Given the relief rally over much of Asia, including India, it is tempting to think the worst is over. That would be foolhardy, what we’re seeing is the Chinese tectonic plates taking a break – keep in mind that while most of Asia recovered a bit of the ground it lost yesterday, the Shanghai Composite Index fell another 5% on Tuesday on top of the 15% fall over the past 3 days. Today’s 5% drop signals that the core of the Chinese economy remains weak, and most attempts to boost it – from cheaper credit to a cheaper currency – haven’t really done the trick.
The larger fear about China remains, that in the absence of robust Chinese demand, what happens to the global economy? Certainly the US is looking healthier than it did a few years ago, but tighter financial conditions there as a result of a stronger dollar and weaker financials of US firms – due to lower equity values, also accentuated by the China crisis – will also lower potential output.
To put the numbers in perspective, a US growth at 2.5% means an additional $435bn for the world economy in 2015 whereas a Chinese growth of even 6% means $623bn more to the global economy – at 7%, China’s contribution would be $727bn. When it comes to individual companies, and commodities, the impact is even greater.
A fourth of Apple’s revenues come from Chinese customers. High-end car manufacturers like JLR, and its owners Tata Motors, also depend quite significantly on Chinese demand. In the case of copper, China accounts for 45% of global consumption.
The number is 50% for coal, 48% for aluminium, 45% for iron ore and 15% for crude oil. It is difficult to see this demand source getting replaced in a hurry.
And, to the extent the yuan keeps falling in line with the capital outflows from China, that’s another worry for global economies to deal with – apart from a lower level of demand, exporters will also have to sacrifice margins to compete with Chinese exporters.
Which is why it is so important for India to make itself more attractive to global investors – of course, at $2 trillion, even a 7% GDP growth gives just $144bn more to the global economy. A sharp collapse in oil prices has made India’s macros – CPI and CAD – look very attractive.
What is missing, so far, is enough resolve on the part of the government to really push for reforms. While MAT relief for FIIs is almost a certainty now, much of this like going ahead with the Cairn arbitration – should the, already delayed, inter-ministerial group finally take that call later this week – is really just catching up on what should have been done a year ago.
The big push on roads is welcome, but what would be even better would be if, for instance, the Railways is able to quickly put out big stations like the New Delhi one for PPP development.
The list of to-dos is a long one and includes, for instance, the need to raise prices of natural gas, to clear stuck projects in the oil/gas sector, to resolve various disputes with oil companies through arbitration instead of blocking them, to raise spectrum caps in telecom, to raise FII limits for investment in GSecs – and to take hard action on defaulting state electricity boards and private sector defaulters to banks.
At its heart, at least so far, the government has been reluctant to take decisions, including privatization, which could be seen as hitting at powerful interest groups like labour.
Also, its response to the crisis, is more statist – let’s build more roads, get PSUs to spend more, cut LPG subsidies using Aadhar instead of cutting subsidies – than one that is more based on market-solutions.
The prime minister, it appears, is pushing for more reforms, but whether they will be more market-oriented needs to be seen. Statist solutions, by their very nature, tend to be more short-term and unsustainable.