Source: Reuters/Vivek Prakash
This year’s IFR India Special Report comes at a challenging time for Asia’s second-largest economy. Many of the issues that were already brewing 12 months ago have snowballed into serious problems, and confidence is wearing thin.
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India’s long-term potential remains enormous, as any capital markets participant would readily agree. The growing consumer population and huge infrastructure requirements are big opportunities for financiers and investors at home and abroad. However, this long-term potential will mean nothing if India is unable to address a host of pressing short-term problems.
India’s growth rate is slipping, inflation remains high and its infrastructure is creaking. Reforms are sorely needed.
Policy paralysis is the root cause of India’s current malaise – and not just at the highest level. Frustration is growing throughout the corporate sector and across the capital markets, where deals are bogged down due to excessive regulation, while essential reforms have stalled.
This report looks at some of the fixes needed to get the country’s markets – and the broader economy – back on track.
The foreign exchange market provides the clearest indication that India needs to restore confidence after a series of scandals and policy missteps. A 25% plunge against the US dollar may help India’s exporters, but it does nothing to ease the old problem of inflation. The rupee looks to have finally found some support, but a sudden rebound looks unlikely.
The bond market, a perennial disappointment for India’s bankers, needs major surgery if it is ever to ease the burden on the country’s overstretched banking sector. Recent moves suggest that its shortcomings have finally been noticed at the top level, but it will take a serious regulatory overhaul to transform the rupee debt capital markets from their current position. India needs to allow more investors – domestic and foreign – to participate, and push companies to diversify away from bank loans.
Lenders, for their part, need to break the habit of rolling over bad debts and stop supporting companies that have outlived their economic lives. However, that is a tall order without some kind of reliable bankruptcy framework to allow banks to recover losses in the event of defaults. As it stands, extending maturities is a lender’s best shot.
India’s equity markets, too, are in need of a lift. The government’s ambitious plans to float more shares in its public companies is, ultimately, the right course of action, but talk of multi-billion rupee selldowns creates a heavy burden on already weak markets. India needs to manage its own expectations, instead of forcing these deals through at too-high prices or trying to time the top of the market.
There is much to be done, but there is also reason for hope. India’s borrowers continue to enjoy a strong following in the overseas loan markets – albeit from very different sources than two years previously – and a recent flurry of US-dollar bond sales was an important vote of confidence in the country’s financial institutions.
Swift action does not come naturally to India, which is known for its excessive red tape. If the events of the last 12 months, however, have finally convinced policymakers that these problems urgently need to be addressed, India may yet emerge stronger.