By Makto Kajiwara/Nikkei commentator
Tokyo, January 3 (Nikkei): Overseas money is pouring into India as stock prices surge along with hopes for Prime Minister Narendra Modi’s aggressive reforms. But one has to wonder — are global investors wearing blinkers as they race into the country? Do they not see the poverty, public health hazards and safety concerns that the nation of 1.3 billion people faces?
When the late Lee Kuan Yew took a look 10 years ago, Singapore’s founding father was forced to admit that while he had led one country, he would be unable to govern India.
India’s dark side remains vast. Nevertheless, the country’s benchmark Sensex index has risen more than 25% since the beginning of 2017, outpacing other big indexes around the world. According to Lipper, a Thomson Reuters research unit, mutual funds investing mainly in Indian stocks had inflows totaling $48.1 billion in the first 11 months of this year. The full-year figure is expected to reach its highest point since the country’s net money inflow turned to positive in 2014.
So far, the global tide of investment cash has been attracted by three big once-in-decades reforms that Modi has managed to pull off.
The first reform came in November 2016, when Modi abruptly announced that all 500- (nearly $8) and 1,000-rupee bank notes, or 86% of all paper money in circulation at the time, were to be scrapped. The move was aimed at black market transactions but it also encouraged Indian shoppers to use noncash methods of buying stuff. According to one estimate, this helped increase the number of point-of-sale terminals used at shops by nearly 40% over the past year.
The second reform was the introduction of the country’s first national bankruptcy law, which speeds procedures for dealing with insolvent companies. Mounting bad loans have been a significant threat to the country’s banking system. Bad debts as a share of total lending in the country doubled over the two years through 2016 to 9.2%.
The third reform, introduced in July, was the goods and services tax, which unifies taxation and does away with myriad state levies. The move is expected to ease the burden of complying with tax procedures and promote the smooth transfer of goods across states, reducing the number of bribes paid to get around complicated rules.
These reforms have caused some pain, dampening consumer sentiment, but over the longer term they are expected to make the economy more productive. In November, U.S. ratings agency Moody’s Investors Service raised India’s sovereign bond rating to Baa2 from Baa3, citing hopes that Modi’s reforms that may, “over time, enhance India’s high growth potential,” although the effects are still unclear.
Amid all the cheer looms the question of whether people are fully aware of the downside risks in India. There are reasons for skepticism, and the mood is similar to 10 years ago, when the investor craze over the BRIC — Brazil, Russia, India and China — economies was in full swing.