Updated: August 25, 2015 8:54:56 am
The Employees Provident Fund could not have received a worse welcome toast from the market than the 5.94 per cent drop it was offered on Monday. But it would be puerile for the Rs 3.6 lakh crore fund or others to turn off at this point from the market. Simply because there is no getting away from the impact of a downturn even if it and others like National Pension Scheme were to seek the safety of government papers.
The huge plunge in the stock market on Monday was not generated by a few brokers’ cartel in India. It was a global seize-up. And a downturn of this size will not spare the government finances too. When the equity market seizes up, it impacts the debt market too, driving drown yields as scared investors plunge for the safety of government papers, making those scarce. It is not surprising then on Monday in a very unusual move the government deferred its weekly auction of debt papers for Rs 14,000 crore to await further signals.
All of this brings home the point that the only way a market can behave well is when the economy behaves likewise. The moral of Monday’s Chinese hurricane is that on this score the Indian economy has done relatively well. The episode was not a test of India’s economic balance sheet. By the tests of inflation management, fiscal prudence and balance of payments, India has done remarkably well. The Rajan-Jaitley team has delivered on these fronts. Even if the hurricane worsens as it is likely to either now or later it is this which will keep the investors interested in the Indian economy. Imagine the consequences if the Chinese storm had blown up in August 2013, instead?
The significant cavil is on the political front. Our internecine fight over economic policies like the GST bill, land law and the delays we made in passing of the insurance bill has cost investors those few hundred points of extra dip on Monday. In 2015 when the story about the emerging economies has frayed across the world—Brazil, Indonesia and Turkey are examples of how disruptive politics has hurt them the Indian story would have looked a stand out show. But the government at the centre has at times slipped up on some of the opportunities—essentially battling for domestic media points than sticking only to the knitting of the larger Indian growth story to the international audience. This is why despite the impressive score card so far the Indian markets ended a tad lower than many Asian markets. The difference, one would attribute lies with the political deadlock in Parliament.
So unlike 2008 when the global meltdown was a penance for the hubris of Wall Street, the shenanigans of 2015 are about China and on a larger scale about the politics of the emerging economies. As RBI Governor Raghuram Rajan pointed out India has to concentrate on making the domestic demand grow fast to ride out this hurricane. There is little or no chance that the slack being created by China will create space for us to export more. And if domestic demand has to rise, the governments at the states and the centre have to focus on job creation and loosen up the strait-jacket for entrepreneurship for Indians to produce more for consumption within the country.
The Chinese hurricane forces the Indian economy to operate on a pull yourself up by the bootstrap model. It is no point saying that the world money has nowhere else to go than India et al. It can run back to the safety of dollar and US bills. The investors need the India government to show a little more spunk for the money to stay invested in the Indian markets.
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