India abroad

With ever increasing sums of foreign money rushing into the Indian equity market, it looks like the India story has been well and truly bought into by the rest of the world. Whatever one's investment horizon, if money has to be made, India is becoming an increasingly important component of the portfolio. The question is: does this spreading endorsement of India's economic performance mean that we no longer have to prove ourselves to the global investment community? Can we now go about our business-as-usual, not having to worry about what the rest of the world thinks of us?

To an extent, yes. The high-growth, low-inflation scenario, even amidst a rather hostile oil price setting, suggests that the underlying factors are robust and sustainable. That the current run of good growth is not so much luck as the cumulative impact of good policy is being recognised and, as the flow of funds suggests, rewarded. But, even amidst all the euphoria, we would do well to recognise persistent concerns amongst global investors, which will not be papered over by the ever increasing highs of the Sensex. In fact, as world scrutiny of India becomes sharper and more intense, the negatives, which are clear threats to the sustainability of current performance, will inevitably receive more attention and, at some point, could well tilt the scales in unwanted directions.

A casual survey of investors and the global media would most likely emphasise four major causes for concern. The most important is the state of the physical infrastructure, which hits the first-time investor smack in the face and immediately causes a re-think on the favourable assessment he has received from his investment bankers. The word-of-mouth publicity impact of this cannot be underestimated. Investors do tend to herd, especially when it comes to newer and less understood markets, and one person's negative impressions could turn off several other potential investors. It is one thing to read abstract accounts of the problems of the power sector in the media and quite another to experience them.

A second source of worry is the perception that salary levels in India, particularly for the resources feeding into the sunrise sectors, are going through the roof, reflecting serious supply constraints. There is clearly an irony in the fact that a country with hundreds of millions of young people yearning to work and grow richer should be facing labour shortages. The failure of the educational system, at all levels, to anticipate and meet the demands of employers is evident. But, more importantly, the state, which should be doing something about it, doesn't seem willing or able. Some more of this and competitiveness could seriously erode, threatening the buoyancy of the stock market. Third, the persistent state of gridlock at the political level, which makes every policy decision contestable and potentially reversible, increases the risk of running out of steam. Finally, the absence of consensus between global rating agencies on Indian sovereign debt being of investment grade highlights the still precarious state of aggregate public finances in the country and deters many potential investors, particularly those with pre-mandated risk exposures.

Yes, the India story is real and positive, but not without several perceived pitfalls. Progress, or lack of it, in addressing these concerns will determine whether the current flow intensifies into a flood or subsides into a trickle.