Why would India Never Decouple from the Global Economy?

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India may have hit a jackpot with Rs.1 lakh crore treasure bonanza at Padmanabhaswamy temple in Kerala; but that’s not the case to be with Greece which is wrestling against tough austerity measures; junked economy status of Portugal; looming economic crisis in Spain as more and more families struggle to pay their mortgages; and, lastly, worsening US fiscal policy and debt ceiling issue.

Above is the list of major global concerns bothering stock markets the world over, even as Indian media remain gripped by speculation on the exact valuation of the unexpected temple treasure which could be good enough to meet the costs of rolling out the Food Security Act, or simply put, comfortably paying off debt of the Kerala state in full.

But, this is not something that could cheer up the Sensex and the Nifty from the economic perspective, as the treasure trove could hardly nullify against four months of central government’s interest and debt payment liability or seven months of defense spending.

chain-and-lock

If there is something that the financial market wants to see – its curbed inflationary situation, chugging growth prospects of the domestic economy, stability in political landscape, brighter corporate earnings and steady global market and geo-political scenario; and not just a one-off multi-thousand crore treasure finding.

Currently, European region is mired by severe debt crisis and is stuck in a vicious circle where the bailouts will continue in association with international financial institutions, ultimately, delaying the inevitable defaults in the weaker sections of the society where the confidence quotient has slumped to its lowest. On hindsight, these bailouts might prove to be futile for the troika (IMF, EU and ECB).

The latest flare-up in the sovereign debt crisis is down-gradation of Portugal’s credit rating to junk status led by Moody’s recommendation; putting the country’s banking sector, addicted to ECB’s liquidity injection against its bonds as collateral for its loans, into quandary.

At this time, the EU authorities have almost discounted a default rating for Greece by the credit rating agencies; even as stock markets celebrate Greek Parliament’s voting in favour of the austerity measures, which was set to be a pre-condition for gradual infusion of liquidity into its system by the troika. But, this is just an impending crisis averted for the time being, and not a saviour for the weaker nations from a possible default restructuring further down the road.

On the other hand, the voices of concern are equally emanating from the US, where the failure to raise the looming debt ceiling, currently at $14.3 trillion, by August 2 could cause the federal government to default for the first time on its obligations to creditors worldwide – which lead to a big loss in the Big Daddy’s creditworthiness and, consequent, global turbulence.

You may ask – what has all this to do with the movement of Indian stock markets? But, fact of the matter is that India continues to remain increasingly coupled with all the news-and-noises arising from the global podium.

Agreed, India is primarily a domestically oriented economy; but she is equally connected with the outer world through its procurement and supplies in the international market. We all know how a small spike in global crude oil prices can raise alarms in the domestic economy – either through government passing on the hike in fuel charges to the consumers or subsidized fuel costs eating into the country’s fiscal comforts.

No summary needs to be provided to the Trak.in readers as to how worsening of the geo-political scenario can lead to sentiment-led turbulence in Sensex and Nifty fluctuations. You’re well aware as to how inter-linked and sensitive are the prices of domestic bullion and currency movements with those of its international counterparts.

Previous recession is testimony to the fact that when there is a global rout, the panicky FII’s tend to book profits in fundamentally stronger emerging economies to off-set their losses in developed markets. Practically, India was never a decoupled economy, nor will it be so in distant future – a logic that many media analysts try to tag with the strength of the Indian economy.

In a nutshell, India’s good health is deeply associated with the well-being of the world economy.

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  1. Prateek Praveen says

    A worth reading content. Yes i agree with you up to a great extent but i guess we need to take a step forward in order to be resilient enough from the turmoil across the globe in the longer term. I guess the turbulence in our markets is more related to the volatile nature of FII’s movement which is certainly linked to the global turbulence. To combat that we need to take some sustainable measures such as FDI in Retail which has been a long overdue which would certainly a big push for our economy.

    1. Viral says

      Exactly, we need more of stable foreign money in form of FDI, rather than short-term oriented FII flows. At the same time, we also need out exporters to spread well their business operation risks in various economies, rather than staying concentrated in few major, yet ailing economies.

  2. PRADEEP AGARWAL says

    I LIKED THE ARTICLE BECAUSE IN REALITY THE INTEGRATION WITH WORLD ECONOMY HAS AFFECTED OUR STOCK MARKETS OTHERWISE WE WERE IMMUNE FROM SHOCKS AND TURBULENCES

    1. Viral says

      THANKS PRADEEP

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