Meghnad Desai Academy of Economics, with World Trade Center, hosted a Panel Discussion with Mr. Saurabh Mukherjea and Mr. Sajjid Chinoy on the 2nd of November 2018.
Topic: Turmoil in the Emerging Markets! Can India Emerge?
The Discussion was opened by Dr. Indradeep Ghosh, Dean Faculty at Meghnad Desai Academy of Economics. He then invited Mr. Vijay Kalantri to say a few words.
Mr. Vijay Kalantri, Vice Chairman of World Trade Center Mumbai, expressed his optimistic views on Indian economy and his belief that the reforms undertaken by the government will prove to be beneficial in the long run, adding to the strength of the economy.
Also, He briefly mentioned the following things.
- Comparing to past events of 2001, 2002 to present NPA situation, he mentioned that it is possible to get out of the situation with proper guidelines. Timeframe is important for any turmoil.
- There is a need of frank dialogue between the institutions that is Government & RBI.
- He also emphasized on MSMEs sector in India as a channel for economic growth.
Mr. Sajjid Chinoy – Economist, JP Morgan. He enunciated about the following points.
He stated that main driver behind global economic stress is push and pulls of currency. Comparison of global economy in 2017-18 with 2018-19 shed light on many aspects of current situation.
The year 2017-18 was Cinderella – Goldilocks scenario which experienced “Synchronized Global Growth” with capital inflows flowing in countries. China also continued on its 6-decade successful growth with its exporting economy.
As oppose to this, 2018-19 is experiencing “desynchronization of global growth”. Main reasons for such situation are
- Declining growth in Europe & high economic growth in US: There is a diversion between European growth & US growth. US growth is fueled by unconventional policy which led to Business expansion.
- Sectoral diversion: Strong global Capex.
- Growth backed by manufacturing generating strong trade flows amongst countries declined due to trade war between US & China.
But the fundamental picture of global outlook is not that bad, global sentiment is still of sound profitability. Developed economies are well-off as $ appreciated. G3 unemployment is lower in 30-40 years.
On trade war –
- Direct effects of trade war mechanically are modest and everything depends on level of China reciprocation and retaliation.
- Impact on business sentiment: Risk is more indirect.
- Capex depends on three factors which are Profitability, cost of capital & confidence. Trade war essentially hampered the confidence, thus capex in G3 countries has gone down and monitored closely.
On Medium term growth –
Potential growth which is also sustainable depends on
- Labor force participation – aging population is the main concern even in China due to one-child policy. There is also constant underestimation of fast falling unemployment rates than intended.
- Productivity – it has declined from 2% in 2002 to 1% in 2018. The drastic shift started happening after the global financial crisis of 2008. There is delusion of improved productivity due to Twitter, Facebook, and WhatsApp. It seems productivity enhancing. Second industrial revolution was more productive period than now.
On Sustainability –
The Cyclical bounce in growth has to come down with absorption of factor production. As Policy around the world is accommodative.
High Unemployment in development Eat up slack very quickly due to higher wages, tighter monetary policy.
FED rate hikes – FED needs 3-4 hikes to reach neutral. This normalization process of rising interest rates will make emerging markets suffer. As a result, there’ll be weaker global growth with tighter monetary policy.
On INDIA –
India suffered from what he referred to as the “Dutch Disease”. Government of India gained a windfall for 4 years due to lower oil prices. Real exchange rate appreciated, hurting the exports badly. As oil prices shot up this windfall disappeared which is visible in the current account deficit currently. The Current account surplus deteriorated by 3-3.5% mainly due to the unfavourable exchange rate. He views this as a healthy & necessary correction. Thus, fighting for the depreciated currency is not necessary. In a nutshell, exchange rate depreciation will help the economy by expanding exports.
He mentioned how India is better off as compared to other emerging markets. He went to explain that volatility in the value of rupee can be acknowledged in three phases.
- April-August – $ strengthened, so rupee weakened.
- September – $ index eased up. Rupee should have appreciated at this time but it kept weakening.
- October-November – Lowering of oil prices in October end have been positive for rupee.
If we look at Argentinian crisis, underlying CAD became much more unsustainable. So, policymakers in India have done well in comparison. India should be cautioned about bilateral trade deficit with China which is around $60 m. Rupee should not get expensive with respect to Yuan which has fair possibility of happening, if trade war gets deeper.
He believes that India is in a better situation as compared to the year 2013. It is significantly better in terms of reserves, twin deficit & inflation.
He concluded on a positive note saying, improvement in fundamental is better due to medium term reforms such as JAM, Stressed asset resolution & GST. There is a time to reap benefits of these reforms but being patient is the only way to appreciate it. Meanwhile, maintaining macro-economic stability should be the main concern.
Mr. Saurabh Mukherjea – Founder, Marcellus Investment Managers. He spoke about the following points:
- He started with expressing his accord with Mr. Sajjid Chinoy’s views on the current turmoil that all the emerging markets are facing. He further emphasized and elaborated on the impact that the tightening monetary policies in the US are likely to have an adverse effect on the emerging markets, in context of both Trade Channel and Portfolio Channel.
- He then explored the topic, Turmoil in the Emerging Markets! Can India Emerge?, with regard to business cycles taking the examples of a small economy that is closed and how the adversity magnifies once the economy opens up to the rest of the world.
- He spoke about the overheating of stock markets in India, which makes the market sentiments even more sensitive to the turmoil. He took the example of how sensitive the share price of an Indian bank’s Stock is to a 100 BPS tightening by the FED.
- He mentioned how different emerging markets have different ways to deal with the same problem referring to their local flavour. Directing this towards India, he spoke about the 3 main domestic factors/conditions that are likely to have the most effect on answering the question, ‘Can India Emerge?’
- The factor that’s likely to have the worst effect if not fixed immediately is ‘The State of India’s Banking System’. He insisted on the point that it is time that Indian banks start lending sensibly and profitably in order to build a viable banking system. He spoke about the positives that IBC (Insolvency and Bankruptcy Code) will bring in the system and how privatisation of public sector banks will add to the efficiency of the banking system in India.
- The factor that’s more or less neutral from the long term perspective is ‘Demonetisation’. He believes a lot has changed globally since demonetisation and the short term repercussion of the same will eventually wave off.
- The factor that’s likely to have the most positive effect is ‘the realisation amongst the investors that real estate is not the most viable asset class.’ This required realisation would direct the domestic saving to other asset classes like stocks and bonds and help in lowering the cost of capital in India.
- He concluded by enunciating that improvement in the health of India’s Banking system is a necessary condition for India to emerge as a strong economy.
Then there was brief round of Questions and Answers with the Audience.
Capt. Somesh Batra, Vice Chairman of World Trade Center Mumbai, then closed the discussion and presented a vote of thanks to the speakers, Mr. Sajjid Chinoy and Mr. Saurabh Mukherjea.
Bookings are closed for this event.
Date(s) - 02/11/2018
4:00 pm - 6:00 pm