Over at “India Ink,” the India blog of The New York Times, there’s a terrific interview with Ajay Banga—the CEO of Mastercard and the new chair of the U.S.-India Business Council. It’s a striking presentation at a time when there’s been little but gloom and doom about India in the markets.
Why all that gloom? Here are six reasons:
First, India’s tumultuous politics have, from a corporate perspective, stalled essential reforms. Tax, pension, and FDI reforms have made little headway under the United Progressive Alliance government, and, as I noted in an earlier blog, parliamentary business has been tied up in knots as the leading national and regional parties squabble.
Second, there has been mixed news from the capital markets. Flows of foreign direct investment into India were up in 2011 over the same period in 2010, but Mumbai’s SENSEX stock index was the world’s worst major performer in 2011. And what is more, the rupee has been among Asia’s worst performing currencies amid fiscal problems, including India’s current account deficit, and persistent concerns about capital flows. S&P recently threatened to downgrade India’s credit rating—a threat that India’s finance minister, Pranab Mukherjee, called "a timely warning."
Third, India’s proposed retroactive law to tax cross-border deals has met with derision internationally. U.S., British, and Japanese trade groups have threatened to turn away from investing in India as a result. Ajay Banga puts it this way: imposing such a tax retroactively “make[s] companies and business very confused. The ability to make sensible predictions about what happens is very important to any business model.”
Fourth, big uncertainties about growth persist. Once high-flying India slowed to 6.1 percent growth year-on-year in the fourth quarter of 2011, the slowest pace since 2008.
Fifth, several sectoral stories are ugly (and growing uglier), including power, mining, telecom, oil and gas, insurance, and aviation.
Finally, Indian companies continue to dazzle the world, but signs abound that they are skeptical about their own country’s investment climate. Take this ominous set of figures: At the end of 2011, the amount that Indians had invested in businesses overseas over the previous year exceeded the amount foreigners were investing in India. Here’s another point of comparison from the Associated Press: “In 2008, foreigners poured roughly twice as much direct investment into India—$33 billion—as Indians plowed into businesses overseas. By 2010, that had reversed: Indians invested $40 billion abroad—twice as much as foreigners invested in India—a trend that continued [in 2011].”
This particular source of gloom matters greatly. With their global ambitions, India’s leading companies now bestride the international stage. They have been responsible for both high- and low-profile mergers and acquisitions in recent years. For instance, the Economic Times notes that “Indian companies (listed and unlisted) announced 1,995 overseas acquisitions from 2000 to April 2012, involving an investment of nearly $116 billion, as per data sourced from Bloomberg.”
But corporate India will need to lead the way in India too. Put bluntly, investment is essential to India’s growth story. So is it not ominous to read depressing quotes like this one from Jamshyd Godrej, one of India’s most distinguished business leaders? Godrej told the Associated Press: "If you are an honest businessman in India, it’s very difficult to start up anything … Companies are going to operate where they see the best opportunities and efficiency for their capital."
The bottom line? There’s plenty of gloom and doom. And much of it seems to emanate from India itself.
But from my perspective, at least, it’s important to temper all the gloom with a sense of recent history:
For one, India has consistently surprised on the upside for two decades. It remains a high-growth story. And India has proved that, in one country at least, you can still squeeze out plenty of growth without very much reform.
Second, even without aggressive reform, greater predictability might still go a long way. Banga puts this point nicely in his interview with “India Ink.” “Reform is needed,” he says, “and everyone gets it. The problem is politics and its compulsions … [But] who are we to talk about India[‘s] politics, look at U.S. politics. Politics doesn’t always allow reform in the way that corporations would like to see. What we can do is talk about Indian leadership. Recent policies coming out of India have confused investors and not just in the U.S.”
Sure, bold reform would be best. But there’s still room for greater predictability, stability, and transparency, even though it’s clear that India’s fractious politics are unlikely to settle down before the next general election in 2014.
Third, India’s most exciting stories are in the states, not at the federal level. And the reality is that companies and investors will increasingly have opportunities in business-friendly states that are less regulated from New Delhi and, thus, are less subject to government control.
India’s constitution divides jurisdiction between New Delhi and the states in far-reaching and significant ways. The center has power over finance, defense, trade, telecommunications, foreign investment policy, and some infrastructure. But the states have wide authorities too on subjects that matter greatly to India’s investment climate, not least over power, agriculture, land, domestic investment, and policing.
States, then, are increasingly masters of their own fate. And strong managers and competent chief ministers have, in some places, delivered striking results.
Such improvements are good for growth. Ultimately, they should be good for investment too.
And this too is true: good governance turns out to be smart politics. Indeed, while India has seen the highest rates of anti-incumbency of any democratic country in the world, there are now strong signs this trend is slowing. And this is especially true at the state level: governments that have successfully improved governance, for example in Bihar and Orissa, have held on to power.