The Capitalist

The financial turmoil rocking the world has spawned many theories. One of them is that Asia will remain relatively insulated from the subprime crisis affecting the West. The other is that Asia cannot go unscathed in a globalized economy, and that capital—in the ultimate analysis—remains global.

One such study by Citi Investment Research shows India not to be as attractive an investment opportunity right now, compared with many other Asian economies. In its report dated 24 September, Citi puts India and China as extremely unfavourable investment destinations. It arrives at this conclusion on the basis of data it has gleaned from MSCI (Morgan Stanley Country Index).

Also See Investment Rankings (Graphic)

But market watchers say such a view could witness a total reversal six months later.

Market watchers say India could become an extremely favourable investment destination once again—once parliamentary elections are over by the middle of next year. Their reasoning is based on several factors. They point to the inevitable consumption boom that India’s new urban centres are bound to generate. They also point to the relative insulation of Indian banks to the subprime crisis. And they also point to the inevitable revival of the Indian rupee contrary to the inexplicable manner in which it began weakening almost six months ago even while the dollar was weakening, and while India’s gross domestic product (GDP) growth rates had not yet started slipping, or inflation indices climbing up.

The fall of the rupee, they add, is typical of the way the rupee behaves each time national elections are announced, when money reportedly comes back from secret accounts held overseas into this country. Plotting a chart juxtaposing parliamentary elections and the rupee-dollar rate can be a very interesting exercise, they add. That could explain the continued flow of dollars back into India even today.

Such a view is confirmed by Ajay Shah, economist and senior fellow, National Institute for Public Finance and Policy, New Delhi: “RBI is one of the poorest performing banks of the world in international rankings of transparency". Shah says that the solution could lie in reforming “the monetary policy process and all aspects of data disclosure".

“Exchange rate pegging leads to a loss of monetary policy autonomy," he adds, and that the “election cycle in monetary policy serves to increase macroeconomic fluctuations, [and that] it should be immune to the compulsions of getting re-elected". He says that the reforming of RBI may get done in three to four years, but sceptics think it could take a bit longer, because the temptations of power and greed are not renounced that easily.

Consequently, most marketmen believe that this propping up of the dollar will stop after the elections. A good indication could come in a few months as a result of dollar/rupee futures trading that began on 1 October. Post-elections, interest rates are expected to be lowered, and economic growth given an impetus. And the negative outlook for India’s markets could then begin to see a change. Moreover, since investors love investing in a country where they can benefit from the double bonanza of returns from investing in undervalued stocks, on the one hand, and an appreciating local currency, on the other, you can be reasonably sure of a revived FDI inflow... Money will need to be parked somewhere, and India is likely to be a relatively more comfortable destination.

Is this wishful thinking? Or will Citi Investment Research revise its findings?

India’s invisible financial crisis: mela to mayhem

The world has been listening about the collapse of one financial giant after another—both in the US and the UK. Most discussions now focus on “who’s next?"

But, almost unnoticed by most people, there is another financial crisis looming large in India. No, it is not the two private banks that could be severely affected, thanks to their exposure to the US subprime market and its derivatives. On the contrary, it has much to do with the loan melas (fairs) the Congress government has been quite fond of.

Both loan melas hurt Indian banks badly, particularly those banks which were government-owned. Unlike the loan melas of the early 1980s, the recent loan mela was a lot different. The former loan mela gave away money to villagers without collateral, or NINJAs as the Americans call them (no income, no jobs or incomes).

But, even while it left many banks with huge bad debts that had to be written off, it spurred rural consumption which subsequently made many rural folk seek out newer ways to generate more money to purchase consumer goods.

Also Read RN Bhaskar’s earlier columns

However, the recent loan mela actually encouraged farmers not to repay their loans. Overnight, it made some of the most creditworthy constituents of the Indian economy into borrowers unworthy of credit. Rural folk have traditionally been the best borrowers. Convention often compels even children to repay their parents’ loans because they believe that they are honour-bound to do so.

But now, with the government actually telling some of them that they need not repay, the unwillingness to pay back borrowed sums—both interest and principal amounts—is infesting the entire rural area. This has made most bank managers extremely worried about giving loans. Demands for sound collateral have become more emphatic, and the margins on the collateral have gone up.

Could this be another time bomb ticking away?

Tata Motors searches for financial incentives

Tata Motors Ltd continues to scout for the right place to relocate its Nano factory, just in case Singur does not work out.

And though many states have been inviting Tata Motors to set up shop in their territories—Uttarakhand, Karnataka and Maharashtra being some of the states whose names have been splashed across the country’s newspapers—no decision has been taken because none could match the financial incentives West Bengal was willing to offer.

For instance, in the last fortnight, Tata Motors’ managers were with the Gujarat government expressing their keenness to set up the Nano plant at Mundra where plenty of land is available (without any dispute), and with the benefit of rail, road and port linkages. But the state government was not willing to grant it the financial incentives it wanted, because it does not want to look unfair to other industries setting up shop in Gujarat. Disappointed, the managers went away.

The verdict on whether to move or not to move from Singur remains open. Either way, the outcome will be both interesting and fraught with implications. In any case, the launch of the Nano, scheduled for the third week of this month, is likely to proceed unchanged, say Tata Motors sources.

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