India finds itself at the bottom of a chart of 15 emerging economies ranked in order of potential economic risk published by The Economist. India is the riskiest of them all, in this reckoning, as assessed by current account balances, budget deficits, credit growth and inflation. Given the equity market buoyancy, this rating comes as an unpleasant surprise to many. While other economies are clearly better placed by the numbers presented in the aforementioned chart, India?s riskiness deserves a closer look as an independent case. The biggest risk factor is that, unlike exporter extraordinaire China, India runs a current account deficit. Forecast at 2.1% of GDP for 2007, this figure is far from alarming, and capital account inflows are so strong that the rupee is actually rising instead of falling against such currencies as the dollar. But it is largely NRI remittances and software exports that narrow the current account deficit. The trade deficit is huge and widening. Unlike Asia?s other big exporters, India has no overseas consumption base of millions hooked on to its products that only tariffs can block. Its exports are contract-led, and depend on far fewer purchase decisions. In terms of vulnerability, however, the bigger fear is a reversal of capital influx. Unlike the big FDI-drawing economies in the region, India depends disproportionately on FII inflows, money that does not necessarily have the long view in mind. With P/E ratios above the safety level of the late teens, goes the risk argument, anything could happen.
On the current account worry, our exports need to diversify and be made competitive without artificial props. But note that India now has sufficient forex reserves to lower the likelihood of a capital crisis that might destabilise the economy. Also, to suppose that India?s equity market would not be able to justify its valuations would be premature, despite signs of a slowdown. Inflation, though not entirely benign, is within control range. As for the other cited risk factors of limited leeway on fiscal and monetary policies, the fisc has not exactly gone haywire, nor should one expect a classic cycle-countering strategy so long as ?exclusive growth? poses its own risks peculiar to India, while a degree of monetary control can be acquired by letting the rupee appreciate. Analysts need not worry yet about the India story. It holds.
