Europe on the verge of crisis: India needs fresh reforms
You sell fear and panic and finally the public spectacle turns into a public execution. The last few days have seen a global risk aversion to equities with a former member of an exclusive club called PIGS – Portugal, Italy, Greece and Spain – Greece once again lurching its way to a new crisis. The slayings at Charlie Hebdo by Islamic gunmen and the resultant "Islamophobia" in France is only going to accentuate the complexities in Europe.
Canadian political economist Daniel Drache reckons that Europe could well be on the verge of a fresh crisis. The happenings in France over the last couple of days have done nothing to change that feeling. A double whammy of weak economies struggling to find their feet forming a combustible mixture with deadly Islamic terror making its presence felt in Europe.
Drache in an interview to Don Pittis of CBC News said that there is a lot of turmoil ahead and when you move to highly ideologised mentalities, then all sorts of things can happen. “When institutions fail to adapt or change, then new policies and practices become possible in the crisis. It’s a door opener and a door closer. You can't go back,” said Drache. What is of equal concern to political and economic analysts in Europe is the rise of a radical Left party in Greece, Syriza, that the research group Oxford Economics says is heading for a “decisive victory” in the country's snap election which is about a fortnight away.
Priority
Almost overnight, the term "Grexit", coined nearly three years ago as a shorthand for Greece's departure from the Eurozone, is back in the news, according to Pittis. Last week in an interview to the Financial Times, Syrian leader Alexis Tsipras has said it will begin a “crackdown” on the country's elite, the wealthy oligarchs who, among other things, control Greece's media. “The oligarchs are high on our agenda”, George Stathakis, Syriza’s economic spokesman, told the paper. “They will be a priority for action”.
So, just when one thought that benign crude prices are going to have a salutary effect on energy-dependent economies like China and India, "Grexit" has returned to the lexicon to stoke the fires for the prophets of doom. However, lower crude prices are not being seen through the same prism by the Western world. In fact, the reverse is true. I will tell you why. On November 14, 2014, in an article entitled “The Implications of $75 Oil for the US Economy” in its publication Daily Observations, the highly respected hedge fund Bridgewater Associates, LP confirmed that lower oil prices will have a negative impact on the economy. After an initial transitory positive impact on GDP, the report explained that lower oil investment and production would lead to a drag on real growth of zero point five per cent of GDP. The firm noted that over the past few years, oil production and investment have been adding about zero point five per cent to nominal GDP growth but that if oil levels out at $75 per barrel, this would shift to something like negative zero point seven per cent over the next year, “creating a material hit to income growth of one to one point five per cent. So, now we are looking at a triple whammy effect which can continue to spook the markets: lower crude prices (great news for India since every time the needle moves by a dollar downwards, India saves Rs 8,000 cr on its oil pool account), Greece’s exit from the Eurozone, and the impact of Islamic terror on European nations.
External shocks are something that India needs to be wary of as it attempts to begin its climb from the abyss of gloom. The other day, Bof A Merrill Lynch in its latest oil update stated, “We see a growing risk of WTI (West Texas Intermediate) and Brent falling to $35 and $40 per barrel near-term to force either non-OPEC (Organisation of the Petroleum Exporting Countries) producers or Saudi Arabia to cut.” Saudi Arabia’s influential oil minister Ali Al-Naimi has asserted that the kingdom – the world’s largest exporter of crude – intends to persist with its current strategy of keeping its spigots open to win back market share regardless of how much oil prices fall. “Whether it goes down to $20, $40, $50, $60, it is irrelevant,” Al-Naimi said in an interview with the Middle East Economic Survey in the last week of December.
Consternation
The Telegraph of London believes that Al-Naimi will come under increasing pressure from other members of the OPEC to row back on its current strategy and agree to holding an emergency meeting of the cartel ahead of its next scheduled gathering in the summer. Opinions differ among the 12 members of OPEC over whether the decision to keep the group’s quota of 30m barrels per day (bpd) of crude unchanged in November was the correct course of action given the risks this now poses to their economies. “Saudis could blink too and cut supplies,” says Bof A Merrill Lynch in its report.
All of this is happening at a very crucial time in our economic turnaround plan. The BJP has come to power on a development plank and already the Sangh Parivar’s lunatic fringe has created consternation with its controversial statements. Added to that on the ground, there appears to be an erosion in Modi’s equity with the “Ghar Wapsi” programmes. This is the year of economic consolidation for India and a transformative budget is critical to add ballast.
The government is clearly showing intent with a catalogue of ordinances, unwilling to lie inert as the Opposition continues to impede the legislative process. Finance minister Arun Jaitley has articulated the new strategic imperative by saying that the Constitution provides for mechanisms to continue with the decision-making process. Those instrumentalities, one expects, will be utilised to the hilt.
Once the Delhi elections are out of the way sometime in mid-February, there are no elections for the government till November 2015, when Bihar goes to the polls. With the electoral calendar freed up, Modi has a huge window of opportunity to ram reforms down our throats. There is another interesting nugget of information which needs to be factored into the equation. Last year almost Rs 97,000 crore came into equities, but debt flows have been humungous – as much as one point seven times equity – and the FIIs are betting on the impending rate cuts. Most analysts claim over the next 12 to 15 months, a 100 basis points of cuts in both the repo and reverse repo rates, from seven per cent and six per cent respectively is anticipated.
Stimulate
India needs to stimulate its domestic demand, it has no choice. For that it needs a softer interest rate regime, which boosts demand through greater bank lending and investment. Unpalatable structural reform remains at the very kernel of change and shock therapy needs to be administered to a nation, which sadly has been deep in the arms of Morpheus for close to a decade. In fact, we need something akin to Arun Shourie’s disinvestment programme, to help shake us out of our stupor.
If India has to remain insulated as it did in 1997 when the East Asian contagion ran riot or in 2008 when the Western economies fell off the cliff, then it has to ring fence itself with self-administration of brutal reforms. It will hurt, but then detox treatment is always painful. The question is do we have the stomach for it?