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India is Afraid, Very Afraid

The financial crisis, working its way westward across Asia, reached India this week. India’s leaders are worried, really worried. In fact, they’re so worried by the dismal performance of their stock index last year that they have made it easier for foreign investors to invest directly in Indian firms. (FT subscription required)

From as far back as Mahatma Gandhi’s boycotts, India has been protectionist.  It’s important to note that despite some deregulation and market opening, this hasn’t totally changed. To some degree, India isn’t opening its markets because its protectionist ideology is breaking down; it’s opening them because the system is breaking down.

The further opening of India to global financial flows faces a number of challenges. The largest is the culture of corruption that pervades India’s civil service. Indian officials see bribes as a service fee, but this pay-to-play culture will prove discouraging to foreign investors, even if markets are officially opened to them.

But for now it’s good to see India taking a step in the right direction. Protectionism might not have been killing India, but it wasn’t making it stronger either.

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  • Sidney

    What happened to my beloved Tata Motors, which I bot as an ADR on the US market? This puppy has sunk close to 50% this year. Not a good sign for the Indian market.

  • Francis W. Porretto

    This could unleash a fascinating set of dynamics. There’s undoubtedly some “native” group of Indian venture capitalists, and these are likely to have established “pads” by which they keep the palms of critical officials well covered in baksheesh. What sort of political countermeasures is that group likely to mount, so as to retain its primacy within the rather cartelized, heavily regulated Indian economy? And what are the bureaucrats who’d just love to have more payments coming in from more sources likely to do in response?

  • bharati

    FWIW, it helped India make pretty much everything it uses. The US is protectionist: check the $ amount of agro subsidies or that the gov buys most arms, etc. Iraq was attacked partly because Saddam wanted Euros not $ for oil. Check what is allowed re imports and rejected on flimsy excuses.

  • DonM

    Of course one way to solve the culture of corruption is to move it above board.

    Of course people pay fees to civil servants. The fees must be documented, and taxed. Civil Servants will be rewarded for the tax on their service fees.

  • Patrick Carroll

    Cool! I’ve been dreaming about owning a house in Pondicherry.

  • JoeH

    “…the culture of corruption that pervades India’s civil service. Indian officials see bribes as a service fee, but this pay-to-play culture will prove discouraging to foreign investors, even if markets are officially opened to them.”

    Hmmm, Greece of the East?

  • a nissen

    #3: From WRM’s tone, your”FWIW” doesn’t amount to a hill of beans yet, but someday, with the first to be coned peoples of South America leading the way, it may be worth a very great deal to anyone left.

    WRM: Yesterday you held that a Chinese leader’s second thoughts on the loss of culture were a crock, and today you brand it as “corruption.” True, culture, i,e, the people’s livelihood is the first thing to go when countries are tricked into cracking themselves open and sign up to to play at the global casino on condition and margin. Half a century’s experience with this addiction suggests that people who should know better are “prescribing the problem.” Most likely far from “a step in the right direction.” Please parse harder.

  • Athena

    Bharati, If Iraq was invaded because of the Euro/Dollar issue, then why have so many oil companies invested in the country not American? It would seem to me that the U.S. would ensure American companies the largest share of oil contracts in Iraq if that were the case.

  • Rich Vail

    You’re right…foreign investors won’t invest if they believe that bureaucrats are as corrupt as “pay to play (i.e. “The Chicago Way”). Many will look but few will pay.

  • Toads

    Until 1991, India was the worst of both worlds : an autarky like North Korean juche, but a democracy where even the simplest projects moved at a snail’s pace because of vote bank appeasement.

    Perhaps the greatest wealth-destroying combination ever created.

    Even now, banning foreign retailers is stupid, but India continues to do it. The shopping experience in India is still in the 19th century, and while quaint, exotic, and interesting for the first-time Western tourist, is extremely inefficient. It takes a full day to do the shopping that would take an hour in the US (or just 5 minutes on Amazon).

  • Toni

    I daresay individual Indians would like relief from the pay-to-play culture. We know they’d welcome the jobs that would grow in a less corrupt economy.

  • Krishna

    Gandhi was not protectionist. He fought against the oppressive and exploitative policies of the British.

  • richard40

    Gandhis produce everything in policy India made sense when they were trying to gain independence from British colonial rule. But once India gained independence, and became self governing, those protectionist policies were still continued, even though they no onger made econoic sense.

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