India stands on the threshold of economic greatness, if only it can ride out the global credit squeeze and overcome an innate desire to regulate itself out of international competitiveness.
Economic growth remains robust but may slow to a credible 7.5%-8% this year despite the wider global slowdown but, like elsewhere in the region, inflation poses the biggest immediate threat to prosperity. Strong commodity prices are feeding through the supply and production chains and sharply higher food prices have given this year’s bout of inflation a serious political dimension.
Looking further into the medium and longer term, inadequate infrastructure is probably the biggest brake on India sustaining its impressively high growth rate. The government, in recognition of this shortcoming, has set itself the daunting challenge of investing US$500bn in infrastructure by 2012. Meeting such a target will be hard to realise. It will require significant public and private investment as well as substantial amounts of foreign capital.
International investor appetite for Indian assets is strong, but the Indian government, rather than just tinker with its capital controls every time the markets run too hot or cold, may well need to rethink its entire capital account framework if it is to attract such large sums of money.
It will also need efficient domestic capital markets, and that is where the regulators come into play – and their record in this field has been patchy over the years, to say the least. It does not seem to be getting appreciably better.
Indian equity markets are down and out, for instance, and while tough market conditions have obviously been a factor, the role that regulations have contributed to the virtual disappearance of India’s IPO market this year has been frustrating.
The Securities Exchange Board of India (Sebi), the country’s famously obstructionist securities regulator, has taken steps to make issuance easier but, predictably, has not done enough. Sebi revised the floor price formula for the pricing of qualified institutional placements and preferential allotments to institutional investors. This is welcome but, realistically, the formula only makes issuance easier in a rising market and does not offer much help in shaking off a bear market. There is hope, however, as the Ministry of Finance, which governs the issuance of ADRs and GDRs, is looking into the issue.
Likewise in the equity-linked space, onerous regulations combined with credit market woes to make difficult times even worse. This time the Reserve Bank of India has come in for criticism.
Throughout the recent economic boom Indian companies piled into the offshore markets, raising capital with popular equity-linked products in order to fund growth. The central bank clamped down on such borrowings, however, fearful that the economy would become too exposed to short-term foreign debt. It subsequently eased restrictions following pleas from issuers but they are still constraining.
The regulators seem to be doing a better job on the bond front – or at least not interfering to the detriment of its development. The domestic bond market continues to progress – at least it did until the sharp rise in inflation – even as G3 issuance dried up on the back of a global risk aversion.
Investor aversion to all but the best emerging market credits spread to India and its aspirational corporate base. Perhaps the most notable change in Indian capital markets over the last year has been the decline in offshore syndicated lending activity as M&A volumes fell.
Indian corporates are using this lull to contemplate the best ways for them to access international capital in the future, which suggests foreign targets are yet to see the end of Indian suitors.
The real changes need to happen at home though if India is to develop the kind of local economy necessary to keep its growth numbers intact. Opening up the domestic capital markets, combined with a more sanguine approach to foreign debt, is one way to attract the necessary offshore capital. That is an easy call to make. The difficulty is in managing the speed at which it flows into the economy during the good times – and out again, if things go awry.