The BRIC countries are meeting next week to discuss the European debt crisis and how they can help the indebted countries in Europe. The Chinese premier Wen Jiabao said in a speech that the US and Europe must get their house in order by following prudent macro economic policies rather than seeking help from China. The US president has become a Robin Hood of sorts by taking money from the rich and giving it to the poor in a USD 440 billion jobs plan. The world has turned upside down and the emerging economies, which were so far dictated by the developed nations on the way to run their economies, are now dictating the developed countries on the way to run their economies.
Watching the crisis developing in US and Europe from India, one can feel the superior position we are in at present. India does not need to borrow funds from abroad to finance its debt, as there is enough liquidity in the banking system to absorb the debt. India is growing at over 7% levels while there is threat of recession in Europe and the US is projected to grow at 2% levels for 2011. Interest rates in India are high, with the RBI benchmark policy rates at 8% and have scope to be reduced if inflation is contained. Interest rate in US is at 0% to 0.25% while in the Eurozone it is at 1.5%. There is not much scope to reduce interest rates in the US and Eurozone to spur the economy.
India’s debt is rated just at investment grade by rating agencies and given its growth and the fact that government has brought down fiscal deficit from 6.8% of GDP in 2009-10 to 5.1% of GDP in 2010-11 the rating is stable and can be upgraded. The ratings of countries in Eurozone are yet to reflect the debt problems and many of them are in the higher category of investment grade rating. Rating in these countries can only come down and not go up. The US rating is AA+ with a negative outlook by S&P implying that further downgrade is possible.
Indian debt is in demand and the question is of easing restrictions of foreigners investing in India debt. Debt limits of USD 25billion is fully utilized by FII’s while the infrastructure debt limits of USD 25billion will be utilized if the norms of investments are eased, which the government is doing so in October 2011. Investors are shunning debt of indebted countries in the Eurozone. Italy had to pay record rates for its auction of Eur 3.9 billion of five year bonds. The bonds were sold at yields of 5.6%, up from previous auctions levels of 4.93%. Italy is rated A+ with a negative outlook by S&P. Italy is one of the most indebted nations in the Eurozone with debt to GDP ratio is 116% as compared to Indian central government debt at around 50% of GDP. Italy had to go to China to make it subscribe to its debt, as it feared that there would be no takers for its debt auction.
India, while not the best run of countries given its issues of inflation, subsidies, corruption and lack of reforms is still on a much better footing than the developed nations. Inflation running at 9.5% levels can come off with prudent monetary and fiscal policies. RBI has been running a tight monetary policy for the last eighteen months while the government has budgeted for a fiscal deficit at 4.6% of GDP for 2011-12 against 5.1% seen in 2010-11. Subsidies are an issue with the government lacking the political will to free fuel prices but there is a sense of worry on the subsidy bill, which is running up due to high prices of oil. The subsidy bill will be three times the budget estimates for 2011-12. Corruption is a big issue with the revelations of the 2G scam. The government has taken tough steps in arresting the corrupt even if they belonged to key political parties allies. The people movement through Anna Hazare has also awakened the common man to corruption and hopefully corruption is on its way down in India.
Every Indian has her day and India is basking in the sunshine at present in relation to the gloom in the developed world.