INDIA

INDIA
The Hindu, Madras, Dec. 5: India might be better prepared than most emerging market economies to face the growing global macroeconomic imbalances but given that the inevitable adjustment will inflict pain there is no room for complacency. The global imbalance has been primarily caused by the propensity of countries with very high savings rate, such as China, Japan, and South Korea, to park their savings in the United States, often at low yields.
With many Asian central banks simultaneously investing their foreign currency reserves in U.S. government securities, the U.S. has been able to finance its very large current account as well as fiscal deficits at relatively low costs. Clearly this arrangement is unsustainable. Already there is a strong clamor in the U.S. to trim its deficits. The asymmetry between savings and investment has been accentuated recently by the huge surpluses of the oil producers.
Global inflation
There is a widespread fear that measures to counteract the resurgent global inflation will be the tipping points for the global macroeconomic imbalances to unravel. Countries such as India with a good macroeconomic performance and a tradition of reforms will be able to withstand better the onslaught of sudden and unexpected changes in global interest rates and exchange rates. Any shift in investors' preferences in the global financial markets will have a far less deleterious impact on countries such as India, which are not dependent on external sources for their fiscal needs. Yet, there is no doubt that the pain of adjustment will be felt in India too. A sharp jump in global interest rates will push up the domestic interest rates, affecting not only the real sector but also banks with huge investments in securities. In a globalizing world, India cannot avoid the pain but is certainly better equipped to minimize it.