About a year ago, when Standard & Poor's downgraded the US's long-term debt from AAA to AA+, the world seemed about to bid goodbye to the greenback's supremacy.At Firstpost, this writer confidently predictedthe following: a gradual shift away from US dollar to emerging market currencies and assets, and a bumpy ride to Indian stocks which could see the Sensex hitting 60,000 by 2018 - or even earlier.Since then, things have gone in reverse. Mea culpa. Till about a week or two ago, thanks to the UPA's absolute inability to get either its coalition politics or its macro economics in order, the Indian stock market has given absolutely no indication that it has any high ambitions on investor returns.Globally, one has been wrong on the medium-term direction of the dollar, which has strengthened like never before.It is, therefore, time to revisit Sensex 60,000. Is that going to be a pipe dream?
Well no. In fact, one would like to reiterate that we are on course for it - despite the blip of 2011-12 - provided we get our policy act right over the next two years at least now. We don't need to do too much. We only need to avoid mistakes. The only event in which we will not hit Sensex 60,000 over the next six years is if our governance goes to pieces (as it did last year) or if the world economy gets into a depression (which it did not last year, but seemed likely to).
In fact, one should look at a Sensex range of 20,000-25,000 by 2013-14. And a takeoff after that.
Compared to last year, in fact, the global macro situation has moved in our favour - though, one must admit, it has less to do with what we did and more with what the US, Europe, Japan and China didn't. It seems the Pink Panther Blunderbusses of the UPA have been beaten in the game of messing up by the US and Europe.
Consider how adversely the world is faring now.
The US is slowing down further, despite years of loose monetary and economic policy. And there is a good reason for that. The US economy, despite a superb micro-economic free-market, is the worst run in the world.
As Shanmuganathan Nagasundaram wrote in Firstpost last week, "On a fundamental basis, the US economy is probably in a much worse situation than even Greece, let alone the eurozone. Readers must remember that the US government uses cash-accounting to report its fiscal deficit at $1.3 trillion. Using GAAP accounting, which is a far more indicative and reliable measure than cash-based accounting, the deficit is well in excess of $5 trillion (Source: shadowstats.com) and growing. So we are looking at a deficit-to-GDP ratio that is well in excess of 30 percent as compared to the eurozone deficit of 7 percent."
The US is not only facing a slowdown at near-zero interest rates, but a "fiscal cliff" from which it could tumble headlong towards the end of this year. As Firstpost noted in May, "By the end of this year, the Bush era tax cuts will expire and automatic budget cuts could also start kicking in from 1 January 2013. The US Congressional Budget Office (CBO) says the US could fall off a 'fiscal cliff' if tax rises and budget cuts of $1.2 trillion 'are not avoided.' If the Republicans and Democrats do not agree to again raise the borrowing limits, the US economy could contract 1.3 percent in the first half of 2013."
The only way the US can avoid all this is by yet another round of quantitative easing - a QE3 - of indeterminate proportions. After QE1, QE2 and two Operation Twists (buying long bonds and selling short-term ones), the surprise is that the US still needs to print money to pay its bills, and even then have huge debts to clear.
Conclusion: There is no macroeconomic reason for the dollar to get its high valuation except for historical reasons - that the scent of the greenback is reassuring to old-timers.
But it won't remain that way for long. What goes up always comes down. The US dollar surely will in the next few years, once the scales have fallen from investors' eyes and they shed their risk-taking fears.
Europe too is going the US way of excessive monetisation, despite the conservative instincts of the Germans. The European Central Bank's (ECB's) core interest rate is down to 0.75 percent, and it will probably be pulled down to 0.5 percent before the year is out.
As Greece flounders, and Spain totters, Italy and France are on the brink, and the only thing that will save the euro and the eurozone in the short run in endless monetisation of deficits - that is printing more euros like the US is printing dollars.
Europe has to get two things right if it is to survive as a single currency area: take an axe to the welfare state, and create a formal fiscal and monetary union so that countries lose their sovereignty and power is vested in a central authority (which will be driven by the Germans).
In short, Europe's return to its old glory will depend on the rise of a continent driven by the Fourth Reich - a benign one, no doubt, but as of now no one can be sure it will happen.
It's either Germany in the driver's seat of Europe or a splintering of the eurozone in slow motion.
And while this happens in slow motion, it is difficult to see smart money betting on the euro. The smarter money should be heading to India, despite temporary blips.
As for Japan, its 20-year deflation continues. So no hope here. And China's slowdown is certain - since it cannot easily export to the rest of the world in this economic scenario. China's second cut in interest rates in less than a month suggests that the domestic economy is slowing faster than one thought.
Now consider where India stands.
One, there is a semblance of return to policy sanity with Manmohan Singh in charge. One cannot expect miracles, but at least the slide will be arrested.
Two, with the Reserve Bank's repo rate at 8 percent when interest rates are near zero in the US, Europe and Japan, money has to flow back to the rupee. It also means India has greater leeway to reverse its domestic slide than probably any other country.
Three, India has always been a domestic growth story. It has stalled not because of the euro and external problems - though they did contribute to it - but because there is domestic diffidence in investing. This will probably get reversed over the next one or two years. (But we should be keeping our fingers crossed anyway and hope the UPA will not goof up further).
Four, if the world slides, India benefits in some areas. This is what happened in 2008-10, when the global recession brought down our inflation rates to zero from 12.5 percent as oil prices crashed. And growth revived. We would not be wrong to assume another round of at least moderate good luck this year.
Five, falling oil prices will give the finance minister space for increasing spending. Hopefully, this time the spending will be targeted at growth-inducing areas like infrastructure, rather than subsidies.
India may be about to get lucky again. One hopes the PM doesn't drop the ball this time.
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Updated Date: Dec 20, 2014 11:24:18 IST