INDIA: Edge of glory

Tough reforms are vital to bring India’s economic growth back on track. Right now, there appears little appetite for the struggle

  • By Neil Munshi
  • 11 Oct 2013
Email a colleague
Request a PDF

When economist Raghuram Rajan was appointed governor of the Reserve Bank of India (RBI) in early August, the Indian press went wild. The man who had predicted the financial crisis years in advance was dubbed a “rock-star economist” with “photogenic appeal”; he was gushed over like a Bollywood celebrity.

For a nation which had in just a few years seen its fortunes turn from long-term double-digit GDP growth forecasts to just 5% growth last year, the media seemed to be saying “here is a saviour.” In the weeks before Rajan took up his post in early September, the rupee went into freefall, losing over 20% of its value in real terms in the span of just three days in the middle of the month.

As the US Federal Reserve’s expected move to begin tapering its asset buying programme loomed, some emerging markets currencies went into a tailspin, few more than the rupee. Every day seemed to bring the currency to a fresh lifetime low against the dollar, even as the RBI scrambled to prop it up in ways some criticized as counterproductive.

A few days before Rajan became the 23rd RBI governor, the government announced that GDP had grown just 4.4% in the quarter ended in June. That led HSBC to slash its forecast for the fiscal year ending in March from 5.5% to 4%, and for the following year from 6.6% to 5.5%.

On September 4, the rupee again crept close to its record low, and Rajan took the helm of the RBI. In his opening statement he announced a slew of reforms aimed at liberalizing the banking sector and expanding financial services to the hundreds of millions of Indians who remain unbanked. “There are so many low-hanging fruit in the economy that if we only pluck them we can accelerate growth substantially,” Rajan said.

Under the reforms, banks were no longer required to receive RBI approval for every branch they open, but they were still required to open banks in underserved rural areas and cities in equal proportion. He also said the RBI would announce a new round of bank licences early next year, and would encourage foreign banks to operate in India as wholly-owned subsidiaries to foster competition.

Down the line, the RBI would introduce new interest rate futures contracts, establish mobile payments systems and ease restrictions on overseas borrowing by banks.

It was a virtuoso display by the former chief economist of the International Monetary Fund, which drew praise from analysts and economists as a positive step. The rupee quickly reversed its downward trend. From over Rs68 against the dollar it strengthened to closer to Rs62 by September 19, also helped by the Fed’s decision not to begin tapering.

In the Indian press, the response was effusive. The front page of the Economic Times, the country’s top-selling business daily, featured Rajan mocked up as James Bond, in a dapper suit and wielding a gun made of rupee notes.


But Bala Balachandran, a professor at Northwestern University’s Kellogg School of Management who has known Rajan for 20 years, says the press has missed the point: a man of action doesn’t carry a gun made of money. It won’t fire any bullets.

“I’m positive he is doing everything he can do...but whatever he is doing is a Band Aid solution to a haemorrhaging problem,” Balachandran says. “What he is doing is probably being influenced by the government to delay this problem rather than solve it – deferring it to a later date to make sure that until the elections, any issues are stopped temporarily.”

Therein, for many economists and analysts, lies the problem – as great as Rajan’s powers of intellect and judgement are, it is unlikely he will be able to enact any major reforms until after national elections in May. This lack of action has been a constant for well over a year, and is only likely to crystallize in the coming months, as the ruling United Progressive Alliance attempts to shore up support ahead of what is likely to be a bruising fight.

“There’s only so much Rajan can do,” says Sumit Ganguly, a professor at Indiana University who has written books on India. “The real issue is that the government must get to work on a host of issues which it has neglected for far too long – from infrastructure ... to reducing restrictions on foreign investment to labour laws.”

In his first policy review statement, Rajan confounded expectations by raising the repo rate by 25 basis points to 7.5% and relaxing tightening measures that had been introduced in July in order to bring more liquidity into the banking system. He also warned that the Fed’s decision to delay tapering was simply a temporary reprieve for India.

“Let us remember that the postponement of tapering is only that, a postponement,” he said. “We must use this time to create a bullet proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike.”

Eswar Prasad, senior fellow at the Brookings Institution, says Rajan was “clearly signalling the limits of what the reserve bank can and cannot do – it can undertake significant financial market reform, but it must remain focused on inflation and cannot take on the entire burden of supporting growth.” With GDP growth clocking in at the slowest rate since 2009, and the wholesale and consumer price indices up 6.1% and 9.5%, respectively, in August, India cannot afford more inaction. But there’s little indication, the RBI’s new vigour notwithstanding, that the implementation of fundamental reforms will be forthcoming.

“We need to wait for elections – any new government will have a mandate for action and thus will be expected to act after elections,” says A Prasanna, economist at ICICI Securities.


While that remains to be seen – the UPA came in with an electoral mandate in 2009 but did nothing as the economy faltered under its watch – there is some hope.

The Cabinet Committee on Investment has set a 60-day deadline for ministries to clear big-ticket infrastructure projects in highways, coal and power sectors. It has so far cleared over 150 major projects, though they are unlikely to bear fruit in the economy until the fiscal year ending in March 2015.

Investment to overcome India’s notorious infrastructure deficit will be crucial to economic growth, says Atsi Sheth, senior credit officer at Moody’s. But finding funding will be difficult. “The problem is that infrastructure requires a lot of investment – the government is not in a position to make this investment, and the private sector is not willing to make the leap, given all of the uncertainties,” she adds.

Parliament has also passed a long-awaited companies bill, a crucial reform that will bring greater corporate governance and transparency to business in a country where 80% are controlled by founders and their families. This summer, the government opened up telecoms to 100% foreign ownership and eased FDI rules for energy, single-brand retail and defence.

Gold imports could fall 11% to 750 tonnes during the current fiscal year after the government raised import duties to a record 10% in the wake of the record current account deficit last year, fed by Indians’ voracious appetite for the precious metal. For those who turned to gold to hedge against the falling rupee and rising inflation, Rajan has introduced government savings bonds linked to the CPI, to be available at the end of November.

Some foreign companies have pared back their investments in the face of red tape and frustration, including Berkshire Hathaway, Posco, ArcelorMittal and Wal-Mart, which had been poised to capitalize on the opening up of multi-brand retail to foreign investment before the reform was watered down. But overall, international equity investors have not fled in great numbers – instead, they’ve pumped more than $2 billion into Indian markets so far this fiscal year.

Finance minister Palaniappan Chidambaram continues to maintain that the government is committed to enacting major reforms and will not be cowed by the prospect of elections in which their victory is far from assured. He has said that the government plans to pass the long-awaited goods and service tax in the winter session of parliament, and has backed the fast-tracking of industrial approvals. Chidambaram has said the government is sticking to plans to cut the current account deficit to 3.7% of GDP during the fiscal year ending in March, from the previous fiscal year’s record 4.8%.


But Chidambaram is himself a potential prime ministerial candidate for the Congress Party, which recently pushed through a $22 billion annual food security bill that will increase the number of Indians entitled to subsidized food to roughly 800 million, more than half the country’s population.

No commensurate revenue increase has so far been forthcoming, meaning the costs are likely simply to be added to the deficit. “India has a very limited revenue base, and this is a commitment that takes it from 0.8% of GDP to 1.2%...[which] is a lot to add to your deficit,” according to Sheth, of Moody’s.

India’s vast poverty means that a strong welfare state is essential. But the RBI has long advocated for the reform of a subsidy system in which over half of the food set aside for the poor never makes it to its intended recipients. Critics have also accused the government of populist pandering with a land acquisition bill, which business lobby groups have said will make it more expensive and difficult to acquire agricultural land for development.

A possible credit rating downgrade now looms, with Standard & Poor’s reportedly giving India a more than one-in-three chance of being downgraded to junk status. That threat may be just the threat the government needs, says Shubhada Rao, chief economist at Yes Bank.

“Realizing the perils of persistent economic slowdown and the spectre of a sovereign rating downgrade, the government’s policy machinery has been extremely active in the last one year,” she says. “This has started to have a gradual positive incremental impact on domestic macros. However, to sustain the positive tempo, it would be imperative for the new government to persist on the path of administrative and policy reforms.”

  • By Neil Munshi
  • 11 Oct 2013

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 Citi 244,235.70 910 8.87%
2 JPMorgan 223,767.95 1021 8.13%
3 Bank of America Merrill Lynch 211,276.97 750 7.68%
4 Barclays 166,062.82 634 6.03%
5 Goldman Sachs 162,877.27 537 5.92%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 HSBC 25,202.67 100 7.14%
2 Deutsche Bank 25,125.19 81 7.12%
3 Bank of America Merrill Lynch 21,836.07 58 6.18%
4 BNP Paribas 18,395.95 105 5.21%
5 Credit Agricole CIB 18,048.72 104 5.11%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 JPMorgan 12,578.87 55 8.17%
2 Citi 11,338.07 71 7.36%
3 UBS 10,682.06 44 6.93%
4 Goldman Sachs 10,419.53 53 6.76%
5 Morgan Stanley 10,194.88 57 6.62%