In New Delhi
A DECADE ago when Asia was in financial and economic turmoil, India stood on the sidelines, rather bemused. Its economy continued to grow, its currency was walled in and its stock markets were relatively unexposed to the gyrations happening in the East.
But this is a different India.
Foreign institutional investors are key players in its stock markets, foreign direct investment this year is projected to touch US$40 billion (S$57 billion), the country is a major source of tourist arrivals for authorities in London to Sydney and the world’s No. 1 motorcycle manufacturer is a joint venture outside New Delhi with the name Hero Honda.
What happens elsewhere affects India. And to a smaller extent, the reverse is also beginning to be true.
There is little evidence that Indian banks have any exposure to the troubled Wall Street banks. ICICI Ltd, the biggest privately owned lender, has said it is provisioning about US$28 million for the exposure to Lehman Bros that its London operations apparently had. Beyond that, the industry itself has little direct exposure.
But the skittishness one sees around is immeasurably higher. Bank stocks have slid in the past weeks. So have software companies. Real estate players too are in a crunch.
One reason for this is that for the major software exporters the US, particularly its financial industry, are a huge market. When banks disappear, so do orders. Downsizing and cost-cutting in the US used to mean transferring large parts of the operations to backoffices in India, but what do you do when the firm itself is dead?
What this implies is that the outsourcing companies in India will scale back on recruitments and moderate their pay increases. As the wheel goes around this translates into fewer men and women in their 30s putting money down for apartments and cars. And that feeds back into the larger economy in so many ways. Besides, with the stock markets in a swoon, people’s sense of their net wealth has also dramatically dropped. The approaching Deepavali season is typically a time when consumer goods companies lick their lips in anticipation of a spurt in demand, but this time the fireworks are likely to be muted.
Thanks to the Reserve Bank of India, probably one of the smartest central banks in the world, India will probably survive the current economic doom with limited impact. But just as efficient as its bureaucrats are, its politicians are another matter.
Just take the farm-loan waiver announced in the February budget: Finance Minister P. Chidambaram, a Harvard MBA, and Prime Minister Manmohan Singh, a reputed economist in his own right, worked to produce what can only be called an astonishing act of fiscal profligacy. The budget said the government would waive the loans of small farmers amounting to the equivalent of US$15 billion.
On top of that the government has announced major pay revisions for civil servants and the military, without much evidence that it is planning to do much to cut waste and reduce efficiency—steps that were to be taken in tandem with the pay hikes. In other words, even as the nation’s financial industry may prove resilient, the fear is that government finances may be in deep trouble!
India's financial industry may be safe from the troubles of the external market, but less safe from its politicians.