The bloodbath in the markets — the Sensex has shed nearly 1,000 points so far this week — is a timely reminder that 2015 may not be the heady year that 2014 was. The euphoria accompanying two momentous developments — the installation of a government promising a radically new governance paradigm and the free fall in international oil prices — is over. The Narendra Modi regime will find itself being increasingly judged on performance and delivery on promises. India will no longer be a default investment destination for global funds: they would want to see an economy showing clear signs of revival, rather than just looking for a safer bet compared to Russia, Brazil, Indonesia or Turkey. Low oil and commodity prices are, likewise, a double-edged sword. While helping to substantially bring down the country’s import bill, they also point to a global contraction of demand that can hurt exports as well.
Indeed, a major source of uncertainty for the Indian economy this year is the external environment. Leaving out the US, much of the world today — from Europe and Japan to China and most commodity-exporting emerging economies — is either in recession or significant slowdown mode. The impact of this may not be limited only to India’s exports. It could extend even to capital flows. Last year, foreign institutional investors poured over $42 billion into Indian equity and debt markets. If the current global conditions persist, there could well be a flight of funds to the US, the only economy showing buoyant growth alongside declining unemployment and gradually rising wages. The indications are already there in 10-year US treasury yields, which have dropped below 2 per cent. Any black swan event — say, Greece exiting the eurozone — would only further push investors into the safety of US treasuries or German and Japanese bonds. A US Federal Reserve interest rate hike will, of course, worsen matters.
