We puff up with pride at the buzz about India [ Images ] in the West. We're proud when Shashi Tharoor [ Images ] gets a shot at the United Nations secretary general's post. We're thrilled with the malls, call centres and software whizzes. But is that enough to bring India the glory it deserves?If India has to achieve greatness, we all need to act. We must have ideas and vision to make this great country a superpower by 2010.Rediff.com calls upon Indians to join this debate on the 60th anniversary of Independence.Come, discuss how this beloved country of ours can achieve everything you want it to be.
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THE year 2010 is not far enough away to justify a long-term vision, such as Vision 2020 which President APJ Abdul Kalam has authored. Equally, the time horizon between now and 2010 will take us beyond the five year term of the current United Progressive Alliance government. One cannot, therefore, view this period only through the lens of stated governmental goals and objectives, i.e. the Common Minimum Programme.
The year 2000 was globally celebrated as the first year of the new millennium. Five years have gone by since then. For India, the events of the past five years have been significant, at times tumultuous and at other times momentous. The events and images that we witnessed during the last five years have included:
Images of India (2000-2005)
March 2000: President Bill Clinton’s visit to India, the first by a U.S. President in two decades.
May 2000: Birth of India’s one billionth citizen.
January 2001: Earthquake in Gujarat killing 30,000 people.
April 2001: Successful launch of India’s GSLV propelling India into satellite-launchers club of five.
July 2001: Failed Agra Summit between Prime Minister Vajpayee and Pakistan President Musharraf.
September 2001: Lifting of U.S. sanctions against India and Pakistan (imposed after ’98 nuclear tests).
December 2001: Terrorist attack on the Indian Parliament.
December 2001: Indian and Pakistani troop formation along border prompting fears of a war.
February 2002: Gujarat carnage, the worst inter-religious killing in a decade.
July 2002: Election of scientist APJ Abdul Kalam as President.
August 2003: Two simultaneous bomb blasts in Mumbai killing 50 (Gateway to India; Zaveri Bazaar).
May 2004: General election; Congress coalition with Manmohan Singh as PM assumes office.
December 2004: Tsunami natural disaster killing over 300,000 people worldwide (12,405 in India).
April 2005: Chinese Premier Wen Jiabao’s visit to India; principles set for border dispute settlement.
April 2005: Commencement of Srinagar-Muzaffarabad bus service between India and Pakistan.
July 2005: Signing of Indo-US nuclear cooperation deal offering civilian nuclear technology access.
July 2005: Mumbai floods prompted by the most severe rainfall in a hundred years killing 1,000 persons.
October 2005: Kashmir earthquake killing approximately 1,500 people in the Indian state of J&K.
October 2005: Simultaneous terrorist bombings in crowded Delhi marketplaces killing 62.
Yet, India remains not so very different a place today in 2005 than it was back in 2000. The events of the last five years have not fundamentally altered the socio-economic and political fabric of the country as a whole. The trend during this period (2000-05) has not taken this nation into an entirely different plane or trajectory.
One reads, sees and hears a great deal more about India in the international media today than has ever been the norm in the past. The column-inches and airtime devoted to coverage of the Indian economy and polity globally have risen. While this is certainly not a flawless barometer, it serves as a better indicator of India being at the cusp of future sustained growth than our operator-driven equity capital markets which have been on an untamed upswing.
The year 2010 is closer than we think. What will India look like in 2010? How different an India will it be from the India of today? As a young Indian, I feel our images of India in 2010 will be shaped, in great measure, by how the answers to four important questions evolve over the next five years:
1. Will this ageing nation be able to elect a younger political leadership?
2. Can our state and government focus principally on the happiness of the ‘common man’?
3. Have we ensured that during the next five years India’s economic growth is unhindered and accelerated?
4. Can this country execute on long-term strategies rather than just near-term fire-fighting exercises?
Younger Leadership for an Ageing Nation? I do not mean to state the obvious. By the year 2010, however, all of us will be five years older. According to United Nations estimates, by 2010 India’s median age, estimated today in 2005 at 24.3 years, will rise to 25.6 years. In fact, India’s median age has risen steadily since 1970 and is expected to continue its upward trajectory – according to some estimates until well beyond the middle of this century. While India, as a nation, will have aged over the next five years and beyond, one hopes that our political leadership will grow younger, more agile and vigorous. This is bound to have far-reaching consequences for the Indian political landscape.
India’s Political Leadership in 2010 – Coming of Age
Congress
Arjun Singh 80 years
Manmohan Singh 78 years
Pranab Mukherjee 75 years
Sonia Gandhi 64 years
BJP
Atal Bihari Vajpayee 86 years
L.K. Advani 83 years
Murli Manohar Joshi 76 years
Jaswant Singh 72 years
It is well-established and widely accepted that there are two political anchors today around which coalition governments can be cobbled together in India. The table above shows a plausible list of the four senior-most present-day leaders in both anchor parties. By 2010, only one of the aforementioned eight major political leaders, who have all participated in governing the country over the past several years, will be under 65 years of age, the ‘normal retirement age’ as defined by the US Congress for social security purposes in that country.
The writing is on the wall with regard to a generational shift in the BJP by 2010. The Vajpayee-Advani duo will no longer be at the helm of that party five years from now. The jury is still out on who could possibly grow into that role in the BJP. The Congress too must see some turnover in its senior ranks by 2010. However, the near universal ageing of the party’s entire senior leadership rung shall not have taken place, unlike in the BJP. Smaller national and regional parties too are witnessing generational shifts with the passing of the baton. The period between now and 2010 is likely to herald a partial dismantling of the gerontocracy that India has evolved into during the post Rajiv Gandhi era.
A younger leadership in India will, by default, have the ability to think and act beyond a limited five year time horizon. The potential upside of such a shift is considerable.
Aam Aadmi Ko Kya Mila? The key question for the poor of India is: Will the India of 2010 be a more livable place? The ‘Aam Aadmi’ slogan today is slowly catching up with the popularity of ‘India Shining’ in 2003. However, the concrete results of this gradual shift will begin to become apparent only by 2010.
Lord William Beveridge, born in India to an ICS father and an educationist mother, was the author of the Beveridge Report (The Social Insurance and Allied Services Report) of 1942 in Britain. He had famously said: ‘The object of government in peace and in war is not the glory of rulers or of races, but the happiness of the common man.’ An economist and social reformer, Beveridge conceptualized and articulated the fundamentals of the Labour government’s legislation for social reform which served too as the outline of the welfare state in post-war Britain. Full employment in a free society was the cornerstone of Beveridge’s belief system. During the year gone by, the Government of India has appeared to embrace Lord Beveridge’s thought process.
One of India’s northern neighbours, Bhutan, sets an example for us. In 1972, Bhutan, led by King Jigme Singye Wangchuck upon his ascent to the throne, had designed and introduced the concept of Gross National Happiness (‘GNH’) as the objective of all economic development and good governance of the nation. What is crucial about this concept is not the debate surrounding whether and how GNH should be defined or quantified. For India, getting mired in the theory of the technical term is uninteresting and unimportant. What is critical, however, is the directional tilt and perspective that this provides a process as complex as governance of a democracy of 1.1 billion people. The ability to perceive life, both in the rural and urban spheres, as it exists through the eyes of millions of common folk is a skill that our political leadership needs to focus on and refine.
Closer to home, no school child in India who has ever read a textbook published by the National Council for Educational Research and Training can be oblivious to ‘Mahatma Gandhi’s talisman’. Gandhiji’s talisman figures prominently on their inside covers: ‘Whenever you are in doubt or when the self becomes too much with you, apply the following test: Recall the face of the poorest and the weakest man whom you may have seen and ask yourself if the step you contemplate is going to be of any use to him. Will he gain anything by it? Will it restore him to a control over his own life and destiny? Then you will find your doubts and your self melting away.’
For a twelve year old, as I was when I first read this quote, the question of arousing one’s conscience through observing the misery around one was somewhat novel. Perhaps I was too young then to understand the import of Gandhi’s words. However, even today in 2005, more than a half century after Gandhi’s assassination, his words provide us with a roadmap.
The UPA government has enacted into law the National Rural Employment Guarantee Act, 2005. By 2008-09, the Government of India proposes to write an annual check of approximately US$9 billion (Rs 40,000 crore) for this programme which will constitute 1% of India’s projected GDP. The proposed phased implementation of the act suggests that by 2010 one full year of the nationwide programme rollout would have been covered. By 2010 the effects and benefits of this piece of legislation should have become visible. The act seeks to deal with unemployment in this country and has its specific focus on the rural domain. The employment dividend that will accrue from this is contingent upon the effective implementation of the act and by tactically plugging holes in an otherwise leaky delivery system. This is the first significant step down the path of India ultimately emerging as a welfare state. No other developing nation of scale has attempted to undertake such a risk and adventure.
Is the Hindu Rate of Growth Dead and Buried? India’s economic growth trajectory since independence has been characterized by economists broadly as having taken place in three distinct phases: 1950/51 - 1979/80 Hindu Rate of Growth; 1980/81 - 1990/91 Initial Reforms; 1991/92 to date Economic Liberalization.
Each of these periods have had their own Real GDP Compounded Annual Growth Rates (‘CAGRs’) which ranged from approximately 3% to 6%. With the advent of each phase, India’s growth trajectory shifted to a new, higher plane.
The most relevant reference period for India’s projected growth over the coming five years is the most recent of the three phases – economic liberalization 1991/92 - 2004/05, which witnessed a 6.09% growth rate. The table below provides both historical data pertaining to this period as well as forecasts for the coming five years up to 2010 by the Economist Intelligence Unit.
India’s Real GDP CAGR %
1991/92-2009/10E 1991/92-2009/10E 2005/06-2004/05
6.31% 6.09% 6.88%
Source: Economist Intelligence Unit; Macroeconomic Indicators; 9 December 2004.
Many times in the past India’s critics have written us off. We had once been written off as a colony. We had then been written off by Paul Ehrlich as being an overpopulated basket case. We had later been written off as being on the losing side during the Cold War as a friend of the Soviets. Most recently, we were written off in 1991 during our balance of payment and liquidity crises. Each time India has proven its critics wrong.
Prime Minister Manmohan Singh recently stated in Parliament that the combined fiscal deficit of the Indian central government and state governments is 10% of GDP and ‘among the highest in the world’. As we begin to mortgage our anticipated future economic growth over the next five years for ‘good expenditure’ such as the National Rural Employment Guarantee, we must also commit to taking the difficult steps needed to sustain and hasten this growth.
India needs, once again, to exceed expectations by beating macroeconomic estimates for the level of real GDP growth that this country should experience between now and 2010. A synopsis of this well-known formula, among other points, includes: reduction of fiscal deficit at the central and state government levels; reform of labour laws and productivity; investment in infrastructure; and reform of the judiciary.
Each of these is a difficult decision which will be accompanied by punishing levels of execution risk. They require courage of convictions and the ability to sacrifice the immediate term for the long-term. India has a better chance with these over the coming five years, given the practitioner’s sophistication in economics that is to be found in our top leadership.
Can India Shift Gears Out of Fire-fighting Mode? The business of governing a country our size has layers of complexity that go well above and beyond those required for managing a large business in the corporate sector, whether in India or abroad. In fact, the analogy of a nation’s CEO itself should be suspect as it is misleading. The title of Chief Executive which President Gen. Pervez Musharraf held in Pakistan from 12 October 1999 to 23 November 2002 is not a bit tenable in the context of India. Luckily, leaving aside our pink sheets, this reference has failed to gain currency in India.
However, there is one analogy from the world of business which warrants examination in the sphere of governance, namely the Long-Term Incentive Plan. This refers to the grant of shares to any eligible employee of a company, the final vesting of which is subject to continued employment with the company and satisfaction of a performance condition. This compensation instrument is specifically designed to increase performance-pay correlation over the long-term and to align incentives of individuals with those of the organization itself over time.
Political travesties and natural disasters sap a very substantial percentage of real-time mindshare and energy of Indian governments. The proliferation of both print and electronic media makes today’s India the most crowded media market in the world. The media has contributed to magnifying the devastation and immediacy of situations raising expectation levels to never-before-seen heights. Valuable time is lost in the newfound and unhealthy media induced need to articulate and communicate damage control measures as opposed to the time spent to implement them. Both in the aftermath of the Jharkhand constitutional crisis and the Mumbai floods, far too many people were seen on television in Indian TV news network studios who should perhaps have been involved in disaster management by being members of damage control teams in the field.
Is there an answer in India for the overwhelming sense of helplessness and despair that a critical mass of such circumstances triggers? Can greater governance bandwidth be deployed for longer-term measures and concrete action rather than be consumed by reacting to immediate term complaining? Can we provide cures for casteism, corruption, communalism, population explosion, environmental degradation and AIDS?
India as a nation has systems and delivery mechanisms which, for better or for worse, do function, albeit occasionally, haltingly and imperfectly, as far as short term deliverables and deadlines are concerned. Equally, given our history as a planned economy, long-term conceptual thinking is on-going both within and outside the government. Anticipating problems and ideating on potential solutions, with an emphasis on long-term silver bullets, ‘armchair-ism’, is an area of national strength. However, a void appears to exist where teambuilding for and implementation of long-term plans is concerned.
Simply put, today’s problems weigh so heavily on those running the government that the potentially bigger problems of tomorrow are left largely unacknowledged and unaddressed. This is an area of great systemic weakness in India. Our leaders are older than they ought to be. Our citizenry, also our greatest asset, is young. A severe and visible disconnect exists between the separate time horizons that each of these two groups are focused on and invested in. Therein lies the problem. Indians have been abysmal at following up on and implementing plans that impact the distant future.
Effective long-term execution is a source of competitive disadvantage for India. That is where Rajiv Gandhi was so uniquely different from other leaders of his generation and later. Given fourteen years of hindsight since his assassination, we can see with clarity his futuristic action-orientation. His successors have been unable to carry that tradition forward. This is why the Aam Aadmi in India, more than the establishment, recall him with such affection and nostalgia. If India is to leapfrog into the millennium we live in, we need to be pro-active in demonstrating that political and organizational capital is being invested in the domain of future-oriented implementation.
I see India becoming by 2010:
* The most populous democracy governed by young, modern, idealistic and innovative leaders.
* Home to the largest number of the world’s poor with an emerging social security construct.
* The world’s fastest growing economy administered by a democratic coalition government.
* A major nation where long-term problem solving has outpaced short-term quick fixes.
2010: Key political risks facing Asian mkts
Asia weathered the economic storms of 2009 remarkably well, but the performance of regional markets next year depends heavily on whether the continent can steer a course through some treacherous political risks.
The difficult relationship between Washington and Beijing
China will face intensifying pressure in 2010 to let the yuan appreciate. But Beijing will not want to put economic growth at risk by letting the currency rise too quickly, and does not appreciate being told what to do by Washington or anyone else.
In the United States, meanwhile, yuan weakness is regarded as a protectionist policy that threatens the U.S. recovery.
Washington may retaliate by imposing more trade restrictions, like the tariffs on Chinese tyres announced in September, sparking a tit-for-tat trade war. And there is also the danger that Beijing's backing of regimes that Washington finds unpalatable flares up into a political confrontation.
Most analysts say Washington and Beijing are painfully aware of the risks and would step back from the brink before any dispute threatened the global economy. But the two countries have yet to find a way to communicate comfortably as partners. The risk of a misunderstanding or sudden chill in relations is real.
What to watch for:
-- The battle over the yuan. Will Beijing let it appreciate, and if not, will Washington throw a tantrum?
-- Protectionism and trade tariffs. If President Barack Obama imposes more tariffs, under pressure from Congress and domestic industry, expect sparks to fly.
-- Any disputes arising from China's dealings with North Korea, Myanmar, Iran and other "rogue states".
Post-stimulus hangover: Asset bubbles and capital controls
Asia is leading the world out of recession, which means Asian governments are among the first to confront a key policy problem -- how to time their exit from the vast stimulus packages that helped keep them afloat during the global economic crisis.
If governments withdraw stimulus too soon, they could topple back into stagnation. And if China falls into this trap, the impact on the global economy could be dire.
But keep policy too loose for too long and they risk not just resurgent inflation but also potentially catastrophic asset price bubbles, as plentiful credit sparks a scramble for property and equities. The danger of China's economy being derailed by a burst property bubble is a key concern for 2010.
Another risk for investors is that countries trying to prevent bubbles and control inflows of "hot money" tighten capital controls and try to lock in foreign cash.
Two more political issues complicate the dilemma.
First, unless governments coordinate their exit plans, there is a major risk of unexpected spillover effects. But the crisis demonstrated the lack of global governance bodies able to handle international policy coordination, and while G20 members have promised to move in step, it is more likely their stimulus exit will be dictated by national interest alone.
Second, disagreements could also erupt within countries, between governments focused on safeguarding growth and central banks fearful of inflation and bubbles. That could lead to bad decisions, and make policy hard to forecast.
What to watch for:
-- All eyes are on China, key engine of global growth since the financial crisis hit. Can it steer a course through the policy perils? If it stumbles, the tremors will be global.
-- Much of Asia faces property bubble risks, with Hong Kong and Singapore particularly in focus.
-- India and Indonesia are two key countries where capital controls could be tightened, spooking investors.
-- The next G20 summits are in June in Canada and November in South Korea. Coordination of exit strategy will be a key theme.
-- Disagreements between the government and central bank are already an issue in Japan. South Korea and India, among others, may also see policy friction in 2010.
Thorny political transitions
In 2009, Asia smoothly negotiated several potentially tricky elections and transitions of power, although the victory of the Democratic Party in Japan's elections after decades in opposition produced some market volatility. Things may be tougher in 2010.
Australian Prime Minister Kevin Rudd is widely expected to win another term, with the only question being the timing of the election. But elections in the Philippines and Sri Lanka are harder to call.
Moreover, two important Asian heads of state are ailing and there is no certainty who or what will come after them.
Thailand's 82-year-old King Bhumibol Adulyadej has been in hospital since September, another complication in the long-running political crisis that has riven the country. Many analysts expect instability to get even worse after his reign ends -- giving Thai markets a rough ride. But most say there is little risk of contagion in other markets.
If North Korean leader Kim Jong-il dies in 2010, by contrast, the tremors will be felt in South Korea, Japan and beyond.
Many analysts say Kim's death could herald the collapse of the regime in Pyongyang, leading possibly to prolonged civil war in North Korea, aggressive moves against the South, or the sudden reunification of the Korean peninsula. In all of these cases, the likely market reaction would be strongly negative.
What to watch for:
-- The health of North Korea's Kim and Thailand's king will be closely watched, and could unsettle markets.
-- Populist pre-election pledges in Sri Lanka and the Philippines may result in economic problems later in the year.
Afpak tremors start to trouble investors
Long-running instability and widespread violence in Afghanistan and Pakistan rarely register on the radar screen of investors. But that may change in 2010.
Firstly, with Obama facing mid-term polls in November, and with effective defeat in the war in Afghanistan still possible in 2010, his strategy may become a central campaign issue and could even cost him a majority in the House of Representatives if things go badly.
Secondly, the decisive victory of the Congress party in India's 2009 elections was another good-news story for markets that could be threatened if militants based in Pakistan provoke a confrontation again, following the bloody 2008 Mumbai attacks.
Analysts expect al Qaeda and its allies to again try to spark conflict between the nuclear-armed neighbours. And Pakistan's weak government, under threat on several fronts, may have its own reasons to focus popular anger on India.
What to watch for:
-- Evidence of whether Obama's troop surge is making a difference, or whether his Afghan policy comes to be regarded as an expensive failure. In the latter scenario, he will be highly vulnerable going into the mid-term elections.
-- The state of India-Pakistan relations, and the risk of conflict if Pakistan-based militants once again launch a major attack on Indian soil.
Social unrest packs a belated punch
Many analysts predicted that the global economic crisis would unleash mass unrest in several countries around the world, with the potential to topple governments. They were mostly wrong. In particular, forecasts that China's leadership could be shaken by serious unrest proved to be way off the mark.
But unemployment is a lagging indicator. Even as the global economy moves out of crisis, many countries will see jobless numbers and social hardship continuing to rise.
Another spark that could ignite unrest would be inflation in food and fuel prices. The global crisis put the brakes on a dramatic surge in commodity prices that is likely to resume as global growth resumes.
What to watch for:
-- The doomsday scenario for markets would be mass unrest across China that threatens to topple the government. Most analysts see the possibility of this as extremely low in 2010, but any upsurge in unrest in China would rattle investors.
-- India, Indonesia, Thailand and Vietnam are other key emerging markets where unrest could hamper economic reform and dent markets if instability flares in 2010.
FACTBOX - Key political risks to watch in Asia in 2010
Asia weathered the economic storms of 2009 remarkably well, but the performance of regional markets next year depends heavily on whether the continent can steer a course through some treacherous political risks:
THE DIFFICULT RELATIONSHIP BETWEEN WASHINGTON AND BEIJING
China will face intensifying pressure in 2010 to let the yuan appreciate. But Beijing will not want to put economic growth at risk by letting the currency rise too quickly, and does not appreciate being told what to do by Washington or anyone else.
In the United States, meanwhile, yuan weakness is regarded as a protectionist policy that threatens the U.S. recovery.
Washington may retaliate by imposing more trade restrictions, like the tariffs on Chinese tyres announced in September, sparking a tit-for-tat trade war. And there is also the danger that Beijing's backing of regimes that Washington finds unpalatable flares up into a political confrontation.
Most analysts say Washington and Beijing are painfully aware of the risks and would step back from the brink before any dispute threatened the global economy. But the two countries have yet to find a way to communicate comfortably as partners. The risk of a misunderstanding or sudden chill in relations is real.
What to watch:
-- The battle over the yuan. Will Beijing let it appreciate, and if not, will Washington throw a tantrum?
-- Protectionism and trade tariffs. If President Barack Obama imposes more tariffs, under pressure from Congress and domestic industry, expect sparks to fly.
-- Any disputes arising from China's dealings with North Korea, Myanmar, Iran and other "rogue states".
POST-STIMULUS HANGOVER: ASSET BUBBLES AND CAPITAL CONTROLS
Asia is leading the world out of recession, which means Asian governments are among the first to confront a key policy problem -- how to time their exit from the vast stimulus packages that helped keep them afloat during the global economic crisis.
If governments withdraw stimulus too soon, they could topple back into stagnation. And if China falls into this trap, the impact on the global economy could be dire.
But keep policy too loose for too long and they risk not just resurgent inflation but also potentially catastrophic asset price bubbles, as plentiful credit sparks a scramble for property and equities. The danger of China's economy being derailed by a burst property bubble is a key concern for 2010.
Another risk for investors is that countries trying to prevent bubbles and control inflows of "hot money" tighten capital controls and try to lock in foreign cash.
Two more political issues complicate the dilemma.
First, unless governments coordinate their exit plans, there is a major risk of unexpected spillover effects. But the crisis demonstrated the lack of global governance bodies able to handle international policy coordination, and while G20 members have promised to move in step, it is more likely their stimulus exit will be dictated by national interest alone.
Second, disagreements could also erupt within countries, between governments focused on safeguarding growth and central banks fearful of inflation and bubbles. That could lead to bad decisions, and make policy hard to forecast.
What to watch:
-- All eyes are on China, key engine of global growth since the financial crisis hit. Can it steer a course through the policy perils? If it stumbles, the tremors will be global.
-- Much of Asia faces property bubble risks, with Hong Kong and Singapore particularly in focus.
-- India and Indonesia are two key countries where capital controls could be tightened, spooking investors.
-- The next G20 summits are in June in Canada and November in South Korea. Coordination of exit strategy will be a key theme.
-- Disagreements between the government and central bank are already an issue in Japan. South Korea and India, among others, may also see policy friction in 2010.
THORNY POLITICAL TRANSITIONS
In 2009, Asia smoothly negotiated several potentially tricky elections and transitions of power, although the victory of the Democratic Party in Japan's elections after decades in opposition produced some market volatility. Things may be tougher in 2010.
Australian Prime Minister Kevin Rudd is widely expected to win another term, with the only question being the timing of the election. But elections in the Philippines and Sri Lanka are harder to call.
Moreover, two important Asian heads of state are ailing and there is no certainty who or what will come after them.
Thailand's 82-year-old King Bhumibol Adulyadej has been in hospital since September, another complication in the long-running political crisis that has riven the country. Many analysts expect instability to get even worse after his reign ends -- giving Thai markets a rough ride. But most say there is little risk of contagion in other markets.
If North Korean leader Kim Jong-il dies in 2010, by contrast, the tremors will be felt in South Korea, Japan and beyond.
Many analysts say Kim's death could herald the collapse of the regime in Pyongyang, leading possibly to prolonged civil war in North Korea, aggressive moves against the South, or the sudden reunification of the Korean peninsula. In all of these cases, the likely market reaction would be strongly negative.
What to watch:
-- The health of North Korea's Kim and Thailand's king will be closely watched, and could unsettle markets.
-- Populist pre-election pledges in Sri Lanka and the Philippines may result in economic problems later in the year.
AFPAK TREMORS START TO TROUBLE INVESTORS
Long-running instability and widespread violence in Afghanistan and Pakistan rarely register on the radar screen of investors. But that may change in 2010.
Firstly, with Obama facing mid-term polls in November, and with effective defeat in the war in Afghanistan still possible in 2010, his strategy may become a central campaign issue and could even cost him a majority in the House of Representatives if things go badly.
Secondly, the decisive victory of the Congress party in India's 2009 elections was another good-news story for markets that could be threatened if militants based in Pakistan provoke a confrontation again, following the bloody 2008 Mumbai attacks.
Analysts expect al Qaeda and its allies to again try to spark conflict between the nuclear-armed neighbours. And Pakistan's weak government, under threat on several fronts, may have its own reasons to focus popular anger on India.
What to watch:
-- Evidence of whether Obama's troop surge is making a difference, or whether his Afghan policy comes to be regarded as an expensive failure. In the latter scenario, he will be highly vulnerable going into the mid-term elections.
-- The state of India-Pakistan relations, and the risk of conflict if Pakistan-based militants once again launch a major attack on Indian soil.
SOCIAL UNREST PACKS A BELATED PUNCH
Many analysts predicted that the global economic crisis would unleash mass unrest in several countries around the world, with the potential to topple governments. They were mostly wrong. In particular, forecasts that China's leadership could be shaken by serious unrest proved to be way off the mark.
But unemployment is a lagging indicator. Even as the global economy moves out of crisis, many countries will see jobless numbers and social hardship continuing to rise.
Another spark that could ignite unrest would be inflation in food and fuel prices. The global crisis put the brakes on a dramatic surge in commodity prices that is likely to resume as global growth resumes.
What to watch:
-- The doomsday scenario for markets would be mass unrest across China that threatens to topple the government. Most analysts see the possibility of this as extremely low in 2010, but any upsurge in unrest in China would rattle investors.
-- India, Indonesia, Thailand and Vietnam are other key emerging markets where unrest could hamper economic reform and dent markets if instability flares in 2010.
'2009 was a good year, next will be brighter'
Q&A: Vedika Bhandarkar, MD & Head of Investment Banking, J P Morgan
Investment banking shifted focus in 2009, as capital raising dominated over mergers and acquisitions (M&As) advisory. US-based J P Morgan led this shift globally. Vedika Bhandarkar, managing director & head of investment banking, tells how even in a supposedly bad year, the bank raised about Rs 1,00,000 crore. In an interview, she tells that this signals hope for the advisory business to pick up in 2010, after a year when J P Morgan was missing from the top of the league table. Excerpts:
So, is it the end of a bad year?
No. A good year is now coming to an end. In 2008, things really slowed down. Till January-February (2009), the equity and debt capital markets were pretty much shut and only M&As announced earlier were concluded. So, 2008 was pretty weak. On the contrary, 2009 has been good. When we went into the calendar year, it did not look like it would be a good year. The first four months were quiet, but we have seen a spate of capital issuances since May. It started with deleveraging, but now we are seeing a little bit of growth capital. Things are not back to normal on the M&A front, but there are enough signs that the activity will pick up in 2010.
Despite a lot of growth in capital markets, bank lendings are growing slowly?
Bank borrowings always lag the recovery in capital markets. Companies in most sectors are optimistic about 2010. A lot of profit growth has come from cost reduction. Companies want sustainable growth for a couple of quarters before they start dusting out old expansion plans. We expect bank borrowings will pick up in the second half of 2010.
In the first quarter of 2008, there were certain public issues that drained out liquidity and forced others to shelve their plans. The next quarter will be a busy one with a large number of issues lined up. Do you again anticipate liquidity issues?
In 2008, the market was not affected because of a few issues. The global crisis had started and money stopped flowing in. Domestic liquidity also started getting tight. The amount of capital raised this year is just under $20 billion (around Rs 93,000 crore). In our best year, which was 2007, the capital raised was $35 billion. So, there is still a fair way to go. Global liquidity is quite high and the flow into equity and emerging market funds will continue. On the domestic side, insurance had a tough 2008, but the situation is better now. There are a lot of prospectuses that have been filed with the Securities and Exchange Board of India (Sebi), there are companies which have raised capital and will come back next year. Besides, there are very few mid-caps that have raised capital this year. There will be a lot of supply, but we are not sure if there will be enough demand for all the issues.
Will the government’s disinvestment programme crowd out private sector issues?
From the numbers announced so far, it does not look so. But if the government wants to bring 10 or 15 more issues, then may be.
How will rising valuations affect M&As, especially inbound deals?
Ideally, M&As should peak when valuations are low. But in practice, it is the other way round. That’s because companies, the buyers and the sellers, are not confident during tough times. Now companies in the US are shifting focus from survival to growth. People have started talking about M&As, which was not the case six months ago. But with strong equity markets, valuations have started emerging as a concern.
Where do you expect to see more activity?
In traditional sectors such as healthcare, information technology services, telecom and general manufacturing.
Are telecom companies getting desperate to expand overseas at a time when consolidation talks are gaining strength here?
There is no desperation. In India, Bharti got some good operating lessons in one of the lowest tariff environments. It has been looking out at markets with similar characteristics. Consolidation in the Indian telecom sector is a given, but we do not know if it will happen in the next 12, 24 or 36 months. Consolidation is bound to happen with tariffs falling and so many players.
The banking sector is also crowded and there is talk of consolidation…
It is completely linked to the government, which accounts for 70 per cent of the banking sector business. We are much more bullish on telecom consolidation happening sooner.
In terms of financing, will there be more of structured finance in coming days?
The market has come out of a major crisis. Right now vanilla financing seems good. Experimenting is on the margin. In private transactions, structuring is back, but not on the public side.
On M&As, it was a bad year for the industry as a whole. How would you rate it for J P Morgan?
The focus for the company this year was on equity fund raising, and we are ranked number one there (in the global league table). In terms of M&As, there have been very few large completed transactions in India. We closed the DoCoMo transaction earlier this year.
