The Relativity of Relative Merit and India's Story

Published: 14th February 2016 06:00 AM  |   Last Updated: 14th February 2016 07:40 AM   |  A+A-


On Thursday, scientists heard and recorded the sound of two black holes colliding a billion light years away to validate the truth about gravitational waves and the theory Einstein predicted a century ago. On that very day, stock markets across planet earth recorded the existence of gravitational waves as stock indices followed a curved downward path, setting off ripples of panic across markets, economies and governments.

The S&P 500 Index slid to its lowest level since 2014, crude oil prices dropped to a 12-year low, bonds yields tumbled, the Yen appreciated against the dollar, charts across markets were awash in red, the discourse migrated from the rise in Fed rates to negative interest rates, and investors sought safety, driving gold prices up to $1,247 an ounce.

Even after the recovery on Friday, major global equity indices are negative over a one-year period—DJIA and S&P 500 are down 9 per cent, Shanghai Composite 10 per cent, Hang Seng 23 per cent, Nikkei 15 per cent, BSE Sensex 19.8 per cent, DAX 18 per cent and FTSE 100, 13 per cent. It is estimated that in 2016, investors the world over have lost over $8 trillion of savings.

In India, notwithstanding the faith in and claims of relative merit, the markets were brutally bruised. Equities and the rupee travelled back in time—the BSE Sensex slid to levels last seen in May 2014 and the rupee threatened to breach levels last seen in August 2013. Indian investors lost over Rs 15 lakh crore in just first 43 days of 2016—and on Friday, there were only sellers in over 700 stocks. As FIIs flee for safety, their holdings in Indian equities slid to the lowest since March 2013.

Unsurprisingly, recession —the R word—is back in circulation. Yes, the Federal Reserve Chief Janet Yellen did speak about uncertainties in the financial sector and the R word did come up in her deposition to the US Congress. But more critically, it was data from US, Japan, China and Europe on the banking sector—the operating system that drives the algorithm of economic growth —that fuelled fears.

And just in January, both the IMF and World Bank forecast a rather sanguine outlook for 2016 with global growth estimated to be around 3.4 per cent. Yes, the Chinese economy is slowing down. Yes, the fall in crude and commodities prices has wrecked the materials exporting economies, but that was known. So what happened for the global markets and investors to be spooked into panic?

Indisputably, the psychosis of inherent uncertainties is haunting perceptions. The phenomenon can perhaps be explained by a splice of Einstein’s theory of relativity. The relativity of simultaneity is often explained through a simple observation. Two people are travelling in a train speeding at 70 km per hour. To the observer outside, the train is travelling at 70 km per hour. The two people inside, however, perceive each to be stationary, in the train.

Now imagine the train as the economy. There is a perception among those on-board that the train may be moving, but they are stationary. Worse, many believe they have been left out and are going nowhere even though the US economy is said to be growing. The Bernie Sanders school of thought believes that most Americans are left standing outside.

The Donald Trump thesis is that the Chinese are travelling on tickets paid for by the Americans.

The dissonance is not limited to the US. It afflicts a great mass of Indians too, who feel left out of the ride. Last week, the Government of India announced that the country was growing at 7.6 per cent. It was met with scepticism and many questions—for instance, about the disconnect between manufacturing growth in the IIP numbers and the GDP numbers, about corporate results, about falling exports, about poor growth in bank credit, about lower investment and demand deflation. The unstated question is: where is the feel-good factor of growth?

Be that as it may, fact is, the global picture will only get murkier, if not bloodier. And India can scarcely be unaffected. India is arguably vulnerable on the external front. To appreciate, consider this: In May 2014, crude was $108 and the rupee Rs 59 per dollar. In 2016, crude is at $27 and the rupee at Rs 68-plus per dollar. That there will be currency wars is a given. India’s reserves are over $350 billion, better than in 1991 and 1997 across ratios. But there are worrying factors —external debt is $482 billion, of which commercial borrowings are $189 billion. The 13-month slide in exports was sustainable, thanks to sliding crude prices. And the surplus —in costs and subsidies—that boosted tax collection will cease to be.

There are other worries. Banking, the motherboard of output, is in a shambles. The cleaning up of NPAs has bloodied bank balance sheets and investor wealth. The hosannas for the clean-up are deafening. The question that begs an answer is: Is addressing the consequence same as addressing the cause? What next? Does the government have the resources to recapitalise? Assuming the government does recapitalise banks, what about the systemic reform?

The harsh reality is that prospects for global growth are dim. India is a globalised economy. The flight to safety of surplus will impact India in investment flows, credit and growth. Budget 2016 affords an opportunity to observe, orient, decide and act—for instance, put off implementation of pay commission, recapitalise banks so they can lend, incentivise states to reform labour and land, and shift PSUs into an Indian Temasek to conserve and raise capital. The idea of relative merit is a tactically seductive slogan, not a strategic life jacket.

Shankkar Aiyar is the author of Accidental India: A History of the Nation’s Passage through Crisis and Change


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