Column : Good but not good enough

Comments 0
SummaryAs investors start their holidays after a tumultuous year in global markets, there’s only one thing they can count on in 2012.

As investors start their holidays after a tumultuous year in global markets, there’s only one thing they can count on in 2012: a continuation and deepening of the European crisis and another volatile year for markets. Slowly the reality is beginning to sink in that there will be no easy or quick resolution to Europe’s problems and that its crisis could drag on for years. And that will have significant impacts on investors in both developed and emerging markets.

With Germany staunchly opposed to any type of bailout for its economically weaker neighbours, it is looking increasingly likely that in the near term, over the next six months or so, we will see a partial break up of the eurozone as it sheds some countries in its periphery, most likely Greece in the first instance. Other countries, think Italy and Spain in particular, on the periphery will swear to meet requirements of the new fiscal union and thereby gain a little breathing space.

However, fiscal belt-tightening will not put peripheral countries on the path to growth, and in the longer term these countries will eventually face mounting social and political pressures to exit the euro and devalue their currencies to get back onto a growth path. So the crisis will drag on with an austerity-ravaged Europe falling into what could be a multi-year depression. Deleveraging by European banks to meet more stringent capital requirement rules will intensify the continent’s downward economic spiral.

So what does this scenario mean for emerging markets, and for India in particular? Within India, the mood has shifted sharply from over-optimism—remember the heady talk of overtaking China and double-digit growth rates—to pessimism, with some commentators ruminating about a possible return to Hindu rates of growth. There are plenty of reasons to be downbeat about India’s prospects—the list, starting with the stalled reforms, high inflation and fiscal bleeding, is by now so familiar to Indian investors that it doesn’t bear repeating.

However, the reality may be less dire than the pessimists predict. The Indian economy remains relatively insulated from global shocks, consumers are still spending, infrastructure investment is picking up and, even though growth may be slowing, it is still around 7%. Rather than an outright collapse, the most likely outcome for India is one of continued high inflation, coupled with stagnant growth of 6-7%.

While a high inflation, moderate growth scenario may not look too bad from a domestic context, especially

Single Page Format
Ads by Google

More from Edit & Columns

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...