Global imbalances and macro uncertainties will make 2016 a difficult year for India

By Sumant Sinha

This is going to be a difficult year – but it will also be a year of reckoning for India and its policy makers. So far the popular perception is that this government is trying earnestly to revive growth, but that the hole has been deeper than imagined.

We are suffering from a lack of demand – and the drivers of growth are taking time to materialise.

The easy stimulus would have been a quick reduction of interest rates but the RBI governor, battling the inflation demon with a long term view, has ruled that out. Linking the repo to CPI rather than WPI means that consumers are getting a lower rate for their savings than they would have liked, while on the other hand, industry is being asked to pay a real rate based off the WPI which is extremely high. This in itself is also suppressing new investments and credit demand.

RBI therefore is not the cavalry riding to the rescue in the short term. The other quick fix would be a fiscal stimulus in the form of lower taxes or higher spending by the government.

This the government has eschewed so far citing, correctly, fiscal prudence. The fiscal deficit target for this year is 3.9%. With oil prices at such an unexpectedly low level, and with the government mopping up so much by way of extra taxes, one has to wonder money is going.
Is it going to meet unanticipated shortfalls in tax revenues given that the nominal growth of the economy is less than the real rate perhaps, or is it bridging the shortfall in divestment receipts? Either way, the reality is that the government has a tough decision on its hands whether to stay the fiscal course or go for some quick spending to kick start the economy.

This leaves only the long haul solutions – fixing sectors of the economy and taking them to a point where investments become attractive despite the shortage of investment appetite. The road sector is one such sector where the investment climate is turning positive again. Railways might be another. Renewables, another sector where demand visibility is there, risks turning away investors with the tightness of tariffs through the competitive bidding mechanism.

But large areas of the economy from agriculture to social sectors such as health and education to tourism, manufacturing and so on are not seeing the kind of traction one would have expected at this stage of the government’s tenure. Given the global macro situation, we clearly cannot expect exports provide any tailwind either.

It is not therefore readily apparent what is going to break the economy out of its funk. Some would argue that an economy growing at 7.5% cannot be described as being in a funk to begin with. Yet that is the general perception. So we have to be prepared for the fact that it is going to take us a while to really have the economy back to a point where the numbers are backed by animal spirits.

The global economy meanwhile is facing serious imbalances. Given the Chinese slowdown commodity prices have crashed, moving in huge steps as they are wont to. Many commodity panies have been left gasping for breath in the midst of their investment cycle.

The oil markets are suffering from their own swings with the Saudis trying to pressurise shale gas producers in the US and perhaps pre-emptively Iran. But the situation now seems to have spun out of their control with prices crashing to a point that is leaving the oil economies gasping for breath. This has sucked the oil driven liquidity out of the markets, which is having its own impact financial markets.

While many millions of individual consumers will benefit from the oil price decline, it will take a long time for this demand to be felt in the global system. But the sucking out of oil dollars is having an immediate impact here and now, which is negative.

At the same time, many emerging market countries and companies loaded up on dollar debt in the years since the financial crisis of 2008. Debt was cheap and there was considerable central bank driven liquidity sloshing around the system. A Chinese yuan devaluation to prevent capital flight out of their country – China lost 15% of its reserves last year and more than $100 billion in December alone – will inevitably lead to a devaluation of many emerging market currencies.

Moreover, the US has chosen this very moment to start their tightening cycle as a result of which the dollar will strengthen even more. This will make it harder for debt laden entities to service their dollar debt. It is therefore likely that there will be defaults in high yield bonds in emerging markets or in the oilspace. Such stresses take many months to work through.

All these global imbalances make the world a difficult place this year. There are too many macro uncertainties and this is not a good time to layer on risk in your business. And that is precisely why the Indian revival could take longer to shape up than expected.

(The writer is an entrepreneur and economic analyst.)