BackIndia: the storm shelter
The nation imports a global recessionary contagion through disproportionate, large foreign institutional investment flows
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Take a deep breath. Exhale. Take another. Then another. Global markets have been in a free fall. And the best thing you can do is to just breathe. Do nothing else.
Sure, the data is confusing. It almost always is in panic situations. Earlier last week, oil prices dipped to their lowest in 12 years at below $27 a barrel. This is the sharpest decline (it began in mid-2014) since oil futures started trading in the mid-1980s. The extent of decline appears to reflect not only a severe supply-demand mismatch in oil but also fears of a drastic global demand slowdown led by China.
Even on a good day, data from China is suspect and that is not helping the situation here. Analysts are having a tough time deciphering whether China is already in the midst of a hard landing or is merely in a normal and somewhat inevitable shift from investment-led growth to consumption-led growth.
Over the past six months, Chinese regulators have reacted without much coordination and in some panic as markets there have shown signs of cracking. A clear message from the top has been to “rescue" the market using any and all means, a dubious project at best.
New listings were halted, short sales banned, state-owned companies forced to buy shares coupled with significant liquidity injections from the People’s Bank of China (PBoC). That plugged the leak for a while, but money has left China in droves since the beginning of this year, signalling that the rescue attempt has failed. Paradoxically, that is a good thing, allowing Chinese markets and the renminbi to find market levels without too much interference.
In the US, it is a tale of two economies. The manufacturing sector is weak but the services sector is strong. Gross domestic product growth is tepid but job creation is strong; the dollar is strong and commodities are weak. In other words, the domestic non-traded sector is robust but the international traded sector buffeted by the strong dollar and low economic growth in other areas is rather soft.
The question is whether low economic growth in the world will drag the US into recession or whether pockets of growth in the US and elsewhere combined with policy action around the world will make this a “market correction" rather than a foreteller of global recession in 2016.
The policy response phase from the big four central banks has already begun. Mario Draghi, president of the European Central Bank, signalled his willingness to cut rates earlier than previously expected. It seems rather likely that the US Federal Reserve, at its January meeting next week, will postpone rate hikes and quite possibly signal a reduction in the number of expected hikes (from four to two) in 2016. The Bank of Japan will most likely increase the quantum of easing and the PBoC will probably announce a slew of measures that add liquidity to the system. Of course, addiction to central bank potions to once again dampen volatility in markets is rather akin to allowing a last sip to stabilize an alcoholic. True stability can only come from further deleveraging and significant structural reforms in Europe, China, Japan and the US.
Amidst all these extremes, India is a relatively normal economy. It remains a mildly inflationary, demand sensitive and balanced economy with positive real rates. This does not mean that all is perfectly well and that we can rest easy, as we have too often done in the past. It simply means that neither self-congratulation nor panic is warranted. The low oil prices and relatively robust economic growth offers a great opportunity to undertake structural reforms at low (relative) cost and further cement the argument for India to be the most favoured large emerging market for investments.
The agenda for structural reforms is well known. It includes big ideas like (finally passing) the goods and services tax Bill, having access to reliable 24x7 power and fixing the bad loans problem in the banking sector. It also means a host of workable small ideas that improve the ease of doing business and reduce the hassle of taxes. India’s developmental focus must remain on job creation and productivity enhancement. This crisis should once again open our eyes to the need for a deep, long-term pool of domestic capital. India imports a global recessionary contagion primarily through disproportionately large foreign institutional investment flows. The much-needed pension reform will ensure domestic capital depth against this type of contagion. The basic structure and design in terms of a National Pension System has already been created. Its footprint needs to be dramatically increased.
The market correction, from India’s point of view at least, will pass. Consistent savers (read systematic investment plan investors) should stay the course. Those already invested should do nothing. Policymakers should get busy. It is a golden opportunity.
P.S. “In a panic, market moves are like a tale told by an idiot, full of sound and fury signifying nothing," says John Bogle paraphrasing Macbeth.
Narayan Ramachandran is chairman, InKlude Labs. Comments are welcome at narayan@livemint.com
Read Narayan Ramachandran’s previous columns here
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