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| Dalal Street blues | | The global slowdown will hurt, but home-grown growth can help |
| Business Standard / New Delhi Aug 25, 2011, 00:59 IST |
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Another day of nerves in the Indian equity market, with a combination of bearishness and volatility, is keeping investors worried about medium-term prospects. While optimists see emerging markets benefiting from the problems of the ageing ones, pessimists argue that India cannot be decoupled from disturbing global trends. Mark Twain once said: “Get your facts first, then you can distort them as you please.” Marketmen seem to be following this counsel down to the last word. Developed economies are headed for a multi-year slowdown. Japan’s downgrade is yet another indication of this. Will emerging economies also go down or will a “flight to safety” keep the markets in countries like India buoyant? If there were to be another “Lehman moment” with crisis enveloping the Eurozone, there could be a domino effect on the rest of the world, especially the United States. A lethal combination of record high debt-to-gross domestic product ratios and record low policy rates has pushed the United States into deep debt. In contrast, Asian economies are merely cooling, as growth rates moderate from a robust to a moderately strong pace. Despite these concerns, the outlook for the world economy remains modestly positive. With problems continuing to hit the West, it is important not to lose sight of this driver. Though there is no doubt that quantitative easing has exported inflation to emerging economies in Asia, the region has its own growth drivers too, which are not strictly linked to the developed world. Inter-regional trade, infrastructure boom and robust domestic consumption story are driving growth in emerging economies.
For its part, India has not fully benefited from this “opportunity” compared to its emerging market peers. Its performance has been weak mainly owing to a lackadaisical political response. Foreign investors have remained largely negative on India throughout this year since reforms have nearly stalled, the investment cycle is grinding to a halt and fiscal worries have re-emerged. All attempts by the government to restore confidence have so far failed. Following a lacklustre budgetary initiative earlier in the year, recent political uncertainty has made investors bearish. Till there are signs of economic revival and improvement in growth, the benchmark indices are expected to remain range-bound. If a new round of spending injected by quantitative easing in 2012 pushes more liquidity into the global economy, the benchmark indices will rise marginally, but the up-turn in economic fortunes is unlikely to be robust, unless structural changes take place in the economy. Markets will trade within 10 per cent (upside and downside) from current levels over the next year. That said, the Indian economy still has much going for it, not least the strength of consumption and investment last year and the solid foundation it provides on which to rebuild. Opening up sectors like insurance, banking and retail could go a long way towards reviving investor sentiment — so could kick-starting the investment cycle. In short, India can benefit from a global flight to safety, provided the government is able to get its act together.
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