Rewind. Two ticking time bombs

Two time bombs are ticking away for the stock markets. One is a global time bomb - the US Fed meeting during December 15-16, when a long-postponed rate hike is expected to finally occur.

The other is a domestic issue, when, on December 19, at the next hearing of the National Herald case, things may get ugly.

A Fed rate hike is widely expected, after the latest US job growth figures were encouraging. A hike of up to 25 basis points, which is expected, should not cause much of a downswing but anything more would. Rates, though, need to rise, because the zero interest rate policies have not succeeded in boosting either consumption or investment in productive assets. It has, instead, gone into creating bubbles in both equity and debt markets, which are looking for a pin.

When the interest rate cycle starts rising, weaker economies, such as Spain, Greece, Italy, and Portugal, among others, would find it more expensive to borrow. Foreign investors will also start re-evaluating the relative merits of debt versus equity markets and may decide to lighten their exposure to equity markets.

During the period of cheap money, economies, such as China, built up excesses. The construction boom in China resulted in surging demand for commodities, and China accounted for half the global demand for commodities, such as steel, iron ore and copper. Now that the economy is slowing, commodity prices have slumped and many metal and mining producers are headed for bankruptcy.

India was expected to not face large FPI withdrawals, primarily because of the impending clearance of the GST Bill, but this hope is now in doubt. This is because the National Herald case has, so far, succeeded in disrupting Parliament and in negating the hope that the Congress would support the passing of the GST Bill.

After Chief Economic Advisor Arvind Subramanian recommended a standard revenue neutral rate of 17-18 per cent, it was hoped that political parties would place sensible economics before partisan politics, and approve it. That would have been a bullish factor for stock markets, as it can help add 1-2 per cent to GDP growth.

So, the US Fed hike on December 15/16 followed by the next hearing of the National Herald case on December 19, would together determine the next move of the stock market.

India’s priorities are to provide more jobs for its young population, and to improve farm economics, as agriculture, which employs 54 per cent of the population, earns 14 per cent of national income.

But for these issues to be properly addressed, political parties must discuss things sensibly in Parliament. Sadly, its functioning gets derailed over other things.

More jobs a challenge

Providing more jobs is even more challenging due to technological advances, with machines taking up more jobs, in all industries. In the Ford Sanand (Gujarat) auto plant, robots are doing 90 per cent of the jobs already. Adding to the technological challenge of providing more jobs is the environmental one, i.e. the need to reduce carbon emissions. The Delhi Government is experimenting with odd-even number plates for cars, though trucks and two-wheelers are bigger pollutants. India must plan for better, cheaper public transport. The argument that private transport provides more jobs is being negated by greater use of robots.

The writer is India Head, EuroMoney Conferences

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