A chastised government is promising shelter from India’s economic storm.THE ”India rising” story was supposed to be one of uninterrupted growth, an irrepressible economic tide that would turn the world’s largest democracy into one of the 21st century’s economic powers.
A rupee that has lost nearly a quarter of its value in 12 months, a soaring budget deficit, tanking sharemarket and savagely curtailed growth were never part of the plan. But this is India’s economic reality.
India’s economy has staggered to its worst position since the global financial crisis of 2008-09.
Inflation remains above 7 per cent, and, despite promises to cut subsidies, India’s budget deficit was 5.9 per cent in the financial year ended March, and will stay above 5 per cent this year.
The rupee is hovering at record lows, near to, and even briefly above, 56 to the US dollar, and has lost 24.8 per cent of its value since this time last year. Analysts predict it might fall as low as 58.50 in coming months if the European financial dilemma deteriorates.
India’s growth last quarter, 5.3 per cent, was the worst result in eight years. The manufacturing sector shrank 0.3 per cent in the quarter compared with a year earlier, while the farm sector grew by only 1.7 per cent.
India was once the darling of international investors, but foreign firms are now steering clear of the country. Several global telcos have quit India over corruption and uncertainty in licensing.
Gross capital formation – a measurement of fresh investments by companies – grew by 5.3 per cent last financial year, down sharply from 11.1 per cent the year before. As a proportion of GDP it has fallen below 30 per cent.
Worse numbers after bad have prompted Standard & Poor’s to cut India’s credit outlook from stable to negative, imperilling its BBB-minus investment grade status.
Finance Minister Pranab Mukherjee says India’s economic malaise is worse now than during the global financial crisis because this time the cupboard is bare.
He says the government does not have the money to repeat the huge stimulus program launched four years ago. ”The second round of global uncertainty and the slowdown has come rather quickly on the heels of the previous one, with practically no headroom for running a proactive fiscal policy.”
But, to the frustration of businesses and despair of India’s 400 million poor, finding an excuse to do nothing has become this government’s modus operandi.
Almost all of the Indian government’s major economic efforts – to allow foreign investment in multi-brand retail (supermarkets); to curb food inflation; to reform taxation and bring in a GST; or to stop the country’s rampant corruption (much of it within the government) – have failed.
A report from Standard and Poor’s this week, titled Will India be the first BRIC fallen angel? – said Prime Minister Manmohan Singh had no authority in the government. “The cabinet is appointed largely by Sonia Gandhi,” it said. ”Hence, the Prime Minister often appears to have limited ability to influence his cabinet colleagues and proceed with the liberalisation policies he favours.”
Dr Kanhaiya Singh, senior fellow at the National Council of Applied Economic Research, told BusinessDay in Delhi: “The government is in a precarious position, a position it has itself created. No one can give this government good marks. The management of inflation and interest rates, and of the economy generally, has not been good for the past few years.”
He said inaction had gripped the government, and time-sensitive decisions were deferred or abandoned because of political difficulties.
”And the major reason behind this indecisiveness is the eruption of a volcano of corruption. That has jeopardised the entire bureaucracy and the political system. No one will make a decision, everyone is too scared.”
Stung by months of criticism, the Prime Minister has committed his government to 10,000 kilometres of new roads, and 18,000 megawatts of additional power generation this financial year, as well as beginning work on 42 port projects and three new airports. ”In these difficult times, we must do everything possible to revive business and investor sentiment,” he said.
India’s unwillingness to use the good times of previous years to prepare for the bad – running up deficits even while growth was in double digits – encourage comparisons with the European economies now staring down imminent collapse. But analysts say that unlike Europe and its structural problems, India’s economic fundamentals are sound and the country can recover.
‘The fundamental ingredients of the Indian economy are intact,” said Kanhaiya Singh, from the National Council of Applied Economic Research. ”They are not jeopardised, so, once these upheavals are taken care of, and the international economic environment comes back to normal, India will quickly pick up.”
”The current problems facing the economy aren’t insurmountable,” Prashant Jain, chief investment officer at HDFC Asset Management in Mumbai told Bloomberg.
”With a few difficult steps, it should be possible to put it back on the rails fairly quickly.”
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