The Indian government unveiled restrictions on how much money businesses are permitted to invest outside the country today in what at least one analyst likened to pushing the “panic button.” The FT has the story:
Shortly before Manmohan Singh, prime minister, promised a return to high economic growth in a speech to the nation, the Reserve Bank of India cut the maximum outward direct investment by companies and individuals in future deals to a quarter of the old level. […]Citing “the current macroeconomic situation” and a desire to curb financial outflows, the central bank also tightened restrictions on Indian residents seeking to send money abroad, particularly to buy property.
The move was perhaps the logical reaction to a trend the Economist discussed at length in last week’s issue: wealthy Indians are doing more business abroad than at home. Singapore and Dubai have become banking hubs where a “Who’s Who” of Indian tycoons do business, an Indian oil executive told the Economist. “Investors and firms do not like India’s fiddly rules and worry that the country may tighten capital controls if its currency falls too far,” one trader said.A new port in Sri Lanka’s capital will be vastly more capable than anything India has to offer. Indian manufacturers and heavy industries plan to do a lot of business abroad. Airlines are based in the Gulf instead of India’s comparatively shabby facilities. Service industries like financial trading and legal services have shifted to more efficient locales like Singapore. Singaporean courts handle legal issues for many Indian businesses frightened by an unpredictable domestic legal system. “The level of comfort Indian companies get from Singapore is unmatched,” said an executive of the Singapore International Arbitration Centre.“The temptation for India is to invent new rules to keep economic activity from moving abroad,” the Economist presciently predicted. And so it came to be with today’s announcement. There is some hope that the new central bank chief, Raghuram Rajan, a former IMF chief economist, will succeed in pushing through reforms and lower inflation. But as Swaminathan Aiyar wrote in the FT, Rajan is a “great jockey. Pity he doesn’t have a better horse.”Prime Minister Manmohan Singh tried to strike an optimistic tone in his “halting, soft-spoken” Independence Day speech at Delhi’s Red Fort: “I believe that this phase of slow growth in India will not last long.” But, he added, “rapid economic growth is an imperative for our country.” Across town, Singh’s and Congress’s most prominent rival Narendra Modi mocked Singh and his party’s recent performance; he also pointed to his own record as Chief Minister of Gujarat, one of India’s most successful and business friendly states, as evidence that he can do a better job at the helm of India’s stuttering economy. Perhaps. There are signs that Gujarat is neither as developed nor as successful as Modi says it is. “Alas,” Aiyar concludes, “all jockeys know that a new owner is no guarantee that the horse will run faster.”