"(Business Standard)- How India should respond to the China slump- China's slump will hopefully reduce the Indian fascination for the Chinese model of controlled economy." • There is a possibility of aglobal financial crisis which will roil all emerging markets, including India. The problems in China will exert a drag upon global tradeables prices which will adversely affect profitability of tradeables producers in India (while benefiting buyers). • The 'China model' will command less respect in India, which could help improve policy formulation. • There is considerable gloom in China. From mid-2014 onwards, a significant scale of capital flight began. It is estimated that over 18 months, capital flight of $1.5 trillion has taken place. • This is also about exchange rate policy. Just as capital went into China when the central bank produced a one-way bet of predictable appreciation, capital is now leaving China as the central bank has produced a one-way bet of predictable depreciation. To private persons, it is wise to take capital out of China as the range of possibilities runs from a 20 per cent depreciation to no depreciation. • Politicians and bureaucrats like to have control, and dispense political favours by 'managing volatility', but this causes harm along the way. • We in India should start envisioning problematic scenarios and the potential channels of influence into India. There are two natural analogies from the past, which inform our thinking about the future. By and large, India did a good job in the difficult 2008 crisis, and mis-handled the minor crisis of 2013. We should mull over these contrasting experiences. In 2008, we allowed the market to work, and got a big rupee depreciation. In 2013, we tried to fight the currency depreciation with a 400 basis points interest rate hike and a slew of reversals of reform. • The retreat from a market-determined exchange rate, from 2013 onwards, has induced moral hazard: Firms are betting that the government will be their risk manager. The costs of exchange rate management are borne by the economy, and the benefits are concentrated in the reduced hedging costs of firms. The bets that have been placed will generate heightened political pressure, in the scenario of a large depreciation, where firms will ask for muscular government action in response to a depreciation. In order to forestall these unpleasant scenarios, the process of shifting away from the post-2013 exchange rate regime needs to begin well ahead of time. • The second channel of influence into India is through prices of tradeables. In China, concepts of accounting and profit are not well understood by many firms. Many unprofitable firms are kept alive through directed credit. Scaling down production, laying off workers and closing factories is often politicised, and the political pressure is in favour of preserving the status quo. • The Chinese crisis is adversely impacting prices and profitability in markets where Chinese firms are significant players. • From the viewpoint of the financial markets, this is a time to buy protection against large negative movements of Nifty and the rupee. If India fails to reform the exchange rate regime, there could be considerable opportunities for macro trading. This is also a time to look at equity analysis and credit analysis through the lens of tradeables versus non-tradables. • The last channel of influence is through the space of ideas. For many years, China's success had encouraged the socialist streak in Indian policy thinking. China seemed to suggest that there was an alternative to liberal democracy and a market economy. It showed a path for control of the economy by politicians and bureaucrats. • The construction of a liberal democracy, characterised by the rule of law, and a well-functioning market economy. This negative influence would now matter less. We would now be able to better focus on building India as a mature market economy. This involves narrowing the work of the State to addressing market failures, embracing the Constitution and the rule of law, and the construction of state capacity for addressing market failures. This involves retreating from government intervention and emphasising the subtlety of policy frameworks that reshape incentives. OTHER PRACTICE QUESTIONS

HISTORY Mock Questions

  clickhere

ECONOMICS Mock Questions

  clickhere

POLITICAL SCIENCE Mock Questions

  clickhere

QUANTITATIVE APTITUDE Mock Questions

  clickhere

REASONING Mock Questions

  clickhere

ASSUMPTIONS & INFERENCES Mock Questions

  clickhere

INTERPERSONAL COMMUNICATION SKILLS Mock Questions

  clickhere

SOLVED ENGLISH PASSAGES

  clickhere

GEOGRAPHY & ENVIRONMENT Mock questions

  clickhere

DECISION MAKING Mock questions

  clickhere

IASMAINSSTUDYMATERIAL

ALLINDIAIASMOCKSERIES


Comment Box is loading comments...



ADVERTISEMENTS

copyrightimage