Till recently, no analyst would have hesitated to conclude that the epicentre of the world’s economic activity was shifting to somewhere between India and China: One is the world’s factory, the other the global back-office.
The two neighbours, housing nearly 40% of the world’s people, are also the hottest growth economies.
If China sizzled at 10.16 % economic growth between 2001 and 2012, India grew at 7.13% since 2000. Together with Brazil and Russia, the Asian neighbours formed the BRIC grouping with the quartet of nations predicted to form the core of what has come to be described as ‘emerging’ markets.
Yet, the fast piling rubble after the devaluation of the Chinese yuan has forced a rethink on the emerging world’s promise as the engine of global growth.
The rupee, which is flirting with 67 to a dollar, is mirroring trends in other emerging market currencies. This has triggered fears of similar moves by other countries that may prefer to lower their currency’s value, lest their exports are edged out by cheaper Chinese goods.
A widespread sell-off in the Chinese bourses have caused more than a 1,600-point collapse in India’s benchmark 30-share BSE Sensex on Monday.
The Shanghai share index’s 8.5% plunge has made investors and foreign fund houses appear to have interpreted this as a ‘danger-ahead’ kind of a signal.
The persistent plunge in Chinese equities could be signs that the world’s second largest economy is more vulnerable than what was earlier believed. As a result foreign funds are moving out of China and other emerging markets such as India to safer locations closer home to cut losses.
That brings us to the question: How far is the rupee from reaching its bottom? More than the number, it’s the markets’ sharp slide that is causing unease.
A volatile and falling stock market could, for instance, upset the Indian government’s plans to sell shares in state-owned companies. A choppy market isn’t the ideal situation for meeting an ambitious Rs 69,000 crore disinvestment target for 2015-16.
To prop up the rupee, India should be able to bring in more dollars and remain attractive enough for investors. This could prompt the Reserve Bank of India (RBI) to keep interest rates high to maintain India’s attractiveness as a market that offers high returns.
High interest rates could help bring in dollars and partially help in arresting the rupee’s slide. The flip side, however, is that it could mean that loan rates will remain high. For the government and the RBI the situation isn’t a happy one to be in ahead of the festival season.
Eventually, the ability to attract investment will be largely determined by the economy’s fundamentals, and the pace of reforms. India can ill-afford to delay critical reforms any longer, if the country were to remain in the race for being an island of stable global growth.