‘Striking the balance between keeping foreign investors happy and not having too big an influx of capital’

If I write from China, or Brazil, South Africa, Russia, Mexico or any other so called ‘big emerging market’, do I envy India? Or Indian policymakers and regulators?

If I sat through the East Asian crisis – of which arguably there were several ominous portends (see Richard Duncan’s work for instance) – and watched the Thai story go from being based on ‘solid fundamentals’ to a debt fueled bubble desperately trying to keep pace with re-rated fundamentals, would I envy India? Or Indian policymakers and regulators?

Sure there are limited parallels between India today and East Asia a decade ago. But lets have a peek at them anyway shall we?

Inflows staggering enough to have an apparently visible impact on the exchange rate; dramatic asset price inflation (booming property and construction sectors, heavy real investment requirement in infrastructure upgrades); volatile speculative inflows into capital markets driven by unwinding global positions – some limited parallels – exchange rate depreciation in export competitor (and overseas market, i.e. China).

Perhaps the key parallels as far as I am concerned – if we see East Asia as a monolith: varying degrees of capital account and exchange rate liberalization, high in Korea, Philippines and Indonesia (crisis impact: high), confused and unpredictable in Thailand and Malaysia (crisis impact: high – moderate), low or none at all Hong Kong, Taiwan and China (crisis impact: low – nil); and the piece de resistance – a fundamentally solid growth story chasing (not driving) dizzying expectations of appreciation.

Ok, one more. Almost to the decade, India was contemplating capital account liberalization when the crisis hit next door and the very finance minister who is in office today tabled a proposition in parliament, a consequence of which has been to put off ‘fundamental reforms’ like complete capital and exchange rate liberalization to this day. For India today, as it was a decade ago, is an overwhelmingly poor country whose vast majority neither have the appetite for the kind of ensuing risk such reforms entail nor a rapacious enough desire for the possible rewards.

While the well dressed Indian financial media sells you its version of fundamental bullishness, please keep in mind how we got to this juncture in the first place. Relatively conservative reforms that bore in mind global ramifications at every step and prudential regulation (for instance, gradual liberalization of direct external borrowings). These are perhaps the only parameters within which the kind of ‘fundamental growth’ India has so enviably achieved is possible to do for a large and poor developing country.

Killing the goose that laid the golden eggs (PNs)? That is, India would receive US$9bn instead of US$18bn in hot money the next time Big Ben decides to shave (the Fed rate)? However, it would send an unequivocal message that Indian policymakers and regulators are still acutely aware of the kind of insatiable appetite excess liquidity breeds and the inevitable hangovers that come with it.

‘Striking a balance between keeping foreign investors happy and not having too big an influx of capital’, entails compromises on two fronts. The Indian financial media would do well to pay some heed to the consequences of the latter and let policymakers and regulators deal with the former for a change.