Donna Block : Share World
Two nations united by history but divided by destiny, India and Pakistan are like estranged sisters fighting over the same man.
They have fought three wars, two of them over the disputed region of Kashmir, and have displayed their nuclear capabilities. This long-running feud is affecting the stability and economic potential of a region that includes more than a billion people, 950-million in India alone
The big sister, India, has one of the world’s busiest stock markets and a myriad investment opportunities. Like other emerging markets, India is dependent on foreign investment, so market reforms have been high on the political agenda. But Indian politics are turbulent, especially when markets are under so much strain.
The good news is most experts agree that India is on track to a market-driven economy. Once hostile to outside investment, liberalisation of the economy has encouraged foreign business. This has bolstered the middle class, numbering about 250-million – the entire population of the United States – and earnings are coming up to par with incomes in the West.
At one time India could barely feed itself; now agricultural products account for 70% of export income. Farmers are prospering thanks to tax-free income and government investment in agriculture, although bad weather has devastated this sector this year.
The bad news is uncertainty about continued support for economic reforms and liberalisation since India’s closed economy insulated it from the worst of the Asian financial crisis. It will be one of the few countries in the region to show positive growth this year. There is also some fear that economic liberalisation, which is widening the gap between rich and poor, will lead to more political instability.
Bombay is the home of Asia’s oldest and India’s largest stock exchange, boasting more than 6 000 listings. There are also 21 regional exchanges, bringing the number of listed companies to nearly 8 000. But because these companies tend not to be very international in nature, the markets are not strongly pegged to those in Europe or the US. As a result, portfolio managers tend to own Indian shares as a hedge against other markets.
The jewel in the crown may have its sacred cows, but it also has an ancient tradition of fleecing lambs. Financial regulation and disclosure is a big problem: companies float new issues without telling the existing shareholders; trade settlement is often late; and recently, unscrupulous promoters have separated investors from somewhere between $650-million and a possible $1-billion in pyramid schemes. Glossy brochures promised riches from fish farms, teak plantations and other agricultural bonanzas. The schemes have either gone belly up or been barred from soliciting new funds by regulators.
Financial analysts are worried about the ripple effect these schemes will have on legitimate companies. Securities dealers are having a hard time raising funds because they can’t compete with the returns promised by the pyramid schemes. And with so many investors getting burned, dealers are worried that people will hold on to their money or use the traditional savings method – gold.
One Bombay securities dealer said: “All this money will go into safe havens or they’ll just sit on cash. Nobody will put it into financial assets.” This would put a damper on the government’s plan to put the country’s large domestic savings to productive use – India has one of the highest personal savings rates in the world.
Pakistan, the little sister, suffers many of the same problems as India. A market collapse in 1995 forced the country to institute a wave of economic reforms and start a program of privatisation. The International Monetary Fund (IMF)stepped in and sponsored programmes that are leading the way in virtually every area of private sector investment.
Ethnic conflicts could pose a threat to stability but economic failure is now seen by most as the only real threat to Pakistan’s future. Unfortunately, corruption is as pervasive as ever. Berlin- based research group Transparency International last year called Pakistan the second most corrupt country in the world, surpassed only by Nigeria. The previous elected government was the third to be dismissed for alleged corruption in the past 12 years.
Nevertheless, Pakistan is well positioned geographically and culturally to be a major swing player between the Muslim republics in central Asia and the giants of southern and eastern Asia. It has three exchanges: the main one in Karachi, which has nearly 800 listings, and smaller ones in Lahore and Islamabad. Foreign investment is encouraged and 100% foreign ownership is permitted in all but a few sensitive industries.
To keep the country moving in a positive direction, private foreign investment as well as aid from agencies like the World Bank and the IMF is needed to meet its development needs. But economic sanctions imposed by the Clinton administration on Pakistan and India after their nuclear tests will start to hurt progress if a comprehensive test ban treaty is not signed soon.
Off the tip of India is the island nation of Sri Lanka. It has a rapidly growing economy and a real problem with a separatist movement among the Tamil ethnic minority. But the stock exchange in Colombo is one of the best-run emerging stock markets. It got off to a shaky start, but improved dramatically when the government lifted a tax on stock purchases by foreigners. There are restrictions on foreign ownership, however.
The exchange has more than 225 listed companies but is likely to remain in the doldrums until there is a more stable political situation.
Next week: Turkey and Greece