The threat of a trade war between the world's two largest economies looms large today. If American and Chinese negotiators manage to arrive at some agreement before President Donald Trump meets his Chinese counterpart Xi Jinping at the G20 summit in Osaka towards the end of June, things could settle down. Otherwise, fear of losing face on the part of either leader, neither of whom can afford to be seen to be giving in to external pressure, would launch a trade war that would push global growth down, wallop markets and currencies, and make policy-making doubly difficult in every country, including in India.
Some air the hope that India would be able to benefit from the relocation of bits of the global value chains that would inevitably follow imposition of 25% US import duty on exports from China. Such minor mercies would not compensate for the major curse that a full-fledged trade war would turn out to be. The financial fallout could be even more damaging than real sector effects of slower export growth, lower investment and a slower pace of job creation, and cheaper oil. The overhang of liquidity arising from the Quantitative Easing policies adopted by the US Fed, the European Central Bank and the Bank of Japan stands ready to act as a force multiplier for the cross-border capital flows that would follow in the wake of, and in anticipation of, economic bad news. Market indices and exchange rates would swing wildly, making the pile of external loans, including via convertible debentures that India Inc has accumulated, a potential source of debilitating uncertainty.
Private players must gear up by hedging their risks with the full range of derivatives now on offer. The government must focus on maintaining macroeconomic stability and policy to boost domestic growth. Capitalise the banks at one go, not in dibs and dabs. Correct the market lacuna in long-term debt possibly with a public institution acting as a market maker for medium to long-term corporate bonds. Revive public-private partnership in infrastructure, particularly in building new towns, to unleash India's pent-up urbanisation. Be prepared.
saving score / loading statistics ...