Archive for March, 2009

Over the last couple of months, each bad news from India has been matched by a corresponding good news. 

Since September 2008, foreign institutional investors have withdrawn over $8 billion from the Indian stock market. The key index, Sensex, has fallen by almost a third. At the same time, over 100 new foreign institutional investors have entered the market.

On foreign direct investment, September to December were particularly bad. Satyam’s fall compounded the fears. But in January FDI jumped to $2.7 billion, almost a 60 percent increase over the previous January. But it’s too early to tell if this is just a blip or harbingers a trend.

In the 12 months to March 2009, the rupee depreciated by 25 percent, a good news for exporters, including Indian outsourcing industry. But it makes the import of fuel and the general sustenance of subsidies difficult, and will result in overall decrease in tax receipts.

Elections are weeks away, so the government will not cut back spending. The government is also under pressure to offer extra tax reliefs to ease the impact of the global crunch. All of this will add pressure on the budget.

The final two good news is that inflation has come down drastically, now at a six-year low of 2.4 percent. And by IMF’s calculation, GDP is still expected to grow substantially, 5.25 percent in 2009-10 compared to much of the world. But then IMF’s predictions about global economic health have been pretty off the mark the last couple of years.

So, is India hurting or not? The overall verdict is a definite maybe. It cannot be claimed that India has been shielded. It also cannot be claimed that the future is rosy for India, since the global recession is not going away any time soon. This is the type of conclusion I hate to reach, but there is no other right now: we just have to wait and see.


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As the global recession deepens, the big question is whether we will see a repeat of the protectionist and nationalist policies that marked the Great Depression era.

In the US, President Obama had to temper down Congress’s Buy American provisions to ensure that that the US stance is not misinterpreted. But he is under pressure to consider greater forms of protectionism.

The UK Prime Minister Gordon Brown addressed the US Congress yesterday, and tried to support a pro-globalization position. But he is also under pressure. Anti-immigrant sentiment is rising in Britain. Demonstrations have taken place even against fellow workers from other EU countries.

Both Obama and Brown may be sheltered a little bit, for they don’t face immediate elections.

India is heading for elections next month. While the major parties, Congress and BJP, are pro-openness, fallout from the global slump may begin to empower the Bahujan Samaj Party, which draws more from the poorer classes and the lower castes. If BSP gets a bigger share of the electoral pie (which I think it will), then Indian policy will be under pressure to extend protection of the poor. Deficit spending will rise there as well.

It is unlikely that India will become protectionist. But it will have to diversify, because no matter how rosy its industry associations are sounding, FDI will continue to fall for the foreseeable future.

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