The Boom From The Bottom

India avoided a U.S.-style housing bust and is better positioned to pump money into the cash-starved financial system today because its much-maligned central bank was never wooed by the allure of easy money—no matter how loudly industry clamored for faster growth. When the central banks of other countries were essentially offering free money, India's realized that, as a democracy of mostly poor voters, it couldn't afford to grow at 10 percent a year if that meant skyrocketing prices for essential commodities like rice and flour. For that reason, the central bank constricted the money inflating the real-estate bubble (and prices for everything else) by raising interest rates to a peak of 12.5 percent last summer, which earned it criticism for being out of step with more aggressively growth-oriented central banks. Because of this, India has ample ground clearance to lower rates and reduce reserve requirements for banks to spur growth and avert deflation.

The private sector is in pretty solid financial shape, too. The central bank kept a close eye on both state-owned and private banks, preventing them from leveraging to perilous heights by keeping the cash reserve ratio high, limiting the use of securitizations and derivatives and essentially barring the off-balance sheet vehicles that U.S. banks used, disastrously, to hide their debt. As a result, India's banks aren't sitting on a mountain of bad loans, which makes them freer to lend to companies in need. Indian companies, cognizant of the cash crunch that burned them in the late 1990s, didn't overextend this time, either. "[One] great source of strength is India's corporate sector, who have much stronger balance sheets [than in the past]," says Chaudhuri.

One sign of that is companies that are putting their wealth to work. In December, India's Wipro Technologies purchased Citigroup's captive IT services firm Citi Technology Services for $127 million in cash, and in October, Tata Consultancy Services was able to buy Citi's business process outsourcing business, Citigroup Global Services, paying $505 million. Both moves suggest that reports of the IT sector's demise in India are greatly exaggerated.

The biggest risk to India in 2009 at this point may not be the global economy but domestic politics. Prime Minister Manmohan Singh's United Progressive Alliance will see its term expire in May, and India's election rules mean that he can no longer enact any significant policies—a measure adopted to prevent incumbents from stacking the deck with populist sops. That means as much as five months of paralysis, precisely when speedy, creative action is the order of the day. Moreover, though the nemesis of Singh's Congress party—the Bharatiya Janata Party—mostly favors similar policies, a change in government would likely result in some further slowing of infrastructure projects that are already running behind schedule. And elections in India can be tricky. In the last one, the BJP-led National Democratic Alliance lost despite racing economic growth, because poor voters rejected the BJP's campaign claims of an "India Shining."

With the light bulb flickering, Singh's Congress may face an even bigger challenge winning them over. The poor don't care how much faster than other nations India is growing, only whether their lives are better than they were five years ago.

© 2009