Finally, the Narendra Modi-government seems to have woken up to the economic dangers facing the country today. The problems of the rupee hitting record lows every day, rising global crude oil prices, a worsening balance of trade and widening current account deficit (CAD), could no longer be ignored.

No wonder then, on September 14, the Finance Minister Arun Jaitley announced several measures to protect the rupee and arrest the widening the CAD. The measures include scrapping the withholding tax on masala bonds— to make the rupee-denominated debt sold overseas much more attractive, incentivising exports and reducing non-essential imports  to shore up the balance of trade position and removal of the 20% exposure limit on portfolio investments by a single corporate group. The measures are likely to help the country save nearly $ 8 billion to $ 10 billion.

Perhaps, the government should have seen dangers coming. Ever since, the US Federal Reserve started raising interest rates and ended the era of ultra-low interest regime, countries like Turkey, South Africa and Argentina, with high current account deficit and huge dollar-denominated loans, have been facing the brunt of changed sentiments of investors and its impact on the economy.

Take the case of Turkey, for instance. While the world was sloshing in cheap loans, following the great financial crisis of 2007-09, the Turkish corporate sector went on a borrowing spree like there is no tomorrow. But when the tide turned, the Turkish government found it difficult to repay the now high-interest loans. By August-end 2018, the Turkish currency Lira, has fallen by nearly 17%.

Adding to the pain was US President Donald Trump. The Trump administration’s decision to adopt a protectionist approach against many countries turned the crisis into a panic among investors. Fearing that these countries would default on US dollar-denominated debts resulting in huge losses, global investors have voted with their feet prompting them to exit all markets that had an ‘emerging market tag’ including stable economies like India and China. The contagion effect is already turning into a vicious cycle.

Kerry Craig, global market strategist at JP Morgan Asset Management wrote in a recent note, “The decline in the lira is multifaceted, caused not only by a weak external position in terms of current account deficit and inadequate currency reserves, but also the challenging political environment, which exacerbates the vulnerabilities of the lira.’’

Similarly, the Argentinian government, which had gorged on low-cost funds—it had raised $80 billion in the past two years-- during the go-go years, suddenly finds itself staring at an abyss. With its currency losing 52% of its value vis-à-vis the dollar this year, it had little choice but to reach out to the International Monetary Fund (IMF) asking for $50 billion bail-out package. South Africa, another strong emerging economy, too has already slipped into a recession, growing at an anaemic 0.7% in the first half of this year.

For emerging economies, the pain is unlikely to ease anytime soon. Only last week, the US Bureau of Labour Statistics reported that wages of American workers, which had stagnated for years causing much misery and heartburn among the employees, had grown in August at the fastest pace since June 2009. According to the data, hourly earnings grew by 2.9% in August as compared to the same month last year. The strength of the US economy is further highlighted by the fact that it continues to add jobs at a rate faster than what had been estimated by experts. For instance, the country added 201,000 more employees in August, significantly more than the estimated 147,000.

Rise in wages and employment implies that companies are back in the investing phase, optimistic about the country’s future and serious about attracting and retaining talent in a tight-labour market situation. While this is great news for the US, it also means that there would be no let-ups for these vulnerable countries and gear up for even more upheavals.

Not only have the statistics helped in further strengthening of the dollar, but it has also given the US Federal Reserve an opportunity to hike interest rates for the second time this year. Again this is bad news for emerging economies because as the difference between US interest rates and those of emerging economies narrows, sell-offs by foreign portfolio investors seeking safe havens in the US markets, will intensify.

It is true that countries like India have held up better than many of these countries and it is still recording healthy gross domestic product (GDP) growth numbers. Yet, the fear is that further meltdown of some of the heavily-- indebted countries could have a deeper impact not just on market volatility, but also on the real economy.

Much of what happens to even stable emerging nations like India will depend to a large extent on what happens to China and its relationship to the US. With a combined private and public debt of nearly 300% of its GDP, any major slowdown in the Chinese economy could have major repercussions on not just on India and the globe and even spark of another crisis. India needs to be on constantly on guard as the world is not much safer even 10 years after the great financial crisis. If it was the debt of common man that led to the 2007-08 financial crisis it could well be the debt of nations that can bring the world to its knees again.

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