China trouble far from over, keep pushing at reform
Given the relief rally over much of Asia, including a topsy-turvy one in India, it is tempting to think the worst is over. What we are actually seeing, though, is the Chinese earthquake taking a break—keep in mind that while most of Asia recovered a bit of the ground it lost on Monday, the Shanghai Composite Index fell another 7.6% on Tuesday on top of the 15% fall over the previous 3 days. Tuesday’s drop signals that the core of the Chinese economy remains weak, and most attempts to boost it, including a cheaper currency, haven’t really done the trick—the jury is out on Tuesday’s rate cut, the fifth in 9 months. In the absence of robust Chinese demand, what happens to the global economy? The US is looking healthier, but tighter financial conditions 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 $435 billion for the world economy in 2015 whereas a Chinese growth of even 6% means $623 billion more to the global economy—at 7%, China’s contribution would be $727 billion. 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—owned by Tata Motors—also depend a lot on Chinese demand. The country accounts for 45% of global consumption of copper, 50% for coal, 48% for aluminium, 45% for iron ore and 15% for crude oil—this won’t get replaced in a hurry. And, to the extent the yuan keeps falling in line with 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 $144 billion 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 inter-ministerial group finally take that call later this week—is just catching up on what should have been done a year ago. The big push on roads is welcome, but it would be even better if Railways is able to quickly put out big stations like New Delhi for PPP development. The list of to-dos is a long one and includes the need to raise prices of natural gas, 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. So far, the government has been reluctant to take decisions, including on privatisation, which could be seen as hitting at powerful interest groups like labour. Also, its reaction to the China crisis is more statist—let’s build more roads, get PSUs to spend more, cut LPG subsidies using Aadhaar instead of raising prices—than one that is more focussed on market-solutions. The prime minister, we are told, 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.