Take steps to lessen impact

The ferocity of panic selling in stock markets all over the world on Monday was as surprising as it was severe. Though all the markets were sliding in the last few weeks as a result of the continuous decline in the Chinese market, the sudden and precipitous meltdown, as it happened on a single day, was not expected. But the 9 per cent fall in the Shanghai composite triggered extreme reactions, which are still being felt. It will take a long time for the markets to recover. The sell-off is a sign of the fear everywhere that the slowdown in the Chinese economy is worse than previously thought. The Indian markets experienced their biggest one-day fall in about seven years, with the Sensex plunging over 1,600 points. The rupee also took a bad hit, tumbling below Rs 66 against the dollar, which is its lowest level in the last two years.

There is no escape from the impact of global economic headwinds in increasingly interlinked markets. The weak indicators of manufacturing growth in China, the currency depreciation it resorted to this month and the sense that the remedies are less than adequate to deal with the situation have led to the present turmoil. For India, the best consolation is that it is better placed than in 2008 or 2013 to face the consequences of a global crisis. The current account and the fiscal deficit positions are manageable and inflation is showing a downward trend. The fall in prices of commodities, including oil, is
on balance beneficial. A cheaper rupee can boost exports. A slowing China is not India’s major export destination either. The good foreign exchange reserve position can be used to stabilise the rupee. RBI Governor Raghuram Rajan has already said that he is open to use it to the best advantage.

India can also take steps to minimise the impact and to even make the crisis an opportunity. Its growth prospects are still real. The economy is more dependent on domestic consumption than on exports. If the government revives the stalled reforms agenda, the country will be able to deal with the international pressure better and may gain from them. The fate of the GST and land acquisition legislations is still uncertain. Infrastructure development and manufacturing need to be given a push in real earnest. Banking reforms are only being talked about. Some of these measures may take time to show results. But they need to be given a start. Since the crisis is not likely to end soon, it is necessary to formulate and implement long-term solutions.