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  • India's Economy Hits the Wall

    India's Economy Hits the Wall

    India's Economy Hits the Wall

    Growth is slipping, stocks are down 40%, and foreign stock market investors are fleeing. Business blames the ruling coalition for failing to make reforms

    by Manjeet Kripalani

    Just six months ago, India was looking good. Annual growth was 9%, corporate profits were surging 20%, the stock market had risen 50% in 2007, consumer demand was huge, local companies were making ambitious international acquisitions, and foreign investment was growing. Nothing, it seemed, could stop the forward march of this Asian nation.

    But stop it has. In the past month, India has joined the list of the wounded. The country is reeling from 11.4% inflation, large government deficits, and rising interest rates. Foreign investment in India's stock market is fleeing, the rupee is falling, and the stock market is down over 40% from the year's highs. Most economic forecasts expect growth to slow to 7%—a big drop for a country that needs to accelerate growth, not reduce it. "India has gone from hero to zero in six months," says Andrew Holland, head of proprietary trading at Merrill Lynch India (MER) in Mumbai. Many in India worry that the country's hard-earned investment-grade rating will soon be lost and that the gilded growth story has come to an end.

    Global circumstances—soaring oil prices and the subprime crisis that dried up the flow of foreign funds—are certainly to blame. But so is New Delhi. Much of the crisis India faces today could have been avoided by skillful planning. India imports 75% of its oil to meet demand, which have grown exponentially as its economy expands. The government also subsidizes 60% of the price of such fuels as diesel. In 2007, when inflation was a low 3%, economists such as Standard & Poor's Subir Gokarn urged New Delhi to start cutting subsidies. Instead, the populist ruling Congress government spent $25 billion on waiving loans made to farmers and hiking bureaucrats' salaries.

    Botched Opportunities
    Now those expenditures, plus an additional $25 billion on upcoming fertilizer subsidies, is adding $100 billion a year—or 10% of India's gross domestic product, or equivalent to the country's entire collection of income taxes—to the national bill. This at a time when India needs urgently to spend $500 billion on new infrastructure and more on upgrading education and health-care facilities. The government's official debt, which dropped below 6% of gross domestic product last year, will now be closer to 10% this year. "Starting last year, the government missed key opportunities" to fix the economy, says Gokarn. In fact, he adds, "there has been no significant reform done at all in the past four years"—the time the Congress coalition has been in power.

    Even the most bullish on India are hard-pressed to recall any significant economic reforms made in the recent past. A plan to build 30 Special Economic Zones is virtually suspended because New Delhi has not sorted out how to acquire the necessary land, a major issue in both urban and rural India, without a major social and political upheaval. Agriculture, distorted by fertilizer subsidies and technologically laggard, is woefully unproductive. Simple and nonpolitical reforms, like strengthening the legal system and adding more judges to the courtrooms, have been ignored.

    A June 16 report by Goldman Sachs' (GS) Jim O'Neill and Tushar Poddar, Ten Things for India to Achieve Its 2050 Potential, is a grim reminder that India has fallen to the bottom of the four BRIC nations (Brazil, Russia, India, and China) in its growth scores, due largely to government inertia. The report states that India's rice yields are a third those of China and half of Vietnam's. While 60% of the country's labor force is employed in agriculture, farming contributes less than 1% to overall growth. The report urges India to improve governance, raise educational achievement, and control inflation. It also advises reining in profligate expenditures, liberalizing its financial markets, increasing agricultural productivity, and improving infrastructure, the environment, and energy use.

    "The will to implement all these needs leadership," points out Poddar. "We have a government in New Delhi with the best brains, the dream team," he says, referring to Oxford-educated Prime Minister Manmohan Singh and Harvard-educated Finance Minister P. Chidambaram. "If they don't deliver, then what?"

    Disillusioned Business
    More worried than most are India's businessmen, who have turned in stellar performances with their investment and entrepreneurial drive and begun to look like multinational players. For them, there's plenty at stake. But lack of infrastructure, from new ports to roads, along with an undeveloped corporate bond market and high prices for real estate, commodities, and talent, are causing them to hit "choke points and structural impediments all over. We will lose years," says Bombay investor Chetan Parikh of of Jeetay Investments.

    Sanjay Kirloskar, chief executive of Kirloskar Brothers (KRBR.BO), a premier $470 million maker of water pumps, already has $100 million in overseas contracts. Yet few infrastructure contracts have come from New Delhi. Kirloskar had hoped to be part of a grand project linking India's rivers, but those plans have been on hold for four years. "The infrastructure growth we had hoped for has not come about," he says. "Instead, we will now expand overseas more than in India."

    Such constraints on growth at home will have an impact. Corporate earnings growth is likely to dip, says Merrill Lynch's Holland, who now predicts just 10% growth, instead of the previous year's 20%. That slowdown makes it less attractive for foreigners to invest in India's stock market. Already this year, foreigners have taken $5.5 billion out of the market, compared with the $19 billion they invested last year. Gagan Banga, chief executive of India Bulls Financial Services, an emerging finance and real estate giant, points admiringly to China's ability to maintain its growth momentum for a decade, while India's has not been able to hold up for even three years. "Serious companies are going to grow at a much slower pace, and some may even de-grow this year," he says. Unless major policy decisions are made by New Delhi immediately to keep the economy on the growth path, he says, "India will slow down even further."

    New Delhi defends its four year reign in India. "We've had 9% growth for four years in a row," says Sanjaya Baru, media adviser to Prime Minister Singh. "That is unprecedented." He attributes it to the increasing rate of investment, up from 28% of GDP to 35% currently, "close to most ASEAN economies," though he admits that a large part is from the private sector. "Yes, there is a fiscal problem, but there's a price to be paid for coalition politics," adds Baru. So having growth drop "from 9% to 7% is not grim."

    Social Backlash?
    Chetan Modi, head of Moody's India, says the increasingly high cost of doing business in India may force global investors who had set up base in India—especially financial-services players—to move to more affordable and efficient hubs, such as Singapore and Hong Kong. If the economy slows and inflation continues to accelerate, says Sherman Chan, economist at Moody's Economy.com, "social unrest is possible."

    In fact, India is becoming a dangerous social cauldron. The wealth harvested by the reforms of previous governments has made itself evident in the luxury cars and apartments in India's big cities, leaving much of India full of aspirations but few means to achieve them. There is a severe shortage of colleges, yet a plan to build 1,500 universities gathers dust. The Communists in the ruling coalition are against both globalization and industrialization, so without new factories being built, employment growth has been almost stagnant, rising to just 2%—a disappointing rate in a country where an estimated 14 million youths enter the workforce every year, but just 1 million get jobs in the regulated, above-ground economy.

    Meanwhile, few expect any bold moves New Delhi, especially with national elections due in 2009 and five important state elections scheduled before the end of this year. Thus far, the ruling Congress party's record has been poor; it has lost almost every state election this year and is likely to lose all five of the upcoming ones.

    The big hope for a return to the course of reform in India, businessmen hope, will be a new government in New Delhi next year. The gravest danger is that India's messy coalition politics will bring into power another indecisive alliance that will keep the country in policy limbo for another five years. If so, says S&P's Gokarn, it's a meltdown scenario: growth slipping below 6.5%, accelerating the chances of India reverting to its 1991 status when it was plunged into a balance-of-payments crisis.

  • #2
    It seems that the whole world is on the brink of a recession, and we will all feel the pain. All the growth forecasts that had been previously accepted will almost certainly have to be revised downwards. We live in 'interesting' times.
    Semper in excretum. Solum profunda variat.

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    • #3
      Ah well we all knew it had to fall apart sooner or later. Nature of the UPA government meant that for 4 years there was not much in the way of reform. At least we had a good run...........
      For Gallifrey! For Victory! For the end of time itself!!

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      • #4
        Wouldnt blame the government. High prices are not confined to India alone. Its a worldwide phenomenon. But off course the incumbent government will have to pay the price for it. Its entirely possible that in 3-4 months the prices might ease and by that time we will have a new government which will take the credit of bringing down the prices.
        Its not the UPA governments fault that oil is at $146. It is not the governments fault that there is a worldwide food shortage and high price. Its just that they are in the wrong place at the wrong time. Im sure at this point of time, even if the NDA was in charge, things would have been no different.

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        • #5
          Yusuf, I was referring to the failure of the UPA to implement any sort of structural reform when times were good, resulting in us getting hit much harder than we could have been. A more agressive reform scheme with fewer expensive subsidy sops might have mitigated the damage.
          For Gallifrey! For Victory! For the end of time itself!!

          Comment


          • #6
            The structural reforms could not be done since the Communists who were backing the govt wanted the priority on populist schemes.

            We are fortunate that there is no food shortage as such, though the prices have gone through the roof and the inflation is at its record high.

            One wonders how long this will last.


            "Some have learnt many Tricks of sly Evasion, Instead of Truth they use Equivocation, And eke it out with mental Reservation, Which is to good Men an Abomination."

            I don't have to attend every argument I'm invited to.

            HAKUNA MATATA

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            • #7
              The silver lining is that people will blame Congress and Communists and therefore Congress and Communists will take a huge hit.

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              • #8
                Originally posted by Blademaster View Post
                The silver lining is that people will blame Congress and Communists and therefore Congress and Communists will take a huge hit.
                Manmohan, though a meek and a soft spoken person, almost effeminate, has regained his stature as a man. He forced Sonia Gandhi to support him and that is no mean task! Then he kicked the Communists in the teeth! He has gone up notches in esteem!

                The Communists, being the guttersnipes, has not only stated that they are on the brink of withdrawing support and reducing the govt to a minority, they have also stated that they will publish the notes exchanged by them and the govt. That can turn out to ruin the Congress Party's image since they were going overboard to placate the Communists and may have thus put their foot in their mouths!

                Not a happy moment in the history of Indian politics.


                "Some have learnt many Tricks of sly Evasion, Instead of Truth they use Equivocation, And eke it out with mental Reservation, Which is to good Men an Abomination."

                I don't have to attend every argument I'm invited to.

                HAKUNA MATATA

                Comment


                • #9
                  Originally posted by bolo121 View Post
                  Yusuf, I was referring to the failure of the UPA to implement any sort of structural reform when times were good, resulting in us getting hit much harder than we could have been. A more agressive reform scheme with fewer expensive subsidy sops might have mitigated the damage.
                  Ray Sir answered that part of your question.
                  Apart from that subsidies are given all over the world. Even the US gives subsidies. You may be saying that subsidies is hurting the economy, but then are you willing to pay Rs 100 or more for a liter of gas?
                  if the government removes farm subsidies, are you willing to pay 50/kg of wheat?
                  Im sure you will cry hoarse then and so will other 1.3 billion people.

                  This government has been paralyzed by the back seat driving by the commies who have enjoyed power without being accountable.
                  Im sure the entire nation is tired of these ppl and they will be booted out in the next election.

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                  • #10
                    Originally posted by Yusuf View Post
                    Ray Sir answered that part of your question.
                    Apart from that subsidies are given all over the world. Even the US gives subsidies. You may be saying that subsidies is hurting the economy, but then are you willing to pay Rs 100 or more for a liter of gas?
                    if the government removes farm subsidies, are you willing to pay 50/kg of wheat?
                    Im sure you will cry hoarse then and so will other 1.3 billion people.

                    This government has been paralyzed by the back seat driving by the commies who have enjoyed power without being accountable.
                    Im sure the entire nation is tired of these ppl and they will be booted out in the next election.
                    Actually I'm all in favour of subsidy removal especially in fuel. Let the natural cost reflect in all things. The farmers of India committing suicide during a worldwide food price rise is a result of market distorting subsidies.
                    Remember, the govt gets its money for all these things such as rural sops for free power, fertilizer, and fuel from us the middle class, the only people in india who actually pay tax. Even in those rare cases where companies and traders do not evade, they pass the cost on to the consumer. Less subsidy, less govt waste, less taxes levied for those subsidies.
                    For Gallifrey! For Victory! For the end of time itself!!

                    Comment


                    • #11
                      Indian Finance Minister P. Chidambaram and Reserve Bank of India Governor Raghuram Rajan discussed their country’s economic situation and addressed concerns about India’s future, at separate meets in the US. Both said that they are optimistic about the growth in Indian economy by 2014 despite other countries pessimistic approach to India. To read more about this visit The American Bazaar

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                      • #12
                        Once on Top

                        Today India Economic Growth rate is the least in south asia.
                        Next Year predicted=3.7%

                        GDP growth (annual %) | Data | Graph

                        Comment


                        • #13
                          The Brig is back! Welcome back, Ray.
                          No such thing as a good tax - Churchill

                          To make mistakes is human. To blame someone else for your mistake, is strategic.

                          Comment


                          • #14
                            Originally posted by Doktor View Post
                            The Brig is back! Welcome back, Ray.
                            No he is not. Someone opened a centuries old thread without adding anything substantive. Where is the Hot dead chick ?
                            "Is God willing to prevent evil, but not able? Then he is not omnipotent. Is he able, but not willing? Then he is malevolent. Is he both able and willing? Then whence cometh evil? Is he neither able nor willing? Then why call him God?" ~ Epicurus

                            Comment


                            • #15
                              Originally posted by farhan_9909 View Post
                              Once on Top

                              Today India Economic Growth rate is the least in south asia.
                              Next Year predicted=3.7%

                              GDP growth (annual %) | Data | Graph
                              Farhan,

                              I know you are probably singing with joy at India being the lowest, but it usually helps to dig deeper

                              IMF says India GDP forecast based on market price, not factor cost - Economic Times
                              "Is God willing to prevent evil, but not able? Then he is not omnipotent. Is he able, but not willing? Then he is malevolent. Is he both able and willing? Then whence cometh evil? Is he neither able nor willing? Then why call him God?" ~ Epicurus

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