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 banks’ ability to lend. Wharton business professor Mike Useem says this is the world’s worst financial crisis. “Unlike the US, the world will not see an immediate impact on the surface, but the pain will be felt slowly,” 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 →

This Wired piece manages to combine 4 of my favorite topics into a single article –

• Who You Gonna Call? The Medicine Man – Lokesh “Mulama”

  Law and Economics
• Indian Governance & Modernization
• The Tech Boom
• Goondas

The story? The crazy things Bangaloreans have to do to establish title to a piece of property.

Let’s say that you or your company wants to build a tech office building on a piece of land currently occupied by a house in Bangalore. Normally, you’d just pay the homeowner for the property and tear down the house to start constructing your office building.

The problem is that actual legal title to land is a pretty murky problem in India (as well as many other parts of the 3rd world). In other words, the guy you bought the land from might not have owned it in a legally clear manner to begin with. His father may have simply squatted on it, and later his eldest son decided to build a nicer house on his boyhood plot of land. Or perhaps his backyard garden – the one you planned on turning into a Nano parking lot for employees – actually belongs to his neighbor?

Continue reading →

What impact will the banking crisis and subsequent stock market collapse have on the developing countries of South Asia? According to one economist, not much. According to Michael Clemens at the Center for Global Development, no economic crisis has been very consequential in the medium to long term:

In historical perspective, many of the most worrisome recent crises are small bumps on a very long road. The entire effect of the 1994 so-called “Tequila” Crisis on per-capita real income of the average Mexican… was erased in exactly three years. In Thailand, epicenter of the 1997 Asian Financial Crisis, it took all of six years. In Indonesia, the poverty rate in the population was back to its pre-crisis level within just three years. Even the big, bad 1982 Latin American debt crisis … [had no long term effect]

Bad years are typically followed by offsetting good years, and good years by bad. The good years get smaller headlines, or none at all. The point is that in the long march of development, some financial crises amount to rounding error relative to the real economy, and the real economy affects welfare. [Link]

Clemens claims this is even true about the mother of all financial crisies, the Great Depression. Even this seemingly cataclysmic event, he argues, had no real impact on long term American growth.

Continue reading →

Since we’ve been talking Indian banking lately, a friend forwarded me this old-ish blogpost at MIT’s Technology Review magazine outlining one way that tech is helping roll out rural banking in India –

<

blockquote style=”margin-right: 0px”>

An ATM for the next Billion?

Kasaghatta, India: It’s a 90-minute walk from this southern Indian village–one of 730,000 in India–to Doddabenavengala, the nearest town with a bank branch. Until a few months ago, Karehanumaiah, a 55-year-old agricultural laborer, had no bank account, which also meant he had no access to formal credit. (He would have to pay 10 percent monthly interest to informal lenders to, say, borrow $45 to buy a goat.) But that all changed in recent months.

Karehanumaiah uses a desktop terminal to deposit 150 rupees (about $3.50) into his new account at Corporation Bank, with help from Muniyamma Ramanjanappa, a village resident who conducts these transactions in her concrete house as a bank representative. First, a smart card and a thumbprint scan prove his identity. Next, Ramanjanappa updates the bank balance information on his smart card by connecting the terminal to the bank database with a cell phone. Finally, Karehanumaiah hands Ramanjanappa the cash and gets a receipt for his deposit (which brings his balance up to 160 rupees)….now that Karehanumaiah has a bank account, he can borrow money from the bank at rates of between 8.5 and 13 percent annually–far less than in the informal system–and gain a toehold into the formal economy.

Ninety percent of India’s rural residents lack bank accounts, and a variety of technologies are being applied to the problem. Other efforts include using cell phones to make payments and execute bank transactions in a nation that is enrolling a staggering eight million new cell-phone accounts monthly, many of them in rural areas.

For me, the article really highlights what real, “bottoms up” econ & tech development is supposed to look like… Continue reading →