India re-discovers its economic mojo
Finance minister Palaniappan Chidambaram has battled valiantly to feed the nimble elephant that is the Indian economy at its best, restarting its stalled fiscal and liberalization agenda. But market expectations are sky-high ahead of the election year and recent evidence that the economy has run out of steam.
A darling of foreign investors, a champion of the public at large and trusted across New Delhi’s often fractious political spectrum – Palaniappan Chidambaram is a well-respected fiscal commander-in-chief and a seasoned political operator.
As emerging Asia’s most powerful finance minister – China’s fiscal blueprint is drawn up by the State Council, among others – these accolades come in handy at a challenging time. Chidambaram has taken a calculated risk by drawing fiscal battle lines a year before an election in an economy famous for its budgetary indiscipline. What's more, dark clouds loom over the Indian economy. In a surprising announcement last Friday, the Indian statistical office estimated growth for the current fiscal year would hit 5% compared with the government's 5.7% estimate.
Nevertheless, there are plenty of encouraging signs that Chidambaram is up to the task of placing India on a stronger footing. Upon his appointment in July, Chidambaram faced 5.3% fiscal deficit that was on the up. Just as troubling, both corporate and foreign institutional investors (FII) had grown wary and weary of the country’s flibbertigibbet financial mandarins. A proposed foreign direct investment (FDI) law, aimed at permitting greater foreign investment into retail operations, was sloppily timed, dying even before it reached parliament.
New general anti-avoidance rules (GAAR), designed to stem offshore money laundering and set to be imposed by 2014, also rattled foreign investors, due largely to their ambiguity and the speed with which they were thrust, without consultation, on the corporate and financial world.
Quietly and effectively, Chidambaram got down to weaving his mysterious magic. He quickly saw, notes Rashesh Shah, chairman and co-founder of Mumbai-based investment house Edelweiss Capital, that “communication had broken down” with the foreign investor community. He adds: “The government had grown convinced that investors needed India more than India needed investors.” From virtually the first day of his fourth coming, he started to mend India’s tattered financial reputation. The FDI law returned to the floor of the Lok Sabha, passing with a bare minimum of fuss, allowing foreign multi-brand retailers access to India, and foreign airlines to buy minority stakes in domestic carriers.
Next up is a probable hike in the stake a foreign insurer can own in its local joint venture partner, to 49% from 26%.
Another strike for pragmatism came in mid-January with the deferment of GAAR to April 2016. What’s more, the finance minister has committed to a reduction in the fiscal deficit at 5.3% this year, before falling to 4.8%. Finally, on February 7, he thrilled advocates of the hitherto stalled state divestment programme by selling a 9.5% stake in power producer NTPC, raising $2.1 billion in the process. The deal was twice subscribed, on heavy buying from foreign funds
In short, within just a few months, Chidambaram has re-opened communication channels with investors, pushed through reforms and kick-started the process of plugging the fiscal gap, triggering market optimism that India would weather the cyclical drop in growth.
Chidambaram “has done remarkably well to restore the confidence of global FDI and FII investors”, notes a co-CEO of a global lender's Asia Pacific operations. He adds: “We have seen a return of confidence in government policy reforms and [that has had a] positive impact on investor sentiment.”
For proof of investor hospitality to India’s apparent commitment to a dose of fiscal responsibility and liberalization even amid weak growth, look no further than monthly FII figures assembled by national stock regulator Sebi.
Of the 12 months before Chidambaram’s return in July 2012, six saw net outflows of FII money. Since then, foreign capital has poured back in, turning outflows into inflows in each of the past six months, and helping boost Mumbai’s Sensex exchange to two-year highs.
Much remains to be done with economic growth in the fiscal year to end-March 2013 set to hit a paltry 5%, the slowest annual rate of increase in a decade. New Delhi will also have to approve a raft of new share divestments to narrow a yawning fiscal deficit.
Nevertheless, markets have invested much faith in his office. Chidambaram – who has occupied multiple cabinet positions – has a discreet manner, characterized by clipped sentences more associated with a mid-ranking bureaucrat or overworked college professor.
Yet Chidambaram is famed for his ability to oil the usually rusty pulleys and cogs of India’s unwieldy bureaucracy. A senior civil servant from his stint as home minister reckons he manages the neat trick of getting people to believe that “what he has decided he wants them to do was their decision all along”.
Edelweiss’s Shah believes India will always need someone of the finance minister’s ilk. Without someone such as him, India “collectively veers toward the sort of good politics that may well not be good economics. [Chidambaram is] able to look past the short-term pressures of politics, toward implementing the sort of long-term economic measures a country needs.”
Chidambaram’s hope is that he will set the stage for an economic rebound similar to the backdrop that accompanied his fourth spell as foreign minister that stretched from the spring of 2004 to late 2008. India’s first modern golden era was characterized by soaring stock prices, rising inward FDI, falling unemployment and narrow deficits.
This period also saw India cement its reputation as a leading global outsourcer, and as a country amenable and even friendly to the global corporate and institutional investor.
The new CFO will be hoping he can help to nurture once again the narrative of India as an emerging global superpower, rather than the wheezing elephant.