Indian rupee dive sparks investor panic

Capital flight worries are rising in India after its equity markets and its currency hit fresh lows. New taxes on gold have been introduced plus caps on how much individuals can take out of the country, amongst other moves.

Disillusionment with India's long-term potential is part-fuelling the crisis. Has India's economy lost its vindaloo?

Investor wobbles
Much of the anxiety relates to India's massive growth, recently hitting almost +9% per annum in recent years, more than double that since between the 1950s and 1970s. Although this kind of growth has ushered in huge prosperity for some, inflation has also grown, eroding competitiveness.

The rupee has weakened by almost 30% in the last two years alone. The situation hasn't been helped by the US recently threatening to pare down the supply of cheap money. That has hit investor confidence, particularly for international investors.

The C-word

A big chunk of India's economy still relates to services, rather than innovation or exports. Think of all those call centres. This makes India's economy vulnerable to the squalls and gusts of global markets. Then there's the C-word - corruption.

"Corruption which acts like a termite, slowly eating the country's wealth and ethics. Transparency International reports about 40% of Indians had firsthand experience of paying bribes or using a contact to get a job done in public office," claimed an online report yesterday.

Mistrust in Indian government is widespread. Recently the BBC claimed that almost a third of sitting Indian MPs were facing criminal charges. Even worse, India's Election Commission discovered that a third of all Indian state lawyers also faced criminal charges.

New caps

All-pervasive bribes and kick-backs are a way for life for hundreds of millions of Indians. It's almost feudal. Indian corruption is particularly rotten in property and construction with a huge black economy attached to it. Multiple agencies distort most steps of the house-building and buying process; there's little effective regulation.

No wonder many Indian companies have preferred to invest abroad rather than face the realities of the home market. But that will be harder from now on due to new caps on international investment. The current crisis, for long-term investors, could be a buying opportunity however.