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Pre-poll populism may hit ‘fragile’ economy

The fresh wave of pre-poll extravaganza could ensure that India continues to remain under watch.

February 5, 2014 2:46:57 am

Even as emerging markets led by the so-called ‘fragile five’ were faced with headwinds going into 2014, the sharp sell-off wave in January that pummelled stocks, bonds, and currencies across key economics has been a bit of a shocker. The emerging market shakeout has largely been prompted by worries of a sharp slowdown in China and the US Fed’s progressive winding down of its bond buying programme. Despite a late recovery on Tuesday, the BSE Sensex is still down 5.4 per cent since its record close on January 23, with FIIs reported to have sold an estimated $656 million in shares over the previous seven sessions.

Amid all this, India, in the company of its peers in the infamous grouping of the ‘fragile five’, looks increasingly vulnerable. While on the face of it, India’s macroeconomic projections may look somewhat comfortable for now, with the rise in interest rate ostensibly the only downside at a time when inflation seems to be ebbing and the twin deficits broadly under control for now (helped by the success of the spectrum auctions, buoyancy in exports, across-the-board spending cuts, along with band-aid fixes such as generous dividends extracted from PSUs and cross-company share swaps). The fresh wave of pre-poll populism, though, threatens to undo the gains in the coming months. With sops raining galore, combined with the political uncertainties of the upcoming elections and on how the new government handles the fallout of this infectious wave of profligacy that seems to have smitten both the Centre and the state governments, could ensure that India continues to remain under watch, and in the company of its four ‘fragile’ peers.

The worries are compounded by the fact that investors, who have taken out more than $6.3 billion from emerging market funds last week, clearly not happy with the way things are panning out in these markets. The shadow of bad debts in the Chinese economy and the resultant fears of a banking crisis there, fears of a currency crisis in Turkey and Argentina, and the rising interest rates in India, all seem to have compounded the nervousness of investors across the globe. While the central banks of Brazil, India, South Africa and Turkey have already hiked interest rates, some rather dramatically, either to prop up falling currencies (Turkey and South Africa) or stem rising inflation (India and Brazil), most of the economies continue to grapple with a combination of weak economic fundamentals and political uncertainty. The sharp reversal of cross-border capital flows has amplified the problems and could spark-off a potential crisis in some of these economies. For India, the impact of the pre-poll extravaganza only queers the pitch in, what promises to be, trying circumstances.

Anil is a senior editor based in New Delhi

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