 "Why India's economy is looking better in a world of flashing red lights")
Ask any drug addict. Once you are used to the highs, it is difficult to give up on the stuff.
This is why Christopher Wood, Managing Director and equity strategist at CLSA, does not believe that the US, Europe or Japan will let go of easy money in the foreseeable future. As a former easy money addict, India is just out of rehab and its economy looks like it is about to bottom out and inflation is past its peak.
In a world economy where “red lights” are flashing everywhere" - to use British PM David Cameron’s evocative phrase - India is signalling green.
The world has lived on easy money ever since Lehman Brothers went bust in September 2008. Since then almost every major country or economic grouping has been busy printing money to avoid a Great Depression. The US has had three QEs (quantitative easing), with the third one having just ended. Europe is sure to ease up again as the eurozone is still to recover. Japan, after doing a massive stimulus under Shinzo Abe two years ago, launched a second massive bond-buying plan a few weeks back. But with GDP again unexpectedly falling in the quarter ended September, yet another money printing exercise is likely.
This is what prompted Cameron to say the other day, “Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy.”
He could say that again, for US industrial output fell by 0.1 percent in October, and China’s third quarter GDP growth was the slowest in five years . Its internal debt bomb could crash the economy in the coming years. According to The Economist, China’s total debt (combining government, corporate and household borrowings) is two-and-a-half times GDP - higher than most countries outside the developed world.
Notes The Economist: “Since most financial crashes are preceded by a frantic rise in borrowing - think of Japan in the early 1990s, South Korea and other emerging economies in the late 1990s, and America and Britain in 2008 - it seems reasonable to worry that China could be heading for a crash.”
To avert this crash, the chances are that China will print even more money and load up on even more debt - just as the European Union, the US and Japan have done.
Not surprisingly, Wood of CLSA is betting that the US, far from ending its QEs, will launch yet another one in 2015 , and the European Union will also do so to keep the common currency afloat and the Union in one piece.
If this is the global scenario, what are the implications for India?
#1: Easy money will keep asset prices high - and this means FII money will continue to flow to India. Good for stocks. Wood of CLSA clearly thinks India is still fairly valued.
#2: A struggling global economy, combined with regional tensions in West Asia, will mean commodity prices will remain benign for a while. Good for India.
#3: A slowing China reeling under debt means in two to three years’ time, India will be the fastest growing major economy in the world by 2017 or 2018. Narendra Modi will just have to keep making life easier for business and recapitalise banks quickly to get the investment cycle moving up.
#4: If the whole world is opening the fiscal tap again, the sensible thing for India to do would be to slow down its own proposed sharp reduction in the budgetary fiscal deficit and focus on cutting the revenue deficit (subsidies, etc). This will allow the government to start investing in projects, which will give a push to industrial revival.
#5: The finance ministry should not pressure the RBI to cut interest rates too soon. Reason: the strengthening of the dollar post the ending of QE is pressuring the rupee downwards. It is high interest rates and the RBI’s forex market operations that are keeping the rupee relatively steady. If the rupee falls further, inflation will revive again even though oil prices are down. It’s not worth making money cheap for business just to start importing inflation again. The battle against inflation must be decisively won this time.
#6: Overall, as the world grapples with slowdown, India will have a problem pushing exports (as the latest October trade figures attest .)
But a global slowdown is less bad for India than for the rest when domestic growth is reviving and inflation falling.
We are probably entering a sweet spot where India looks good because the world looks worse.