India can reap harvest from the market crash
While the Congress can direct barbs at the Narendra Modi Government over one of the biggest crashes of the Sensex in recent years, the fact is that the debacle, which wiped off over seven lakh crore rupees in a matter of hours on Monday, had nothing to do with the management of the domestic economy. The massive aftershocks emanated from the collapse of the Chinese market, preceded by the repeated devaluation of the yuan. It was not just neighbouring India but markets as far away as Europe and the US that suffered the consequences.
Many people have been tempted to equate the market bloodbath with the 2013 crisis, which emerged primarily from the US and took its toll elsewhere, including India. But the situation is entirely different today for this country. As Reserve Bank of India Governor Raghuram Rajan observed, the macro-economic fundamentals in the country are stronger (than they were seven years ago). The current account deficit stood at just 1.3 per cent of the gross domestic product in 2014-15, as compared to 1.7 per cent for the preceding fiscal. In addition, the RBI holds sizeable foreign exchange reserves of close to $355 billion, which it can deploy to contain and even tide over the market meltdown.
Also, the 2013 event had hit India really hard because, as an emerging market economy, it was saddled with a high retail inflation rate of nearly 10 per cent, current account deficit of nearly five per cent of the GDP and regularly soaring fiscal deficit. The flight of capital in these circumstances was, therefore, imminent. With inflation well under control for some time now and the Government having sensibly used the opportunity of low global oil prices to mop up savings and tax revenues rather than take the populist approach to splurge on the crude oil benefit, there is no reason to be apprehensive about another similar flight of capital. While it is true that the crash has seen many thousands of stock market investors get considerably poorer on paper, there will be occasions for them to recover the losses. One silver lining is that the commodity markets have taken a big hit worldwide. India is a major importer of commodities.
The other factor that should cheer up domestic stock market sentiments is that, with the Chinese economy wading into a severe crisis, global players will be even more tempted to look towards India. In other words, if the Government manages to turn the crisis into an opportunity, it could in the coming months see greater interest among global investors in the Make in India and the Digital India campaigns. It must be remembered that India is today among the best-performing emerging market economies, with those like Brazil and a few others facing problems that have slowed them down. Instead of going on the defensive, the Ministry of Finance should use the occasion to push through reform measures — at least the ones that can be done through executive orders. The RBI too must play a role in the process, given that Mr Rajan is upbeat on the country’s ability to emerge stronger from the present situation. Many experts believe that the RBI should lower interest rates to seize upon the opportunity arising out of the crisis. It is a call the Governor has to take.