THE POWER OF GLOBALISATION, both the upside and the downside, has been apparent to investors in India’s stock markets over the past few weeks. In mid-December, the US Fed’s decision to cut interest rates by just 25 basis points led to a huge selloff in most Asian markets. India was no exception. The chain of causation can be complex to observers unfamiliar with economics.
The market wants interest rates to be cut to prevent the slowdown in the US housing sector from turning into full-blown recession. However, rising inflation, fuelled by a spike in food prices caused principally by the large-scale diversion of land to growing corn for ethanol, has meant the Fed has limited leeway to cut interest rates. This could mean a deeper recession in the US, which in turn would hurt Asia’s export-oriented economies.
Of course, Indian markets have since been recovering. What is clear is that Indian investors had better get used to being intimately impacted by faraway global events. The great global wave of liquidity pulled up most capital markets, including ours. Tightening of money and credit, and greater uncertainty in general can hurt India.
The broader picture is that seven years into the new millennium, India is more globalised than it had been in the first 60 years of its independent existence. That holds for the capital market, trade and foreign investment and the huge Indian diaspora.
India was a highly globalised country once upon a time. At the start of the 19th Century, according to economic historian Angus Maddison, it was among the largest industrial exporters in the world. But those export industries, as is well known, were destroyed by competition from Manchester. As a result, India could not benefit from the great wave of globalisation led by the British Empire, which happened between the 1870s and the eve of First World War. That phase of globalisation is immortalised in Keynes’ famous description of the imaginary British gentlemen, who, sitting in London, could buy stocks and bonds anywhere in the world.
India lagged behind other major economies during that era of economic growth. It was largely a supplier of agricultural commodities and exports of manufactured, principally textiles, were struggling to take off. Between 1870 and 1913, India’s per capita GDP grew only 0.6%, half the UK rate. In contrast, in the current wave of globalisation, India starts off in hyper-growth mode. It is the fifth largest economy and seemingly — at least in the imagination of India’s top businessmen — destined for glory. Net cross-border inflows topped $46 billion (direct and indirect FDI plus long-term debt) in 2006-07, according to the McKinsey Quarterly, compared to $24 billion a year earlier.
There are a number of broad measures of globalisation. One is the physical ratios — trade and inflows/outflows of investment as a percentage of GDP. The second is what might be referred to as the contribution of the Global Indian gene pool, the complex linkages between the global diaspora and the mother country. Another more nebulous measure is the impact of the values of globalisation on the wider Indian society.
Though not of the same magnitude as China, India’s foreign trade (exports plus imports) have grown rapidly since the start of this century. Foreign trade (exports plus imports) is currently 32% of GDP, high by the standards of our recent past. If one adds invisible exports (mainly software) they come to around 11% of GDP. Similarly foreign inflows into India have been growing at a rapid clip. FDI is pushing the $20-25 billion per year mark and exports are around the $160 billion mark.
These numbers will doubtless grow as the Indian economy expands. Software and BPO exports, for instance, are expected to double from the current $30 billion to $60 billion by 2010, according to Nasscom. India already has 50% share of the world outsourcing market, though the total addressable market is estimated to be $1.5 trillion in 2010, according to Nasscom. Exports of skill-intensive manufacturing exports alone could reach $300 billion in 2015, according to McKinsey. Yet these figures pale besides China’s current figures: $1 trillion of exports and FDI of over $100 billion per year. China’s trade surplus exceeds India’s total trade.
Comprehensive globalisation of the external sector would have to mean full convertibility, which means you and I can convert the rupees in our salary account into any currency of our choice. It would mean that Indian citizens can acquire property and shares anywhere in the world, though we would have to grant corresponding rights to foreigners. It would also mean Indian companies being allowed to borrow abroad without any restrictions, and companies listed in India being allowed to offer stock to foreign investors. In other words, shareholders of Corus (say) would be allowed to swap their stock for Tata Steel shares. Similarly, anyone willing to invest in Indian companies would be allowed to open an account with registered Indian broker, subject to due diligence.
India’s favourable demographics may also help increase its presence abroad, in the broad sense of the term. Western Europe may see an increase in the proportion of its population over 18 from the current level of 18.6% to 35% in 2050. For North America, this proportion is likely to be 30% by 2050. By next year, 20% of Japan’s population would be over 65.
India is expected to become the world’s most populous country by 2035. Already, a fifth of the world’s under-24 population lives in this country. The opportunities for Indians to emigrate to the rich economies are obvious. Not inevitable, though. Just 10% of the population in the college-going age group (in absolute terms around 7 million) actually go to college. So most Indian youths lack relevant skills. And immigration laws have to change in Western Europe and Japan.
By 2020, according to the famous Goldman Sachs re