Expect nothing, live frugally on surprise.

Tuesday, December 2, 2008

The darker clouds

India has two Taj Mahals — one, a monument to love in Agra, and the other a shrine to hospitality in Mumbai. Standing on the Arabian Sea, the Mumbai Taj is not just an icon of India’s financial capital but also a symbol of its growing wealth and power. The terror attack of last week that left this building wounded could cause more damage to an already bleeding Indian economy, draining it of foreign investments.
Already foreign investors have pulled out some $13 billion enervating the stock market. The nation has been impacted by the tight liquidity conditions, the sluggish economic growth, and an anaemic currency.
Favourite destinations Despite the bureaucracy and crumbling infrastructure, India is one of the favourite investment destinations because of its size and the rate of growth it has managed the last decade. But the increasing frequency of terror attacks could become a cause of worry for foreign investors.Foreign firms tend to shy away from markets that exhibit instability of some form, mainly because the cost of operations goes up. Even if there is no exodus from India, some short-term postponement of investment plans can exacerbate the situation, some observers fear. But the Commerce and Industry Minister, Mr Kamal Nath, is confident the attacks will not slow investments. He told Reuters that, “This does not have an economic component”.

Corroborating his view, rating agency Standard and Poor’s also does not think the attacks should affect India’s sovereign rating of BBB- with a stable outlook.

S&P said it expected a short-term negative impact on the currency and stock exchange as well as a slowdown in tourist arrivals but that such effects would recede with time if there were no further attacks. India is also hoping for this and expects investor attention to return to the fundamentals once the initial shock of the attacks wears off. Thus, most observers of the Indian economy are sanguine about the long-term outlook, when this could actually be the larger problem. India has not addressed several systemic problems that can have a far more serious impact than the acts of the terrorists.

Unaddressed problems Just consider the crumbling infrastructure: Of everything, there is shortage. Power, roads, rail capacity, port facilities. With the country set to emerge the most populous in the next decade, the pressure on infrastructure can be imagined.

Or, the decaying agriculture. The Green Revolution experiment has unravelled and the effects are beginning to show. Drop in farm productivity due to soil contamination and the shrinking water-table. India’s food security is fast eroding and it is more often in the world markets buying even the staples. This is not good augury for a nation with a large population. With farming becoming a losing proposition, people are moving to urban areas for work, bringing tremendous pressures on the infrastructure.Or, the poor quality education. While the rising population is a problem, it also gives India a demographic dividend. It will be one of the youngest nations in the world. But this would be of little use if the youths remain poorly educated and badly trained. Yes, India can take pride in churning out the world’s largest numbers of graduates. But what of their quality? The West will certainly need workers, but will the mal-educated Indian graduates be able to take advantage of this demand? Are they up to global standards?

Or, the severe corruption. Observers fear the terror attacks will raise the cost of doing business in India. Perhaps, corruption will terrorise more investors. It will significantly raise the cost of doing business and presents a more dangerous and potent barrier to investment flows.

Or, the unhelpful bureaucracy. True, India was left a steel framework but it could well have dismantled that rusting structure and put in place a modern one. Indeed, the former colonial masters have long got rid of it. It is a nightmare to negotiate the labyrinthine bureaucracy to get anything done. Why would foreign investors want to waste their time and energies going around in circles?

Or, the devious politics. The great comfort one draws from the fact that India is one of the most robust democracies is quickly lost in the constant quibbling and bickering that informs Indian politics. There is an air of uncertainty about continuity of policy.

This is key to business confidence and continued investments in the country. Surely, there are many parties in the Western democracies too.

But the economic policies do not deviate dramatically from one another. So policy stability is more or less assured to businesses. These and problems of this ilk are what India must worry about. They have the potential to do much long-term damage. Sure, India needs to tackle the terror problem, but simultaneously it must look within too. If there is going to be a re-think at various policy levels, perhaps it is a good time to look at some of the systemic problems too. Politically, this may be an opportune time because there could be unity in this jingoistic moment. The terror attacks are dark, but passing clouds. India must worry about the darker clouds constantly hanging on the horizon.


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