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Business News/ Opinion / India prepared for global turbulence

India prepared for global turbulence

While not a 'big bang', the incremental reforms by the BJP-led government are helping strengthen the economy

A file photo of Prime Minister Narendra Modi. Photo: AFPPremium
A file photo of Prime Minister Narendra Modi. Photo: AFP

Lima proved a convivial setting for the recent World Bank/International Monetary Fund (IMF) Annual Meetings, but the mood was downbeat. Worries about China and Emerging Markets (EMs) took centrestage. The IMF forecast EM growth to moderate to a six-year low of 4% with only a small upturn next year. The Institute of International Finance (IIF) also projected non-resident capital inflows to EMs to fall below 2008 levels in 2015, with only a moderate recovery in 2016.

The gloomy prognosis reflected the congruence of a number of negative factors. The first was uncertainty surrounding the magnitude and path of Federal Reserve rate hikes, which led to heightened risk aversion from mid-year. A slowing China reflecting both cyclical and structural strains, and negative spillover for world trade was another factor. Its surprise mid-August depreciation also elevated global uncertainty.

A third factor was the end of the commodity super cycle. While commodity producers have been hit by weak prices, gains for commodity importers have been slow in coming in part due to consumers and corporates so far holding on to savings and/or deleveraging. Other factors were slow progress in reforms in many EMs, along with political concerns.

Overall, EM growth has fallen with weak exports and subdued domestic demand. Asset prices and currencies have come under pressure notwithstanding a recent rally. The countries most affected were those with large current account deficits, commodity sectors, and heavily indebted firms and consumers exacerbated by political uncertainties. EMs with large foreign holdings of domestic stocks and bonds suffered. Brazil and Turkey stand out, but Malaysia and Indonesia were also hit.

Against this challenging backdrop, India is one of the few bright spots in the world economy. A necessary building block was the measures taken by the Congress-led government to curb fiscal and current account deficits in the wake of the ‘taper tantrum’ in mid-2013. Thereafter, Prime Minister Narendra Modi’s reformist government gave a much needed shot in the arm, along with the sharp decline in oil and gold prices.

While not a ‘big bang’, the incremental reforms by the Bharatiya Janata Party (BJP)-led government are helping strengthen the economy’s foundations. The fiscal programme has encompassed deficit reduction, elimination of fuel subsidies, more productive spending and expanded privatization. The government is transferring more resources to the states and ranking them based on the ease of doing business to spur competition and make India more investor friendly. Administrative and governance reform has been a priority.

Financial sector reforms have also made good progress, including the focus on financial inclusion. Foreign direct investment limits have been enhanced and railway projects opened to the private sector. Legacy tax disputes are being resolved. The Reserve Bank of India has seen the light in the run up to Navaratri to step up monetary easing using the room provided by sharply lower inflation.

Although upward revision of growth numbers has proved controversial, the debate being succinctly summarized in a recent column in this newspaper, things are on the mend. In May 2014, I wrote a piece on betting on Modi, and investors have been generally well rewarded. Improving economic performance, lower inflation, falling current account deficit, limited exposure to China, and liberalized regime for portfolio flows underpin India’s being favourably regarded by foreign investors.

While the new normal is subdued global growth accompanied by periodic market volatility, the improved policy environment and a dovish Fed bolster India’s resilience and should sustain sizeable capital inflows.

But, we can’t rest on our laurels. There is a lot of catching up to do, not least with the ageing dragon, along with many downside risks to navigate. Important reforms have so far failed to gain traction, in part due to opposition intransigence in the Rajya Sabha, including the goods and services tax and amendment of the land acquisition Act. Greater effort is needed to unblock stalled projects, which are contributing to stretched balance sheets of many infrastructure companies and making bankers risk-averse. In the face of opposition at the centre, a stronger push for labour and land reforms in states would be helpful, championed by Bharatiya Janata Party-controlled ones.

In this regard, the US provides a good example of reforms often being led by states while Congress is paralysed by partisanship. Meanwhile, whatever the outcome of the Bihar elections, Modi should not lose sight of those who gave his government a decisive five-year mandate for reform and change in the 2014 Lok Sabha elections. To the extent that the government continues to deliver on reforms, voters and markets should reward good policies.

Bejoy Das Gupta is chief economist for Asia-Pacific, Institute of International Finance, Washington DC.

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Published: 19 Oct 2015, 09:16 PM IST
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