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THE MOUSE AND THE ELEPHANT

Kalpana Kochhar and Charles Kramer

The Financial Express, June 9, 2008

That India is a rising economic superpower is well known. India’s GDP growth has been one of the fastest in the world, and in purchasing power terms it now ranks fourth in the world—above five of the G7 countries. Per-capita income rose by 4.7% per annum on average between 1995/96 and 2005/06, accompanied by a drop in the poverty rate of over 8 percentage points between 1993/94 and 2004/05. The middle class is burgeoning and the ranks of Indian billionaires is rising, seemingly by the day. Indian companies continue with their global economic ambitions, racking up a string of high profile acquisitions—Corus and Jaguar recently, and MTN possibly on the horizon. And more and more foreign companies see India as an attractive place to invest, with inward direct investment by those companies reaching a record $5.7 billion in February 2008. From a broader macroeconomic viewpoint, growth has been driven by rising saving and investment, both up some 10 percentage points of GDP during this decade.

But, India’s international financial stature remains moderate by comparison. While the stock market is thriving, India’s government bond market is illiquid and its corporate bond market is moribund at under 7% of GDP, a fraction of the size of the markets in Korea or China. With the banking system dominated by public sector banks, which control over 70% of banking assets, and entry by foreign banks limited, India has few world-class financial institutions with global reach and scale. Moreover, regulation hamstrings the ability of institutional investors such as pension funds and insurance companies to participate in domestic financial markets, and thereby help those markets develop. For example, derivatives markets, the “oil” in the engine of global finance, remain underdeveloped, and increasingly trade offshore—in fact, trading in contracts like over-the-counter interest rate and currency products and in Nifty futures has migrated to the friendlier regulatory environment of Singapore.

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