Political Band-Aid

MORE than patriotic fervor, it's the attractive bottomline that has fired the enthusiasm of the 1.5 million-strong Indian American community in the RIBs. "Yes, I have invested a decent chunk in the bonds," says Dr Sudhir M. Parikh, wealthy New Jersey-based physician and political activist. "It's an excellent vehicle for India to raise money and soften the impact of sanctions. For me it's a good investment because the deal makes a lot of business sense, and there's also an element of nationalism or patriotism."

 Srinivas Sunder, the dynamic head of SBI's operations in New York, told Outlook: "RIBs have been a big success, attracting all categories of people, from the salaried class to the wealthy business class. Patriotism is a factor but the bonds make enormously good commercial sense." He said that even cabdrivers queued up at the SBI offices in the city borough of Queens, to add to a collection which was already $250 million (as of August 19) and was expected to touch $350 million before the cut-off date.

One of the biggest promoters of the bonds in the US has been the tireless campaign by the Overseas Friends of the BJP. Says its president, Prof Dinesh Agarwal: "This is the first time the Indian government went out for help to Mother India's children living abroad, instead of asking for more loans and aids from other countries or global institutions. Of course, some corporations and business-minded people may have bought the bonds because of the high returns, but most have bought them out of their concern, love, and desire to help India."

Agrees Stanford University's Prof Rafiq Dossani. "The timing," he says, "is very good. India risks a foreign exchange shortage if its economy recovers by yearend. Hence, the decision to obtain funds now is a good one. The cost is about 50 to 100 basis points higher if you consider countries with comparable risks. But since the issue is being marketed to individuals and not institutions, a higher rate becomes necessary."

Wall Street, however, is not so sure. Some analysts worry that RIB could get India caught in a trap. Says one: "This is a feel-good move that has a political message. To show the West that India can work around the sanctions to keep foreign currency flowing. But from an economic point of view, RIBs are high-cost foreign borrowing. And if India is not careful in how it invests this money, the whole scheme could go bust."

 The analyst argued that India should make the investment climate attractive for residents, then NRIs and foreigners would automatically follow. "Business decisions are not based on patriotism, but on hard numbers of returns on investment. Take China. It was only after Beijing liberalised and made investing attractive that overseas Chinese paid attention to China. First it was from Hong Kong, then from Malaysia and Singapore, and then from Taiwan itself. Once that happened, foreign corporations flocked to China."

Adds Prof Ashutosh Varshney, who teaches political science at Columbia University: "China after Tiananmen proved that foreign investment can be a confidence trick—the more people believe that others are investing, the more they also feel like investing. Given the affluence of overseas Indians, they are certainly in a position to start the race. But will they do it? That's hard to answer."

Prof Sumit Ganguly, author and professor of political science in New York, also believes that the bonds "are a good, if limited, idea" and warns that "at bottom, India needs to open up its economy and invite long-term foreign investment." Even Prof Agarwal agrees: "There should be a more long-term policy and incentives to tap the financial clout of NRIs. India should execute this PIO (People of Indian Origin) scheme and start a new ministry to look after NRI-related issues."

Although enthusiastically embraced by the Indian American community, RIB is at best seen as a political Band Aid, not sound economic policy. As another Wall Street analyst points out: "India must quit waving the flag and evolve real economic policies. Politics is important, but economics is more important for the nation."