India can certainly count her blessings for being better placed than most countries amidst the global turmoil. The fall in crude oil prices by 49 per cent over six months has helped bridge some of the current account deficit and helped decrease the oil subsidy bill significantly. Together with falling global commodity prices, inflation, too, has cooled almost to the comfort level of the Reserve Bank of India. If the government had only managed gold imports better, it would have made a significant difference to the current account deficit.
The two major global problems are slowing growth and depreciation of currencies against the strengthening dollar. The Indian rupee, one of the best-performing currencies till recently, has been hit with foreign institutional investors (FIIs) getting out of the Indian stock markets and going back to the US markets as they thought interest rates would be increased by the US Federal Reserve.
The rupee lost two per cent of its value in the last four days because of this, and also because of dollar-buying by importers and external commercial borrowers scurrying to cover their dollar exposure. However, with the Fed announcement on Wednesday that it is not in a hurry to raise rates, the FIIs will probably be back in the Indian and emerging markets. This accounted for the robust upswing in the stock markets on Thursday.
But what has been good for the oil-importing countries has been disastrous for the oil-producing countries. Russia has been one of the worst affected as oil revenues accounted for almost 50 per cent of its GDP. The weakened rouble has caused a huge crisis in Russia and could to some extent impact Indo-Russian trade, particularly the pharmaceutical industry. Russia has impressive gold reserves and, to that extent, may be able to tide over its economic crisis, but Moscow could depend more on New Delhi and Beijing since the US sanctions.
Europe has been unable to see growth for over a year and is not likely to recover soon. The export-dependent emerging markets are also facing slower growth. China is still the strongest though it is cooling down its overheated economy and is expected to see lower growth.
In this scenario, while India remains an attractive investment destination for both foreign direct investment and portfolio investment, RBI governor Raghuram Rajan’s “Make for India” call is significant as it would cut India’s dependence on exports and decrease expensive imports. India will be cushioned to that extent against the global economic turmoil. Prime Minister Narendra Modi certainly has a challenge on his hands and has to quicken the pace of bringing in reforms that would facilitate ease of doing business and cut corruption.
