Column

From the way the markets have been behaving of late, it seems all our worries are over. Compared to the start of the year, stock indices have nearly doubled in value. Looking at the pipeline of new public issues ahead, the party is apparently expected to continue. But if you look at the global picture, and our own macroeconomic mess, things are far from comforting. Though fears of a depression have receded, governments are fretting about high unemployment, the unwinding of all the excessive spending of recent months, the inflated dollar, protectionism, and the possibility of a painfully slow recovery.

In our own case, we can see some economic stability, but inflation is in positive territory once again, and the government may end up borrowing heavily despite this, forcing the Reserve Bank to push up interest rates sooner rather than later.

So which is the right signal to pick up? The optimistic message of the markets, or the relative pessimism of hard economic data? The answer is both. There is no doubt that the developed countries will have to steadily wind down the excessive liquidity they pumped in to save themselves from a 1929-like situation. This will delay the global economic recovery. Equally, global imbalances will have to be corrected. The US has to learn to save more, the Chinese to spend more, and the Western Europeans to compete better.

India will have to do all three (get government to save more, citizens to spend more and our companies to compete without tariff barriers). The world will have to make all these changes using less energy and reduce greenhouse gas emissions.

If all this, or at least some of it, were to happen, the balance of economic power will shift first to China and then to India — about 10 years from now. The US dollar will fall as the world buys more yuan and rupee to reorient itself to changing economic equations. When this trend catches on, the markets will have nowhere to go but up — at least in China and India.

Put another way, the current buoyancy in the Sensex may be overly optimistic relative to the fundamentals, but if we look at the Indian economy over the medium term, the markets are reading the signals right. The important reason is this: the markets move not on pure fundamentals, but relative fundamentals. In an uneven global scenario, money will move from economies with a dicey future to those that look better tuned.

Despite poor economic management, the Indian economy is in that sweet spot where global money is going to chase it. The government may have a huge Rs 4 lakh crore hole in the Budget, but in the context of the trillions of global dollars looking for a place to earn a decent interest, there will be no problem financing it. All India has to do is open its doors, and the money will come in. But this money will come with a big minus: it is skittish, and only fast-paced reforms will keep it here.

Apart from big western investors and pensions funds, the petro-plutarchs of West Asia, Russia, Latin America and Asia will also be looking for worthwhile investment opportunities. India is where all the economic forces meet. In addition to providing the opportunity, we have a transparent system unlike China’s.

India’s position is truly unique. We are one of the economies with steady growth and a good balance between domestic consumption and savings (again, unlike China). We are not excessively dependent on exports, and so the currency can also be relied upon. When (not if) the dollar declines, people holding that currency will have to look for a safe place to put their money. Rupee and rupee assets are good options. China will, of course, grab the lion’s share of fleeing money, but India will attract its share and more. Even demographically, India has an advantage with its young population for the next 10-15 years.

Put all these factors together, and what you get is this: rising foreign inflows, cheaper money, easy capital and growth. The downside of allowing large inflows is volatile exchange rates and inflation. The right recipe for success is to allow the rupee to rise, ensure good and cheap supplies of wage-goods like food and daily necessities for the poor, and lots of reforms.

India is on the threshold of unearned economic strength. All we need is a government willing to be proactive on reforms. We have nothing to lose but our poverty. The only thing we have to do is not screw it up.