Indian Winter

30/08/2013 at 4:51 pm

One of the effects of the market’s recent taper tantrum has been to depreciate developing-world currencies, provoking fears in some quarters that we are on the cusp of a re-run of the events of 1997 which saw various tiger-shaped dominos tumble across the Asian part of the emerging market landscape. Particularly badly hit has been India. At one point on Wednesday the rupee stood 31% weaker against the dollar than it had done at the beginning of May, when the panic kicked off. Despite a muted recovery it is still down about 25% at present. Is the writing on the wall for the BRICs? Is it the Asian crisis all over again?

The short answers are “no”, and “no”.

It is true that Indian GDP has slowed and that today’s release for the year to Q2 came in below expectations. On the other hand, 4.4% annual growth in real terms doesn’t look so bad from a developed-world perspective, disappointing though it is set against an average rate for India over the last ten years of 8%.

It is also true that the Indian balance sheet is not as strong as some of its EM peers, with IMF putting its gross government debt to GDP ratio for 2012 at 67%. And India is running a budget deficit of about 5% of GDP at the same time – though again, these figures look downright enviable if you’re the US, Eurozone, UK or Japan.

So far, so worrying. But we are still some distance from 1997 and here’s why.

Going into the ’90s collapse the Asian tigers had been over-hyped and over-invested in by exuberant developed-world investors drunk on low inflationary growth and technological advancement. At the same time they had begun to have the rug pulled under them in certain industries by lower-wage China through an insistent combination of economic liberalisation and currency devaluation. (When Thailand, first casualty of the 1997 collapse, stood on the brink of annihilation in June of that year its economy was already in recession.)

Furthermore, the level of foreign currency debt at the time was huge, and countries including Thailand were trying to maintain currency pegs against the dollar with derisory levels of foreign exchange reserves to back them. On the way into the crisis, external debt to GDP in Thailand and elsewhere in the region was running at over 60%.

Today the attitude towards emerging market investment is far from exuberant – indeed has been relatively gloomy since the crash of 2011. And even with debt to GDP of 67% India has gold and foreign exchange reserves of almost $300bn. That’s much less than China, or Russia, but brings the net debt position down to under 50% of GDP. In addition, with budget deficits and real GDP growth balancing each other out, that debt ratio is not increasing.

Neither is there a sudden attack on a currency peg to contend with. The rupee already devalued from 45 to 55 against the dollar in 2011-12 and inflation at that time peaked just shy of 11%. There seems little reason to expect the current devaluation to 65 to result in something much more dramatic.

At the same time, export growth has bounced: up 11.6% on the year to July, an eighteen-month high. We should expect that kind of thing in a period of material currency weakness. (This is exactly the supposed cure-all remedy some have in mind for the beleaguered members of the eurozone periphery.)

It is precisely when we come to exports and growth, however, that we stumble over the real disconnect between fantasies about a reprise of the Asian crisis and the reality of the situation today. When India was booming back in 2010 and the rupee was moving sedately sideways, US monetary policy was in very much the same position as it is today. It has not changed in the interim. Therefore, the slowdown in the Indian economy cannot reasonably be attributed to a change in American monetary tapering, tinkering or anything else. Therefore, there is no reason necessarily to expect the Indian economy either to benefit or to suffer from changes in the US monetary environment over the next few quarters.

What has changed since 2010, however, is that Europe (including the UK) re-entered recession, Japan joined them in the aftermath of a calamitous natural disaster, the US recovery slowed, Greece defaulted and confidence collapsed. If we seek the cause of strain on the economy of India as elsewhere in the developing world, it is surely here that we find it – not in the press releases of the Federal Reserve.

Which brings us back to the present. It is not 1997 which lies around the corner, but 2014. So far – further shocks permitting – the coming period looks likely to be one of continued recovery. This will make an especial change coming from Europe, though if this week’s GDP revision for Q2 is anything to go by the pace might be picking up in the US too.

Can the Indian economy benefit from stronger growth across the developed world without reacting to changes in quantitative easing by the Fed any more than it has done so already?

Now there is a question to which the answer might just be, “yes”.


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