If you set out to prove the decoupling hypothesis, the idea that Asian markets are now sufficiently distinct from the US and Europe to be insulated from the global financial crisis, you could do worse than starting with India.
While at one point it looked as though the global recession would more than halve the 8.5% growth rate that India had averaged over the previous five years, the country now looks set to grow by as much 6%–6.5% this year and even faster in 2010, the effects of a severe drought notwithstanding.
India’s resilience is largely attributable to a successful government stimulus package and monetary policy easing along with the ability of its local financial markets to fill the funding gap left by the near-closure of international markets in wake of the Lehman Brothers collapse. Despite this success, there are constraints on India sustaining such a strong growth rate – the lack of adequate infrastructure and the country’s famously Byzantine regulatory system are chief among these.
Still these drawbacks should not blind anyone to the country’s achievements and the emergence of India’s domestic loan market is one such achievement. In recent years Indian borrowers have largely funded their international expansions through the offshore loan market, but with liquidity in this market drying up – and stringent prohibitive regulations governing it – activity has dwindled.
By contrast, the rupee loan market has just kept expanding, thanks to local banks’ newfound willingness to underwrite quite large deals aggressively, particularly in the project finance space. The country has ambitious plans to spend US$500bn on infrastructure over the next five years and this should ensure the domestic loan market continues developing.
The domestic-bond story has also been positive – this market has done well to turn itself into a viable alternative funding source for companies whose traditional funding avenues have been cut off. The rupee bond market’s prospects into the medium-term, however, are not as good as the rupee loan market’s prospects because of a limited investor base and tight regulations.
Meanwhile, in the equity market, issuance has surged since the May 2009 election gave the ruling Congress Party a decisive majority, removing major question marks over the country’s political outlook. Issuance was minimal in the first five months of year and then, post-election, an avalanche of issuance, especially QIPs, hit the market. The pipeline is now bulging.
Beyond issuance in primary markets, India’s entire financial sector is also expanding rapidly as growth in the asset management industry clearly demonstrates. India’s investable wealth is forecast to grow from about US$250bn now to US$1trn by 2012. The infrastructure to support this will grow accordingly, resulting in a plethora of new pension funds, insurers, mutual fund managers and the like. Joint ventures will be a major part of this as foreign players seek to participate in this growth.
India is undergoing a stunning transformation and has made big strides towards turning itself into an open market economy. However, there is enormous scope to cut the huge amount of red tape involved in doing business in India and in easing the restrictive laws that govern the country’s capital markets. While India’s regulators might argue, with some justification, that their stringent regulation of capital market activity has shielded the country from the worst of the crisis, longer term these regulations will continue to be a brake on economic growth.