The chronic failure to meet deficit targets and the rising domestic debt provide the rationale behind the downgrades as analysts agree the fiscal problem is fast outstripping the pace of economic reform. The challenges lie in containing the burgeoning fiscal deficit, central and state, which could exceed 10 per cent of gdp the current fiscal.
Equally worrisome is government debt that could also approach 70 per cent of gdp or more than 400 per cent of revenues—higher than most similarly rated sovereigns. The inordinate delays in disinvestment and the "growing contingent liabilities on off-budget appropriations" have also bolstered the belief that only an emergency will trigger radical policy alterations.
Specialists say the deceleration of gdp growth towards 5.2 per cent last fiscal from the late '90s near 7 per cent reveals structural flaws. However, Kristin Lindow, VP and Senior Credit Officer at Moody's, New York, would highlight the dire need of corporate governance in state-controlled institutions like uti and ifci, with reference to the financial drain of recurrent bailouts.
Agrees Mark Mobius, the 64-year-old maverick investor and director of Templeton Asset Management, India: "Market integrity is of paramount importance. So is one's faith in the system as it's all about making capital feel comfortable, wanted." Mobius also notices the lack of momentum in reforms: "The question people like me ask is: will India ever be a welcoming and secure place for my clients?"
Such economic instability, coupled with the downgrades, depress the sentiments of potential foreign investors. Perceptions are decisive prior to investments in virgin markets and downgrades heighten the risk potential. After all, says Ashok Bhatia, formerly with s&p, London, and now to join the imf: "It's the fundamentals that win fdis at the end of the day."
Considering global investors are always keen on returns in dollar terms, this fiscal turbulence, according to Arvind Panagariya, professor of economics and co-director, Centre for International Economics at the University of Maryland, may well jeopardise the inflows as it potentially leads to expectations of a future rupee depreciation.
What makes or breaks investment decisions? Veena Jha, project coordinator, Unctad, sums it up under four block heads, namely market size (both domestic and export); infrastructure (including power, transportation, labour); conducive government regulations; and security (financial and otherwise). What makes our case distressing is that we fare miserably on all above counts. An average turnaround for a foreign project is 18 months after fipb clearance and 90 per cent approvals in core sector projects seldom yield to actual projects on the ground.
According to the World Investment Report 2000, between 1997 and 1999, India's share in global fdi inflows has eroded from 0.75 per cent to 0.25 per cent. In fiscal 1999, even Brazil, which seven years ago got the same as us at $2.5 billion, attracted $31.3 billion. That's because, says s&p's Joydeep Mukherji, India has liberalised its investments policies only on paper; attitudes have barely changed. The invisible barriers—time-consuming procedures, petty licenses, permit raj et al that thrive locally—are still a huge obstacle (see interview).
Security remains yet another issue. "Who'll come to India where jehadis are running amok?" asks Saumitra Chaudhuri, economic advisor, icra. The lack of concrete trade arrangements have also proved costly for us. Trade analysts feel that despite high inflation, Brazil could attract fdi worth $34 billion in 2000 as it's the focal point of Mercosor, a free trade agreement among Latin American countries.
Such inherent problems shake the very foundation of the market size. "Investors do not even look at the whole of India. You may have hydrocarbon in the northeast and minerals in the east and northwest, but the scanner is always on three-and-a-half states," says Chaudhuri. They are Maharashtra, Karnataka, Tamil Nadu and the national capital region of Delhi. According to Panagariya, these bottlenecks have also prevented us from exploiting the Indian diaspora to the hilt like China did.
The Enron tussle has been a disaster. Says Mukherji: "Although many Indians see it as an allegedly one-sided power contract, outsiders find it raising disturbing questions about the value of, and the rule of, law in the state." It indicates that economic decisions are always vulnerable to internal politics and that local leaders are unhesitant in their quest for domestic political mileage, regardless of the damage it may do to the country. fiis are known to take steps to scuttle most infrastructure projects where government's the key customer. "People aren't interested in nitty gritty. The very fact that Enron—India's biggest fdi—is in a mess will raise 20 new questions," said one. For Mobius, it'll only reinforce the view that India's unreliable for business.
Post-downgrades, India has two options—be dismissive as North Block or wake up to the fact that our the fdi regime just doesn't match global standards. As far as the foreign investor is concerned, he's been sitting in the train for far too long, waiting for the guard to blow the whistle and show the green flag.
With Sanjay Suri in London