The key to whether the current aversion will extend into the long run is whether the government has a plan to deal with both terror and kickstarting key economic reforms.
PRADIP SHAH
Chairman, IndAsia Fund Advisors Pvt Ltd
‘Investors who took advantage of lower stock and business valuations after 9/11 did well - as will discerning investors poring over Indian opportunities’
In Man’s Search For Meaning, Victor Frankel talks of “tragic optimism”— optimism in the face of tragedy. We in Mumbai have just lived through three days of senseless tragedy, shared vicariously by the country. For some of us who lost friends in the hotels we all frequented, the tragedy has a chilling immediacy — not only do we grieve with the shattered families but we realise it could easily have been us.
And yet it is also important to look for reasons to be grateful. That many friends had a miraculous escape. That it could have been far worse. That the collective indignation of the country against ineptness of the government seems to be bearing fruit. This palpable, countrywide rage, which could have brought down the government in a smaller country, will have an enduring lesson for the politicians and bureaucrats. In time, under this government and its successors, intelligence gathering will improve; security will be better; accountability of administrators for governance will reduce bureaucratic callousness of the like suffered by the poor relatives of the victims at the train station.
With the terror scars yet very visible, with the final death toll yet to be declared, it is easy to imagine that its economic consequences will be deep and lasting. Immediately after 9/11, I came across many American global investors who thought the end of the whole world was nigh. However, communities more remote from the site of the tragedy grieved but continued with their economic activities. And soon Americans, too, followed. They have not forgotten, but have carried on achieving and accomplishing.
We in India need to keep up our stride. The potential of our economy is enormous. We have a democracy; a framework of resilient institutions; entrepreneurship of high order; a large skill base; and a diversified economy with a stable agricultural component on which a majority of our citizens depend.
We are seeing a global economic downturn of the kind not seen for seventy years. India is at a risk of being drawn into that maelstrom. Recessions begin in the mind and there is added pessimism arising from recent terrorism.
Timely governmental action is needed to change that mindset, to give reasons to people to feel things will be better. Some easy-to-implement measures include increasing the monetary stimulus; adding a fiscal stimulus through a quick-acting significant and widespread cut in excise and service taxes, as well as through targeted public expenditure; reducing impediments in the way of foreign direct investment such as sectoral caps; and simplifying access to our securities markets by all foreign investors. Harder to implement are actions to improve the rule of law, deliver speedy justice, and eliminate absolute poverty.
Our entrepreneurs will seize opportunities they can grasp. Global citizens who deal with India will also join in. Investors who took advantage of lower stock and business valuations after 9/11 did very well for themselves. So will discerning investors poring over Indian opportunities.
For our leaders, Victor Frankel’s advice, truncated and out of context, may still be apt — “Live as if you were living for the second time”. The government should seize the opportunity to “act properly” and act boldly. It has nothing to lose in the last few months of its tenure; indeed, it may get a second life in the coming elections.
SUBIR GOKARN
Chief Economist, Standard & Poor’s Asia-Pacific
‘The less persuaded that local and global investors are that the government will speed up reforms, the more damage breaches of security will do to investor perceptions’
The Mumbai attacks will undoubtedly have a significant short-term impact on the economy, but whether this will spill over into the longer term depends on how strong the policy response is. I would like to see two types of policy response. One is on the security front, clearly focussed on both preventing recurrence of last week’s events (and the several that preceded it) and, should they occur, dealing with them quickly and efficiently.
I think several actions taken by the government in recent days — dispersion of NSG capacity, better logistics and so on — are an absolutely necessary part of the right response, but there are institutional reforms that are far more difficult and will take some time. Let’s at least get the process going.
But, this is only one half of the required response. The other is on the economic front. Complacency had set in with the growth acceleration and the economic reform agenda had taken a back seat. Whatever progress was made on critical issues like infrastructure — ultra mega power plants and airports, for example — while commendable, took way to long. The gap between supply and the demand levels implicit in an 8-9 per cent growth scenario was widening.
Even in a relatively benign security environment, investors would have become increasingly disillusioned with the slow progress, not only on infrastructure, but a variety of issues on which movement had just stalled — financial sector, labour markets and education, to name a few. The sputtering of the reform process was already beginning to affect investors’ perceptions about the opportunities in India adversely. A vitiated security environment will only reinforce that trend.
The point is that there are many factors that contribute to a hospitable investment and, therefore, growth-facilitating climate. Persistent and credible actions on the economic policy front are as important as actions that enhance individual and institutional security. The less persuaded that investors (both domestic and foreign) are that the government will press ahead with reforms, the more damage breaches of security will do to investor perceptions and, eventually, growth prospects.
The government would be naive to think that a single-pronged approach, which focuses on the proximate issue, will be enough to assuage investor sentiment. The more positive the overall perception about the economy’s long-term prospects, the greater is the ability to absorb and recover from the kind of shock that we were hit by last week. At different levels, both the global turbulence and last week’s attack bring home the point that you just don’t know where the next shock will come from, how hard it will hit you and how long it will persist. Not even the best intelligence or analytical capability will shelter you.
The only way to go is to use every opportunity you have to keep on reforming the system, continuously improving its shock absorption capacity. Eternal vigilance, it is said, is the price of liberty. Well, continuous improvement is the price that we have to pay for sustained growth. Not just on one front but on all.
Views are personal
