market and currency have added to the instability, and sent shockwaves around the world.
India, considered one of the “fragile five” two years ago, is remarkably stable if one looks beyond the day-to-day action. The Sensex is up three per cent on a year ago, with valuations in general still not cheap — at a time when money is said to be getting pulled out of emerging markets. The rupee may seem weak against the dollar, but it has gained over the past year against both the euro and the yen. Helped by how commodity prices have moved, inflation is under control. Meanwhile, the drop in oil prices should save the economy 1.5 per cent to two per cent of GDP. Naturally, the current account deficit is comfortably small. Interest rates are dropping, too slowly but dropping nevertheless. In terms of stability, you never know what lies round the next corner but at the moment India looks quite good in an uncertain world situation.
The question concerns economic growth. No country has sustained annual growth of eight per cent and more (government leaders talk of double-digit growth) without exports playing a big role. The two bursts of rapid economic growth that India saw (in the mid-1990s and from 2003) were periods when exports grew rapidly, by an annual average of 20 per cent or more. The more recent years have seen exports virtually static. With China slowing down, Europe growing at just 1.5 per cent and Japan showing no momentum, while the oil exporting countries (including emerging economies giants like Russia and Brazil) suffer massive revenue losses, it is hard to see exports providing much buoyancy — especially when there seems to be some risk of a currency mini-war.
India’s domestic growth engine therefore needs to fire on all cylinders, but is hard to manage when the credit system is challenged and most large companies are debt-laden. There are no easy solutions to such problems, as the Modi government has discovered over the past year. Systemic solutions will take time to work out and then deliver. The country faced a similar situation around the turn of the century, when companies had taken on too much debt and bank books looked even worse than they do now. The economy pulled out of that one because interest rates were dropped sharply, and the world was heading into a finance-driven boom. No such deliverance is visible today. The message on both the stability and growth fronts, therefore, is that the country must hunker down and play safe, not silly.
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