Emerging Problems

Emerging markets has become a phrase that incites a lot of excitement. With high growth rates and the possibility of huge returns, investors have flocked to put money in the best performing emerging markets. One of the darling emerging markets over the past decade has been India. The combination of a large landmass, rich with resources, and the world’s second largest population has been the framework that allowed India’s GDP to grow at an average rate of 7.65% a year over the past decade. This well outpaces the United States as well as almost every western economy and has caused investors to salivate at the potential they see in India. Regardless of these extraordinary statistics, recent stumbles in India’s economy has reminded everyone just how risky emerging markets can be.

In the span on a month the rupee has sank, stockmarkets have tumbled and money-markets rates have risen. Exacerbating the problem is newly introduced Indian capital controls, limiting the flexibility of investment and frightening foreign investors who are worried that their funds may be frozen. The Reserve Bank of India (RBI) has made an attempt to calm bond market while the rupee has dropped to an all-time low in relation to the dollar. This has produced the worst economic conditions in India in at least a couple decades. All this has foreign investors worried. At current prices they own about $200 billion worth of equity. It may be unlikely that they begin a mass exodus but if conditions worsen scaring them away, there is little India can do. The rise of market interest rates will cause pain for those in the credit business and inflation is sure to rise.

It is hard to see what options India has to confront these issues in the short-term. A wiser route may be to deal with structural problems they face. India still has all of the trappings that have made them an enticing investment opportunity, they must not ruin their innate advantages with policies that hurt their economy. India has continued its rise despite deep structural issues it has had. The time to reckon with those may be approaching. As India continues to emerge as a world leading economy some of the issues that have been overlooked in the past will now be scrutinized. If they take this opportunity to fix some of these problems, history will see this period as a hiccup, instead of a turning point.