?Press forward on capital account liberalisation and the development of the bond market?. This is how our financial experts are prompting the UPA in the midst of the meltdown in Wall Street. This is strange for many reasons.
There is so far no credit crunch in the Indian market. Nor has it been proved as in the case of the US that Indian economy is capital market driven. Less than three per cent of Indian savings go to the stock market. Indians still save the traditional way. There has been umpteen attempts, incentives and discentives to make Indians become more sensex savvy. But we stayed back and for good reasons. Look at what over blown finance market did to the US. Here according to a Bloomberg report, five investment banks now gone bust paid their top executives $3.1 billion reward in 2003-07. The financial sector accounted for 40 per cent of all corporate profits in the US, according to The Economist. ?You can understand why across the US there is anger at the unfairness of a Wall Street bailout when little has been done to help distressed homeowners and troubled manufacturing companies?, writes T N Ninan, in Business Standard.
This anger of the US citizen is best captured by Joseph E Stiglitz in a piece in The Nation (Sept 26, 2008). He wrote, ?The objective of the bailout should not be to protect the banks? shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages?.
Should India allow itself be sucked into such a financial regime? The people who advocate such a system are of course its biggest beneficiaries. They want us to believe that growth comes out of financial system manipulations, making the economy into to gambling den. From being the smallest component among the major categories, financial firms, became the biggest as a consequence of the sway of financial capitalism. It pulled down the US economy. Should we repeat the mistake? Yes, to tide over the credit crunch in the wake of the US crisis, our experts repeat. This is the new slogan of the neo-capitalist lobby in India.
That the US law makers have some rethink on the trillion dollar bailout plan came to them as surprise. The most informed segment of economic opinion makers in the West seems to be united on one thing. That the Wall Street sharks should be for some time allowed to get stewed in their soup.
The crisis so far is mainly confined to the US and Europe. But friends in India assure us that India cannot be insulated in an increasingly global economy. These people are eager to sink and let India play sucker to a decadent system. They want us to panic. The alibi is sustaining growth. So far this growth has not spread prosperity. In Manmohan'sIndia still 400 million people live on Rs 15 a day. So for the last four years money has been trickling up, to borrow an expression from Joseph Stiglitz, did not trickle down. These years also witnessed the maximum capital account relaxation.
Last week the government eased the external commercial borrowing (ECB) norms. The US crisis will put pressure on availability of funds, they said. If funds are not available in the foreign market how will the easing of norms help?
India still remains attractive for foreign investors. There is no proof so far that there is a scarcity of funds in the domestic market. A few months ago the IMF made a study of financial globalisation in India and concluded that India'scapital account is more open than those of China, Thailand, and Brazil. But India is less open than those of Korea, Turkey and Mexico. Being relatively less open to financial market games, India is experiencing less volatility in capital flows similar to other countries in similar category. Total net capital flows have risen six-fold since 2004 and the depth of the foreign exchange market shows India'sgrowing financial integration. Along with India'sgrowing financial integration domestic currency derivatives trading tripled since 2004 to over $ 34 billion per day. The rupee'sshare in global turnover of traditional foreign exchange products more than doubled during this period, according to this study. India can wait and should. There are some who believe that the US crisis is more of the Wall Street and not as severe as they claim.
Two statements from Prime Minister Dr. Manmohan Singh and Finance Minister P. Chidambaram made sense. They indicated that the time was not ripe for more reform.
Unctad, in its World Investment Report 2008 has predicted a rosy scenario for India. It says, India ? the largest recipient of FDI in South Asia ? and most member countries of the Association of Southeast Asian Nations (ASEAN) also attracted larger FDI inflows. . Overall, prospects for new FDI to the region remain very promising. Sustained economic growth, demographic changes, favourable business sentiments and new investment opportunities were among the main factors contributing to the region'sgood performance in 2007, and they should continue to attract FDI in the near future, it said.
If with the current state of reform we can achieve this should we risk the whole economy to the casino syndrome? More good will come if you liberalise further, the IMF says and lists, greater hedging flexibility, more flexible use of options to complete the derivatives market and encourage hedging strategies that result in capital inflows and introduction of currency futures?Over the Counter(OTC) and exchange based trading for forums?leading, greater capital account openness for broader and deeper financial markets. All finance market minefields.
There is a case for strengthening the financial system in India. But it is primarily the corporate debt market and banking sector. Only recently corporate investment turned to increase reliance on external finance. And IMF admits ?firm growth is negatively corrected with a benchmark for industry level need for external finance.? The use of external funds seems to be picking up.
In fact, the share of external funds in total funds gradually declined from 26 per cent in 1991 to 9 per cent in 2004 and was not a big factor in India'sgrowth story. India repaid its debt during this period. (IMF, India Selected Issues, 2008).
We know how well Wall Street financial wizards managed risks. And how discriminatory the so-called global financial architecture is. Indian banks seeking entry in the US have been kept waiting for years but it takes only two days for troubled US investment banks to get banking licence.
India'stop business banks make less than 10 per cent of their income from proprietary trading. The risks may not be worth it. As it is Unctad report has noted that FDI inflow to India has been steady and remains attractive and there has been no major slow down. This was mainly because of the attractiveness of India'smarket, its demographic profile and growing consumerism. The Japanese companies and others from Taiwan and South Korea are considering India as an alternative to China and the best place to do business. India is likely to achieve the target of $ 30 billion FDI in the current financial year.
Every country is reviewing finance sector integration from time to time. ?Eight countries use a formal process to review transactions; only the Netherlands and the United Arab Emirates do not have a formal review process. The Netherlands, however, restricts entry into certain sectors such as public utilities, and the United Arab Emirates limits ownership in all sectors. During the formal review process, national security is a primary factor or one of several factors considered. All countries were reported to share concerns about a core set of issues, including, for example, the defence industrial base? says Unctad. The report makes some interesting observations. They are useful in the Indian context. We need not be rushing where others fear to tread.
Most countries have established time frames for the review and placed conditions on transactions prior to approval. For example, a country may have national citizenship requirements for company board members. In most countries, reviews are mandatory if the investment reaches a certain size, or if the buyer would achieve a controlling or blocking share in the acquired company. Five countries (France, Germany, India, Japan and the Russian Federation) allow decisions to be appealed through administrative means or in court. In addition to the formal mechanisms, there are unofficial factors that may influence investment in each country. For example, in some countries an informal pre-approval by the government may be needed for sensitive transactions.
In terms of preferred regions and country groups for FDI, East, South and South-East Asia remain the most preferred region, followed by the EU and North America. Here is the most significant aspect.
China is the most preferred investment location, according to the Unctad survey, followed by India, the United States, the Russian Federation and Brazil. Viet Nam remains in sixth place because of the availability of skilled and cheap labour and its being the second fastest growing economy in the world behind only China.
Another interesting revelation is the JBIC survey of Japanese manufacturing TNCs. It found that China again ranked at the top, although the number of firms planning to expand production in the country continued to decline (JBIC, 2008).
As for long-term prospects, the survey showed for the first time India replacing China as the most promising country for business operations of Japanese Trans National Companies (TNC).
What India badly needs is not more financial sector reforms but better infrastructure ? better roads, transport, electricity, water and better governance.
(The views expressed in this column are personal. The writer can be contacted at [email protected])