Asia knocking?

The chaos in the capital markets could be a loud message that India8217;s immunity from the Asian flu is a thing of the past. Yet even if it is the world capital markets 8212; Wall Street and European stock markets have taken a beating alongside Asian ones 8212; that have immediately told on Indian bourses, there is no absolving the BJP government of having stretched its luck. It is worth pondering why India escaped direct damage from the first attack of the Asian flu. Being still a relatively closed economy worked in its favour. The central bank stepped in early on to convey that it was determined to safeguard the rupee at a time when India might just as well have gone the Asian way. It was sharply criticised for trying to put a floor under the rupee and choking the economy by causing interest rates to rise. But this newspaper had argued even at the time that the choice was between compromised growth and possible disaster. It seems to have been vindicated.

Yet that is not where the trouble lies this time around. Theovervalued rupee had to be left to find its level once the worst of Asia8217;s troubles seemed past. In any case even comfortable forex reserves will not suffice to bolster a seriously threatened currency and raising interest rates is not an appetising option. In fact is hard to say that sound policies will keep the crisis at bay when Japan8217;s economy grows worse every day and threatens to drag the rest of Asia with it. That said, this government has done more than its fair share to create poor expectations. Indeed it may be premature to conclude that India has been overwhelmed by Asia. There are ample reasons to seek at home just now for crashing markets, apart from the looming payments crisis that is said to have partially fuelled Monday8217;s fall. A more proper diagnosis perhaps is that poor economic expectations, created by sanctions, a bad Budget, and general economic ineptitude have combined with world developments to wreak havoc. The bottom line however remains that all this make India very vulnerable to afresh Asian onslaught.

As Asia established with startling clarity, market sentiment is a fragile thing driven by expectation. Once panic takes hold, it can be very irrational indeed. When Asia first began to unravel, investors took fright out of all proportion, creating a fresh crisis of their own. Much the same thing could happen elsewhere. Doomsayers have warned for a long time that as healthy as America8217;s economy is, nothing justifies the wild euphoria that has gripped Wall Street for so long, and that the bubble will burst sooner or later. Japan could quite easily provide the prick. As for India, quite independently of the world scenario, the markets are right to find precious little to cheer about. Sanctions may not hurt in the short run but they will in the longer run. Even in the short term the indirect fallout of worsening investor confidence is what will take the real toll; this is already apparent. And desirable though a cheaper rupee is, the fear is real of a possible crash. The last straw, ofcourse, was the Budget which took no trouble at all to take a grim situation in hand. Instead it set off possibly misplaced fears of high inflation, hand in hand with suspect growth. All that can be hoped for at this point is that India is not facing a relentlessly advancing Asian disease.