US investors suspend scepticism about a BJP government
WHEN a panel of the Senate Foreign Relations Committee meets at the end of this month to hear testimony on India from representatives of both the Clinton administration officials and India experts from non-governmental outfits, a key focus area will be the economic policies of the newly-installed BJP-led government.
At a March 20 gathering in Philadelphia, some 350 attendees at the Wharton School's annual conference on India got a preliminary feel of the US perspective on the new government's economic policies and goals. While Gary Wendt, chairman of GE Capital, was concerned about "politicians" mucking up the economic reform process, Frank G. Wisner, the former US envoy to India, was more upbeat in his assessment.
Wendt complained that obtaining a "license gives us a licence to apply for other licenses before the real start of business in India". He said politics played a "more important part than economics" in getting approvals for projects. But he added: "We'll be there in India. We'll be patient and we'll continue to invest. And we hope the political process will come along with the rest of the world." In an interview, he said: "You'd expect us to do more in India and acquisitions is one way to grow. And if acquisitions are available we try and make them."
"We want to be optimistic about India," Wendt said, "because when there is a new government we always have the hope that they will have the capability to bring about change. And India has to change."
Wisner, who has emerged as a one-man crusader to evangelise about the BJP-led government, told the gathering: "India's future need not be painted in gloomy colours. The India that Americans are discovering is an India on the move. It's seemingly chaotic politics and its traditions of poverty are not the defining features of modern India. My hope for the new government will be that it will give a new impulse for reforms."
He said the BJP's "strong and proud" advocacy of "Indian nationalism" was welcome as long as it was "not exclusionary nationalism at others' expense, but an inclusionary one and in keeping with the traditions of Indian culture. I am persuaded of India's potential and am able to tell my American audiences that reform is here to stay."
As the investment banking community tries to figure out what the new regime's economic policies are all about, Standard and Poor's on March 23 said India's credit rating outlook was stable and left the country's BB-plus foreign currency rating unchanged. The New York-based agency said the BJP-led administration was expected to take a "cautious reform path...to balance the policies of constituency with the demands of its numerous and vocal coalition partners."
S&P's latest India ratings continue to reflect New Delhi's economic reforms, supported by a "robust political consensus, including industrial and trade liberalisation, and lower tax rates. A high, but declining, net external debt burden, alleviated in part by significant concessional debt; and comfortable external liquidity, with reserves equal to about three times the country's short-term debt". S&P said the new government "is likely to balance its ideological support for domestic investors with measures to maintain the flow of foreign direct investment". But, it added, "infrastructure bottlenecks are likely to lead to growing pressure for higher government capital spending".
Such increased spending would weaken public finances and erode India's creditworthiness. A greater commitment to fiscal prudence, including more credible efforts to reform the public sector and accelerate privatisation, would strengthen the country's credit standing, the report advocated.
Yet another report is expected shortly from Moody's Investor Services. According to sources the agency's analysts are still working on the final shape of its report. However, in January, Moody's warned India might be downgraded from its Baa3/P-3 status. In a "summary opinion" in February, it wrote: "Moody's is concerned that the impetus for structural reform has diminished (in India) relative to the agency's expectations. The public sector finances have not improved to the extent required by the high public sector debt and debt servicing burden, not least to address the country's enormous investment requirements going forward." It warned: "No matter what the political stripe of the new government, implementation of a sound economic framework will be crucial to reversing the deterioration of macro-economic balances." But in New York, Rajiv Khanna, president of the Indo-American Chamber of Commerce, said of the new regime: "I'm very bullish about India. I believe it's someone like the BJP that can bring true economic liberal-isation to India because the people of India trust them to do so in a manner that the country is not sold out to foreign interests."
He added: "I've been telling the investment community to discount the rhetoric that preceded elections and keep in mind that a party in power will behave more responsibly than its electoral rhetoric." Jay Pelosky, an emerging markets strategist with Morgan Stanley Dean Witter Discover in New York City told a reporter: "We're positive about India. We feel the Indian government will be business and market-friendly."
The four main things the investment community is now looking for are: transparency, anti-corruption policies, fiscal and monetary policies and political stability.And there are some experts who don't agree with Wisner and Khanna. Commenting on stability, Paul Kreisberg, a senior fellow at the prestigious Woodrow Wilson International Centre for Scholars in Washington DC, said: "I continue to be sceptical about the ability of this diverse crowd to sustain their agreement on a broad range of issues. My guess is so long as the government doesn't do anything too dramatic, it may work."
Kreisberg, whose views on South Asia are taken seriously on Capitol Hill, added: "As long as there is enough money to satisfy all regional claimants, it may work, but unfortunately money will clearly be a big problem and avoidance of big policy issues will slow down efforts to speed up development. I tend to share the view that 12-24 months may be a good guess for longevity of this government, at least at this point in time."
A senior Clinton administration official added: "We don't see the new government making any radical departures. We think the reform process is here to stay. We should have a better feel once the budget is presented." Which will be another 10 weeks.