It’s a game of patience
It will take a while before the zigzag flights of capital settle down to a new normal state. The challenge is to manage this transition in the least painful manner.india Updated: Aug 23, 2013 00:18 IST
It’s now a matter of a realistic ‘when’, instead of the more abstract ‘if.’ As the rupee breached 65 to a dollar, everyone from the man on the street to the money market professionals and policy makers, seems to have one question on their minds: How far is the rupee from touching a scary 70 to a dollar? It’s not in India alone that stocks and currencies have contracted a global flu after investors began flocking to safer locations like the US ever since Fed Reserve chief Ben Bernanke hinted about rolling back the policy of pumping in cheap money into the system. China, Brazil, Russia and several other emerging nations such as the Philippines, Indonesia, Thailand and Turkey are suffering from the same syndrome, prompting policy makers to soothe nervous markets with reassurances on the domestic economies’ strong fundamentals. All of a sudden, fresh question marks loom over these economies where the government and monetary authorities have much less elbow room to spend their way out of a crisis.
Any analysis of the Indian economy would be incomplete without a comparison with its peers in the emerging world, particularly 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 the start of the new millennium. Enviable achievement at a time when the US, EU and Japan were reeling in recession during the latter half of the period. Together with Brazil and Russia, the two Asian giants evolved into the BRIC grouping with the quartet of nations forming the mass of world economic activity in the last decade. The tide seems to have since turned. Local currencies in the emerging world are falling because foreign investors are selling out, preferring instead to plough into the US market, which is showing signs of resurgence.
It’s tough to be bullish in such gloomy times. More so, when the gloom is all-pervading in the neighbourhood and among the peer group. Like India, most governments and their respective monetary authorities in the emerging world have gone into a huddle unveiling action-packed steps to avoid a hard landing. A sustained recovery in the US, Europe and Japan will be beneficial for the world economy. It will take a while before the zigzag flights of capital settle down to a new normal state. Eventually, funds will return to India and its peers, for these will remain the islands of global growth. The challenge is to manage this transition in the least painful manner.