India Dimmed :

agree to a fiscal pact in December 2011 India Dimmed and to support a Greek restructuring plan gave the European Central Bank (ECB) cover to ignore the intentions of its Avinash Persaud founding fathers and act as a lender of When you are in a country suffering a decline of confi dence, a drying up of international capital flows and a weakening currency, its citizens tend to place all blame on the government. This is not entirely unfair. Even if the government is not directly to blame and even though confidence is a fickle thing, who else should take responsibility? The reality, though, is that external factors often play a role too and a change in the flows could also trigger a change in domestic confi dence. Few commentators like to dwell on that. They far prefer the delicious exercise of pointing fingers at local politicians and gossiping about the fate of Rahul and Priyanka Gandhi.

HT PAREKH FINANCE COLUMN

agree to a ﬁscal pact in December 2011 India Dimmed and to support a Greek restructuring plan gave the European Central Bank (ECB) cover to ignore the intentions of its Avinash Persaud founding fathers and act as a lender of

hen you are in a country suffering a decline of conﬁ dence, a drying up of international capital ﬂows and a weakening currency, its citizens tend to place all blame on the government. This is not entirely unfair. Even if the government is not directly to blame and even though conﬁdence is a ﬁckle thing, who else should take responsibility? The reality, though, is that external factors often play a role too and a change in the ﬂows could also trigger a change in domestic conﬁ dence. Few commentators like to dwell on that. They far prefer the delicious exercise of pointing ﬁngers at local politicians and gossiping about the fate of Rahul and Priyanka Gandhi.

Yet the loss of conﬁdence in India and the drying up of international public and private equity ﬂows coincided with the European credit crisis and a similar slowdown in portfolio ﬂows across Asia. The crisis put western investors into a risk-averse mode: stay close to home, bring in investment time horizons and switch to safe assets. The characteristics of investing in India do not ﬁt the bill. First, there is the “institutional and cultural distance” between operating in India and operating elsewhere. According to the World Bank, Doing Business report, India ranks 134th out of 184 in the ease of doing business (how does business get done in the other 50 countries?) and 182nd out of 183 in terms of enforcement of contracts. Second, after the many bull runs, Indian equities offer, at best, long-term, not short-term value. And, third, despite, or perhaps because of the heavy weight of over-regulation, Indian equity prices are more volatile than those in developed markets. In risk-averse environments all the warts that were always there but were airbrushed out of dreams and investment prospectuses alike, come squarely back into focus.

In the second quarter of 2011 India saw $3.5bn worth of private equity transactions with 90% of the 123 deals involving an overseas private equity investor. However, by the fourth quarter this had slumped by 50% to $1.8bn. This slump reﬂected a general loss of allure of Indian assets and saw the value of the rupee fall 20% at one point. In India, commentators cite many proximate causes of this decline. Almost all of them are born in India.

Global Inﬂ uences

Fair enough. But it is interesting to note that the fortunes of the rupee, so apparently tied up with local Indian factors, were matched very closely by the fortunes of the euro, which, starting off in the second quarter of 2011, lost around 15% of its value versus the dollar, plumbing depths at precisely the same time as the rupee. Rahul Gandhi can be blamed for many things, but surely not the value of the euro. What we are witnessing in Indian ﬁnancial markets relates in part to developments in India, but in equal part, they reﬂect a loss of investor risk appetite the world over. The ebb and ﬂow of this international investor risk appetite is heavily inﬂuenced by the European credit crisis.

It is important to note then that the European crisis has turned a corner. The decision of European governments to last resort for European banks, providing them with sufﬁciently long-term and favourable liquidity so that fears of a European banking crisis have decisively fallen off. The slow return of risk appetite can be seen in lower bond yields and buoyant equity markets. There have been many false dawns before in the European crisis. Investors have had a roller-coaster ride. But the ECB’s actions in December 2011 and again in February 2012 are on a completely different level. In two, three-year, longer-term reﬁ nancing operations (LTROs) in December and February, the ECB offered $1.3 trillion of liquidity to banks on longer term and more favourable collateral arrangements. Woe betides any speculator still betting against the euro and standing against this wall of liquidity.

As bond yields fall further and equity markets become more fairly valued, international investors will once more lift their heads up and consider the longterm growth prospects of India, paying less heed to the near-term challenges. India’s light will shine once more. If it means that Indian politicians lose interest in the continuing task of improving the ability to do business in India and improving the court system, this will be a mixed blessing.

Avinash Persaud (apersaud@me.com) is chairman of the ﬁ nancial ﬁ rm, Intelligence Capital, and senior fellow, London Business School.