India Shining? Or the Greece of Asia?
India Shining? Or the Greece of Asia? | Via Meadia
What ails India? So asked the FTs Mumbai bureau chief of a Western investor recently. The answer? Everything. On every indicator we look at, there is a red flag, the investor said. This country is close to becoming the Greece of Asia.
Growth has stalled. Inflation, thought to be under control, jumped up again on Monday. Data last week showed industrial output declining and the trade deficit growing. This week the rupee fell to its lowest rate ever against the dollar.
There are a number of reasons why India, once Asias most promising economy, is slipping. One is the decline of the License Raj, the long accepted patronage network of businessmen and politicians, the system of permissions, licences, and investment that kept Indias economic machine churning at a high rate. Recently, the Raj has come under attackfrom a zesty media and active public who want more transparency, from foreign investors who want an easier way to get a piece of the pie, from an empowered Supreme Court and government auditors.
As Indias economy continues to modernize, there will be inevitably be times of slow growth, inflation, corruption scandals, and skittish investors. Prime Minister Manmohan Singh, who championed the wildly successful economic reforms of the 1990s, has not had that kind of success in the next round of reforms. His government may be cracking down on corruption, but partly as a consequence of the complicated politics of Indian coalition-building, vital decisions have been deferred and even the low hanging fruit has been left hanging on the tree.
Singhs government will pay a steep price if the economic climate does not change by the time elections roll around in 2014. His Congress Party was battered in provincial elections a few months ago. One frontrunner to replace him, Narendra Modi, is a divisive figure and, due to widely credited reports of his personal responsibility for massacres of Muslims, he is not beloved by the international community. His party, the BJP, is usually identified with Hindu nationalism, and elements of that party have been labeled fascist.
But Modi is a champion of business in his home state of Gujarat. Gujarat has consistently been one of the great success stories in the Indian economy, and Via Meadia can envision Modi pushing that line with some success during national elections. If Singhs government cant prove its current policies will brighten things up once again and continue Indias great success story (India shining), then we may well see Narendra Modi waltzing triumphantly into Delhi in the near future. If so, the world will have to hope that Modi the prime minister will live up to the best elements of his mixed record.
The rise of great powers is complicated; look at the way that Andrew Jackson, one of the great American advocates of popular democracy, was also a slaveholder. Indias story is going to be at least as complicated and as difficult for itself, and for countries whose strategic interests are closely bound up in its fate.
India isn't shining
India isn't shining
Saying forget fundamentals, its all about the flows worked well in Q1, with $8 bn flowing into Indian equities. But already the last few weeks have looked more uncertain, as concerns on Spain have re-appeared, and fears on Chinas outlook have grown. Meanwhile, US growth expectations are already high, so there is less scope to surprise on the upside. This implies that, at best, were in for a phase of consolidation, with less of a clear direction in the global macro data. That suggests a more discerning market and more focus on Indias fundamentals. So, how bad do they look?
The big events of March all ended up being neutral to disappointing: the Reserve Bank of India (RBI) left the repo rate unchanged; UP elections were disappointing for Congress and the Budget was relatively safe and neutral.
The combination of elections, coalgate, GAAR confusion and retrospective tax amendments have once again triggered negative foreign investor perceptions about India. Yet, the government seems to assume that despite policy paralysis, overreaching executive actions and now retrospective tax amendments, foreign investors will just keep on coming.
In the run-up to 2008, a lot of the foreign investment into India was chasing India shining, seeing the worlds second fastest growing major economy, a model of high growth, fiscal consolidation and macroeconomic improvement. That picture is quite different today. Yes, growth is still high, relative to almost every other global economy. And, yes, that economic potential remains remarkable. But, there are lots of issues that need to be worked through before one can unambiguously become bullish about India macro. Be bullish on India micro; on states, sectors, themes and stocks, but to get more bullish on India macro is going to take some time.
There is a struggling coalition government. A lack of balance in economic policy, with a fiscal deficit that doubled from 2008 to now, and overemphasis on monetary policy to combat structurally high inflation, resulting in overly aggressive rate hikes, discouraging investment and impairing growth. There is then the unhelpful issue of oil running at an all-time high in rupee terms. Every 10 per cent increase in global crude prices could have a direct impact of 0.5 per cent increase on WPI inflation, as well as dragging down growth.
We think RBI will cut the repo rate in April, but that it will be unable to cut rates aggressively or decisively in FY13. So, whilst the picture should slowly improve, for now, Im cautious.
