Author: Evan A. Feigenbaum, CFR
In recent months, there has been little but gloom about India’s economic prospects in the financial markets, for the following six very good reasons:
First, India’s tumultuous politics have, from a corporate perspective, stalled essential reforms. Tax, pension and FDI reforms have made little headway under the United Progressive Alliance government, and parliamentary business has been tied up in knots as the leading national and regional parties squabble.
Second, there has been mixed news from the capital markets. Inbound FDI was higher in 2011 than over the same period in 2010, but Mumbai’s SENSEX stock index was the world’s worst major performer in 2011. And the rupee has been among Asia’s worst-performing currencies, floundering amid fiscal problems, not least India’s current account deficit and persistent concerns about capital flows. These factors recently led Standard & Poor’s to downgrad India’s credit rating.
Third, India’s proposed retroactive law to tax cross-border deals has met with derision internationally, and has caused US, British and Japanese trade groups to threaten to reconsider investing in India. The new chairman of the US–India Business Council, MasterCard CEO Ajay Banga, has stressed how the tax undermines the predictability on which investors rely: imposing such a tax retroactively, he recently told The New York Times, ‘make[s] companies and business[es] very confused. The ability to make sensible predictions about what happens is very important to any business model’.
Fourth, big uncertainties about growth persist. A once high-flying India slowed to 6.1 per cent growth year on year in the fourth quarter of 2011, the slowest pace since 2008.
Fifth, several sectoral stories are ugly (and growing uglier), including power, mining, telecommunications, oil and gas, insurance and aviation. Regulatory and legal hurdles, failure to move on reforms, licensing delays, and an array of other problems continue to beset these industries.
Finally, Indian companies continue to dazzle abroad, but even these firms appear sceptical about their own country’s investment climate. The following story summarises this trend: at the end of 2011, Indians had invested in businesses overseas more than foreigners were investing in India — a stark reversal of 2008 figures, when foreigners poured roughly twice as much direct investment into India — US$33 billion — as Indians plowed into businesses overseas.
In fact, this particular source of gloom matters greatly. With their global ambitions, India’s leading companies now bestride the international stage. They have been responsible for both high- and low-profile mergers and acquisitions in recent years, to the tune of nearly $116 billion in overseas acquisitions from 2000 to April 2012. But corporate India will need to lead the way domestically, too. Put bluntly, investment is essential to India’s growth story. So it is disturbing to hear Jamshyd Godrej, one of India’s most distinguished business leaders, comment that: ‘If you are an honest businessman in India, it’s very difficult to start up anything … Companies are going to operate where they see the best opportunities and efficiency for their capital’.
The bottom line? There is plenty of gloom and doom. And much of it seems to emanate from India itself.
Still, it is useful to temper this outlook with a view to recent history and an eye to India’s states.
For one, India has consistently surprised the world for two decades with sustained high growth. And with India’s reform prospects stalled by political bickering and interest group politics, it is useful to remember that, in one country at least, you can still squeeze out plenty of growth without very much reform.
Second, even without aggressive reform, greater predictability might still go a long way. Ajay Banga, has made this point well: ‘Reform is needed’, he says, ‘and everyone gets it … The problem is politics and its compulsions … Politics doesn’t always allow reform in the way that corporations would like to see. What we can do is talk about Indian leadership. Recent policies coming out of India have confused investors and not just in the US’.
To be sure, bold reform would be best, but there is still room for greater predictability, stability and transparency, even though it is clear that India’s fractious politics are unlikely to settle down before the 2014 general election.
Third, India’s most exciting stories are now in the states, not at the federal level. And the reality is that companies and investors will increasingly find opportunities in business-friendly states that are less regulated by New Delhi, and thus less subject to government control.
India’s constitution divides jurisdiction between New Delhi and the states in far-reaching and significant ways. The centre has power over finance, defence, trade, telecommunications, foreign investment policy and some infrastructure. But the states have wide authorities, too, on subjects that matter greatly to India’s investment climate, not least over power, agriculture, land, domestic investment and policing.
India’s states, then, are increasingly masters of their own fate. And those most likely to succeed will be those that also recognise the need for good governance. After all, good governance turns out to be smart politics: while India has seen the highest rates of anti-incumbency of any democratic country in the world, there are now strong signs that this trend is slowing. This is especially true at the state level, where governments that have successfully improved governance, for example in Bihar and Orissa, have held on to power. Strong managers and competent chief ministers have, in some places, delivered striking results. And the good news is that such improvements should be good for growth and, ultimately, for investment too.
Even A. Feigenbaum is Adjunct Senior Fellow for East, Central and South Asia at the Council on Foreign Relations.
A version of this article was first published here on the Council on Foreign Relations Asia Unbound blog.