Mile for a Tamil
How do India’s investors spell relief? Palaniappan Chidambaram. Stocks have soared since word broke in June that the urbane lawyer might take a third turn as finance chief. His return in August has proved an antidote to the errors of his predecessor Pranab Mukherjee, and has revived foreign buying. But the rally will only last if the latest reforms boost flagging growth.
Chidambaram’s latest feat is to promise a National Investment Board, a one-stop shop for investment approvals that could replace the bureaucratic wilderness that helps put India below the West Bank and Gaza in the World Bank’s ease-of-doing-business rankings.
A lawyer from Tamil Nadu with a business degree from Harvard, Chidambaram knows what investors want to hear. That makes his encore a welcome relief to Mukherjee’s widely panned tenure. Before being bumped up to the presidency in late June, the finance minister presided over an anti-investment rollback, threatening to levy taxes retroactively on foreigners, while failing to arrest a slide in government finances. The government once expected annual GDP growth close to 8 percent; the Asian Development Bank’s most recent forecast is for just 5.6 percent this year. As a result, investors pulled $1.93 billion from India in the second quarter, helping send the rupee to a record low.
The mere prospect of Chidambaram’s return helped to revive faith. Since May, Mumbai’s benchmark stock index has risen almost 19 percent: investors pumped $2.1 billion back into the country in July alone. Since his reappointment in August, Chidambaram has not disappointed. After winning ruling Congress party kingmaker Sonia Gandhi’s support, he unveiled September’s “big bang Friday” reforms – cutting diesel fuel subsidies while easing restrictions on foreign investment in retail, airlines and broadcasting. India has since lifted rules on overseas borrowing and moved to open the insurance sector.
The promised National Investment Board may prove even more significant. But investors will eventually need to see evidence that new investment is eliminating infrastructure bottlenecks, reviving GDP growth and corporate earnings. Indian stocks now trade close to 14 times this year’s expected earnings, up from a multiple of about 12 times in the spring. If Chidambaram succeeds in pulling India’s growth story out of the hat, the revival will be more than justified.