Just when India’s economy seemed to have broken its chains, growing at over 9% a year for three years in a row, the US financial crisis threw the global economy into turmoil. India’s growth for the next 12 months is predicted to be about 5%. This is certainly respectable, especially relative to the rest of the world, but represents a halving of per capita income growth compared with the recent dream run. What is surprising, though, is that India’s stock market is still limping along.
In 2009 so far, the Sensex is up about 10% (less in dollar terms), with most of that increase coming very recently. That is not bad compared with many industrial countries’ stock markets, but well below several other emerging markets. China’s Shanghai index is up at least 30%, and Russia’s and Brazil’s markets have also posted much larger year-to-date gains than India’s. China’s current and predicted future growth remains above that of India, but not by that much, while Russia and Brazil are both expected to grow more slowly than India. What’s going on?
Of course, stock prices in efficient markets reflect expected future earnings, so it is possible that corporate earnings in India are expected to be weaker than overall growth performance. Certainly, India’s stock market and even its overall formal sector are far from representative of its overall economy. This is to be expected, since India is poorer in comparison than many other emerging markets, and therefore less financially developed.
There could also be a narrower explanation, tied to the institutions that govern global money management. India was relatively late in attracting global capital, as many fund managers did not view the country as an attractive long-term growth prospect, or simply did not have the expertise to judge how and where to invest in India. That began to change in the last few years, and portfolio inflows contributed to a run-up in the stock market that exceeded the country’s growth acceleration. In not much more than three years, the Sensex almost quadrupled to a high of at least 20,000 in January 2008, almost double current levels.
Global capital was quick to leave when the downturn came, and it could be that foreign portfolio investors are still trying to figure out what they have learnt from their first engagement with the Indian stock market. The three other Bric countries remain more familiar ground, and have easy-to-understand stories for investment: Brazil and Russia are commodity exporters (and commodity prices are firming up), whereas China is a manufacturing powerhouse. India’s technology-related services sector has distinguished itself but remains quite small by global standards. Financial services, one of India’s high-potential sectors, has been at the centre of the global economic rout. The compelling India investment story has yet to crystallize for fund managers.
It is also the case that old fears about the government’s attitude to business may be re-emerging. The prospect of a hung Parliament after the general election (which concludes next month), with the balance of power again with the Communists or with regional parties that have no track record in terms of economic policymaking, can be an important deterrent to investment. It is easy to sit on the sidelines for a little longer until the political dust settles.
The recent increase in the stock market, though, even as the economic outlook remains uncertain, may be a predictor of positive outcomes in the next 12 months. Some durable goods sectors such as automobiles, cement and steel are showing signs of life. The global economy, too, seems to exhibit glimmers of recovery, though growth in countries such as the US, which have overborrowed, will take longer to recover than in nations such as China and India, which are less burdened by debt. There are signs that fiscal stimulus measures are working, and indeed, in India’s case, the outgoing government’s precrisis policy of pumping money into rural areas seems to be making a difference: A recent story in The Wall Street Journal (“India defies slump, powered by growth in poor rural states”, 10 April) describes how even untouchables in the poorest state, Bihar, are starting to see economic and social gains. Finally, opinion polls suggest that the status quo will survive the elections, and that a coalition government led by one of the two big parties, and without the Communists, may be in a position to take the economy forward.
The crisis and the fiscal response have certainly made things harder, but the gratifying aspect of Indian economic policy is that, even after two decades, there are so many low-hanging fruits in terms of efficiency- and growth-enhancing reforms. If nothing else, the outgoing government has identified these fruits, as well as a guide to picking them, through a series of committee reports. Any effort at implementation should yield quick results, in terms of growth exceeding 5% in the next year, and a further stock market recovery.
Nirvikar Singh is professor of economics at the University of California, Santa Cruz. Your comments are welcome at firstname.lastname@example.org