In late September, India “surprised [10]” 51 out of 52 economists by cutting rates a larger than expected 50 bps.
Despite RBI Governor Raghuram Rajan’s penchant for catching markets off guard and despite the fact that exports had fallen for eight consecutive months, economists still failed to predict that anything more than 25 bps was in the cards.
“The weakness in India’s exports is striking, not only in terms of past trend, but also from a cross country perspective,” Deutsche Bank wrote at the time. “Indeed, India’s exports performance has been the weakest in the region in 2015.”
In short: in a world gone Keynesian crazy, you live and die by your willingness to engage in competitive easing and with China having just a month earlier moved to devalue the yuan, India had little choice but to cut lest the export picture should darken further.
Since then the malaise has deepened.
Exports have now fallen for 12 straight months and although some of the decline is probably attributable to slumping prices (as opposed to lower volumes), it’s worrisome nevertheless.
“India’s external trade likely fell for second consecutive year in FY16E, with both exports and imports contracting by 18.5%YoY and 17.2%YoY in the period Apr-Nov’15,” Citi notes, adding that “the meltdown in India’s exports and imports was even sharper than the global trade which contracted by 12- 13%YoY.”
On Friday, in the wake of China's continued devaluation of the yuan, Indian Trade Minister Nirmala Sitharaman expressed concern about the effect a sharply weaker RMB will have on her country's trade deficit with Beijing. "It's worrying," she said. "My deficit with China will widen."
India is now looking at ways to prevent a flood of cheap imports from hitting domestic producers. "India steel companies such as JSW Ltd have asked the government to set a minimum import price to stop cheap imports undercutting them," Reuters writes [11]. "A similar measure was adopted in 1999."
And cheap Chinese imports aren't the only thing domestic corporates have to be concerned about. If the Chinese economy continues to land hard (so to speak) a sharper devaluation is a virtual certainty. That could weigh on the rupee and imperil Indian corporates that have borrowed in dollars.
“If China keeps getting hit like this, the yuan has to devalue, and we will see another crisis in India,” Vishal Kampani, managing director at JM Financial said in a January 8 interview with Bloomberg [12]. "A devaluation of the yuan could weaken the rupee, creating 'huge problems' for Indian companies that have to pay back dollar loans, Kampani said." Here's more:
China is India’s largest trade partner and third-largest export market, so a slowdown there could prolong a record slump in the South Asian nation’s overseas shipments, which declined 12 straight months through November.
A China-led rout in Indian markets also risks damping private investment, already hurt by credit lines choked by bad debt and a legislative gridlock that’s blocked economic bills. That would boost pressure on Prime Minister Narendra Modi to sustain public spending even at the risk of worsening Asia’s widest budget deficit.
As a reminder, the country's fiscal situation is a bit precarious or, as Citi puts it, Modi has "good intentions in a challenging environment." "We believe that the government is committed to a fiscal consolidation path, but balancing the credibility of its deficit compression promise and presenting a realistic budget which does not give a negative growth shock is going to be tricky," Citi wrote, in a note out Monday.
Yes, it's "going to be tricky" because as we've seen in countless other countries over the past five or so years, fiscal retrenchment and booming growth aren't compatible.
So ultimately, the spillover from China may well force India to choose between shoring up the deficit and keeping the economy going with fiscal stimulus as private investors close their wallets. Meanwhile, a sharp drop in the rupee is going to put tremendous pressure on Indian corporates who have borrowed in dollars and are "less [hedged] than we would wish", to quote Rajan.
Why should you care about this, you ask?
Because as we showed back in November [13], the fate of global growth hangs on just three countries and if you believe Goldman, India will be the strongest performer:
[14]
