India has reasons to cheer despite global commodity meltdown

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While crashing commodity prices and a slowing Chinese economy will make it a difficult year for most emerging countries, India has good reasons to cheer as it was in a privileged position being a big commodity importer, a top Harvard University professor has said.

The China slowdown has not had a major negative effect on India as its exports to China are small, said Dr. Gita Gopinath, John Zwaanstra Professor of International Studies and of Economics at the university’s Department of Economics,

The high borrowing interest rates also did not bother India much and given that India has a young workforce, the demographic aging trends and their negative impacts are not a major concern either, she said in a recent lecture at a business school in Mysore

Dr Gopinath said four major trends were playing out in the global economic field—China’s slowing growth; a collapse in commodity prices; the beginning of the end of easy money; and inherent weaknesses in developed economies, especially an ageing population.

  • Slowing emerging markets, especially diminishing GDP growth in China, was having a negative effect on the global economy, with a steady decline in the exports of different countries to China. China accounts for 10 percent of the world’s imports. Slow demand from China spells trouble for countries exporting heavily to China.
  • The collapse in commodity prices, of up to 40 percent in a year, has sent a chill down the spine of commodity investors. That drop was due to a slowing Chinese economy. The OPEC’s supplies in the market have reduced crude prices and the International Monetary Fund (IMF) believes the trend of low oil prices will continue through 2016.
  • The beginning of the end of low interest rates. Over the past five years, many governments and large corporations started borrowing heavily from the US, resulting in a huge build-up of debt in emerging markets. This debt is not in the balance sheets of banks but in the balance sheets of large companies in emerging markets, which is a new trend. With commodities prices falling, there is a serious concern about the debt build-up and its impact.
  • Ageing populations in developed economies. The demographic trends of rising life expectancy with an increase in ageing populationin advanced economies has had a negative impact on the global economy with a steep decline in the ratio of the working population to the retired population. Another weakness is reduction in productivity growth. This trend represents the most critical long-term economic dilemma facing the developed world. The big implications are on the fiscal side—increased social security and related costs on the budgets with a significant amount of the population being retired and trying to live off the wealth it generated during its working years.

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