Global Investors Set Sights on India

The Economist: Business in India: A Bumpier but Freer Road
The Economist: India's Economy: India's Surprising Economic Miracle
The NYT: India A Hit for Foreign Investors

Financial investors from around the world have recently been making more investments in Indian markets. The United States and Europe have been hit by a severe recession and recovery has proven difficult. India's economy, however, paints a very different picture. India is generally considered to be an "emerging market," but its economy is very unique and doesn't easily fit into any one category.

India's economy is growing quickly–– analysts predict that its GDP will grow by 8.5 percent this year alone. The Sensex Index (India's version of the Dow Jones) is up 114 percent since the end of 2008. In the next three to five years, may analysts expect India's economy to begin outpacing China (though it will be a much longer time before India has a larger economy than China, as China's economy is currently four times larger). While much of the world is starved for growth, India seems to be the exception. One reason for India's rapid growth rate is the large population of young workers in India. According to Morgan Stanley, India's working-age population is expected to increase by 136 million in the next ten years, while China's is only expected to grow by 23 million. India has also reaped the benefits of pro-business economic reforms that took place in the early 1990s. Prior to these reforms, government regulations often restricted Indian companies' growth, but now, they are competing with world's largest and most successful businesses.

For many of these reasons, more foreign financial investors have been investing in India. In fact, foreign investors have put $28.5 billion in Indian stocks and bonds in this year alone, which is more than twice the level that had been invested at this time in 2009. Foreign investors are moving money to India and other emerging markets to reap the benefits of the difference between the United States' near zero Federal Discount Rate, and interest rates in India, where the Reserve Bank of India has set a key benchmark rate at 6 percent. As this difference increases, investors will make more money by borrowing dollars and investing them in high yield stocks and bonds in India.

In spite of its strong economy and workforce, not everything is rosy in India. One serious problem in the country is its infrastructure and inefficient utilities. At the 72-nation Commonwealth Games, held in India this week, India earned less than favorable reviews–– critics cited things like ineffective security and poor sanitation. Another problem facing India is a lack of education. Public schools are poorly run and underfunded. While it may have a large, young workforce, 40% are illiterate and nearly half of Indian children under the age of five are malnourished. There is also political instability in India, which makes some foreign investors nervous. The government is now attempting to correct some of these problems. For example, it will invest $500 billion on infrastructure. Although public schools are still not good, affordable private schools have become more prevalent and more parents have come to recognize the value of a good education, encouraging their children to stay in school rather than having them work in the fields.

Discussion Questions:
1) Is India's economy getting "dangerously frothy"? Some analysts are still skeptical of the Indian market. Do you think that foreign investors are making a smart move by investing so heavily in India?
2) Could the flow of investments from developed countries like the United States to Indian markets be potentially damaging? For example, the U.S. Government is injecting money into the Indian economy at low interest rates in an attempt to help it recover. However in India, this flow of money could raise the value of its currency, making exports less competitive and causing inflation.