EU crisis may pull down Indian markets in 2012: Swaminathan Aiyar

Discussion in 'Economy & Infrastructure' started by nrj, Dec 14, 2011.

  1. nrj

    nrj Stars and Ambassadors Stars and Ambassadors

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    What is your view on the IIP data that we saw yesterday and do you believe that given the current numbers that we have seen, India can achieve a growth of over 7% this year?


    I still think you will do it, but there are genuine doubts whether you will and it can genuinely be asked are we now at the start of an industrial recession, if not overall recession. It does look pretty serious and even in a slightly longer term, if you say look beyond to the next financial year, earlier we were talking about 9% very happily. And now it is a serious question, even next financial year would we really be able to do 7%?

    If capital goods because that is the first topic that we start the discussion on and it is considered as the lead indicator for the economy has collapsed in such a fashion in October, are the recent numbers throwing up dangerous signs indicating significant slowdown in the Indian economy?

    The two are not compatible except in the very short run. Now, either this is a blip which goes away, otherwise it is a trend in which case, the whole of industry in some sense will get into recession and GDP growth will fall below 7%. Of the two, I have a growing feeling that the second and rather more gloomy scenario is what we are going to face in the coming year.

    What about the market environment? Is the policy inaction at the government front making FIIs jittery regarding investment in India?

    In a liberalised economy, you should not be depending on government all the time. In a liberalised economy, if you have seen that the growth is taking place and look, even if the growth has come down from 9% to 7%, this 7% is still a miracle economy. So, people should be investing in a miracle economy. I am somewhat puzzled when I look at the different sectors.

    In some areas like power and so on, you can say there is a lack of government decision making and there is a problem in regard to what happens when the import price of coal goes up. But that is not the area which seems to be in crisis immediately because electricity generation is actually up 8.9% in April-October this year, but all kinds of other areas, it is just not going up.

    Now from my point of view, if an economy is going to grow even only at 7%, there should be plenty of decision making, there should be plenty of investment. As far as I can see, the FDI, foreign direct investment has gone up this year. So in some sense, foreigners seem to have more faith in India than we Indians seem to have right now. It is a puzzle, let us see which way it goes. It is going to be influenced I am afraid by politics and if the politics look bad, I would expect the foreign investors also to begin to diminish some of the enthusiasm that they are showing.

    What options does the government have now in such a dire scenario given the political compulsions also it faces to kick-start the economy?

    The political scenario frankly is bleak. We have a situation where yes, we all knew it was difficult to get legislations through the Rajya Sabha because the government is short of a majority. We have a situation here where it was not even a question of introducing a bill.

    There was an executive action of allowing FDI in retail and on that you are unable to carry the allies with you. You have a situation where Mr. Pranab Mukherjee gets up and says we had to rollback our decision on FDI in retail because otherwise we might have precipitated a midterm election. The Finance Minister of the country is telling you that this government is in danger of falling. So this can only make things even bleaker.

    If I was a foreign investor, I would take this very very seriously with this country. There are all kinds of difficulties, it is not the kind of place where we should be in. So I am not at all surprised to see that today many of the other Asian stock markets are doing quite well. The Indian market is falling and it is falling because alas we have a situation where there is a lack of faith in foreigners. And that lack of faith in foreigners is based on the fact that the Finance Minister of India is saying that this government is unstable and it was in danger of falling.

    It is almost sure that the government will not meet their fiscal targets this year, do you think the government will resort to then milking the cash rich PSUs like Coal India, MMTC, NTPC or for that matter SAIL as well for meeting its divestment in fiscal targets?

    I would say there is not a slightest chance because even on this, people like Mamata Banerjee would have objected and they are now terrified of Mamata Banerjee. So in these circumstances, the chances of going ahead with this kind of privatization. It depends, as in cases of some loss making companies, maybe. If it is simply in the case of some other companies where it is a small sale of a minority stake, let us see. As far as I can see the market conditions are going to be extremely unfavourable for this and the political situation is going to be unfavourable for this. With a combination of those 2, I do not see large scale government PSU sales happening.

    One question on the topic at hand, the winter session of the parliament which is passing by, no meaningful reforms being taken. Do you think the government can spring up a surprise by passing any key bill?

    Let us see, there are various bills in the offing, some of which the BJP at some point of time itself proposed. So some things could go through. If the pension bill goes through, it is a positive, if the mining bill goes through, it is a positive. Land acquisition is yet to come up.

    I do not know what is going to happen. The real problem is the politics. If the BJP or other people feel the government may actually fall, then there is a danger of bringing the government down amidst these allegations of corruption and so on, then there will be no reason whatsoever for the BJP or any opposition party to cooperate with the government.

    And unfortunately that is the direction in which we are heading right now because the politics has got much worst and some of these other bills which I would hope to go through, I have a feeling that because of politics, nothing may go through both the houses.

    What is your view on the Indian markets currently because we have been among the worst performing markets in the emerging market pack. Given the global and macroeconomic factors, is there more pain for the markets as we step into 2012?

    Definitely, I see a deep recession coming in Europe. The Eurozone is in trouble. The Brussels summit that they had has not solved the problem in any long-term sense. So, this is going to haunt the European market and in any case, the Germans are asking for kind of austerity on the part of the other people in order to balance their budget. So, when you call for austerity, you are calling for recession. So, Europe is going to be in recession. It is going to be pulling down lots of other people as well, including us.

    China also is facing some prospects of a slowdown. Perhaps that will not really slowdown much, but the overall prospects therefore are not good, they are pretty gloomy. So the global conditions are not good. Over and above that suppose we have a situation for instance where there is greater and greater loss of faith in the euro, if there is a rush of money from the euro into dollars and the dollar appreciates very sharply, it will mean that the rupee will be depreciating very sharply.

    If the rupee is depreciating sharply against the dollar, every foreign institutional investor will say why am I leaving all my money in a market where the currency is depreciating. So there are a number of reasons to be gloomy about the coming year as far as stock markets are concerned.

    European crisis may pull down Indian markets in 2012: Swaminathan Aiyar - The Economic Times
     
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  3. agentperry

    agentperry Senior Member Senior Member

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    eu didnt bought down chinese but indian economy. moreover i thought its goi decision to defer fdi in retail, power projects, mine closure and backing fof form many projects fo intense capital investment and not european union parliament
     
  4. nrj

    nrj Stars and Ambassadors Stars and Ambassadors

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    Euro Crisis To Adversely Impact Export Growth: Care

    Credit rating agency CARE on Monday said India’s exports growth is likely to be hit in the coming months due to Eurozone crisis, reports PTI.

    “Though India is primarily a domestic economy, India’s exports are positively linked to the global economic growth.

    This is likely to adversely impact India’s export growth in the coming months,” CARE said in a report titled ‘Impact of Euro crisis and global slowdown on India’.

    However, it said the growth will be only marginally affected by the slowdown in the euro region debt-stricken countries as our exposure is low.

    “Average elasticity between India’s exports and the advanced nations or the euro region’s gross domestic product (GDP) is 0.18,” it said.

    It is observed that in 2010-11, India’s exports to the European region and US moderated. However, the country’s exports to the Asian and the African region, which have a greater share in India’s exports, grew during this period, it said.

    The report also said that the foreign direct investment (FDI) has not been significantly affected by the crisis while the foreign institutional investors (FIIs) are showing outflow in the last couple of months.

    It, however, noted that the software services and other export oriented sectors would benefit from the rupee depreciation.

    India’s earnings from the software sector have been increasing steadily over the years at 27.7%. In 2008-09, the world economic growth slowed to -0.7% but software services continued to increase, albeit at a slower rate, it said.

    In the first 8 months of 2011, the rupee had been stable in the range of Rs44-45 per dollar. A depreciating trend became stark since August 2011.

    The rupee has depreciated by 18% against the dollar and by around 9% against the euro since August 2011.

    EURO CRISIS TO ADVERSELY IMPACT EXPORT GROWTH: CARE
     
  5. nrj

    nrj Stars and Ambassadors Stars and Ambassadors

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    Impact of Euro Crisis and global slowdown on India: CARE


    CARE Ratings has come out with its report on impact of Euro Crisis and global slowdown on India. As per the rating agency export oriented sectors are likely to benefit if the rupee continues to depreciate or remains in the current band.

    Global Economy

    • Euro zone debt problem is likely to remain a concern in the near future. Further, the European banks withdrawing credit in order to shrink their balance sheet would deepen impact of the debt crisis on the other economies.
    • Near zero level interest rates are to continue in the advanced countries in the immediate future

    .
    • Rising fiscal deficit in US and uncertainties over the economic conditions in most developed countries are adding to the worries.

    Impact on India:

    • Though India is primarily a domestic economy, India’s exports are positively linked to the global economic growth. This is likely to adversely impact India’s export growth in the coming months. However, growth will be only marginally affected by the slowdown in the euro region debt stricken countries as our exposure is low.

    • Software services and other export oriented sectors would benefit from the rupee depreciation.

    • FDI has not been significantly affected by the crisis while the FIIs are showing outflow in the last couple of months.

    • International commodity price moderation is not being translated in domestic prices. Further, exchange rate depreciation would worsen the inflationary conditions in the economy. Therefore, the RBI would have to continue with its anti-inflationary stance in the near term if domestic conditions do not improve.

    What is happening around the world?

    Credit Default Swaps (CDS) provides a unique window of viewing the state of uncertainty in any country. Table 1 provides information on the CDS for a set of countries at two points of time. Table 1 shows the severity in the crisis which has eroded the creditworthiness of various countries as the euro crisis spread. The CDS spreads have increased for countries which have now come in the forefront of the crisis like Italy, Hungary and Spain.

    They have increased 4-fold in case of Greece and remained at higher levels for the others. This reflects that the crisis is still some way from being resolved.
    An important outcome of the developments in this area and the solution being worked out is that European banks have to improve their capital ratios and would have to either: raise new equity, use retained profits or shrink the balance sheet. Raising new capital is a challenge given the rising distrust amongst investors continuously. Increasing profits is difficult as the outlook deteriorates as illustrated by the CDS spread.

    Therefore, the banks appear to be left with little choice but to shrink their balance sheet. This would lead to lowering credit which will further exacerbate the crisis.

    Inflationary scenario:

    Global inflation (CPI) in 2011 so far increased to 4.2% from 3.3% seen for the same period in 2010. Inflation in the advanced economies rose sharply from 1.6% in 2010 till Jul to 2.6% in 2011. Similarly, inflation in the emerging economies increased to 6.5% in 2011 from 5.8% in 2010. Since May 2011 with an exception in July 2011 international commodity prices and metal prices in particular are moderating.

    Compared with Apr 2011 the international metal index showed a decline of 19.7% with copper declining by 22%, aluminium 18% and zinc 21%. Headline inflation in India (WPI) has been outside the comfort zone of the Indian Central Bank since late 2010. Therefore, the RBI has been increasing interest rates in order to curtain the rising inflation.

    RBI has increased interest rates 5 times (175 bps) in the current financial year. The RBI has maintained time and again that the high headline inflation would start to decline from Dec 2011 and would sttle at 7% by the end of the fiscal. Domestic inflation for the month of Oct 2011 stood at 9.7%, while the international commodity prices where moderating. This implies that the moderation in the international commodity prices has not been translated in to the domestic commodity prices.

    Exchange Rate Depreciation could worsen the outlook:

    Since the global uncertainties aggravated, the Indian exchange rate has depreciated 17.4% against the US Dollar during the current financial year. This has been higher than that observed in other markets like Euro and Pound depreciated by around 5.3% each against the Dollar during the same period. The depreciating rupee is likely to add further pressure on domestic inflation and India’s import bills.

    The rupee depreciation will particularly hit the industrial sector and put higher pressure on their costs as items like oil, imported coal, metals and minerals would get affected. However, it is believed that the IT services sector, textile sector and other such export-oriented industries in India are likely to benefit from the depreciating rupee.

    Conclusion:

    Assessing the impact of the global activities on India, we can conclude that with the continued uncertainties in the global economy as illustrated by the rising CDS spread, slowdown in economic activities pressure is felt on the FII inflows in India. The exports and the software services earnings are marginally impacted by the slowdown in the world GDP. On the other hand, export oriented sectors are likely to benefit if the rupee continues to depreciate or remains in the current band. FDI flows have been less volatile to the euro zone crisis.

    Read full report in attachment
     

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  6. nrj

    nrj Stars and Ambassadors Stars and Ambassadors

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    Euro zone crisis to hit India's sugar, cotton exports


    India's export of key farm items like sugar, cotton and wheat might get affected as the global commodity prices could fall by 15-20% due to deepening of euro zone debt crisis, a top government official said.

    "Commodity prices were booming globally. For last two months, they are either stagnant or moving southwards. My feeling is that if the crisis as it is unfolding, can put even more pressure and prices will come down by 15-20%," Commission for Agricultural Costs and Prices (CACP) Chairman Ashok Gulati told PTI.

    The CACP is a statutory body that recommends the Centre on the pricing policy for major farm items.
    "India's agri-exports would come under pressure. Already, wheat exports have become uncompetitive," he added.

    In September, the government lifted a four-year ban on wheat export and allowed shipments upto 2 million tonne. However, so far less than 1,50,000 tonne has been shipped.

    Gulati pointed out that "sugar mills could face similar situation, because by January-February 2012 sugar exports are also expected to be unviable and may lead to huge domestic surplus and increase in cane arrears".

    The government is yet to take a decision on sugar export policy for the ongoing FY12 marketing season. The country's sugar output is expected to exceed demand at 25-26 million tonne against the annual domestic demand of 22 million tonne.

    The euro zone is facing severe sovereign debt crisis since last three months and the G-20 is trying to find solutions.

    Warning that the ongoing crisis could impact in a big way the country's cotton exports, Gulati said, "I will be worried about cotton exports because the US and European demand is coming down. Even demand for Chinese and Indian cotton is also expected to slow down".

    India could otherwise be exporting 6-7 million bales of 170 kg each in 2011-12marketing year (October-September) if it declines to 3 million bales, there will be huge accumulation of stock in the domestic market, he said.

    "If cotton exports fall, the Cotton Corporation of India (CCI) will be under lot of pressure to hold the price line", he added. India exported around 6.5 million bales last year.

    Export of fish as well as oilmeals (animal feed) could also be hit due to an expected fall in global rates, he added.

    However, Gulati noted that the softening of global prices of commodities like edible oils such as palm oil could benefit India in reducing its import bill.

    "I hope palm oil, which has gone up to $1122 per tonne, expected to come down to $900 per tonne. It will put pressure on domestic oilseeds industry but will give a relief on import front," he said.

    Euro zone crisis to hit India's sugar, cotton exports
     
  7. nrj

    nrj Stars and Ambassadors Stars and Ambassadors

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