News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

This article was first published 9 years ago
Rediff.com  » Business » Why India's reforms cannot be postponed

Why India's reforms cannot be postponed

March 18, 2015 09:28 IST
Get Rediff News in your Inbox:

The government needs to work harder on labour law flexibility and stable regulatory systems

Indian tricolourThe attention of financial markets around the globe is fixed on the United States, where the country’s central bank, the Federal Reserve, is meeting for two days.

Federal Reserve Chairperson Janet Yellen has so far allowed the bank to say that it is being ‘patient’ with regard to increasing the US’ ultra-low interest rates.

If the meeting, which ends on Wednesday, signals an end to that patience, then it will be assumed that interest rate increases may follow as soon as June.

The US economy has been growing at a fine clip of late, and data on non-farm employment have provided positive surprises.

Given that, the Fed will sooner or later have to end the long reign of ultra-loose monetary policy.

When it does so, the effects on markets are likely to be significant.

The dollar has already risen sharply, as market participants anticipate an interest rate increase and shift resources back into the US.

The Indian markets saw a bit of up and down over the past week, and that volatility is likely to continue until there is clarity on what the Fed is going to do -- as well as on the nature of India’s own growth revival, and on what corporate results season is going to bring.

Yet, in the overall emerging-markets class, there is little doubt that India has some reason for comfort as compared to its peers, particularly those in the BRICS.

China has slowed sharply.

Russia’s economy shrank a notable 0.7 per cent in the last quarter, it was reported on Tuesday.

And Brazil is in major trouble, with million-strong street protests calling for the resignation of President Dilma Roussef.

Inflation there is at a 10-year high, fuelling popular unrest.

Galloping price rises are proving difficult to tame, even though the benchmark interest rate is 12.75 per cent, following four straight increases after President Roussef was re-elected.

Meanwhile, markets were told on Monday that the commonly-used proxy for Brazil’s gross domestic product growth decreased 0.11 per cent in January, following a 0.6 per cent contraction in December -- an additional negative surprise.

In a speech in Mumbai on Tuesday, the managing director of the International Monetary Fund, Christine Lagarde, reminded listeners of the dangers of vulnerability at a time when the Fed changes its monetary policy stance.

In mid-2013, when former Fed Reserve chairman Ben Bernanke had first said that the Fed’s massive bond-buying programme would ‘taper’ to an end, emerging markets were hammered.

At that time, India was among the worse sufferers.

Since then, however, India’s numbers have shown a reasonable amount of improvement -- most particularly and relevantly, inflation, on the back of lower oil prices.

There is thus the possibility that India will, this time, ride out a wave that may swamp many other emerging markets.

However, markets will look for more than the headline numbers.

They will look for sustainability.

Ms Lagarde is right to remind the government that structural reforms ‘need to be pursued with the utmost speed’.

She has pointed out that India is a ‘bright spot’ and is ‘marching in a different direction’.

But she also correctly pointed to the unfinished agenda of reform, particularly to labour law flexibility and stable regulatory systems.

The government needs to work harder on these areas if it is indeed to ride out any waves the Fed may unleash.

Get Rediff News in your Inbox:
Source: source
 

Moneywiz Live!