Emerging Markets – Where does India stand?
It has been a decade that the world was in the grip of a global financial meltdown, which began with debt obligations connected to subprime mortgages in the United States that led to an international banking crisis. Credit flows dried up and caused the worst global recession since the Great Depression. Growth in developed economies stalled. Extraordinary measures by central banks, and demand from Emerging economies spearheaded the global economic recovery.
Ten years on, US has returned to a path of growth, but a host of the emerging market economies including Turkey, Argentina, South Africa, Mexico, and Indonesia are in the grips of a currency crisis. India and Brazil are witnessing relentless currency depreciation. Pakistan and Sri Lanka are gripped by ballooning debt. The fear of an impending contagion is wrecking stock and bond markets across the developing world. The headwinds – in the form of a strong dollar, rising global interest rates, rising oil prices, uncertain geopolitics, deepening trade war between the United States and China and the failure of Brexit – complicate India’s journey towards prospeirity.
India is the fastest-growing large economy in the world and accounts for 15 percent of the global growth. The country registered 8.2 percent growth in the first quarter of 2018-19, continuing a sustained growth recovery over the past four quarters. The initial hiccups of transformation are over for the Indian economy for reformatory measures like GST and IBC and the broad basing of growth is evident from the uptick in the manufacturing sector performance (13.5 percent growth). In comparison, IMF’s global growth projection for 2018 is a tepid 3.9 percent.
India’s Q1 current account deficit (CAD) stands at 2.4 percent of GDP. In value terms, the CAD was at $15.8 billion in April-June this year as against $15 billion in the same quarter of 2017-18. High crude prices have largely contributed to this widening CAD. In the September 2018 update of its Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) has set the forecast price for the Brent spot price at $74/bbl for 2019. According to a Reuter report, Bank of America Merrill Lynch has said that its average Brent crude oil price forecast for 2019 is $80 per barrel. Brent crude futures were at $81.48 a barrel in September this year. A modest estimate hence can be made that Brent would be hovering around $77 to $ 80, next year.
Global investor sentiments have been positive for India; Net foreign direct investment at $9.7 billion in the first quarter of 2018-19 was higher than $7.1 billion in the year-ago period. Foreign institutional investor (FII) equity holding firmed up to some extent in June end this year (mostly in banks and financials and media and entertainment sectors) after the initial exodus on the back of the strengthening dollar. Domestic Institutional Investors (DII) holdings jumped to a 12-quarter high during the same period, giving buoyancy to the market.
India’s foreign exchange reserves reached a peak of $426.08 billion on 13 April 2018. Following the rupee downslide, India’s foreign reserves fell by $25.58 billion representing a decrease of 6.40 percent since April 2018. With India’s monthly import bill close to $40 billion, we have enough forex to last around 10 months with the central bank at the moment.
While RBI monetary management seeks to ensure a monitored fall for the rupee, the long term goals to augment resilience definitely lies in boosting the real economy and augmenting corporate governance, especially performance of the banking system in the country. The government has already raised import duties on 19 items, including jet fuel and air conditioners to control CAD. Other measures include removing of the 5 percent withholding tax on masala bonds, removal of the foreign portfolio investor exposure limits in corporate bonds and a freer ECB regime.
The plus point for India is that the government has successfully adhered to the fiscal consolidation policy. The fiscal deficit averaged 3.9 percent of gross domestic product (GDP) between 2014 to 2018, down from an average 5.5 percent between 2009 to 2013. Consumer inflation has also eased to an average 5.7 percent between 2014 and 2018 from the 10.1 percent average seen between 2009 and 2013 and demand for gold as a hedge against inflation is low, again taking off some of the pressure from CAD.
India appears to be in a position where with proper fiscal and monetary support, it can tide over the short term issues emanating from the emerging market crisis. But the long term resilience of the fastest growing economy in the world rests on raising its competitiveness, labour productivity, economic and structural reforms and regional economic integration with neighbouring countries and other RCEP nations. Specialization based production through global value chains (GVCs), export promotion and time bound protection for fledgling industries can put India ahead of the curve.