Mary Holdener
Emerging Markets

Let Them In(dia)!

By, 10/07/2013
Ratings143.714286

 

Will India continue emerging from its antiquated market system? Source: Gareth Copley/Getty Images News.

India’s rupee has taken it on the chin lately, and most seem to blame QE for the country’s recent suffering. We have a hard time sloughing responsibility off on the US, though. Federal Reserve policy could impact foreign economies to a degree—but QE’s end (first) hasn’t yet started and (second) has been widely known for a while. Worries QE’s end is causing Emerging Markets’ currency flight are likely overwrought, even if markets swing on sentiment in the short term. Longer term, ending contractionary US QE (whenever it happens) is likely a tailwind for global markets. The more important question regarding India’s foreign capital flight should be why the country’s so vulnerable to it in the first place—the answer to which likely lies with its government’s historical hostility to foreign capital, its antiquated market system and, hence, a constant struggle to attract necessary resources. India’s foreign policy folly can teach global investors much about protectionism’s ability to handicap markets’ development.

Modern India has been resistant to foreign investment largely since its start—likely an aftereffect of centuries of foreign occupation. After independence in 1947, the Indian government ruled in the “national interest,” passing policies effectively ensuring investment in India would largely be domestically or state-controlled. The economy surged under these policies for 40 years (mostly on cheap labor and commodities), but Indian capital markets developed slowly. As a result, India today still has a small private sector, heavy-handed government involvement in markets and a long legacy of protectionism.

Now, the Indian economy is slowing, too, and the government has tried encouraging more foreign investment in response—like allowing foreign individuals to directly participate in Indian stock markets and letting foreign retailers hold majority shares in Indian subsidiaries. More foreign investment (and therefore, more foreign cash circulating in the economy) could potentially help stem India’s current liquidity crunch and currency devaluation. Unfortunately, it’s extremely unpopular among Indian citizens, who see foreign businesses as a threat to local competition.

It’s true increased foreign competition would likely put out some local businesses in the short term—and that would certainly be difficult for individuals involved. But ultimately, foreign retailers’ presence would likely improve overall quality of life in India! As it stands, hunger runs rampant—not for a lack of food production, but proper storage and shipping. Most food goes bad before it reaches consumers. Foreign businesses, seeing the need for better infrastructure, would likely risk their own capital to reach a relatively untapped market, hoping to substantially increase revenues in return. Most everyone else involved would benefit, too—from increased exposure to more goods and services, greater capital flows and India’s integration into global business systems.

Yet until Indian politicians and citizens understand just how much the long-term benefits outweigh potential short-term dislocations, resistance will remain. For instance, freer-market legislation has technically passed, but every policy has been hedged with protectionist contingencies—i.e., requiring at least 30% of services to be locally sourced—creating logistical problems for foreign businesses looking to enter India. Facing so much local, political and logistical resistance, foreign firms are already throwing in the towel—businesses won’t risk capital with too little (or no) reward.

Hence, India will likely continue struggling to attract foreign funds, making the country vulnerable to currency shock when those funds depart, like they have been these days. India’s recent monetary policy hasn’t helped much either, considering its central bank’s intentionally inverted the yield curve this year—a widely accepted economic negative that seems to have further spooked investors. Of course, in time, open-market reforms could eventually modernize India’s economy, but the country has a long way to go. Fortunately, India is only a small slice of global growth—a well-diversified portfolio likely sees limited impact from its economic, monetary and market folly. Also, cyclical factors can swamp structural defects in the short term. But India could greatly ease the process by allowing investors more latitude in the country’s markets. Such reforms are key for Emerging Markets like India to keep emerging, and they’re key for equity investors to consider when weighing an investment decision. 

Click here to rate this article:


14 Ratings:

5/5 Stars

4.5/5 Stars

2/5 Stars

3/5 Stars

0.5/5 Stars

2.5/5 Stars

4/5 Stars

3/5 Stars

5/5 Stars

3.5/5 Stars

5/5 Stars

4/5 Stars

5/5 Stars

5/5 Stars

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.