{"id":250451,"date":"2015-08-28T15:28:20","date_gmt":"2015-08-28T09:58:20","guid":{"rendered":"http:\/\/www.tehelka.com\/?p=250451"},"modified":"2015-08-28T15:28:20","modified_gmt":"2015-08-28T09:58:20","slug":"revenge-of-the-red-dragon","status":"publish","type":"post","link":"https:\/\/tehelka.com\/revenge-of-the-red-dragon\/","title":{"rendered":"Revenge of the Red Dragon?"},"content":{"rendered":"

\"Photos:
Photos: AFP<\/em><\/figcaption><\/figure>
\nFor the first time, India was poised to grow faster than China and become the fastest-growing economy in the world. Then came the revenge of the Red Dragon, which tanked global stock markets and devalued several currencies. On Black Monday (24 August) \u2014 most market collapses happen on this day \u2014 stocks across continents fell like nine pins as they took their cue from Shanghai, whose index dropped by 8 percent. The story was the same in the US, Europe, Asia and Latin America.
\nWithin six hours of trading, the Bombay Stock Exchange (BSE) Index went into a tail spin and fell by over 1,600 points, the largest single-day slump in seven years, as Indian investors lost their shirts worth over $100 billion. All the stocks that comprised the indices of the BSE and National Stock Exchange were in the red, and foreign investors vamoosed with almost a billion dollars in a single day. Global currencies, including the rupee, took a major beating.
\nEveryone blamed China for the boil. In the recent past, its growth has slowed down, debt has zoomed, and its bid to opt for multiple currency devaluations hasn\u2019t worked. With one of the world\u2019s largest economies in trouble, its big sneeze was bound to chill the world \u2014 and India. However, this is only a part of the story. India also suffered because of the economic travails in Europe, uncertainty about America\u2019s future monetary policy, and its unique domestic problems.
\nThis is really a tale about how a cold in China, fever in Europe, pain in the US, and a mix of dehydration and humidity in India decimated Indian stocks and currency. This is a narrative about how the globalised world wreaks havoc when things go wrong, and how India, unlike China, is the sufferer, despite her claim that she is on her way to become an economic superpower, like China. In short, this is a story about how a butterfly in Brazil can cause a Tsunami in Asian seas.
\nA tale of several nations<\/span><\/strong>
\nThe China impact is simple to grasp. As it is one of the world\u2019s largest manufacturer- consumer, an economic slowdown will lower demand for products that it imports and reduce supply of items that it exports. While the former will lead to price slumps, the latter to inflation. Thus, the continents that produce raw materials and intermediary goods, like Asia, Africa and Latin America, will earn less, and those that consume final products, like Europe, America and richer parts of Asia, are likely to spend more. In both cases, the result is the same: pressure on foreign exchange assets.
\nIn the end, it will impact the Current Account Deficit (CAD), i.e. the difference between a nation\u2019s foreign earnings and expenditure, of most nations. India is no exception; it is both an exporter to China and importer of Chinese goods. The advantage that India, like other nations, enjoys is due to the slump in global crude prices. Being an importer of crude, this will reduce her expenditure by a considerable proportion. Also, the decrease in other commodity prices will benefit her.
\nTo save its economy, China resorted to several devaluations of the Yuan, its currency. The idea: a less strong currency will boost exports and lead to higher growth. The logic: to give an Indian example, a few months ago an exporter who sold his product for 60 would earn $1, when the rupee-dollar exchange rate was $1 equals 60. Now that the exchange rate has devalued to $1: 66.65, his product is still worth 60, but he gets 90 cents for it, a reduction of 10 percent in income.
\nExperts feel that the Yuan\u2019s devaluation can kick-start a race among nations to adopt the same strategy to boost their exports and prevent a flood of Chinese imports. The idea for the latter: like devaluation boosts a nation\u2019s exports, it makes imports into the country expensive. The logic: a few months ago, if an imported product cost $1 or 60, it would still be priced today at $1, but will cost 66.65. Such a scenario makes foreign investors flee a nation because of the currency uncertainty.
\nAdd to this scenario the fact that despite the Greece bailout, Europe is not out of the woods. Although European Union leaders have maintained that there are no chances of a contagion effect, there are several question marks over the economic futures of Greece, Spain and Portugal. This adds to the nervousness of global investors, who flee at the first signs of trouble.
\nThen there is the American dream or rather its nightmare. Everyone expects interest rates in the US to go up in the near future. This will mean that the returns from domestic investment will go up. If the risks in other markets, especially in emerging markets like India, rise or remain the same, foreign investors are likely to move their money elsewhere and seek a safe haven in the US. It is finally about the risk-return equation. Anyway, investors have lost money in emerging markets this year; however, their losses in Indian stocks are less than in others markets.
\n
\n
\"What
What was it?<\/strong> Many wondered as the Bombay Stock Exchange plummeted on that fateful Monday<\/figcaption><\/figure>
\nA story of fiscal deficit<\/strong><\/span>
\nFinance Minister Arun Jaitley has regularly evinced confidence in the Indian economy. He said that trends in sectoral growths, tax collections and corporate sentiments indicate that the economy is on an upswing. Unfortunately, experts feel differently. They point to limited hike in private investments, below-the-average monsoons, iffy corporate results and spiky and inconsistent growth in core and infrastructure sectors. Several CEOs, who sang Modi praises in the past, have publicly said that this government has under performed in the past 15 months.
\nModi\u2019s failure is his inability to walk his talk and fulfil the promises he weaved during his election campaign and after he assumed power. The last monsoon session of Parliament provided evidence that this government, like the previous regime, may fall into the policy paralysis trap. The opposition managed to stall crucial reforms like Goods and Services Tax, and land acquisition. Given the NDA-2\u2019s minority in Rajya Sabha, the future may witness more of the same.
\nIf the investment sentiment and growth prospect remains subdued, Jaitley has to raise the estimated 69,500 crore through disinvestment of government\u2019s shares in state-owned entities. Thus, he needs to escalate the pace of privatisation, especially what he dubbed as \u2018strategic sale\u2019 in his second Budget. This is where local factors impact Indian stocks. Past experiences prove that whenever India wishes to raise the disinvestment tempo, public sector stocks go for a toss.
\nThis is exactly what happened in the run-up to Black Monday. Over the past few weeks, several public sector stocks took a beating. In the past two weeks, Coal India, with a decline of 18 percent, featured among the top five losers in the last fortnight. Even on 24 August, they were among the most badgered among all the stocks. GAIL\u00a0was among the top five losers with a 13 percent decline, followed by ONGC\u00a0(11 percent). Ironically, this was the day when the disinvestment of state-owned Indian Oil Corporation began. Luckily it was oversubscribed on the first day.
\nA banking narrative<\/strong><\/span>
\nAmong the biggest losers on Black Monday were the banks, both in the public and private sector. The reason was obvious to everyone who knew about the crisis in Indian banks. Experts have predicted that \u2018stressed\u2019 loans, which include bad loans (non-productive assets) and those that are likely to become one, would cross the 8,00,000 crore mark. Almost 40 percent of these loans will constitute bad loans. The crisis in sectors like coal, steel and power can peg this figure higher.
\nEven though the government hailed the auction of coal blocks as a huge success it may turn into a bane over the next 12 months. The allocation of the mines to private and public sector players earned a mind-boggling 4,00,000 crore. But due to several factors, these captive mines and related-user industries (steel and power) may turn unviable and, hence, unprofitable. This will further stress the banking sector, which has huge exposures to all the three sectors.
\nExperts contend that the government will then attempt to save these sectors, as well as the banks. Its only option will be to hike power tariffs, which is likely to have a multiplier, but negative, impact on the economy. The experiences in other natural resources, like spectrum (telecom), hint at a hike in power charges. The only sufferer then will be economic growth.
\nThe biggest fear in the corporate sector and the banking sector is a slump in rural demand due to below-average rains. This will hurt corporate earnings over the next few quarters, and result in good loans turning bad in even the consumer sectors. This is a situation that the government can ill-afford. So, it has to get growth at any cost. But the fiscal constraints remain. Jaitley cannot let the fiscal deficit to go up because that may lead to a global downgrading of India\u2019s rating.
\nIn addition, bad monsoons can cripple the agriculture sector, which is ailing with emotive and crucial issues like farmers\u2019 remuneration, debt and suicides. During his election campaign, Modi promised that his policies will hike farmers\u2019 incomes by 50 percent. While this government has rejigged the numbers to show lower suicides, the situation in several parts of the country is grave. Debt and low productivity remain the major issues that plague the lives of farmers.
\nA nightmarish scenario<\/span><\/strong>
\nImagine this scenario. Inflation levels go up, guided by the continuous rise of food products. In Delhi, onion prices threaten to reach 100 a kg. The central bank refuses to lower the interest rates since it wishes to focus on price rise. High interest regime impacts growth; growth remains low as sentiments fail to improve, and private players play the wait-and-watch game. The rupee takes a beating due to global factors, which has a negative impact on CAD.
\nObviously, corporate earnings fail to improve; in fact, faced with a decrease in rural demand due to bad monsoons, several companies incur losses. The effect on the Indian stock markets is imaginable. Most stocks will plummet, and foreigners will exit in a great hurry. As foreign money flees, it will put further devaluation pressure on the rupee, which will increase CAD. Higher prices of imports will impact demand for such products, which will further curtail growth.
\nAs production slumps and supply reduces, prices of several products are likely to go up. It is a typical demand-supply- price curve. The central bank doesn\u2019t touch interest rates; sentiments within the business community become more negative. The downward cycle goes on and on. Within a couple of years, India is back to an era of high inflation and low growth. The latter affects the incomes of people and the former hikes their expenditures: A double whammy for the citizens. Imagine the economic consequences! It is a nightmarish scenario for Modi and Jaitley.
\nNow imagine the political consequences of such economic developments. While the country\u2019s economy spirals downwards, the ruling regime takes several political hits. The BJP\u00a0and its coalition partners lose several state elections over the next couple of years. They don\u2019t manage to get the required numbers in the Upper House and, hence, are unable to push through any policy, critical or minor. It is caught in a classic policy freeze. Finally, imagine the consequences of such politico-economic trends when the country goes to the polls in 2019 to elect the next prime minister!
\neditor@tehelka.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

It\u2019s about China, stupid. Take a breath and think again. It\u2019s also about the European Union and America as well as about Narendra Modi\u2019s India.<\/p>\n","protected":false},"author":78,"featured_media":250471,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[56],"tags":[2879,596,453,666,1770,2424,6605,574,9382,406,9383,96,50,9384],"_links":{"self":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/posts\/250451"}],"collection":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/users\/78"}],"replies":[{"embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/comments?post=250451"}],"version-history":[{"count":0,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/posts\/250451\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/"}],"wp:attachment":[{"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/media?parent=250451"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/categories?post=250451"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/tehelka.com\/rest-api\/wp\/v2\/tags?post=250451"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}