Focus on internal economic policies not Chinese slowdown

As China slows, and takes corrective action, the rest of the world, especially people who play the market for a living, look shell-shocked. But why? No economy can go on growing around 10 per cent-odd rates for decades: China managed to do so for nearly 35 years. It is now slowing down, manufacturing and export growth cannot keep pace in a sluggish global economy, its markets are tanking and the currency has declined against the dollar, which has strengthened against most major currencies.

Anywhere else, this would have been seen as normal, but market makers globally are reacting to China like rabbits caught in a headlamp. George Soros, one of the canniest players out there, now says this is akin to the crisis of 2008, when the US subprime crisis brought the global economy down. Surely, he is exaggerating.

China’s crash is also being blamed for the sell-off in Indian equity, now at 52-week lows. That misses the point. Indian markets have lived in a bubble for at least two years, and it is time this burst. The fundamentals of companies, especially in the infrastructure, metals, construction and cement sectors, are poor. This reflects extremely poor implementation of projects, a domestic slowdown and political gridlock that prevents reform legislation. Most of our bigger companies in all these sectors are heavily debt-ridden, with little hope of shedding the burden unless projects actually get moving on the ground. The latter has proved extremely tough. This burden threatens lenders, most of which are state-owned.

It is not enough for the government to stick to deficit targets. It must invest aggressively to free up the animal spirits of the private sector. Companies saddled with debt can be freed up, by carving out specific projects into special purpose vehicles and taking them off the books and handing them over to other solvent investors. This will call for political dexterity, to pass the Bill to create a bankruptcy code, and determined leadership to get the financial sector and industry to act in coordination. Internal policy action is what the economy and the markets need, not better-behaved neighbours.