IMPACT ON INDIA
As the wildly seesawing markets demonstrated this week, the implications for India and emerging economies are not entirely clear.
On the face of it, one would imagine that US debt downgrade and what it says about the US economy would imply that India by contrast, with its 8% plus GDP growth rate would become a more attractive destination for global liquidity.
The ironic, short-term effect, though, of the US debt downgrade, was to actually make US treasuries more expensive! The reason is that a US debt downgrade implies a lowered ability for US to be borrower and purchaser of last resort that it had become during latter half of the 20th century. It in turn meant the developing economies -- especially Asian economies such as China, Japan and Korea -- that depended on exports to the US would be disproportionately hurt. In India, it meant that our bellwether IT companies would find it harder to grow their businesses in the US and the debt-crisis ridden Euro-zone. This was the driver of the brutal sell-off on the Indian bourses on Monday.
In the medium term though, the effects are not very clear. On the one hand, a slowdown in the global economy helps lower oil prices, which helps India. But on the other hand, FII and perhaps even FDI inflows into India might further exacerbate the already bad inflation situation, hurting the common man and driving down stock market valuations. The direction of the market in the medium term may then depend on how investors view the relative strengths of such macroeconomic counter-currents.
There seems to be a greater consensus, amongst economists on the long-term direction of the world economy. The emerging markets of Asia and BRIC countries, India included are going to have an increasingly greater share of global trade, driven by young dynamic populations that are slowly becoming wealthier. The US like its ideological predecessor, the British Empire, will no longer be the world's essential economy. So, if...