Before August 19, the last time the Sensex index touched 18,400 was just after its all-time peak of January 2008. India’s capital markets had just recorded the country’s biggest IPO and confidence was running high. Of course, the Reliance Power listing proved to be a disaster and the markets collapsed. Is it different this time?
India has much to crow about. Solid economic growth and a stable political environment have combined to draw crowds of international investors to its capital markets, while the country’s corporate leaders are back on the international acquisition trail.
Its banking sector managed to navigate through the global financial crisis with relative ease, helping the country post an impressive GDP growth rate of 6.7% in the crisis year of 2008-09. Ministers are now predicting growth of 9% or higher for the 2010-11 fiscal year, another sign of renewed confidence in the economy.
Equity markets are booming again. Foreign investors poured US$11bn into India’s stock markets in the first seven months of the year, and even the notoriously challenging IPO sector is bursting with confidence.
Corporate defaults have been few and far between, and that track record is helping industry champions, such as Vedanta Resources and Bharti Airtel, pursue debt-funded acquisitions - both overseas and at home. The fickle international bond markets have welcomed Indian issuers back with open arms and low coupons, while lenders are only too keen to cough up billions of dollars to support the expansion plans of their top corporate clients.
However, challenges remain. India’s inadequate infrastructure is still the biggest hurdle to continued growth. Economists call for near-term spending of US$500bn, but spending alone is no guarantee of progress: last year’s promise of 20km of badly needed new roads a day looks to be stuck in traffic and is likely to be revised down to a more modest 12km-13km. Cost over-runs remain widespread: a McKinsey report estimates that each infrastructure project costs on average 20%-25% more than planned, while the 2010 Commonwealth Games in Delhi this October are set to cost between three and 15 times initial estimates, depending on whose numbers are used.
Other than a dreaded global double-dip inflation poses the biggest threat to economic, as well as social, stability. Wholesale prices increased 9.97% year on year in July, presenting policymakers with the delicate challenge of tightening monetary policy and reining in price rises without derailing economic growth.
Excessive regulation is often listed as the biggest obstacle to the development of India’s capital markets, and deeper capital markets are essential if Indian companies are going to be able to finance their growth plans. However, here at least the government appears to be making some real progress. Reforms are in the works to pave the way for a more efficient IPO market and the introduction of credit derivatives - both of which should free up banks and institutions to put their money to more productive uses.
A rampant stock market index is a sure sign of investors’ confidence in the country. For another indication that interest is again at fever pitch, look no further than these pages: this year’s India Report is IFR’s biggest ever, a sure sign that both local and international banks remain convinced of the country’s potential.