Expert Opinion

Published: Dec 29, 2021
Updated: Dec 29, 2021

Debt-hit Evergrande’s global tremors

The stimulus-driven economic recovery and massive vaccination campaigns in the US could generate herd immunity a little earlier than anticipated. Every household will dig into its savings account to indulge in the leisure activities it has neglected for most of the year, itching to go out and celebrate with friends and family. In 2021, consumption spending will be 8.3% higher than in 2020 and 4.9% greater than in the baseline for the year following. Future economic conditions predict more sales and happy days in-store.

If we assume the upside scenario, the US economy will grow at a faster rate of 4.5% versus 4.1% in 2020. The higher the growth rate, the lower the unemployment rate will be by mid2022. As the labour force participation rate rises, more people are returning to the workforce. Midway through next year, core CPI inflation, actual and expected, begins to slow down, proving the current supply shock to be transitory and giving the US Fed more breathing room before raising the policy rate. With the economy having run hotter for longer than previously anticipated, the Fed raises interest rates for the first time in this recovery in early 2023 compared with late 2022 in the baseline.

EVERGRANDE TREMORS

The massive Chinese property developer, Evergrande, was unknown to most people outside China a few weeks ago.

But now it’s all the rage in financial markets worldwide. Since the summer of this year, Evergrande’s bond yields have risen from about 12% to almost 60%. As a result of its large debts, the company has a massive risk premium. Hong Kong stocks fell sharply last week because of concerns over what is going to happen next. Chinese residential construction has grown rapidly during the past few decades. In spite of this, most of the properties constructed have remained empty, retained by relatively wealthy investors as speculative investments. In fact, approximately 90 million people could be housed in vacant properties — more than Germany’s entire population! Following the severe second wave of Covid-19 pandemic in India, the International Monetary Fund downgraded India’s fiscal 2021-22 growth forecast from 12.5% to 9.5%, a drop of three percentage points. Despite the fact that the global economic growth rate remained at 6%, India’s fiscal 2022 GDP growth has been revised up to 9% according to ICRA’s revisions to its outlook. However, for the next fiscal 2022-23, the IMF revised the economic growth for India up from 6.9% (projected in April 2021) to 8.5 % now — higher by 1.6 percentage points.

The gross GST revenue collected in September 2021 in India came to Rs 1,17,010 crore, up by 23% yoy. Of this, CGST is Rs 20,578 crore, SGST is Rs 26,767 crore, IGST is Rs 60,911 crore, including Rs 29,555 crore collected on import of goods, and cess is Rs 8,754 crore, including Rs 623 crore collected on import of goods.

FISC DEFICIT

At the end of August, the government’s fiscal deficit stood at Rs 4.68 lakh crore, or 31.1% of the budget estimates, according to data released by the Controller General of Accounts (CGA). Net tax receipts were Rs 6.45 lakh crore while total expenditure was Rs 12.77 lakh crore.

Despite fears of a worldwide contagion triggered by the likely default by debt-ridden Chinese company Evergrande, as well as the US Fed’s tapering stance and interest rate timelines, Indian bourses displayed whipsaw movements in tandem with foreign securities. As each story thread unravelled, the pressure on bourses eased towards the end. US junk bonds appeared unaffected by the debacle while yields on their Chinese counterparts soared. Concerns about China’s ‘Lehman moment’ and global links were dispelled. As a result of China’s central bank injecting $18.6 billion of liquidity into the banking system, some anxiety was also quelled.

INDIAN INDICES SOAR

In India, both major indexes have risen over 1.5% in the last fortnight. The Sensex and the Nifty scaled record highs. The Nifty managed to see a peak above the 17,800 level while the Sensex ended above the 60,000 mark. Positive global cues and receding pandemic fears boosted market sentiment. As of the close of markets on September 1, 2021, the S&P BSE Sensex declined 360.78 points, or 0.61%, to 58,765.58. The Nifty 50 index fell 86.10 points, or 0.49%, to 17,532.05. The comeback of the FIIs after a hiatus of 5 months and the support garnered by the market at every dip also hint at the continuation of this optimism in Indian indices.

(Dr VVLN Sastry is a post doctorate in Economics and a PhD in Law & Public Policy. He is a passionate economist, financial analyst and law expert.)