Revival or Mirage?

Revival or Mirage?

The US Federal Reserve Bank has not begun to taper its massive economic stimulus programme of $ 85 billion per month after all.  Mr. Ben Bernanke, the Fed Chairman, could not announce a tapering this time on the 18^th of September, but repeated his message on it, saying he might begin to do so soon.

But Mr . Bernanke will be ending his term shortly, and the tipped to the post incoming Federal Reserve Chairman is expected to continue the easy money policy too.

The tapering could begin in December,  say several international brokerages who feel the constant printing of money must be reduced, and it may extend into 2014, and could begin larger than the $15 billion that was expected this time.

Others say the economy, and indeed the entire economy of the West, and consequently the world, is far too fragile to countenance any such move in the near future. And tapering during the holiday season?

Hawkish observers think the huge stimulus programme in the US may be building a new bubble and  are promoting ever higher commodity prices, but even talk of tapering spooks the US market every time. So the strategy may well be to keep threatening a tapering, to see when the markets finally stop reacting adversely, before actually moving in real terms.

People, banks, business, industry, have, let us accept, all become accustomed to near free money, and are unwilling to give it up.

Politically too, it is also very difficult for the Obama government to take an economic decision that promises great turbulence both at home and abroad. The US has a very large economy, the largest in the world, but it is built on enormous debt in many trillions of dollars, built over many years, quite a lot of it financed by several foreign governments.

Any tightening of monetary policy, even in the next year or two, will rock the global economic foundations again. But if the real economy does not grow sufficiently, say the economic hawks, the eventual outcome will be a disastrous and disorderly collapse.

Meanwhile, sensing the gravy train is unlikely to stop anytime soon, the world’s emerging stock and currency markets are happy, that at least for now, they can hope to consolidate some gains.

This, after a severe drubbing received all around, less or more in different countries, since the first announcements on possible future tapering came from Mr. Bernanke in May 2013.

This reprieve has enthused our stock market too, chafing at the bit to rally before the festive season. The Sensex has gone up over 700 points after the announcement today, the Nifty by over 200 points likewise. The markets are near all-time highs and might have to be re-rated as to its expectations on a bullish basis.

The rupee has also rallied, and may indeed hover around the Rs. 60 to the $ mark soon, a good recovery from being within a whisker of Rs. 70 to the dollar just days ago. But this is, paradoxically, because the  US dollar is weakening.

This externally induced windfall cum solid relief rally in India, albeit on highly beaten down prices of 90% of the stocks, affords an opportunity for the RBI and the Finance Ministry to reduce interest rates, and ease the very tight monetary policy in other ways too.  

The RBI and its new governor Raghuram Rajan, who certainly has luck on his side, will speak on its own monetary policy on Friday 20^th September 2013, just one day after this piece is being written.

A right and strong signal on monetary easing to Indian business and industry and the foreign investing community will be most welcome.  The markets could rally for the next two or three quarters if the US tapering bogey goes away, irrespective of the domestic scenario, and in anticipation of a green signal after the elections on many fronts.

While it is not the province of the RBI, might one hope about some policy pronouncements alongside  to stimulate domestic growth too?

There are reports on the government planning to introduce mild austerity measures. This is defensive action, and not very encouraging. It is just as well they are likely to be mild in nature because government austerity imposed on itself is often bypassed by shifting expenditure to other heads in an accounting sleight- of- hand.

The downsizing of government, of course, is the only effective answer, but this is unlikely to be voluntarily undertaken. Logically, it can only come about when it reduces its tentacular hold on a whole list of things in favour of the private sector.

However, the old socialist mistrust of the private sector is alive and well , and the conviction towards greater privatisation despite the likely increase in efficiency is not much in evidence. Instead, there is the relentless promotion of big government for the patronage, power and opportunities for corruption it affords.

Will Narendra Modi’s government do it given the chance? It is very likely that his government will shift focus to only those things that help the poor and needy and transfer the profitable areas to the private sector and quite swiftly at that. That is how the Gujarat government has shown good results, and there is every likelihood of his implementing similar policies on a national basis.

The UPA  meanwhile has rushed through  a number of laws, with large price tags attached to their implementation, in its last few months of office. They are hoping it will provide them political traction at the hustings, with special reference to the Food and Land legislation.

And now, it seems keen on waiving nuclear safeguards and liability clauses for reactors to be purchased from the US prior to the general elections being announced.

The Congress Party wants to retain its influence with the West even if it is forced into the Opposition benches, while the new government will have a tough time finding the finances to implement the new laws, if the economy continues to stay in the doldrums.

And since it is not perceived to be politically strategic to hand over a reviving economy to the successor government, the UPA is not likely to take sufficient advantage of the opportunity afforded by the moves of the US Federal Reserve.  

The market could revive spontaneously however, doing so on a variety of global cues, despite a do-nothing government, and the Indian agriculture sector could also do better on the back of a good monsoon.   

This may improve matters generally, but the Congress led UPA will no doubt be hoping to discredit any successor government led by the BJP or the “People’s Federal Front” as Derek O’ Brien of the Trinamool Congress would have it.  

But since not much is going in favour of the UPA at present, perhaps they won’t be so lucky.

(1,137 words)

September 19^th, 2013

Gautam Mukherjee