I wrote in June about India and its intense summer. The meteorological department had predicted a less-than-average monsoon season. Well that prediction is now proven false. India is enjoying a good monsoon season. In fact in some areas, we have issues of flooding which is also a problem if it continues. But overall we can see a decent agricultural crop and good sectorial growth.
So should we break out the champagne here? Hold on, not quite yet!
The political scene in India seems to be headed for a logjam rather quickly. The party led by the charismatic Prime Minister Modi seems to be hitting stall speed. Whether it was the landslide victory they achieved in the election last year or just new ministers who got power handed to them in a big way, the bureaucracy seems to be ratcheting up rather than being eliminated.
Reforms are stuck and the marquee Land Reform Bill is dead now. Many major reform bills were dependent on the Land Reform Bill, and with that stalled, we can see a significant slowdown in the progress that this government will be able to achieve in the near term.
Some of the arrogance of the ministers is seen in the way they are handling the tax reforms within India. Without meaningful tax reforms we will not see significant foreign investments flowing in to India.
Mr. Modi’s “Made in India” campaign seems to lack support from the corporate sector because of the lack of reforms in the energy industry and overall reform paralysis that was the bane of the previous government.
The ruling party, known by the initials BJP, is busy fighting rival political parties rather than figuring out how to pass the reforms despite huge margin in Congress. The lack of support in the Senate locks down reforms and the BJP cannot seem to find middle ground to get things done.
If this lack of growth continues in India we can see Indian growth rates go back down to the 5 percent range rather than the hopes and expectations of 7 percent to 8 percent growth rates. This will be a major shock to the global growth rates. There is now strong rumblings of property prices in India and talks of 30 percent to 50 percent declines are getting louder and stronger.
China experienced a massive price adjustment in its stock markets. While overdue, the heavy handed response by the government to manage that crisis does not instill confidence that China is ready to wear the global business leader crown yet.
Europe seems to have averted disaster for now by forcing Greece to capitulate and accept more austerity. While the crisis seems to be over for now, I am personally suspecting this is not the last we have seen of Greece. I believe they will exist Euro in the next 21 to 24 months. So the Euro crisis isn’t over. As usual, the can has been kicked down the road for now.
Latin America is fading fast and with Brazil now facing a near-certain recession. With Mexico plagued by low oil prices, we can expect to see a contraction there, too.
That leaves the United States. First, we cannot grow in isolation. The Federal Reserve has painted iself into a corner as I had predicted.
With the growth still weak, the Fed will raise rates as it promised, otherwise it will lose credibility. But that increase may come in the form of a 0.1 percent increase once or twice or a bold 0.25 percent raise once and then nothing for the next year or longer.
That is not a meaningful increase in rates and is a mean show. But the financial sector will run with that and supporting interest rates will rise, starving fledgling businesses of much needed credit oxygen.
If we have any hopes of growth in the U.S., this move will certainly go a long way in stifling it as much as possible.
Now the real kicker will be to see if the International Monetary Fund inducts the Chinese yuan into the SDR in October. If that occurs, major volatility will be injected into the currency markets.
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