Just as India’s finance ministry began its ill-conceived attack on foreign investors, global markets began their downturn in May 2012. This time, everyone realised the long-term problems India faces. Foreign capital again resumed its flight out of India. The rupee did not collapse this time, but it went on an unrelenting selloff, which was worse. The despair in India was palpable. The Indian growth story was officially over. To use S&P’s metaphor, the angel’s wings were clipped.
Growing new wings
What could go right for India? Could the country, the first emerging market to fall, become the first to rise again?
I believe this could happen – for several reasons. Frankly, the steep fall in the rupee has been a blessing for India. The country is as much of a fiscal mess as any among Europe’s PIIGS (Portugal, Italy, Ireland, Greece and Spain). But it has the flexibility of a free currency. There is no question that India is much more attractive at Rs. 55 to the US dollar than at Rs. 44.
A global slowdown might actually make India more attractive than other emerging markets that rely on exports, chiefly commodity exports. In contrast, India benefits from falling commodity prices. A fall in oil and agricultural commodities could cool down Indian inflation and allow the RBI to cut interest rates. These cyclical factors could add to the real structural strength of the Indian economy and boost consumer demand.
Contrast this with China where, according to a Financial Times article, “demand is fading fast.” The article states, “With demand weak… to many parts of the economy…[this] feels like deflation, as corporates appear to be losing pricing power… At this moment… the economy needs a new structural breakthrough.” Other emerging markets, dependent on commodity exports, could suffer from China’s waning demand. This makes India’s real, secular, structural consumer demand story both unique and attractive.
So India, the first BRIC and major emerging market to fall, could end up being the first to recover with a cyclically positive story of low inflation, falling interest rates and the structurally positive story of secular demand. America, the first country to suffer a credit bust in 2008, is widely recognised today as the first economy to emerge from the bust. India could end up being the first economy to come out of a global emerging market bust.
