Rebuild Brand India

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In the world of global finance and eco- nomics these days, much mention is made of ‘animal spirits’. Whenever I hear these words, I think of that wonderful book, Eats, Shoots and Leaves, and the image of a cowboy Panda comes to mind.

In many ways the issues facing the indian economy – stagflationary conditions, depressed stock markets and the depreciating rupee – are driven by the very same animal spirits, which in my view are Trust, Confidence and Hope.

As these ebb, our problems mount, but if they can be restored, the Indian economy, with its great underlying strengths, could become a beacon of hope in an otherwise bleak global environment.

The Indian spring, the anti-corruption agitation that galvanised the entire nation through 2011, demonstrated the deficit of Trust that people have in our political leadership, cutting across party lines.

The deadlock in Parliament, with the ruling coalition and Opposition at loggerheads on every major issue has led to a crisis of Confidence. Business and investor sentiment has been affected by the regulatory uncertainties, stalled public investments in infrastructure, problems with land acquisitions and overall lack of cohesive policy reform. The hope that despite all these hurdles the India Growth story will continue unabated has deadened, as headwinds from the global economy, affect India through trade and capital channels.

The investment boom in India during the 2004-2008 period coincided with a very supportive global growth environment – lax monetary conditions, buoyant capital markets and high investor risk appetite. This allowed for significant asset market buoyancy. For India, this was visible in the form of large capital inflows through portfolio investments and external commercial borrowings, which in turn allowed for sharp rupee appreciation and a multi-year bull run in the stock market. These conditions allowed Indian companies to finance investments easily and raise capital, both via equity and debt, at very low cost.

However, the recent escalation of the euro zone sovereign crisis has resulted in severe investor risk aversion and a flight of capital to perceived safe havens such as the United States. As a consequence local stock markets have fallen sharply and the rupee has depreciated to a lifetime low against the US dollar.

This combination of circumstances has hit the Indian corporate sector hard. The cost of dollar-denominated debt has gone up with acute rupee weakness. With local interest rates having risen sharply on the back of rising policy rates, a rising fiscal deficit and tight liquidity conditions, the cost of local debt has also increased. At the same time the weakness in local stock markets has made access to equity capital more difficult.

In a nutshell, the key enabling conditions that enabled the private investment boom in India during 2004- 2008 have been reversed.

Should the euro contagion spread rapidly to the other PIIGS (Portugal, Italy, Ireland, Greece and Spain) nations, there could be a sudden and sharp contraction in risk appetite, which could lead to very large amount of capital outflows from India.

Is there a way out of this situation? I believe there is. The drivers of growth in India are fundamental and strong. What we need is a revival of Trust, Confidence and Hope.

The onus of getting the Indian economy back on track lies with our political leaders – both the ruling coalition and the opposition.

Faced with what is possibly the worst global economic scenario since the Great Depression, it is time our leaders united in a bipartisan manner to do what is right for the country rather than focus on their (re)election prospects.

A few strong signals would send the message both internally and externally that India is back in business. For example :

The passage of the Lokpal Bill, backed further by an anti-bribery and corruption legislation could start restoring citizens’ Trust in their elected representatives.

Bipartisan support to measures that curb the fiscal deficit (such as an increase in diesel prices) and prioritising the passage of economic bills that have been long pending such as the Goods and Services Tax bill would go a long way in bringing back Confidence.

Measures to fix supply side bottlenecks in the infrastructure sector and the farm sector and a revival of stalled public investment projects would give Investments a much needed boost.

Will this be sufficient to withstand the impact of the global economic tsunami that could soon be upon us?

Let us hope for the best. It is only if we swiftly restore these three powerful animal spirits, that we can begin to trust that Confidence will restore the India growth story and help battle global headwinds.

The author is Country Executive and Chairperson India, The Royal Bank of Scotland N.V.