United we stand, says China to India - Views on News from Equitymaster

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United we stand, says China to India

Mar 5, 2009

India-China unite against protectionism
Although China may choose to disagree with India on most of the latter's foreign policies, it has chosen to unite with India on an issue that is impacting it as much - protectionism by developed economies. It may be recalled that US President Obama in his maiden budget speech had said that his administration would do away with tax breaks for firms outsourcing jobs to overseas destinations, including India. Nearly 1,000 US firms, which have shipped their jobs overseas, are expected to be affected by the proposed elimination of tax incentives.India has been opposing the protectionist policy citing that during the time of economic crisis developed economies must ensure that there is no hindrance in the flow of investments to developing countries. China itself has witnessed considerable drop in its exports to the US and nearly 670,000 small-scale export oriented enterprises have been shut down in the economy leading to loss of 6.7 m jobs.

Probably the unison of the two fastest growing economies, at a time when most the world is facing recession, may cause a change of mind in the developed world.

Fifth rate cut in as many months
Having exhausted almost all means of fiscal stimulus and encouraged by the drop in inflation (measured in terms of WPI), the RBI has made a final attempt at reviving the economy with another monetary stimulus. The central bank cut the benchmark interest rates - repo and reverse repo rates - for the fifth time yesterday since October 2008 after economic growth slowed to a five-year low. While the repo rate (at which banks borrow from the RBI) was dropped to a record low of 5% from 5.5%, the reverse repo rate (at which banks park their funds with the RBI) was lowered to 3.5% from 4%.

Despite the RBI's attempts at lowering the cost of funds for banks, concerns over rising credit risk together with the slowing of economic activity have moderated credit growth in recent months. Even as some public sector and private sector banks have cut lending rates in response to the RBI's monetary policy stance, according to the latest data, non-food bank credit has decelerated further to 19.7% YoY in February 2009 as compared to 22.7% YoY in February 2008.

India's burgeoning government debt which is nearly equivalent to 80% of GDP has been a matter of considerable concern in recent months. The government expects its borrowings next year to increase to a record Rs 3.6 trillion (US$ 72 bn). Citing this concern, global rating agency Standard & Poor's has even downgraded the nation's sovereign rating outlook to negative from stable. Yields on India's benchmark 10-year government bonds have also risen by 1.2% (to 6.4%) in the last two months because of the deteriorating government finances.

India's vulnerability to economic crisis
In what may offer some comfort amidst the distress, the International Monetary Fund (IMF) in its latest report on global economic crisis has categorised India as 'moderately vulnerable'. The global economic body, has however, warned that the crisis has shifted to the world's poorest nations and 22 countries may need as much as US$ 25 bn in additional funding in 2009 to cope with the downturn. Under current IMF projections, the total balance-of-payments shock in 38 developing countries could amount to around US$ 165 bn and increase to as much as US$ 216 bn under a worst case scenario.

Developing economies have been particularly affected by the falling demand for exports and a dramatic slowing in remittances from overseas workers as the US and European economies witness severe contraction. Further, according to the IMF, about half of all low-income countries are expected to witness a sharp drop in foreign direct investment (FDI).

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