Emerging Debt Crisis: Who pays the price for 'Fiscal Profligacy'!

The International Monetary Fund (IMF) has issued a stern warning in the midst of a better than expected economic recovery: "The global economy is recovering from recession more quickly than expected but rescue efforts have worsened public finances, and if not reined in, will lead to a debt explosion." It has pegged global economic growth for this year at 4.2%, led by emerging economies like China and India. China is expected to grow at 10%, closely followed by India. IMF has indicated that the heavily indebted European countries should weaken their currencies to boost exports, and at the same time surplus countries like China should let their currencies to strengthen to boost domestic demand. However, this spells doom for the Indian exporters who are struggling to adjust against the rising Rupee. Surprisingly, the equity markets across the globe have so far ignored the writing on the wall. Perhaps 'liquidity overhang' has a major role to play in the current uptrend.

The economies in the Euro zone will have to start the process of fiscal consolidation soon as the debt to GDP ratio in many of these countries is close to the Word War II highs. Reducing debt to pre-crisis levels would require many painful steps including tax increases and cutbacks on core government programs like social security. The tax payers will have to share the brunt of the fiscal profligacy of their respective governments, who have doled out largess's to save many disgraced financial institutions from bankruptcy. In the midst of all the mayhem, investors from the Euro zone would continue to pump money into the emerging markets. By and large this augers well for the stock markets in India. But the markets have, at the moment, discounted all the good news, and there is no fresh trigger for the next up move. The markets are likely to take a breather, before embarking on a fresh onslaught towards attaining new highs in the next 18-24 months. Some of the negative factors which the Indian markets would find it hard to ignore are:

• 
  
  Rapidly rising inflation: Watch word would be the progress of monsoon rains in the sub-continent, a good monsoon would help reduce the pressure on food prices. A bad monsoon, on the other hand, may lead to rising interest rates, putting pressure on the bottomlines of companies.
• 
  
  Internal security situation: There are serious threats to India's security from across the border as well as from the naxalite insurgency within. The political will of the Govt. would play a positive role in averting any major disaster.
• 
  
  Unearthing of the Financial crises: The world for the time being seems to have tide over the Dubai and the Greek financial crises, but many such crises are yet to be unearthed. Any major debt crises has the potential to throw the world markets into a tail spin.
• 
  
  Any Political upheavels in India: The union Govt. has initiated certain measures in the past which may have serious political repercussions e.g the 'Women's Quota bill', 'Creation of new states' and other such controvertial issues which can stall the process of governance.

The world economy is passing through a very critcal phase, and any delay in curbing fiscal profligacy could be detrimental for the long term health of the Global economic stability.