Despite some very stringent rules controlling the flow of rupee out of the country, India has been unable to stop the currency plunging this year.
Investors are now turning their attention back to the US and Western Europe as the economic giants start to come round from five years in a virtual coma. The life support of quantitative easing has worked to a degree, but with that now being wound down there is less cash sloshing around and emerging markets are missing out.
But India’s biggest problem is what underlies this malaise: corruption and cronyism. The country has seen its economy grow to the point where its major companies have stretched out into the rest of the world. Foreign investment has in turn been invited into the region, but with that investment has come a level of scrutiny that has revealed the extent of just how corrupt India’s economy is.
Many will argue it has always been there, but the level of scrutiny and foreign investment has not. India has to reform and take an iron grip on this corruption or risk losing further confidence from investors. Until this is solved investors will continue to pull out of the country.
Almost every day there is a story about corruption in the Indian media. Sectors such as mining, real estate and telecoms have been particularly affected.
Given the improving economic news in the developed world, foreign investors will be eager to find a more secure and trustworthy place for their money. The continual diet of corruption has battered the image of India as a reliable investment destination and low investor confidence has led to less capital formation, less employment, less tax collection and less consumption. All of these have a combined effect on driving the decline of the rupee.
India has benefited from the poor performance of the US and Europe in recent years and from liquidity given by the US Federal Reserve and the UK’s central bank. But now it is payback time.
During the good times the Indian government had a chance to take stock and implement much-needed economic reforms, especially in the manufacturing sector. But it did nothing. Time is now running out to implement these changes to stay ahead of the other emerging markets.
The key to overcoming corruption lies in strengthening India’s institutions. The institutions of police, judiciary, tax collection, and academia have been weakened over the last few decades. India has to do structural reforms like police and judicial reforms to strengthen its institutions.
Sourindra Banerjee is Assistant Professor of Marketing at the UK’s Warwick Business School. He specialises in the performance of emerging markets and how they function in the global environment.
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