Is India a global power?

Thanks largely to globalisation, it is the four BRIC countries (Brazil, Russia, India and China) that have emerged as potential economic giants. As the Economist of Nov 5 points out these 4 powers were, interestingly, statist power, where Governments were dominant and free markets less open. The fall of the Berlin Wall encouraged, in the absence of a viable option, their shift to free market economics. The rest, as they say, was history.

Of the four it was China that has led the economic race and has become the contender for a gradual shift in global power, such as had occurred post World War II, when the US took over the reins from a war devastated UK. This process would take decades, were it to happen, since China does not (yet) have democratic freedom, which was the hope of globalisation.

The current global stock market rallies in the BRIC countries are driven both by better economic fundamentals (the developed world is growing at 1%) as well as the surge in global liquidity as a means to avert a financial collapse. The stock of financial savings in the developed world is 3 times its GDP and this is largely institutionalised. Prior to institutionalisation of savings, in the 60s (when mutual funds came into prominence) individuals held some 75% of equity and institutions (like banks) 25%; the ratio is now more than reversed. Institutional investors look mainly to maximising profits, and move wherever expected returns are higher. This positions India well. But there are some ifs.

One if is the capacity of the global money flow to be able to absorb it. A few countries have, in fear of creating bubbles, restricted foreign inflows. Brazil has constrained its companies from borrowing and has imposed a tax on FII inflows. India, specifically RBI, is also contemplating such move, which may be sensible. However, the Government is keener to let the markets rise, as there is a pipeline of public sector company stock which they wish to sell. This stock could well absorb more foreign inflows.

The bigger if is in the quality of governance and of planning. The political class is Teflon coated and is never ever brought to task. Madhu Koda, former CM of Jharkhand who is being investigated for amassing Rs 2000 crores in 5 years (even as his father remains a subsistence farmer) is but the latest of many examples where no action is taken. Nor has action been taken against political leaders found by the Liberhan commission to have been involved in the destruction of a mosque; that the report also took 17 years to prepare is another indication of poor governance and accountability. According to a report, some $40 b. are paid in bribes in the 4 BRIC countries! Is it any wonder that the Indian Government is not asking Swiss banks for information, as the US has done?

Such poor governance, of course, impacts economic performance. Let us see its impact on the 30 sensex scrips.

Finance companies (ICICI Bank, HDFC, SBI and HDFC Bank) account for 23.2% of weightage of the sensex. Around 80% of banking sector assets are with public sector banks and Government policy is to hold a majority stake in them. The banks are prudently managed, but, not being subject to pressures of corporate democracy, are slow and steady, and have a far lower P/E multiple than warranted by performance. The Government would not put at risk the safety of India's financial system by reducing its stake below majority in all but, say 3 of the largest banks, but that is a politically tough decision no party would ever take the risk of.

Much of India's household savings is channelized through banks, earning a return lower than the rate of inflation thereby eroding wealth. Just consider the figures for FII and Domestic Mutual Fund investment to date in 2009:

Net investment, in Rs crores
FII DMF
Equity 74,193 - 3,554
Debt 9,519 195,464
Total 83,710 191,910