US jobs data gives India some breathing room
For India’s markets, already spooked by the strength of the US recovery and the possibility of the Fed taper coming into effect even by the year’s third quarter, Friday’s US payroll data comes as a sign of relief since it suggests the Fed’s bond taper may be a bit longer in coming. As compared to the median expectation of 185,000 new jobs being created in July, a total of 162,000 got created; jobs data numbers for both May and June also got revised downwards by around 26,000 taken together and, more importantly, the jobs tended to be low-paying, indeed the average wage was marginally lower than in June; the jobs were more in trade than manufacturing. So, although US GDP growth has picked up steadily, from 0.1% in Q4 2012 to 1.1% in Q1 2013 and to 1.7% in Q2 2013, the jobs data suggest the growth impetus is still weak—the July jobs data confirms the weakness in private consumption demand will continue to be a headwind as far as more robust growth is concerned.
A recent IMF report, on the spillover of unconventional monetary policies such as in the US, is important in this context. For one, while many argue excessively loose monetary policies in the US caused a problem by driving excess liquidity into emerging markets like India, the IMF says this may not necessarily be true—there is, after all, no way of knowing how much US interest rates would have risen in the absence of the extra liquidity. If they had, for instance, emerging markets like India would have felt the same impact they are feeling now—of portfolio funds going back to the US given the increasing yields in those markets. And while it could be argued that emerging markets saw more forex flows because of US monetary easing, the IMF quotes statistics to say net private capital flows to emerging markets are certainly below their pre-2006 levels.
All of this, of course, is in the past. The key is what happens in the future, when the Fed’s taper starts. A lot depends on how it takes place and the IMF’s spillover report hypothesises three scenarios. In a smooth exit case, where the increase in US growth is perfectly synchronised with the taper, the global economy benefits more from US growth than it suffers from the fall in global liquidity due to the taper. In other cases, where the taper is not synchronous with the rise in US growth, the net impact will obviously be worse. While the synchronous situation is obviously better for India, the larger problem is that years of running excessive current account deficits has left India very vulnerable to even the slightest stop in global flows—FDI flows used to exceed the CAD prior to FY08, by 2012 they financed only a fourth of the CAD, though the figure improved to 30% in FY13. So while the US breather is good news, each quarter of excessive CADs just makes India that much more vulnerable.