The Question Jon Stewart Asked Nandan Nilekani. How Would We Answer It?

It was such a pleasant surprise to see the great Jon Stewart invite Nandan Nilekani on his show. After all, who expected Jon Stewart to have heard of Nandan or his company InfoSys. But then the mystery was cleared up.

Jon asked Nandan about his friendship with Tom Friedman of the New York Times. Ah! No wonder Jon invited Nandan. These big media types have to take care of each other’s friends. Any way, it was great to watch the Magnificent Stewart be so warm and courteous to Nandan Nilekani after his recent TV annihilation of our fave, Jim Cramer. (See the Nandan interview on ).

Nandan did a good job and explained why he wrote his new magnum opus, “Imagining India”.  He explained how India’s large population had become what he called India’s demographic dividend. This fits with our own analysis (See our article “Will The Indian Market Be To America What The American Market Was To Europe 100 Years Ago” – February 7, 2009 ––was-to-europe-100-years-ago.aspx  ).

Near the end of the interview, Jon asked Nandan “What would you say is the biggest detriment right now for India? What’s the thing that could be the biggest pitfall?”.

Nandan replied “I think the lack of education because we still have a lot of young people who are not getting good schooling and that’s going to be the difference between demographic dividend and demographic disaster”.

That is a valid point. Nandan should know. He is associated in a real way with Pratham, the greatest (& most effective, most successful) education NGO in the world (see

Education is certainly a great priority. But, in our frank opinion, that is not the answer to Jon’s question. So what is that one factor that could spell the difference between success and failure in India?

In our opinion, it is the lack of the American Financial System in India, in particular, the lack of a vibrant Bond Market like America has. We sort of quake in fear as we write this. Had we said this on Stewart’s show, he would have cut us up and scattered the pieces among his vast audience.

After all, everyone knows it is the American Bond Market that has caused unlimited carnage on American society and the world. Why would we think India needs it when its creator America, led by Jon Stewart and his not so merry band, is trying to destroy it, at least malign it.

India needs capital to grow, to meet its gaping needs for investments in education, agriculture among others. A large inflow of foreign capital was the main reason for India’s spurt of growth in the past few years. According to experts who study this sort of a thing, India received cumulative inflows of $224 billion over the past 5 years, of which 2008 saw inflows of $108 billion, virtually half of the total inflow. This serviced India’s explosive credit and capital spending cycle. India’s outstanding credit grew from $189 billion in March 2003 to $643 billion in March 2008. In these 5 years, India spent $1.4 trillion on investment. This is what they mean by leverage.

Unfortunately, much of this was hot money that had come in to play the Indian stock market. When the global credit bubble burst, so did India’s bubble of credit inflows. The Indian stock market, Sensex, fell from 21,000 to about 8,000 in 2008 and the value of the Indian Rupee fell from Rs. 38/$ to about Rs. 51/$.

American economy is falling more rapidly than India’s economy at this moment. But, you could not tell that from the amount of money that is pouring into America from all over the world. Why? The safety and the liquidity of the Great American Bond Market.

Look at the facts. A week ago, America borrowed about $63 billion by selling US Treasuries at historically low interest rates. Next week, America will borrow about $100 billion by selling US Treasury securities again. There is no shortage of buyers. Everyone in the world wants to put their money in the Great American Government Bond Market. 

This Government Bond Market has allowed development and maturation of other secondary Bond Markets like the Corporate Bond Market, the Municipal Bond Market and the Asset-Backed Bond Market. These markets allow American Corporations and American State/Local Governments to keep borrowing money for their needs or for future atonement of past mistakes.  

India has none of these advantages. Like the American government, the Indian government runs a massive fiscal deficit. But unlike America, neither Indian Government nor Indian Corporations can borrow large sums of money on their own terms in their own currency. 

Why? Because, India has not developed a large, vibrant Bond market. So Indians have only two choices for their savings, the stock market or the Banks. Indian Nationalized Banks are a secure place to put money and so most Indians invest their money in Fixed Term Deposits (CDs) in these banks. Unfortunately, the Indian Government uses these savings for its own fiscal needs. Estimates suggest that over 70% of India’s savings are held captive and used by the Indian Government.

This starves the Indian corporate sector of the capital it needs to grow. It has to depend on foreign inflows of capital or borrow from foreign banks in foreign currency. This adds tremendous risk, a risk that American entities never have to face.

It is well known that many Indian State Governments are technically insolvent and depend on the Central Government for their financial needs. Each state competes with the others to curry favor with the Central Government because that is their lifeline. This is why every facet of India’s development gets politicized. 

If India had a Municipal Bond Market like America’s, each Indian state could raise its own capital from that market. It would then have to compete with other states for that capital and improve its performance to get capital at the best possible rates. If India had a Corporate Bond Market, Indian corporations could raise much needed capital at home to finance their growth. 

Getting back to education, Indian University systems such as Indian Institutes of Technology and Indian Institutes of Management could raise money in the Indian Bond Market, like Harvard and Yale did recently in America. Other major universities could do the same. This would free up the meager resources of Indian Government to fund education for the vast number of India’s young children. Local Education systems like Mumbai Education Board could also raise their own capital to finance their plans for educating Mumbai’s slum children, thereby allowing more government funding for rural education.

The list goes on and on. India has many noble causes and many crying needs. Today, every cause and need goes with a begging bowl to the Central Government for funding, a Central Government which already runs a very high fiscal deficit, so high that its rating has been downgraded recently to near junk status. 

So, Mr, Stewart, the biggest detriment right now for India is the lack of an American style Bond Market.

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