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India steady in fresh bouts of turmoils

India steady in fresh bouts of turmoils
Global financial markets turned turbulent in the first week of July with Greece facing a chaotic exit from the Euro-Zone and a more ominous rout in China’s stocks, defying authorities’ repeated interventions to stabilise market and preserve growth at around 7 <g data-gr-id="59">per cent</g>. These two new risks spreading panic to markets around the world have already led to a mark-down of global growth to 3.3 <g data-gr-id="60">per cent</g> in 2015 while the IMF hopefully projects stronger recovery to 3.8 <g data-gr-id="61">per cent</g> in 2016, in its latest Outlook Update.Amid all this, India’s growth is seen to be steady at 7.5 <g data-gr-id="62">per cent</g> this year and in 2016, which puts the country not only ahead of China but also makes it the fastest-growing worldwide. Provided, IMF Update says, demand support comes from fiscal policy re-balancing “aimed at boosting longer-run growth, through tax reform and spending re-prioritisation”.

India continues to have the advantage of lower oil prices in 2015, helping to reduce price pressures over a period and also to contain the current account deficit. This should ease the burden on monetary policy but, IMF points out, structural reforms to raise productivity and remove bottlenecks to production are urgently needed in many economies including India.All data point to India’s economy still struggling with recovery and the country is also not rid yet of uncertainty over the course of monsoon, of vital bearing on agricultural fortunes. After a timely start, which induced optimism among policy-makers, there has been a long pause in rainfall over large parts of the country. While the RBI Governor Dr Raghuram Rajan notes some signs of pick-up in capital investments, he underlines that growth acceleration would follow removal of bottlenecks for stalled projects and that spade work to create sustainable growth needs to continue.

Finance Minister Arun Jaitley is keen on ensuring passage of GST and Land Acquisition Bills in the forthcoming monsoon session of the Parliament but this hardly looks possible given the highly controversial provisions in the proposed legislation now before two select committees. Passing the GST and reforming the land law would accelerate this investment turnaround according to him.But Jaitley, after a ten-day trip across USA, has also come to realise that credibility on what his Government has done so far and is trying to do with recovery and reforms, is only “ partly restored” and that the momentum must be maintained over next two years to win over and provide comfort to world investors.

In any case, the Modi Government, with all its commanding strength in the Parliament, has become vulnerable to a series of accusations by political opponents on a number of issues involving propriety of actions of Ministers of BJP at the Centre and in Rajasthan, such as favours extended to Lalit Modi who had taken refuge in London and is wanted in India to face criminal charges. Prime Minister Narendra Modi has kept quiet for weeks over this.The Vyapam scandal which has also hit the face of BJP is being referred to CBI after the Madhya Pradesh Chief Minister Shivraj Singh Chauhan was forced to bow to the pressures from public over several months, with the Congress having raised the issue first, and opposition parties have all urged that the CBI inquiry should be under the Supreme Court’s supervision.Political tensions are thus likely to dominate the Monsoon Session of the Parliament and overshadow the legislative business that the Modi Government wants to push through, especially the Land and GST bills over which there are differences even within the NDA. Most opposition parties are determined to resist passage of these two bills in the monsoon session and it would become a test of political wills.

India cannot be totally immune to the current market upheavals especially in Europe and USA ,where stocks tumbled to a four-month low and US Fed officials also weighed on the effects on US growth the crises in Greece and in the financial market of China, second largest economy. But its <g data-gr-id="77">macro-economic</g> stability is assured and the country has a comfortable cushion of reserves to meet any contingency of capital outflows. Yet, spillover effects on trade and finance and the exchange rate cannot be ruled out.The turn the in market is universal and affected India’s stock market as well. But with low linkages to India in equities, a major impact is unlikely, according to market analysts. Nor is there likely to be any rate rise by US Fed till the last quarter of this year. The Federal Reserve had signaled in June it was on track to move the benchmark interest rate this year.

IMF which has recently reviewed the US economy and financial sector has made out a case for 
deferring interest rate increase until there are greater signs of wage or price inflation. It suggests that US Fed hold off on rate rise until 2016, stating US needs to put public finances the on sustainable path and address fiscal imbalances.Greece has called for another bailout, a three-year rescue plan, after its voters decisively rejected on July 5 any more austerity imposed by the eurozone regime, and it has until Sunday (July 12) to agree to EU terms or face potential expulsion from the single currency union. Athens has reportedly promised to take steps on taxes and pension payouts and other measures to modernise its economic system. A full summit of European Union leaders has been called for the coming Sunday.

After its failure to make a 1.7 billion dollar payment to IMF due by June 30, IMF cannot under its standard procedures extend any new financing until Greece cleared its dues. But the country remains part of IMF with voting rights and representation. IMF Chief M. Lagarde has said the Fund priority would be to help Greek people through its difficult economic turmoil. 

A balanced approach would be for Greece to take steps to reform its economy and European partners providing additional finance and debt relief.But the Chinese meltdown has far greater spread effects for the world economy, being a major importer of commodities and the largest exporter. After a major rally over the past year, with the Shanghai composite index up by over 150 <g data-gr-id="63">per cent</g> peaking in mid-June, the Chinese stock market declined by about 30 <g data-gr-id="64">per cent</g> more recently. The authorities took a series of monetary measures including cuts in interest rates and reserve ratios and other measures to contain the market volatility and stabilise growth.

To reassure the world, the Chinese Government said on July 8 that the country has the confidence and conditions to realise its major economic and social development targets this year. However, the World Bank said engineering a gradual shift to a more sustainable growth path poses challenges for policy makers, given real-sector weaknesses and financial-system vulnerabilities. The Bank report outlined efforts required to help investment bemore efficient and realign growth over the medium term.

The World Bank expects China to grow by 7 per cent in 2015 and 6.9 per cent in 2017 as against IMF’s 6.8 per cent and 6.3 per cent respectively. While India and China are higher growth economies of BRICS, and South Africa is also projected to grow 2 per cent this year, there will be contractions in Russia of minus 3.4 per cent and Brazil minus 1.5 with modest recovery of both likely in 2016, according to IMF Update.
S Sethuraman

S Sethuraman

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