India A Port In Asian Storm

ANZ Investment Bank has forecast that India will emerge from the Asian crisis relatively unscathed since it has avoided a major fallout from the turbulence in Asia.

Describing India as, a port in the Asian storm, Rana Kapoor, general manager, ANZ Investment Bank said that despite the rupee coming under pressure and interest rates rising, a relative analysis vis a vis other Asian countries shows that these moves have been far less stinging for India. The major indicator is the spreads on India paper that have widened, but significantly less than in the rest of Asia. For a prime corporate such as IDBI, the spread over LIBOR is currently about 200 basis points compared with the 75 bps in mid-1997. The spread on the Indonesia sovereign bond maturing in 2006 in contrast has widened from about 200 bps in October to 850 bps currently.

ANZ has forecast that there is no likelihood of any policy changes, although political vacuum until the new cabinet is in place will delay the 1998/99 budget and the reforms process. But with all parties in broad agreement over the need for reforms and liberalisation, differences exist only over the pace, rather than implementation.

Moodys assessment seems overly dismal to ANZ. Indias low income classification gives it access to substantial aid inflows on a concessional basis. This source of funds, together with inflows of FDI has meant that reliance upon short term debt is low. Indias short term liabilities are only 6 per cent of the total debt compared with the over 60 per cent in South Korea and Indonesia. Indias account deficit is less than two per cent of GDP, total debt service is about 25 per cent of foreign exchange receipts, and reserves over US $27 billion. The bank report states, Economic prospects remain solid and unexciting but in the current environment these are reassuring characteristics. The problem confronting India is the fiscal deficit, which in 1996-97 was about five per cent of GDP and the 1997-98 budget projected to fall to 4.5 per cent. But tax cuts, public sector pay rises and continuation of subsidies, coupled with slower than expected economic growth, mean that the target is unlikely to be realised.