As Growth Slows, India Awakens to Need for Foreign Investment
Comment of the Day

February 08 2012

Commentary by David Fuller

As Growth Slows, India Awakens to Need for Foreign Investment

This topical article from the NYT and IHT is likely to be of interest to many global investors. Here is the opening:
NEW DELHI - When India's finance minister, Pranab Mukherjee, flew to Chicago recently to address a group of American executives, it was to deliver an urgent message: India is still open for business.

He listed pro-business policies his government recently approved or soon would: foreign individuals could invest directly in the Indian stock market; overseas specialty retailers like Gap could open wholly owned stores in the country, and bigger retailers like Walmart would soon be admitted. And though Mr. Mukherjee did not cite it, he could just as easily have mentioned a proposal the cabinet is considering to let foreign airlines buy as much as a 49 percent stake in India's airlines.

"I urge you to seize this moment and contribute to our collective prosperity in the times to come," Mr. Mukherjee told his audience, the World Affairs Council of Chicago.

The flurry of activity by the Indian government has helped push Indian stock indexes up by 15 percent this year, and the rupee has climbed 8 percent against the dollar

Skeptics wonder, though, whether Indian politics will really allow Mr. Mukherjee and his boss, Prime Minister Manmohan Singh, to force significant change on the nation's hidebound protectionism. But there is no question that after years of taking rapid economic growth for granted, the government is finally awakening to the need for new policies and greater foreign investment.

The change is occurring as analysts and India's central bank conclude that growth - which was at 8.4 percent or higher for much of the last decade - will fall sharply to 7 percent in the current fiscal year and remain sluggish in the next one, which begins in April.

The signs of new salesmanship from Mr. Mukherjee are a notable departure from his demeanor, and that of other Indian officials, for much of 2011, even as their economy was slowing and inflation was gathering steam. Preoccupied by a big anticorruption protest movement and internal bickering among politicians, officials tended to dismiss the gloomy data as unimportant or as temporary setbacks.

But this year, Indian leaders have begun publicly acknowledging the nation's economic problems.

"The growth slowdown was a nice wake-up call for us," Kaushik Basu, the chief economic adviser to the Finance Ministry, said in an interview.

David Fuller's view Wake-up calls, although necessary, are seldom "nice". However, it is welcome news that India's central government appears to have shaken off its complacency and torpor of last year. Recent announcements have been so upbeat that I wondered if it had employed a public relations advisor.

Inevitably, there is a 'needs must' element and this belated response to a slow economy is also influenced by some important state elections commencing in Uttar Pradesh next week, although the result will not be known until early March. Victory for the Indian National Congress party, which is by no means assured, is necessary if it is to have a freer hand on economic policy.

Meanwhile, this year's more proactive governance and a very favourable global equity performance have enabled India's stock market to break the bear trend which commenced in November 2010, as you can see from these charts for the Sensex Index (weekly & daily) and particularly the important India Banks Index (weekly & daily).

Both are now temporarily overbought but if at least half of the gains since the December low can be held during the next reaction and consolidation, as I suspect, a slower ranging advance is likely to occur thereafter, particularly as the Reserve Bank of India lowers short-term interest rates. To continue its recent outperformance India needs to reassure investors that it can return to a stronger GDP growth rate because its valuations are higher than for other Asian stock markets.

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