Indian Stock Exchanges Going Global?

I have written previously about how global markets are getting more integrated and showing signs of high correlation.  Regarding this, I had also highlighted the point of imperfect information dissemination and how domestic markets have changed.  The previous article talked about how exchanges and other capital markets, which were earlier domestic in nature, especially of emerging economies such as India have now gone global or have initiated the process of doing so.

A valid concern then arises whether any of our stock exchanges have the ability and necessity to become truly global. Ability? Of course yes. India enjoys a strong technological advantage, thanks to its IT sector. Supplemented with the appropriate investor friendly policy environment, India has better chances in comparison to its competitors. Furthermore, necessity, as economics teaches us, arises from a near inelastic demand curve. And presently, I would say that this inelastic demand is present in the form of the huge investor interest in the growing returns of the securities of Indian capital markets.

As I write, the US short term interest rates are close to zero, and the US long term rates are around 2-3 %. The interest rate prevailing in India is currently around the 6-7 % range. Thus, this vast interest rate differential makes a compelling case for carry trade. But cash- laden investors in the West are looking for even higher returns in the form of equities.

The question we should be asking to ourselves is that, can Indian stock exchanges make it big on the international stage in the next 10-20 years? I say yes.

India is among the many emerging economies that they consider and competing for the same factors of production and markets for its production. The race to fight for these economic resources and markets for sale has only intensified since the economic crisis begun.

The race for other factors of production shall continue, but I would like to focus on capital as the most necessary factor for the coming years. Capital is a very important input for growing economies and if India needs to sustain existing growth levels of 9%, it has to tap external savings and investments. In simple economic terms, investments in an economy are equal to the domestic savings, budget surplus and net imports. Hence increasing capital inflows in the form of foreign investments on the NSE traded stocks will be a great boost to the Indian economy.

Just recently in May, when the government announced plans for compulsory 25% stake sale in all listed public companies, there was a lot of hue and cry over whether the market would have enough liquidity to absorb  so much of stake sale. The estimated amount of equity issuances over the next 3 years is around $30 billion. This amount is trivial in comparison to what large corporations in the US issue. For instance, HP is planning to come out with a $33 billion bond issue in the coming weeks.

Another important factor is competitiveness among the national exchanges itself. NSE is closely followed by BSE and another MCX-SX is waiting in the docks If not NSE then there will be some other exchange. But in my opinion, with its current position in terms of the market position, management and technology advantage, NSE is the most amenable to such expansion.  

NSE has recently signed a cross listing agreement for futures of flagship indices with CME and earlier with SGX, but these listings are just to give foreign investors a feel of Indian markets and assist  in portfolio diversification. The real deal will be when the NSE can convert the volumes and listing numbers the large foreign bourses boast about.

My last argument for having such high hopes of seeing an Indian stock exchange reach the heights of a global exchange is the comparative advantage Indian capital markets have over other emerging economies markets. In the recent World Economic Forum’s Global Competitiveness Index, although India fell two places to 51st rank, its financial markets were rated 17th across the world. This shows how the existing level of competitiveness in the Indian exchanges and the future can be built on this grounding.

Two Worlds Apart

The world is clearly split today. With one half looking forward to a bright future and with big aspirations in their hearts and the other half of the world looking behind, still picking up rags from the remains of the last bust and trying to rebuild their economies. One half of the world is flush with liquidity and raising money is just a blink away. Whereas the other half is still carrying heavy debt burdens on their shoulders and has no idea how to lessen it. One half of the world is witnessing rapid economic progress and expectations of growth, even better than before the recession. Meanwhile, the other half is still finding it hard to recover and repair, with its problems ranging from looming inflation to mounting unemployment.

The world that was once ‘emerging’ has now arrived and the world that was once long arrived, is now trying to re-emerge. Okay enough of euphemism, let’s make it more simple! What I mean is the rebalancing of global economy is taking place more quickly than anticipated, with the current recession being just a catalyst. According to my understanding, the change was always happening, but not noticeable.

The world that was once ‘emerging’ has now arrived and the world that was once long arrived, is now trying to re-emerge.

The welfare states of the West were gradually piling up debts and unproductive government spending was further exacerbating this debt. The 2 ‘lost decades’ of the Japanese economy clearly highlight the implications of an economy saddled with expensive welfare programmes. However, not many have taken notice. For instance in America, healthcare as a percentage of GDP was just 5% in 1962. It has grown to 15% in 2010 and even after the present Obamacare reform; estimates are poised at 20% in 2017 and 25% in 2025.

Difficult fiscal outlooks are not the only problems the West faces today. Other depressants are heavy national debts, aging workforce, slowdown in consumption, expensive factors of production and the growing social and cultural discontent, especially towards immigrants and minorities.

On the other hand the East is brimming with optimism and consumption is rising at a frantic pace. Emerging economies are filled with opportunities. Innovation is growing with leaps and bounds. They successfully decoupled themselves from the collapse in the West, which was a surprise to many pundits. But again many had learnt their lesson from the Asian crisis in the 90s, and their adjustments in policy making were gradual, but not that impactful or noticeable. Strong domestic consumption accompanied with prudent foreign exchange controls built over the last decade or two have helped them recover from the crisis and in general brought in public glare their economic might. Even politically they stand taller than before. The extension from G-8 to G-20 is a significant reflection of today’s time.

Cooperation or Isolation?
What the West needs is not to grow discontent against their growth but, to learn and partner in their success. The West still holds the cards on many fronts. Ranging from intellectual asset base and technical prowess to existing influential shareholding in global institutions like IMF or UNSC. But now starts the real challenge to build partnerships, rather than blocs and give the world a better tomorrow.