Opportunity beyond the Chinese conundrum and the Indian cacophony

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Anoop Swarup

Chinese Conundrum and Indian Cacophony

The rise and fall of the Chinese Bull has been much discussed and debated but few on the global stage have cared to look at the role India can play in economic resurgence of the world in a recessionary gloom the world over.

Let us examine the China conundrum and the India cacophony from a world view that remains skeptical and unsparing. As China keeps surprising the world, the shifting gears were apparent in 2012 when the Chinese GDP growth came below 8%, and with rise of labour costs China would loose its edge as the manufacturing hub of the world. Perhaps it may gradually evolve from an asset based to a service and consumption based economy. In contrast India gives some hopes as also some jeers as the growth data released recently for April to June quarter reveals that India as yet struggles to remain the fastest growing major economy for the second quarter in a row with the GDP hovering at 7%.

Considering the world view particularly from Hedge Fund legends such as George Soros in the backdrop of increased global conflicts in past few years in the mid-East and the rivalries in Europe and Asia we may be heading for a global catastrophe once again with China providing the flashpoint. The prediction is based on the fact that the Chinese demand may have to shift from being export driven to domestic. In this scenario, the leaders in China may resort to military conflict in order to stay in power and to prevent the country from breaking down. In case of an adversary such as Japan where the United States may become a party the conflict may turn into a third World war with Russia aligning itself with the Chinese in the words of George Soros.

There are skeptics who fear that just six years since the worst financial crisis since the 1930s yet another one is on the horizon as we have failed to learn from the Greek debt crisis, the Argentine default in 2001 and the looming currency crisis and collapse of the emerging markets such as Malaysia, Brazil and South Africa.. The omen is here and now with DOW and NASDAQ hitting a new low and 99% of S&P 500 facing a worst year.

The problems are being precipitated by rising national debts, the soaring dollar and the unprecedented fall in oil prices. The concern is going to be a real one in case the US Federal Reserve raises the interest rates, perhaps in November 2015. Ann Petti-fog, Director of Policy Research in Macroeconomics asserts ‘We’re going to have another financial crisis.’

In this global backdrop let me explain India’s cacophony of discordance that may well prevail on the Chinese conundrum of opportunity if we do not act fast and pull our act together. Land, Labour and Taxation, in the words of Finance Minister Arun Jaitley a few months ago, were the major pillars of Narendra Modi’s reforms agenda. However, now we may lose out on all these fronts, if we do not act in time. India’s own reform agenda with GST and Land reforms has now hit a major hurdle with the States and the opposition. Coupled with a bad Monsoon there are issues driven and exacerbated more by ineptitude in India rather than climate and act of God such as MAT problem, startling black money laws, delay in bringing about a Direct Taxes Code confusing taxes and disparate laws and no talks of the much needed labour reforms. Modi governments dream budget now appears as a distant dream with the inept handling of the logjam by the discordant opposition in Parliament.

Let us have a look at the economic headlines in the past few weeks, as amid the global economic gloom, triggered by China, India’s growth prospects were seen to be brighter than those of other emerging markets. The fact also remains that after its worst single-day washout of 1625 sensex points and a sharp rupee depreciation of 82 paise against the US dollar, both stocks and currency bounced back gaining 291 points and 55 paise respectively in just a day.

China’s slowdown is just one of its problems. Its debt is pegged at 282% of GDP by some estimates compared to India’s at 32%. Its growth has been export led compared to India’s domestic demand driven. Reserve Bank of India Governor Raghuram Rajan tells us why it is different this time, and how India is no more in the club of the ‘Fragile Five’ or ‘Troubled 10’ with all the reasons for brighter prospects.

As India seeks better ratings with S&P, Moody’s Investor’s Service maintains that India’s macro economic indicators have improved over last few years and that will help India withstand any volatility in global capital flows. Let us not forget that India is blessed with a huge domestic market and a large stock of cheap workforce, if we ensure a national mission on skilling the demographic dividend, India will have more opportunity to get investments. Thanks to its resilient consumer spending and improving macroeconomic fundamentals, India is to a great extent insulated from any global crisis and this is best asserted in the words of Finance Minister Arun Jaitley who said: ‘the crisis should be converted into an opportunity to grow by speeding up the reforms’. And he is not off the mark in pointing out ‘India, with 8-9 per cent growth rate, can replace China as the driver of world economy’.How much and when that would happen will not only be a defining moment for ‘Modi and India’ but also set the stage for coming of age of a new and resurgent India and for the ‘Elephant versus Dragon’ story to be complete.