It is time for India to change its historical policies of subsidising the low productivity sectors to penalize the high productivity ones with more taxes.
The combination of wider trade and fiscal deficits added to lower reserves makes the currency weaken severely. Recent data is quite concerning. If the government decides to ignore these issues, India could become the biggest risk in emerging markets and for the The biggest risk economy.
Authored by Daniel Lacalle via DLacalle. The situation in India is not as desperate as in Turkey or Argentina, because FX reserves are not being depleted at high rate, but the trend is concerning and the outlook for growth, trade and fiscal balances is weakening.
Another warning comes from the maturities in foreign exchange. Foreign exchange reserves remain acceptable, but are falling rapidly.
The problem of emerging markets is largely self-inflicted and comes after years of raising imbalances, both at a trade and fiscal level, based on impossible expectations of growth and demand.
That combination will not work in a world that has lower tolerance for fiscal and trade imbalances and a risk-off scenario.
Yet governments ignored this and continued to increase imbalances as well as rising debt in US dollars. India can easily navigate this turmoil if it changes some misguided demand-side policies.
That is just noise. The government has prefered to raise taxes and increase spending, and the demonetisation policy was a big mistake read.
All the cash that was taken out of the system came back a few months later. Deficit was revised up to 3.
The question is, will the government do it? Additionally, tax wedge is already a high burden. The Federal Reserve has warned for two years about rising rates and policy normalization. Trade deficit in July was the highest since As oil prices rise, and imports soar, the overall balance of payments is moving into larger deficits than expected, as capital inflows weaken and are unable to current account deficit.
Additionally, printing more rupees is not going to solve the challenges. Or will they prefer to blame an external enemy and increase the imbalances?Biggest risk - I made a life changing decision of giving up my job, to: spend more time on myself, as I was slowly dying in my job - I had to have a career change, build a business, work on myself, I was still grieving from the passing away of my mum.
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That is just noise. The problem of emerging markets is largely self-inflicted and comes after years of raising imbalances, both at a trade and fiscal level, based on impossible expectations of growth and demand.".
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