Intro: Managing food inflation and keeping large workforce constructively employed will keep the growth engine humming. Only then will India be able to offset the fall in global growth and will be one of the few countries that will miss the deflationary cycle that the global economies are going to face.
Last fortnight had two important economic news that could affect the growth prospect of countries like India. One, Chairperson of the United States Federal Reserve Janet Yellen has said that it will start exiting zero policy rates later this year, two there is forecast by Morgan Stanley Investment Management that the next recession will be made in China and this will pull down the global growth in the coming years to below 2 per cent as against 3-3.5 per cent predicted by other agencies. This news is likely to affect India in many ways: the flow of foreign investment is likely to reverse, the price of crude is likely to come down even further thus benefitting India’s balance of payment situation.
What could be expected from rising interest rates in the United States and the ensuing likely rise in the value of the dollar is a correction in the monetary situation of financial institutions, business corporations. All have borrowed millions of dollars in the last few years because of zero rates, they will now face an increase in the real local-currency value of these debts as currency will readjust to the new value of the dollar. But what will really be tricky for India is that while US interest rates will rise how will it manage the domestic interest rates? India’s corporate sector is going to come under pressure as it has borrowed heavily and is already finding it difficult to service the loan, it has been lobbying hard with the Reserve Bank of India (RBI) to push down the interest rates to single digit rate so that it can service the loan. But given the situation, will the RBI Governor be able to lower the interest rates when the world over interest rates will actually be rising? After all interest rates in alignment with the US will also affect the value of the domestic currency and the balance of payment situation.
This brings us to yet another realignment that is going to happen the value of Rupee Vs Dollar. With the demand for rupee falling there could be a revision of the exchange rate. Where will the Rupee headed for from the 63 level to a Dollar? What will be the RBI’s stance on exchange rate in the given flight of currency is worth watching, though one thing is clear managing the currency rate is going to be a tricky situation for Governor Raghuram Rajan. However, there is a silver lining, the stronger growth in US markets will benefit the export of goods and services. How will we make Made in India goods more competitive through a weak currency as has been done by Japan, Germany and earlier by China is a point to be pondered over?
It is expected that the Fed is likely to start raising rates more slowly than in previous cycles, responding gradually to signs that US economic growth is robust enough to sustain higher borrowing costs. There are still signs like inflation and unemployment that the Fed will require to be sure of before taking a call on increasing rates. Consequent to what happens in the US there will be a reversal of money from countries like India where it was parked to earn
better interest and better return on investments. Despite interest rates rising in the US, the foreign investors it is likely will stay invested in India because of the long term story that it promises and the consistency in the growth that will happen over a period of time.
As global investors navigate the uncertain waters of growing markets like India in the next few years, they should remember that, the wave of industrialisation and urbanisation and the associated productivity gains are far from over. With fast growing populations and productivity, India will enjoy a growth advantage over developed economies for some time to come.
There is another good reason for India’s growth momentum to be intact because a loose credit and fiscal policy has been tightened large current account and fiscal deficits have been have been taken care of. A flexible exchange rate, which leaves us less vulnerable to a disruptive collapse of currency pegs, as well as ample dollar reserves to shield against a run on currencies, government debt, and bank deposits. Government borrowing even though high is going in creation of infrastructure as against social sector welfare schemes of the erstwhile government. This spending by the government is likely to create more jobs, and hence the spending and saving (investment) cycle will see a greater momentum.
China’s economic slowdown, together with the end of the commodity super-cycle, will create additional headwinds for India, one those who were relying on supplies of commodities to China such as steel, iron and other commodities are seeing their businesses tottering and are struggling to find a new market even though it is domestic. With a
correction the world over in prices of all commodities it will be beneficial for India to build its infrastructure rapidly, for this it must take a leaf from the Chinese who are masters in completing the projects in record time. India is on the course of big public investments but more often than not there is a high possibility of delay in executing the project either deliberately or purely for the lack of sufficient funds. Strict timelines are needed to be spelt out while projects are handed over to the extent of levying penalties and blacklisting tardy firms this has to be done if we have to take advantage of the commodity prices cooling down to build super structures.
The Chinese concentrated on export led economy and did not focus on domestic demand instead the demand from the West was an advantage for the Chinese, but India enters a high growth trajectory when the export demand is slumped and the one big market it has to its advantage is the domestic market. But how soon we create a domestic demand will depend on creation of immediate employment opportunities for skilled and unskilled manpower and putting the large unemployed population in creation of infrastructures like smart cities, ports, highways etc and giving a boost to small and medium scale sector. This will have to work in tandem with the long term programs such as Skill Development, Digital India and Make in India. Managing food inflation and keeping large workforce constructively employed will keep the growth engine humming only then will India be able to offset the fall in global growth and will be one of the few countries that will miss the deflationary cycle that the global economies are going to face.
Bhagyashree Pande (The writer is Executive Editor of Whispers in the Corridors)
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