India’ s recent economic woes
The Economist recently declared that“ India’ s financial system is like a ramshackle engine lovingly maintained by a sect of oil-spattered engineers and wearily tolerated by most people who depend on it.” One such engineer is Raghuram Rajan who, on September 4, 2013, took the helm as the 23rd governor of the Reserve Bank of India( RBI). His immediate task was to tackle India’ s worst economic crisis since 1991. In the second quarter of 2013, the economy grew a measly 4.4 percent. The country’ s banking system reeled.
As investors fled the market, Rajan was confronted with two options: a) raise interest rates in an effort to stabilize the rupee and risk crippling industries; or b) follow the free-market approach. Rajan took a calibrated stance by easing restrictions on the banks’ ability to borrow in dollars, and by backing moves to reform India’ s structural problems, dodgy fiscal policies, and weak manufacturing base. Had he taken the free-market approach, he would have risked testing the market’ s patience, and perhaps unleashed further instability through financial speculators.
India has not battled economic woes alone. After signals that the U. S. Federal Reserve( the Fed) would shift reins and adopt a tighter monetary policy, several other emerging markets were hit this year by the reversal of foreign investment inflows. The Fed’ s announcement prompted global investors to shift billions of dollars out of emerging financial markets and erode the value of local currencies. The rupee shed close to 40 percent of its value.
The sell-off by global investors was further compounded by new capital controls introduced in August 2013. These controls curtailed the annual limits that firms and individuals could transfer out of the country, thus spooking foreign investors who feared the limits might impact their funds. Despite assurances from the Indian authorities that no such restrictions would be placed on foreign investors, the markets continued to slide.
Success in the face of dysfunction
Despite this recent financial trauma, according to the 2013 Credit Suisse Global Wealth Report, India currently boasts 182,000“ dollar millionaires.” The 2013 Wealth-X and UBS Billionaire Census has determined that, of the existing 2,170 billionaires, 103 hail from India. These ultra-high net worth individuals( UHNWI) seem to tolerate India’ s economic and political dysfunction.
Given the Indian government’ s tight regulation of its banks and debt markets, India’ s actual center for investment banking is not Mumbai, but rather Singapore. Some analysts estimate that while half of all rupee trading is offshore, most financial disputes are arbitrated outside of India. Unlike China, which enjoys some control over the economic activity in Hong Kong, India is obviously unable to control similar activity in Dubai or Singapore. The UHNWIs understand these processes, and it seems they have long understood that they can safely park their investment funds in Mauritius and pay taxes at that island’ s rate of effectively zero.
Political dynamics are an additional source of uncertainty for the Indian public. While India proudly proclaims its status as the world’ s largest democracy, it also suffers from turmoil within its legislative body. There are effectively only two major national parties: the Indian National Congress( INC) and the Bharatiya Janata Party( BJP). Both domestic and foreign investors view the BJP as friendlier to business. Wealthy Indians anxiously await the next election results.
What does this mean for EB-5?
In spite of the many incentives EB-5 developers have to enter the Indian market, they must first tackle certain obstacles that I see in the process. First, India does not have a sophisticated network of migration agents that have ready access to EB-5 program information. While the EB-5 program is popular in China, very few Indians have heard of it. Second, Indian investors have access to a host of international immigration programs. Third, unlike Chinese investors who are keen on immigrating to the United States, wealthy Indian citizens are typically not anxious to move. Fourth, Indian investors are usually looking for a higher return on their investments than their Chinese counterparts. Fifth, there is currently a $ 75,000 cap on capital outflows. Lastly, EB-5 developers have difficulty tracking the source of funds. Yet, I think none of these hurdles spell doom for the Indian EB-5 market.
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