Ghost of 2008: Is Indian economy better placed today?

The resilience of Indian economy to withstand any shocks arising out of US Federal Reserve interest rates hikes has now been reiterated many times. 

Not only Raghuram Rajan, governor, Reserve Bank of India (RBI) but even Christine Lagarde, chief, International Monetary Fund (IMF) has said that India is better prepared in case there is capital flight from Indian markets if US Fed hikes rates. 

Although, Lagarde, who was in India last month, even said that emerging markets, including India, may suffer as stronger dollar may have a significant impact on Indian financial markets. 

A stronger dollar doesn't bode well for India as the country continues to run a current account deficit and has a massive debt in dollar terms. 

Raghuram Rajan seconded Lagarde and said that their might be volatility in the Indian stock markets but assured that the country is fully prepared to deal with global headwinds arising out of  US Fed policy announcement. 

Industry experts and analysts say that the Indian stock markets fell and foreign money disappeared a couple of years ago when the US Fed signaled tapering of Quantitative Easing (QE) was because India's economic fundamentals were less stable. India was running a current account deficit of over 4% as against 1.2% now and dollar reserves to tackle any outflow were low. Today, RBI  has mopped up over $340 billion to prepare itself for any adversary. 

But does this really mean that Indian economy is well prepared and resilient to any external shocks? 

Liliana Rojas-Suarez of Center for Global Development, in an essay titled Emerging Markets Macroeconomic Resilience to External Shocks: Today versus Pre-Gobal Crisis compared the data of 21 countries from 2007, the pre-global financial crisis year to 2014 and came to the conclusion that "Macroeconomic performance in four of the six countries in the sample is less resilient now than in 2007. India and Malaysia positions have also deteriorated significantly."

Current Account Balance

When compared to past few years, India's current account deficit this year looks manageable at 1.2%. However, the same in 2007 was 1%. 

source: tradingeconomics.com

She said, " On an overall basis, countries in Emerging Asia are currently best positioned regarding financing needs than other emerging market economies. However, current account surpluses have declined in all of them, with India and Indonesia displaying deficits." 

External debt to GDP

Many have already red-flagged India's growing appetite for dollar loans of roughly $460 billion. Dollar has been getting stronger and it is likely to only strengthen. In that case, India's dollar loans are likely to balloon. 

The situation gets frightening if one compares India's foreign debt today as against 2007. 

source: tradingeconomics.com

Also Read: Debt continues to be India Inc's favourite, up 30% since January

Rojas-Suarez said, "In spite of the sharp improvement in the Philippines, which now occupies the first position in the ranking19, and the sustained strength of South Korea, the macroeconomic performance of Emerging Asia as a region is relatively not as resilient to external shocks as it used to be. India’s position has deteriorated significantly and Malaysia has joined the group of relatively less resilient countries; the former due to recent excessive indebtedness both external (private sector) and domestic (public sector)." 

Furthering ,"For emerging markets as an asset class, the important deterioration in relative (and absolute from the discussion above) macroeconomic resilience by Brazil and India, two of the largest countries in this investors’ country-category is not good news."