Is India heading towards next Ice Age?

Date:   Monday , August 01, 2011

Itís often said that whenever the U.S. sneezes, the world catches a cold. But, what if India gets cold? Yes, I am talking about the concern whether India is heading towards a recession. The U.Sís attempt for another round of quantitative easing (QE), to bring the economy back on track reminds me of the sabre-toothed squirrel Scrat in the famous movie Ice Age that in its search a location to store its prized acorn creates havoc in the lives of the characters of the movie. This current move by U.S. to secure its economy will kill all the developing economies and the developing world have to think hard for out of the box solutions on how to combat the same rather than passing the buck.

QE3 is good for us from a short-term market perspective but over the medium to long run India needs an impetus. At the moment, business confidence and investor confidence is sliding because we donít see political establishment doing anything for the economy. If there are no changes for economy reform, we will have a real challenge in our hands with a softening and a sliding budget deficit and sliding investor confidence.

The concern is not just in India, itís across the world. The money generated as a result of QE3 will flow to emerging markets as these places are hotspots for investments and economic growth. Though this sounds exciting, the flipside is there will be more challenges in terms of high liquidity and the high inflation rate in the developing markets. Bloated oil subsidy bill will be a big headache and it will test the governmentís fiscal deficit targets as well. India already is fighting inflation and in case sharp commodities rally, it will be a tough struggle. Now itís time for Europeans and the developing economy how to neutralize the ticking time-bomb set by U.S or letís wait and see which countryís trouble will trigger chain reaction across the world.