Opportunity fading for India to gain from crisis
When Southeast Asian markets and economies began to crumble last summer, Indian stockbrokers began to crow. It was their turn for the good times at last.
India had not attempted to cement its currency to the US dollar, and its economy was not fuelled on a binge of cheap foreign-currency borrowings. It should have reaped the rewards.
But it has not. Leave alone the fact that poor countries should think twice about the economic impact of testing atom-bombs, the Indian economy has done little better than moulder for other reasons. One of them was revealed a few days ago, when the government announced that it had taken steps to speed up foreign investment.
Industry Minister Sikander Bakht admitted then that only US$7.8 billion of $39 billion-worth of investment plans cleared since 1991 had come to fruition.
This disappointment has been particularly acute in the past year (see first chart). Foreign direct investment inflows have contracted and portfolio investors have shown they are not convinced by what should have been the relative attractions of the Indian stock market.
The fact is that, back in 1991-92, then finance minister Manmohan Singh managed to abolish the licensing system under which all Indian enterprises had to obtain specific licences from government for their industrial activities. That one reform produced a notable economic rally. But, for all the talk of continued commitment to the reform path, there has been precious little of it since. India still suffers from the Nehru affliction.
The founding prime minister and the members of his family who succeeded him in the Congress party adopted the socialist thinking in vogue at the time of independence and it just cannot be shaken. Congress governments have tied up themselves in crony obligations and non-Congress governments in political bickering. And it has become worse.
Indian statistics are notably tardy but, as the second chart reveals, the latest on government finances, up to September last year, showed that the fiscal deficit had ballooned because revenues were down. A fine idea of cutting taxes to stimulate the economy had backfired.
Meanwhile, industrial production growth remains in low single digits, exports have slumped, the merchandise trade deficit has grown enormously; the only thing stopping the balance of payments from dropping into a hole has been private-sector transfer payments, a fancy way of saying gifts.
So it is understandable that the present government has approved 70 foreign investment plans within a single fortnight and is making much of the $182 million Ford Motor plans to inject into its Indian operations.
But the cure for India's problems lies more at home than abroad, and the figures say that foreign money overall is reluctant until the Indian Government can show much greater resolve than it has done so far.
The danger for foreign investors looking at India is that much of Southeast Asia is now tackling its problems in a straightforward manner; the chances for relative outperformance in India are fading.