India-UK: Weathering the storm together
It must have seemed to most observers that India has been caught in the perfect economic storm over the past weeks. Newspaper coverage has focused on the 27% drop in the value of the rupee over the last couple of months and on the price of onions rising to some Rs 80 per kg (versus a normal price of Rs 10 per kg).
In many ways neither of these events are unusual at this stage of the cycle. The currency normally comes under pressure -often by up to 15% -as fiscal discipline goes out of the window as the election approaches. At the same time, monsoons often exacerbate price volatility in staple foods by underscoring the deficiencies in the food supply chain.
However, fiscal indiscipline in the form of the National Food Security Act - supremely laudable (it feeds 67% of the population) but supremely costly (it costs $23 billion per annum) populist measure combined with a plethora of measures from tinkering with capital flows to increase of duty imports of TVs from the Gulf. The National Food Security Act costs will fall into the next fiscal year and as such there is a fair chance that the Indian government will hit its fiscal deficit target this year. However, these moves have resulted in an erosion of confidence within India about the state and direction of the economy over the last year or so.
And at the same time, the attractiveness of all emerging markets have been undermined by the cessation of quantitative easing in the United States.
Inflation has been ticking up, and dissatisfaction with the government has being growing in some quarters. Domestic sentiment amongst Indian corporates as well as consumer confidence has taken a hit, under scored by the latest economic numbers which showed a growth of a mere 4.4% and disquiet over the proposed Land Acquisition Bill. One merely has to see the value destruction amongst quoted Indian midcaps to understand the impact.
Amongst Indian corporates, the sentiment is truly appalling and in my experience it has never been so bad. Indian companies that report in rupees, but hold debt in foreign currencies, are under immense pressure, and on top of this they are exposed to a banking sector that is in need of reform and re-capitalisation.
However, I agree with Alan Rosling, co-founder of solar power company Kiran Energy, when he says “I've been here 15 years through booms and busts and I don't remember such a negative sentiment in the business community...That's the typical view [in Mumbai] - that India's lost its way... [But] the pessimism is overdone because the economy is not that bad.”
Perhaps the incoming Governor of the RBI, the respected Dr Raghuram Rajan, can take some comfort. It is almost universally accepted that the rupee is undervalued. Certain sectors within the Indian economy -such as IT and ITS, pharma, textiles - continue to prosper, this being a major constituent of the Indian economy. Many major industrials are well diversified and/or are exporting to growing economies such as those in Africa. And, critically, the monsoon was very good and yields in agriculture across rice and grain are expected to be significantly higher than previous years. This alone would normally add up to a couple of percentage points onto economic growth.
Critically the India growth story remains intact -particularly for foreign companies looking to enter India at this juncture.
An important distinction should be made between the attitude and behaviour of Indian corporates who are heavily exposed to upstream commodity prices and to any deterioration in the rupee, and UK corporates, who are looking at the long term India growth story.
For UK companies, India has always been a long term investment and the investments they are making today are not expected to start generating profit until 18 or even 24 months away. The Indian economy continues to grow and the causes of this growth have not changed. Significantly, companies like Unilever, Triumph, Cadbury's, Rolls-Royce and JCB continue to move forward with their investment plans in India.
If one puts India's situation in context, and looks across the developing world to countries such as Brazil, Russia and China, most emerging economies are cooling off after an extraordinary decade of growth. In fact, with the rupee seemingly temporarily undervalued and medium and long term growth rate still looking solid, India presents a great investment opportunity for UK companies relative to other emerging economics.
Nonetheless, over the last few years Indian policy makers have repeatedly shied away from difficult but necessary reforms when things were looking up. This has, and continues to create, a difficult trading environment, but I would argue that we have been here before, in 2003, when fiscal tightening coupled with internationalgrowth rescued India. Clearly the international economic situation is materially different but India's structural position is much stronger. Now, it is probable that the recovery “j” curve will be flatter and take longer.
A crisis has always been needed to force India to make the necessary changes required to drive growth for the next decade. As one senior industrialist said to me recently “We, Indians, never fix the roof when the sun shines.”In time these reforms will come, and those that have laid the ground work will reap extraordinary benefits from their investments.
Richard Heald is Chief Executive, UK India Business Council (UKIBC) -www.ukibc.com