The Economy: Some Crystal Ball Gazing

The Economy: Some Crystal Ball Gazing

by Gautam Mukherjee - Monday, July 20, 2015 03:36 PM IST
The Economy: Some Crystal Ball Gazing

With the Chinese economy beginning to collapse, and the European Union in turmoil, what can we expect for the Indian economy in the near term?

Stock market veteran Shankar Sharma of First Global thinks many Indian small and midcap stocks are poised to return 100 per cent growth over the next year, while large caps will give a modest 15 per cent, a tad higher than fixed income instruments.

Sharma said this in the backdrop of the crises in Greece and China, implying that, for the moment, India may gain rather than lose from the turmoil internationally.

Sharma is usually known more for his bearish projections and so, this refreshing and positive public outlook from him is indeed a pleasant surprise.

Other major brokerages are confidently predicting a 10 per cent rise in the main indices by March 2016, and the continuation of the ‘long term bull market’. There is a tentative renewal of interest in India from the foreign institutional investors (FIIs), and the domestic institutional money, mainly from the reflated mutual funds, is also in evidence. People seem to be finding ‘pale green shoots’ appearing at a policy level, and feel that private investment must, therefore, follow in one or two quarters from now. Some have made bold to expect another interest rate cut from the Reserve Bank of India (RBI) in early August, citing lower wholesale price index (WPI)-based inflation.

What is definitely missing for now is a growth in company earnings. So, once again, the indices are running ahead on optimism rather than valuations, but still, the speculation here is tame compared to China.

The money market outlook, wherein India has enough reserves to pay for 11 months of imports at this time, predicts that the rupee may well slide a little, to 65 to the dollar, particularly if America raises interest rates. RBI Governor Raghuram Rajan is widely credited for managing the macro position of India’s finances very well, though the industry is languishing and complaining of very high-interest rates.

While America is now on the mend, the economic survival of Europe is crucial to it. If the European Union as a whole, or any of its less solvent constituents, goes under, it is America that will have to jump in to save it from drowning. Such is the umbilical cord interdependency between the ‘old world’ and the ‘new’.

But no such obligation extends to China. And if it finds itself in continued trouble, it will just have to trim its ambitious sails and concentrate on surviving.

That China’s overall debt is in the region of $ 28 trillion, some three times the size of its economy, is, of course, quite daunting. Most of the debt is to do with domestic real estate that is now no longer selling.

China may also find it difficult, going forward because its domestic consumption has not grown sufficiently to take up the slack from its collapsed export markets. Its infrastructure, as well as manufacturing and armament building capacities, are also largely idle. China needs new and viable markets that can pay, and these are few and far between today.

The Chinese establishment may want to reassure the world that all is well, but the fact that Chinese stocks, owned over 90 per cent by domestic players, have been soaring above their underlying values for all of the last eight years is a consequence of massive speculation and not company performance. Given the present situation, the Chinese currency too is likely to suffer great volatility if it is floated to join a basket of international currencies.

In Asia, it has all happened before, and there is a sense of déjà vu. Irrational exuberance broke the backs of the so-called ‘Asian Tigers’ who had built their raging, double-digit GDPs on the development of golf courses and luxury tourist resorts, till that vacuous business model collapsed.

In China, there may be a big bubble waiting to burst, with both its property sector and financial markets in trouble, and its manufacturing cum export story finished. That is what happened in America – the housing bubble burst in 2006, followed by the financial markets in 2008.

India, of course, is an exciting, primarily domestic, opportunity, catering to 1.27 billion people, projected to go up to 1.50 billion by 2030. This internal appetite is far from met and is mouth-watering, rather more than a modest export performance.

This could change, of course, if the massive Make in India programme gains traction, particularly in defence manufacturing. It could take the share of manufacturing in GDP up from 12 per cent to 25 per cent. But right now, if India was a small domestic opportunity, with the same level of exports as it has currently, it would not figure in the global discourse at all.

The Indian IT capability is indeed impressive, both domestically and through people of Indian origin in Silicon Valley, but this is a human resource advantage, and many international IT companies have, and are, setting up wholly-owned establishments in India to leverage it. Besides, the buyers in Europe, America and Japan are themselves recovering from huge lows.

And yet, perhaps due to the halving of oil prices and the stepping up of government spending on infrastructure, the International Monetary Fund (IMF) forecasts 7.5 per cent GDP growth this fiscal for India, a full half per cent above the China estimates.

But will India chug along, reasonably unaffected by China slowing down and the EU struggling? It is, on balance, regarded as the ‘cleanest dirty shirt in the emerging market’. But how many dollars will flow in remains to be seen.

Iran too, coming out of its punitive sanctions after a decade, will keep the downward pressure on oil prices and afford new business opportunities for India. But low oil prices will make it impossible for OPEC and other major oil producers elsewhere from dominating any discourse for a long time to come.

So who, or what, will rule the roost now, or is the world truly headed towards being governed by committee?

Lord Meghnad Desai starts off his new book, Hubris-Why economists failed to predict the crisis and how to avoid the next one, with: ‘Economics was born in a whirlwind of change’.

Today’s world is indeed changing faster than many of the powers-that-be can grasp! Too often, these yesterday people are applying their tried and tested poultices to scars, instead of to the fresh wounds.

We still take a year or more for a sanctioned project to begin implementation, for example. And we have a clutch of nearly a dozen or more 24×7 TV channels devoted to business, in English and the vernacular, almost as many in print and online, to tell us all the ways we can be difficult!

There is, of course, a substantial opportunity to mirror the renewed optimism on the Indian bourses. Just as the 2 per cent to 5 per cent of foreign portfolio investment jumped in blind into the opaque but multi-trillion dollar casino of the Chinese bourses because the real economy was then growing in double digits; the possibilities in India are massive too.

Right now, the government could work to fan this windfall optimism, a second wind, bestowed after Narendra Modi’s election in 2014, with much bolder implementation on its many initiatives. So much so, that the many initiatives, cascading at us on a near daily basis, are being mocked, as if they were just fond fantasies.

It is the implementation that could be the tipping point, the credibility builder, and the force multiplier for the India story. Everyone is aware of the reformist and business-friendly intent of the Modi administration. Apart from the tentacular and most resilient red tape,

India is far more transparent and boisterously democratic than most other countries in the first place. The problem is it still moves at a snail’s pace, no matter how often it protests otherwise, and how clever its slogans are.

Gautam Mukherjee is a political commentator whose columns figure regularly in different right-of-centre media outlets
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