India has all the right ingredients. Yet, instead of producing a delightful dish to tempt even the most sceptical of emerging markets investors, its recipe is in danger of leaving a rather bad taste.
A stable government and tight controls on capital flows protected India from the worst of the global crisis in 2008-09, but the country has failed to capitalise on its position of strength so far.
Worse still, India’s efforts to boost its reputation as a business destination are under threat. Corruption scandals are undermining confidence among foreign investors, while domestic entrepreneurs complain that overregulation is harming their prospects. Inflation, too, has yet to be brought fully under control.
Even after years of fund inflows, inadequate infrastructure remains a problem. Countless infrastructure projects are under way, but only the country’s domestic lenders are able to carry the financing burden, leaving the banking system under heavy pressure.
Although there has been plenty of progress, India’s capital markets still need wholesale reforms. Debt restructurings are too slow to keep institutional investors interested, while liquidity in the bond markets is thin. The introduction of CDS products will help, but the predictably cautious approach of regulators means any dramatic improvement in trading volumes is unlikely.
On the equity side, India’s public-sector issuers continue to set bad examples, waiting for mythically perfect conditions to offer stock and squeezing too hard on pricing when they should, instead, be using public offerings to establish solid market reputations and encourage secondary performances.
Global conditions, however, are very much in India’s favour.
As the US and Europe teeter on the brink of recession, global investors are looking to divert more funds towards emerging markets - both in an attempt to boost returns and to gain exposure to countries that are actually growing.
There is no better time for India to gain a firm footing on the world stage. For that to happen, however, serious changes are still needed. First and foremost, the country needs to portray political stability, which seems difficult with the government clearly distracted by recent anti-corruption protests and unable to act in a way that does not have an impact on India’s image as an investment destination. Inflation is also a clear problem, but the Reserve Bank of India has acted decisively in taking the right steps to ensure the matter remains a manageable one, at least for now.
Infrastructure development is a key impediment to the country’s economic growth, but this will require appropriate funding avenues. The rupee debt markets can be key funding sources and are getting much needed attention from regulators, but continue to suffer from lack of depth due to restrictions on the kinds of investors that can participate in this area. A large chunk of funds are with state pension and provident funds but they are unable to invest in a variety of rupee corporate debt.
Foreign investors remain restricted, contributing to their disinterest in the local bond markets. Long-term funding options away from just the rupee loan markets need to be developed for India to provide its corporations with the necessary ammunition to fund their infrastructure projects. The securitisation market needs to be given a chance to grow beyond its current state of infancy, albeit with necessary safeguards.
India clearly stands on the verge of being the recipient of huge investment flows - if only it gets its act together.
Otherwise, the country will find itself missing out on a prime opportunity to assert its influence on the global economy. The Asian nation with second-biggest global population cannot afford to let that come to pass.
