Market turmoil poses new problems
The meeting of finance ministers and central bankers from G-20 nations in Ankara on September 4 and 5 come at a crucial moment. This meeting takes place against the backdrop of weakening global growth prospects due to rising volatility in financial markets. Such volatility was amplified recently when China’s stock prices tumbled, followed by currency devaluation. However, the question is whether any effective joint actions by advanced and emerging economies would emerge from these deliberations at a critical moment in the post-crisis era.
Both global growth and trade turnover have slowed down, more than in 2014. Emerging countries, especially commodity exporters, have suffered the most (Brazil and Russia). Tightening financial conditions result in capital outflows even from relatively faster-growing countries like India, which has, however, benefited from lower global oil prices.
In a note to the G-20, the IMF draws attention to moderating global growth. According to the note, the slowdown this year will be more pronounced for emerging economies. These economies are likely to experience a tightening of financial conditions with a deteriorating market sentiment and significant capital outflows.
While prices have fallen across the board, the decline in equity and currency values across a range of emerging markets have reached “crisis proportions”, the Washington-based International Institute of Finance (IIF) says. There are fears of a revival of currency war among countries trying to keep themselves above water. These fears will have to be assuaged in the G-20 meet.
India, one of the world’s largest commodity importers, looks better placed to meet cross-border repercussions, given its relatively favourable near-term growth prospects and reduced external vulnerabilities in the wake of sustained fall in oil prices. However, the IMF cites that “some macroeconomic imbalances remain”.
While the faster-than-expected fall in inflation has created space for considering modest cuts in the nominal policy rate, medium-term inflationary pressures and upside risks to inflation remain, IMF said. And with balance sheet strains in the corporate and banking sectors, financial sector regulation should be enhanced, provisioning increased, and debt recovery strengthened.
Already, the Finance Ministry is pushing for a further rate cut. Chief Economic Adviser Arvind Subramanian has gone to the extent of posing a deflation threat to warrant a rate reduction, a view not shared by other top economists like Dr C Rangarajan. But the latter favours a cut in the next RBI policy review if inflation remains at current low level.
RBI could then wait and see how things evolve with the monsoon inadequacies and possible rise in CPI as well as the expected US Fed rate rise in coming weeks, according to Dr Rangarajan. Since Subramanian talks of “price deflation”, the Finance Ministry should tell us which all prices in consumer basket have come down, beyond perhaps petrol and diesel prices. Simply equating decline in indices - a statistical average of hundreds of items - with prices in the market will not suffice.
In fact, Moody’s (rating agency) sees inflation as a real constraint, more than growth, in its assessments, because India has underperformed on inflation compared to peers. Dr Rangarajan sees the likelihood of CPI rising later. The RBI would also have to take into account the fall-out from the monsoon failure and US Fed’s rate rise expected in the coming weeks, before making further moves.
Financial market turmoil and their underlying causes would engage the G-20 Finance Ministers. Meanwhile, China would be expected to defend its policies on the market-related adjustment of its currency, the renminbi, and cite its monetary easing actions to stabilise its unsteady stock market. But the general concern is about the extent of its currency adjustments shortly.
India’s Finance Minister has already said that not a single domestic factor has contributed to the present international market volatility. But the facile assumption that China’s slowdown and weakened outlook presents a unique opportunity for India to take a global growth leadership role is misplaced.
China’s cheaper currency makes it much more competitive with command exports to all countries. China is determined to safeguard its exports and preserve growth at not less than 7 percent in 2015. How far the G-20 Ministers go for “joint actions” by advanced and developing economies to raise growth and mitigate risks, as well as arrest decline in world trade, remains to be seen.
Unless the G-20 nations take up coordinated policy measures with a common objective of reversing the slide toward a global deflation and ensuring growth and employment, the risks and uncertainties will not abate. Moreover, such coordinated policy measures would require commitments from both advanced and emerging market economies.
India has recently seen some capital outflows and the stock market have turned bearish outright. Although domestic demand is on a gradual rise, India will be performing well below its potential in 2015/16 and could see a pick-up next year, according to most forecasters. The worst hits are the oil and commodity exporters, though, India has gained some fiscal space and reduced external vulnerabilities as fall in oil prices has continued.
Like RBI earlier, IMF has emphasised for India structural reforms to raise growth potential including removal of infrastructural bottlenecks in the power sector along with labour and product market reforms to improve productivity. RBI has also envisaged only a “modest pick-up” in activity against the backdrop of tepid global recovery.
The challenges for Government remain. How to advance reforms, while encountering political difficulties as we saw in the September 2 labour strike, to be able to raise potential growth and alleviate structural constraints. Unexpectedly, the global environment has also turned less conducive for India to push ahead with certain initiatives.
Global growth in the first half of 2015 declined in comparison to the second half of 2014, IMF note to G-20 said. It reflected a further slowdown in emerging markets and the weaker recovery in advanced economies where there are protracted weaknesses in productivity growth. In the USA, growth was only 1.8 percent in the first half of the year as compared to3.8 percent in the latter half of 2014.
Relentless pressures on Indian currency and losses on Dalal Street are also making investors wary, and some leading investors seem headed for exits. In August alone, the outflow was 2.52 billion dollars from the equity market, the largest for a month since October 2008.
There is no doubt that problems of the type are now afflicting the BJP-led NDA Government and its credibility on reforms for faster easing of doing business, and job-creating growth is currently at a low ebb. IPA
(The views expressed are personal)