An English banker lands at the airport in Mumbai, where he is picked up by a driver.
"First time in India?" the taxi driver asks, amused at the startled expression on the man's face as he gazes through the window to see cycle-rickshaws and a stray dog passing by, amidst the construction boom throughout the city.
"I'm not from around here," he replies, rather surprised as a red convertible zooms past. "And you've always lived here?"
"Born here," the driver says, passing multi-storey blocks with rooftop swimming pools. "Back then this was all a barren land."
"You're a lucky man. Think you'll ever leave?" asks the visitor, alluding to the developing world’s dream of migrating to the West.
"Why?" the driver asks. "Everyone is here."
At HSBC we expect a bank to know when a market has emerged, rolls the end credit of the advertisement.
This advert clearly reflects HSBC's admirable, long-term strategic aim of being a banking leader in India for many years to come. But currently, wealth and asset managers, including HSBC's private banking division, are going underweight India in response to a wide set of pressures on the economyThe bank holds a relatively downbeat outlook on the Indian economy in the short-term, as growth continues to slow, with a wide current account deficit and high inflation preventing the Reserve Bank of India from acting more forcefully to support growth.
“External demand is weak because of the global slowdown and the eurozone crisis and this is impacting the export sector,” says Esty Dwek, global investment strategist at HSBC Private Bank.
Many private banks have scaled down investments in India, in the wake of political logjam and policy paralysis during 2011, as a result of widespread protests against corruption. Though the populist movement led by Anna Hazare may have long died down and been forgotten about, there have been several political roadblocks to economic policymaking.
Last year’s much awaited pro-liberalisation move to open up foreign direct investment in the country’s $450bn retail sector was aimed at allowing foreign multi-brand retailers, such as Tesco and Carrefour, to own stakes as high as 51 per cent in Indian joint ventures and also raised the cap on foreign direct investment in single-brand retail from 51 per cent to 100 per cent.
CAPITAL FLIGHT
Although the bill was expected to tame India’s persistently high inflation and boost investment, protests from the opposition and a key member of the ruling coalition led the government to roll back the decision. This is by no means the first instance of political interests severely limiting the opening up of key sectors. Problems relating to bureaucracy and red-tape further prevent the country from attracting much-needed foreign investment.
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Robert Aspin Standard Chartered Private Bank |
Such uncertainty is causing capital flight from India. The country’s rate of GDP growth declined to 5.3 per cent last quarter, from 6.5 per cent a year earlier, while the trade deficit widened to a record $184.9bn in the fiscal year ending in March. This period has showed the slowest pace of growth in nine years.
“India has twin deficits which it is not addressing as it keeps government subsidies, in particular for food and oil prices, in place, weighing on government finances,” says HSBC’s Ms Dwek. “Lack of policymaker action to reduce supply-side pressure and improve the fiscal picture has led to a loss of confidence in India, and as a result to foreign direct investment outflows and an underperformance of Indian assets.”
The flight of foreign investors is causing the rupee to depreciate. It has fallen over 17 per cent against the dollar since the start of February, though signs of recovery are present.
With inflation high and sticky, the central bank has been unable to support growth. Inflation has been a problem since the start of the year, with high oil prices, rising food prices and rupee weakness.
“We have to work to reduce inflation and once that happens, the cyclical slowdown will recover to pull back towards structural growth rates,” says Sankaran Naren, chief investment officer for equities at ICICI Prudential Asset Management, India’s third biggest money manager.
He attributes the slowdown to rising crude oil prices in 2007 to 2008 and then again from 2009 to 2011. “In these phases, when crude oil prices went up, the Indian government did not pass on the fuel hike to the people and that led to a huge subsidy on the fiscal side and also increased the current account deficit because India had much lower prices than anywhere else in the world barring the US and a few countries of the Middle East,” comments Mr Naren.
FUEL PRICE HIKES
The situation, where energy prices were not passed on to consumers, brought problems to the Indian economy, including the current account deficit and inflation. Mr Naren sees two solutions: one is through crude oil coming down to $80 a barrel and the other through an increase in fuel prices in India.
“Though they have increased the petrol prices, they’ve not increased the diesel prices,” he says. “Our belief is that energy reforms are the heart of the problems in India and if we are able to tackle the energy reforms in India, the cyclical slowdown phase will stop within a few quarters of energy reforms being implemented.”
