Mending India: has Raghuram Rajan got what it takes?
He's the other rock star banker in the spotlight: can he give investors in India a reason to cheer?
MOVE OVER Mark Carney, there's a new rock star in the central bankers' club. Big hopes are riding on the arrival of Raghuram Rajan at the Reserve Bank of India in September.
An outspoken former IMF chief economist and prolific polemicist, Rajan has credibility and bounce. He's rated as one of the few to have predicted the financial crisis, giving detailed warning of the dangers of financial innovation and skewed incentives in 2005 (a brave stance at the time). More recently, he topped a poll in The Economist as the thinker with "the most important ideas for a post-crisis world".
The big question for investors, not to mention India's 1.2 billion inhabitants, is whether Rajan can pull the country out of its economic funk. Despite his impeccable credentials, there's widespread scepticism. As commentator Swaminathan Aiyar sums up: "Great jockey. Pity he doesn't have a better horse."
Things have gone progressively downhill since the glory days of the Indian Summer in the noughties, when growth rates topped eight to ten per cent and India was confidently acclaimed the great challenger to China.
Now there doesn't seem to be an economic problem the country isn't suffering. The rupee is crashing, inflation is high, the state-owned banks are larded with debt, industry and exports are stagnating and, as Aiyar observes, "the current account deficit is as wide as the Ganges in flood".
India is in danger of becoming the new Japan – always just about to turn the corner, but never quite getting there. There were big hopes last year when the PM, Manmohan Singh, pushed through reforms to open up the economy to foreign investors. But the process has stalled and, with an election due next year, hopes aren't high that the policy paralysis will be overcome anytime soon.
Not exactly the most promising investment picture, then – and that's been reflected in the performance of India-focused funds, which have been chalking up losses so far this year. True, there's been a bounce back from the lows of 2008: First State Indian Subcontinent is up 104 per cent over five years; Aberdeen Global Indian Equity by 72.3 per cent. But, overall, your money would have done better elsewhere. India's benchmark BSE Sensex 30 index remains way off past highs.
Some think the combination of historically cheap shares and all-pervasive gloom offers a fantastic buying opportunity – rather like blue-chip European companies this year. India never does things by halves and, as Singh has pointed out: "Business mood, which was unduly optimistic in 2007, is unduly pessimistic today." There's a well-rehearsed argument that India is always at its best when its back is against the wall.
Moreover, the big picture that inspired so much excitement a decade ago hasn't really changed. With its young population, surging middle-class, well-regarded multinational companies and strong institutions, India still ticks all the right investment boxes on paper. There may be cronyism, but the system is nothing like as opaque as China's and corporate governance standards are much higher. Indian policy wonks might be tearing their hair out about the current four to five per cent growth rate but that still looks healthy enough from a western perspective.
The trouble is, things could get a lot worse before they get better. Rajan's first priority is to head off a full-blown currency crisis. Yet measures to stabilise the rupee involve sucking liquidity out of the banking system – and there's a risk that could create a credit crunch that pushes growth still lower.
Cometh the hour, cometh the man? Perhaps. But Rajan is the first to admit he isn't going to solve India's entrenched economic problems on his own, and has no "magic wand to wave". He's a man to watch, but – for the time being – you're probably better off on the sidelines. ·