Okay, stock markets are more or less back where they were when Narendra Modi took over as prime minister last May. And the rupee too has lost a fair amount of value. So, if you are Rahul Gandhi, you will rush to blame Modi for the slump. But since it is not your business to see these things through the prism of partisanship, induced, no doubt, by a refusal to come to terms with the loss of power, it will be natural for you to analyze the downturn rationally.
On Monday, the Sensex ended at 24,893, the lowest since 4 June 2014. On the same day, the rupee lost 0.54 percent to close at 66.83 a dollar, the same level last seen on 4 September 2013. Cataclysmic events in China have cast their shadow across the global markets. India could not have remained insulated. The incessant flow of bad news from China continues to rattle world markets. More than a month after the Shanghai stock exchange meltdown, the churn in the Chinese markets continues unabated. Chinese currency is still under pressure despite the devaluation last month. Her foreign exchange reserves fell by a whopping $ 93.9 billion in August alone. In June last year, the Chinese foreign exchange reserves were at $ 3.99 trillion. They have lost $444 billion since then. The Chinese can use their foreign exchange reserves to prop up the yuan only to further erode its value.
For the problem is systemic. The over-bloated real estate and share markets, both propped up by a huge mountain of debt, had to see heavy corrections in the absence of strong fundamentals. With the export markets slowing due to the creeping downturn in the European and Asian markets, thanks partly to the sharp fall in the prices of commodities and oil, it was inevitable for the Chinese exports to suffer. The belated push to grow the domestic consumer sector hasn’t met the kind of success needed to compensate for the tapering off of the growth in exports. The uncertainty in China is still spooking the world markets. Almost all currencies have lost value in the wake of the Chinese crisis. The one currency which is going from strength to strength is the US dollar. It is also because of the talk of impending rate hike by the Fed, though leaders of other major economies would wish that it held back till at least next year. Big capital is flowing out of all major economies towards the US. The Chinese have seen foreign investors take out money in recent months.
In India, where the economic conditions are not half as bad, foreigners have been net sellers in recent days. In the last two weeks, the FIIs are said to have sold shares worth about $2.5 billion. The expected rate hike in the US is a huge factor in the sell-out by the FIIs. But there is also some profit-taking at a time when the world markets seem to be getting back into the cyclical bear phase. Market analysts also ascribe the recent sell-out to the unusually higher inflows following the formation of the Modi Government. Marketmen read the political bazaar well. It seems that one of the factors for caution is the coming Bihar Assembly poll. A good showing by the NDA can help Modi regain a lot of the sheen lost during recent months. If the PM regains the political initiative, he would be able to push some of the long-pending structural reforms, including further opening up of the economy to foreign capital, easing of the socialist era labour laws, etc.
Of all the emerging economies, India is still the best placed to exploit the escalating Chinese crisis. It is on the cusp of a growth cycle, has a huge domestic market, is better placed to gain from the steep fall in the prices of crude oil and commodities and, above all, has a huge workforce of educated professionals. The fact that the e-commerce has attracted substantial foreign funds underlines the potential for gainful investment in the Indian economy. Unfortunately, the domestic industrial sector still continues to be a laggard. Despite the PM’s ‘Make in India’ programme, there has been no palpable increase in the capital goods sector or in the off-take of bank credit. Banking sector is saddled with unconscionably high bad loans. Even if the bank rate is lowered there will be resistance against fresh lending. Also, defaulters being the top ten business families which together account for some 80 percent of the nearly ten lakh crore rupees of bad loans, it is important to solve this crisis on an urgent footing before there can be any fresh investment in the manufacturing sector.
