This post is intended as a discussion post, inspired by a recent Tehelka article posted on our news tab, entitled, A Lifeline of Red Tape?. The thesis of the article is this: while India’s stock market may be in free fall (it’s already lost 50% of its value from a year ago), the economic fundamentals of the country remain somewhat solid. The crisis in the global economy may not be devastating across the board, because India’s domestic economy is sheltered from world markets:
For economies such as India, the domestic growth is real and reasonably steady. But the impact of the recession in the US and the global credit freeze has meant that stockmarkets are in turmoil as foreign institutional investors (FIIs) sell equity in domestic stocks to meet liquidity needs back home; companies which had raised funds abroad now see the money supply dry up; and lack of liquidity impinges on Indian banksâ€™ ability to lend. Wharton business professor Mike Useem says this is the worldâ€™s worst financial crisis. â€œUnlike the US, the world will not see an immediate impact on the surface, but the pain will be felt slowly,â€ Useem told TEHELKA (link)
Unfortunately, after that, the Tehelka article doesn’t really add much more meat to the thesis (though it’s still worth reading). But I think it’s an interesting point to discuss, and it’s one that my friend Rajeev, a software guy who lives in Bangalore, also suggested to me recently when he was visiting: India’s slow path to liberalization/privatization and relatively conservative rules for foreign investors will protect it from the worst of the current global financial crisis.
(Note: that is NOT the same as saying we need a return to 1970s socialism. Rather, the thesis is simply that caution in reforming and “modernizing” the Indian economy seems much more attractive at times like these.)
Obviously, the foreign institutional investors who had been propping up the Indian stock market in particular will be pulling back (they already have, as I understand it). And the IT industry, which is so heavily oriented to the global economy, is going to be feeling pain.
But while those are parts of the Indian economic boom we have been hearing the most about here in the U.S., they actually remain relatively small parts of the broader Indian economy, which is still based, first and foremost, in agriculture. The fact that most Indians owe relatively little (many Indians still prefer to pay for their homes in cash, and do not heavily rely on credit cards) also helps them weather the storm. But is that enough to keep the Indian economy moving forward?
I am less clear on what is happening with the Indian real estate bubble; I have read some things that suggest the market is on the verge of collapse, but anecdotally, friends and family in Delhi and Bombay tell me prices are still quite high. Do readers have any data on this? Also, what impact is the devaluation of the Rupee likely to have? Continue reading →