Reply to Editor - Cover Story of Economist - 24th Aug 2013 - How India got its funk

Dear Editor of Economist Magazine,

Hope this email finds you in best of health and spirits. I’m a regular reader of Economist magazine. But to my disappointment, the Cover story of your 24^th Aug 2013 Edition has been poorly drafted and investigated.

To substantiate my point I would use pointers which would help you in understanding my perspective so that you can take an educated decision on what went wrong with the Cover Story.

Firstly the fall in rupee and the sentiment for Foreign Investors related to India has less to do with US Fed’s hinting to reduce the bond purchase program, whilst it has to do more with the systemic change which Indian social system is witnessing. To elaborate it further, India is perhaps the only democratic country in the world , to implement full fledged transparency in all matters including public finance & government functioning. This has been made possible through RTI ( Right to Information) through which any citizen of the country can find out information related to all expenditure including public office & the Prime Minister’s Office, at a very nominal cost, as low as INR 10. This has been implemented as law a few years ago and due to which the approval process of any large public project has been carefully monitored & watched and hence delays are bound to happen. This is a systemic change and India like any other economy would take few years to adjust. Once this is done, movement of approvals would be faster tracking the growth back. Good news here is even if politicians don’t want this to happen, it’s a natural process and would evolve on its own.

Secondly, your point that business tycoons are wary of investing in India is contradictory. When one of the largest FMCG companies (Unilever, Glaxo Consumer Care) or liquor companies (Diageo) decides to invest few billion dollars in equity in an economy when they have options of almost 40 countries available, it reflects the interest of the World business leaders to come to India and do business with Indians. Money which has exited the Indian capital markets has been hot money of hedge funds which track daily returns. FDI is good for any economy better than FII. Not saying that FII money is bad, but surely conviction of business leaders for an economy can be seen through FDI investments. Infact long only funds have constantly been buying India at all levels of distress. It’s the domestic Investors and domestic mutual funds who have been selling and that is on account of high fixed income opportunity which has been arising in Indian markets.

Thirdly Food security Bill, which has given hope to the country that less number of people go hungry and empty stomach to bed in night. As per your statistics India spends INR 90,000 Crs as food subsidy, whilst the Food Security Bill which entitles 81 Cr population of India subsidized food would create burden of INR 1.20 lac crore incrementally, INR 30,000 Crs, which is manageable looking at the government expenditure. With Unique Identification Program (UID) being implemented the cost of distribution and its effectiveness would only increase. Most of the state government including Tamil Nadu, Chattisgarh, Gujarat already has Food Security Scheme for the state. Some states which might not currently help would lead this move in the right direction.

Fourthly, the Poor state of Nationalised banks. These were the same banks which didn’t face any risk of bankruptcy during the global meltdown and stood strong the test of all defaults when mighty ones of the West crumbled. Government of India on an ongoing basis has been getting the banks to waive the farm loan credit and that is the major reason for some stress assets in their balancesheets. But this was needed to stop the condition what otherwise would have led to Arab spring. If rural India is in stress, recovery of loans can create civil unrest and hence this was done. Indian government on a constant basis has been recapitalizing the banks ensuring Basel 3 norms are followed and implemented by mid 2014.

Having mentioned all the points above, I do agree lots can be done if political will is there including simplifying the tax regime, creation of Irrigation infrastructure, which itself can lead to  incremental 1.50% GDP growth for next few years etc.

But my point has been that Cover story doesn’t portray the true picture of the Indian economy and the logic behind it for a Global investor.

Many thanks for reading it patiently.

Hope this would change in times to come.