Money is flying out of India
When money become skittish
Policy Watch
Last week, a Bloomberg newsletter disclosed a very interesting fact. That as many as 107 companies overseas, accounting for a total value of $16.5 billion had been acquired by Indian entrepreneurs. This represented the largest amount of money that Indian entrepreneurs had invested overseas in recent times.
This number becomes even more important if one considers that the money that fled overseas was larger than the money that was invested in India. This was true for three of the five past years. 2020 and 2023 were the years when inflow was larger than outflow. But when totals are considered, $48.6 billion were invested overseas compared to an inflow of just $38.4 billion.
What this means is that India is losing more money than attracting money.
Great enterprise
From the entrepreneurs’ point of view, this was a great opportunity.
· First, values are depressed in other countries, especially in Europe and even the US, where people have been confronted by a burgeoning debt, low economic growth and a contraction of markets. The two wars – in Europe and the Middle East – have only made economic conditions worse over there (free subscription -- https://bhaskarr.substack.com/p/india-china-and-russia-could-be-dancing). So, obviously, there is an opportunity that Indians were keen on capturing.
· Second, thanks to the stock market book, Indian companies could borrow more money from banks – given their high market capitalisation – and buy stocks overseas at lower price-earning multiples.
· Third, they were only too aware of the inevitability of a further depreciation of the Indian rupee. At such times, it makes sense to borrow in dollars, and pay that back later because each dollar sent back will fetch you more rupees.
It was a triple bonanza for Indian businessmen.
Of course, there is always a danger of some trigger-happy policy maker in India banning investments overseas. They are often better at announcing bans than addressing the root causes. But if that happens it will be a double blow of India. First, it will stop investments which could translate into attractive dollar returns in the coming years. Second, it would compel more businessmen to pick up bargain offers using funny money – money that is sent out through unofficial (hawala) channels and registered in some other names. That will weaken the rupee even faster, with disastrous consequences.
Why is the rupee falling?
Economists have been warning the government for long that the policies it was pursuing were going to hurt both industry and the Indian economy. Money was already becoming skittish, and was constantly looking for safer places to park itself.
The key causes for the rupee falling are actually
· a failure to export more than import, thus worsening the trade balance. Compounding this are
· ideological curbs on leather and beef which are traditionally major export items and employment generators,
· ill-conceived PLI schemes (
) which favour capital intensive industries requiring constant import of components, and
· an increasingly unhealthy business environment.
The last has caused many wealthy Indians to flee India (https://www.telegraphindia.com/business/35000-high-net-worth-entrepreneurs-left-india-during-narendra-modi-regime-amit-mitra/cid/1835449).
Another cause is the reluctance of Indian policy makers to allow Indian gold in private hands to come out into the open market. This may involve amnesty schemes or other incentives, but will actually allow India to get gold back into the official circulation, which can then be used as collateral for cheaper loans and improve the country’s reserves. Unfortunately, the World Gold Council isn’t really interested in pursuing this measure as it could reduce the demand for imported gold. Do remember that India has unofficial private gold holdings of an estimated 25,000 tonnes. The WGC is after all a body financed by gold producers. They make money when more gold is sold. If India allows its hidden gold to resurface, it could reduce gold imports. Today, a lot of gold continues to be smuggled in (free subscription --
).
High import duties also add to the attractiveness of smuggling. All smuggling invariably causes the rupee to become weaker because dollars are purchased on the black market.
Finally, excessive government spending has caused inflationary pressures. This has two disastrous consequences.
(1) It makes the poor man lose even the little money he has. Remember, India is a very unequal society. Almost 90% of India’s population earns a per capita national income that is almost half that of sub-Saharan Africa (Free subscription -- https://bhaskarr.substack.com/p/did-someone-say-viksit-bharat). If only the government had learnt to be more prudent with spending money.
(2) Poor management of the economy has led to counterfeit notes proliferating (https://bhaskarr.substack.com/p/demonetisation-is-someone-flying) and an inflation in infrastructure costs (https://bhaskarr.substack.com/p/indias-big-infrastructure-investment) thanks to time and cost overruns.
Deceleration
All this has set into motion forces of deceleration.
GDP has begun tumbling.
So have tax collections. There are good reasons to believe that much of the GST buoyancy was on account of huge government spending on non-productive items like freebies. Each rupee given away as dole or a freebie, invites GST collections when the recipient spends the money. That money further attracts GST, with a cascading effect.
The combination of the above policies has caused GDP to tumble and GST to fall.
It is only now that the government has realised the extreme folly of overspending and has begun to tighten its purse strings. That is good. But expect the fallout to be harsher on tax collections and GDP. And, yes, the government will be advised to curb the temptation to increase GST rates. Almost 90% of India’s population is already burdened by such taxes. Don’t impoverish them further.
The solution would lie in
· making the business climate friendlier,
· focussing urgently on improving the quality of education so that the youth is employable (
), and
· offering more incentives to industry to create production facilities and thus create jobs.
Remember that more jobs will be lost in the next two years, thanks to AI and the march of technology. That will add to the pain youth face. Measures will have to be introduced on a war footing to mitigate this pain, without resorting to freebies. Freebies actually teach people to stop working. That is why the RBI’s largesse to the government was most unfortunate (
).
Most of all, the government must begin trusting its businessmen, who are after all the people to pay for the perks that ministers and bureaucrats enjoy. They should pay heed to Margaret Thatcher’s exhortation about there being no public money (
).
India needs to learn its lessons all over again, and usher in liberalisation, and not protectionism with high duties and bans on exports.
Will Indian policymakers learn?
The author is a senior journalist and researcher.
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Do watch my latest podcast – a conversation with Manish Chokhani on investments -- at
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Sir, the government in power is anti poor and meant for the rich, with Ambani, Adani, Birlasoft of their ilk. Therefore increasing custom duties leads to enriching the government, which instead of doing something fir the poor and marginalised channels this surplus to help it's chosen capitalists. The government care two hoots when
the Indian rich and powerful splurge money overseas or Indians leave the country. The government reasons those who emigrate sell their businesses and Industries to other Indians who will continue to create wealth, which is misleading because successful Enterprises are the result of a few and once they exit their companies others who take over will not bring that sensibility, insight, dynamism and network. The new owners will run the enterprise to generate profit and most will find hard and survive after a few years in a firefly competitive world. The current dispensation will ensemble masses, impoverish the country and strut like knaves in a Shakespearen drama.
,
With the sad demise of Dr. MMS comparisons will be made with Modi, the 24 hour politician and jack of all functions. It is good that comparisons be made because Modiji's cupboard is bare and it needs sharp eyes to peep into MMS's achievements. Where Modiji was a the man for crony capitalist and in his sheer love for Gujrat shifted key developmental works to Gujrat MMS couldn't erase his concern for the poor and the Panjabies wondered what he had done for Punjab. Modi was the real hindi movie actor for displaying his love, insight and daring for atomic energy, space and high technology and MMS did all that and more without speaking about it. Where Modi's world view is muscular Bharat and shouting from tree tops MMS was slow but sure and his forays into foreign policy made the most powerful nations exten their hand of friendship and closer contacts, Modiji has made Indians the least loved around the world. This is neither a comparison between two leaders in almost the same era Where one tried what he could to wipe the tears of the most poor Indian, which Gandhiji beleived was the road to national prosperity and the other who strode as a napoleanic hero on white charger.