Eye on global factors a must for the Indian growth story

  • J Mulraj
  • Updated: Jun 20, 2015 09:03 IST

Federal Reserve chairman Janet Yellen did not raise interest rates at the FOMC meeting last week, opting to kick the can further down the road instead and continuing with monetary easing.

Monetary easing, continued over an extended period of time, has several consequences, and these will manifest at some point in time. Kicking the can down the road only postpones the day of reckoning.

An extreme example of excessive printing of money is Zimbabwe, which has printed so much of it that its currency is completely debased. Just consider that 175 quadrillion Zimbabwe dollars (a quadrillion is 1 followed by 15 zeros) are worth US $5 [1], and one can imagine how worthless its money has become.

Of course stock markets cheered the postponement of the interest rate hike, because it can party longer. But the cheap money has gone to create bubbles in various markets, chief amongst which are the Chinese stock and real estate markets.

As an article ‘The China Bubble is going to Burst’ in Bloomberg points out, the market cap. has tripled over the past year, to $9.8 trillion (second only to the USA) and the forward P/E is a whopping 84 times! [2]

The Chinese real estate market has also been booming, creating an oversupply of residential and commercial area that is astounding. Realty companies which have raised debt in global markets through their Hong Kong listed subsidiaries, such as Kaisa, have defaulted on their bonds.

Global debt is $ 199 trillion, as per a McKinsey Global study ‘Debt and (not much) deleveraging’ [3]. This does not include derivative products. The financial industry did not learn its lessons from the 2008 crisis and has created a pool of $ 550 trillion in outstanding interest rate derivative products! This is like 8 times global income and poses a hugely unimaginable risk.

The reluctance by Yellen to raise interest rates must be seen in the light of this outstanding derivative position. Bond prices would start falling, (the fall has started) and the bond bubble could pop.

These, then, are the global concerns. Bubbles in markets such as China’s stock or realty markets. Or in global bond markets, thanks to a mountain of derivatives. Or a Grexit, and the fallout this would have on other, weaker, countries such as Spain, Italy and Portugal. Or the eventual rise in interest rates whenever political will to do so is mustered. Given that US production growth has been the weakest since Jan 2010, [4] this appears to not be imminent.

In India production grew 4.1% in April, higher than expected [5]. The monsoon has, so far, been above average, belying the gloomy forecast of IMD. The government has taken several initiatives, such as Make in India, the Bibek Debroy suggestion to push for private sector participat, the negotiations with state governments to clear the GST bill, the move to make labour laws more flexible, and others.

India has been aided by falling prices of crude oil and the resultant drop in our current account deficit (CAD). The future behaviour of crude oil would determine the elbow room the government has in its currency management.

Dr. Kent Moore believes that prices of Brent crude will go to $82-85 by the end of the year, basically because of lower production [6].

The traditional main player, Saudi, will cut production, he expects, because it needs higher prices to meet its social obligation costs. The unconventional (shale) producers will see production from the new wells already sunk taper off from July (new wells peak in 18 months) and will find financing capex more expensive, more so in the event of a Grexit.

Crude prices would probably not hit the levels he anticipates, but the reasoning for an increase are plausible, and even if they increase to $ 70 it would make a dent in India’s CAD, dependent, as it is, on imports.

The other risk for India is the ease with which scamsters can escape retribution. Investors would be unwilling to invest in India’s growth story. Scamsters like NSEL and Saradha are able to get adjournments with great ease denying justice to victims. Surely the government, in consultation with the judiciary, can speed up justice and ensure that each party in a dispute is limited to two per side, as is the practise followed in other countries.

The BSE Sensex closed the week at 27,316, up 890.

The India story is a compelling one, but global factors need to be kept an eye on.

[1] 175 quadrillion Zimbabwe $ = 5 US $. The debasement of currency through excessive printing of notes http://www.bloomberg.com/news/articles/2015-06-11/zimbabwe-officially-removes-local-currency-from-circulation
[2] China bubble is about to burst http://www.bloomberg.com/news/articles/2015-06-16/china-bubble-debate-turns-to-when-not-if-stocks-will-tumble
[3] global debt is at $ 199 trillion file:///C:/Users/mulraj/Downloads/MGI%20Debt%20and%20not%20much%20deleveragingFullreportFebruary2015.pdf
[4] US production growth lowest since 2010 http://www.zerohedge.com/news/2015-06-15/us-industrial-production-weakest-january-2010-flashes-recessionary-red-flag
[5] Industrial production grew 4.1% in April 2015 http://www.business-standard.com/article/economy-policy/industrial-production-rose-4-1-in-april-115061200889_1.html
[6] Brent crude prediction of $ 82-85 by year end by Dr Kent Moore http://oilandenergyinvestor.com/2015/06/how-a-meeting-in-paris-just-changed-my-oil-outlook/

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