The performance of Indian equities has been nothing short of fabulous, with many prices doubling and even tripling in the past two years. The Bombay Sensex 30 Index is up about 150 percent since May 2003, and the broad Bombay Stock Exchange 500 Index has gained around 175 percent. Particularly impressive have been the nearly 200 percent rise in the IT Index and increases of roughly 250 percent in both the Consumer Durables and Capital Goods Indexes.
A small public sector and concomitant low taxes have also aided the economy. In the 2004-2005 fiscal year ended March 31, the Union (or central) government's net tax revenue amounted to 7.9 percent of nominal GDP and total receipts equaled 10.8 percent. With expenditures running at 17.6 percent of GDP, last year's fiscal deficit (or total government borrowing requirement) equaled 4.5 percent of GDP, according to the Reserve Bank of India Bulletin.
Prime Minister Singh, as finance minister in the early 1990s, crafted many of the reforms responsible for India's economic renaissance, including lower tariffs, fewer import and forex restrictions, the lifting of industrial licensing and price controls, and a reduction in the top marginal income-tax rate from a staggering 97.5 percent to a more sensible 35 percent.
Sound monetary management nowadays leaves little room for complaint, with consumer price inflation trending around 4.4 percent on a 12-month basis over the past five years. Monetary stability has helped keep interest rates down, too. Since 2000, 10-year government bonds have yielded 7.8 percent on average, making for a mean real interest rate of 3.4 percent over the period.
But only through an ever-increasing ratio of financial capital to labor capital will labor productivity make the gains necessary for substantial improvements in the country's overall standard of living. Capital availability will rise with the expansion of the domestic economy, of course. But more is needed. Given the immense size of its labor force, India requires massive injections of foreign capital to make the investments in technology and equipment needed to augment output per hour. So, of the panoply of potential governmental reforms, liberalizing foreign capital flows is far and away the single most important one.
If India becomes a more hospitable home for foreign investment, their economy can grow 10 percent yearly for the next decade, representing an economic shot across China's bow. Embracing Anglo-Saxon market economics will strengthen both the Indian and American economies, thereby adding even more power to the new diplomatic entente.