No Gloating from India Over U.S. Downgrade

  • Share
  • Read Later

An Indian stockbroker watches share prices on his screen during trading at a brokerage house in Mumbai on August 9, 2011. (Photo: Indranil Mukherjee / AFP / Getty Images)

Indian businesses are worried, even if they’re not quite ready to admit it. That was the subtext of the statement issued yesterday by Nasscom, the industry’s main trade group, after the big American downgrade announced on Monday. “The economic crisis in the US, unfolding over the last few days, does not have any major bearing on the country’s private sector,” the statement said. Nasscom’s position — as it has been since the 2008 financial meltdown — is that India’s IT companies have diversified beyond the U.S., that it has “a burgeoning domestic market which is equipped to sustain growth” and that bad times in the U.S. are actually good times in India, because “in case of an economic slump, we see the Indian IT industry strengthening its partnership with the US customers to build-in greater business efficiencies.”

Investors aren’t buying it, quite literally. The three big blue-chip Indian IT stocks plunged yesterday: TCS, the largest IT firm was down 6.46%; Infosys, down 4.78% and Wipro down 5.28%. The pressure on IT stocks brought down the Bombay Stock Exchange by  1.82% — not nearly as bad as the sell off in other Asian markets, but still a sign of trouble in a country that has been gloating until very recently about being immune to the ill winds blowing through the U.S. and Europe.

Policymakers came out in force to reassure India and the rest of the world that everything’s fine, beginning with Finance Minister Pranab Mukherjee: “India’s fundamentals are strong, we are in a position to manage the challenge” to Montek Singh Ahluwalia of the Planning Commission: “I think our growth will still be robust” to chief economic advisor Kaushik Basu: “the India story remains robust.” Ahluwalia went so far as to predict 8.2% growth for the Indian economy this year, and 9% for the next few years.

India, however, did not join China in scolding the U.S. to “live within its means.” How can it? India’s estimated public debt is about 56% of GDP, not much better than the U.S. at 59%. The U.S. has huge entitlement programs like Social Security and Medicare; India has huge subsidy programs for the rural poor and a bloated public sector; the American public resists tax increases; the Indian public resists tax collection in general. And India, unlike China, allows its currency to float more or less freely against the dollar, making it more vulnerable to exchange rate pressures.

For India’s economy to be the “safe haven” that policy makers promise, two things will have to happen. First, foreign investors from the U.S. and Europe will have to believe that they will get real returns from the billions they have been investing in Indian infrastructure and power companies. Foreign direct investment in India was up 57% in the first half of this year — but that’s compared to 2010, when FDI plunged by 25%. That pull-back was a wake-up call for India; when investors have other options, they’ll go elsewhere. India needs FDI to improve its dismal infrastructure and power grid (thanks to all that debt, it can’t pay for it by itself); and it needs reliable electricity and good roads for factories, shops and software companies to run profitably. Second, it will have to ease the remaining restrictions on retail and other industries. U.S. companies have realized that they need to reach Indian consumers to have a hope of surviving the 21st century (case in point: Ford’s $1 billion investment in an auto factory in Gujarat); if India wants to be part of that story, it will have to let them in.