Posted by: Manjeet Krpalani on March 13, 2008
As the US economy brakes, it is causing the meaningful economies of the world to stall with it. India and China, which are both supposed to balance the agony of the groaning giant on the Atlantic, are having a deceleration of their own. China’s rising inflation – 8.7% - has already caused concern. Now India is seeing dangerous inflationary signs – and clear indications that its dizzy-high economy is coming down to earth. Economists like Rajeev Malik of J.P. Morgan have cut India’s growth estimates for 2008 to 7% from over 8%, while Ridham Desai of Morgan Stanley are warning of a 50% decline in the Indian stock market from its peak of 21,000 earlier this year. “The factors that could cause a bear market include a combination of bad global financial markets and policy errors at home,” says Desai in a March 13 report.
Inflation has crossed 5%, way past the comfort levels of India’s conservative central bank which has been working overtime this past year to keep it below that level. And because Indian politicians have refused to lift the subsidies on oil and diesel for the domestic economy, fearing a political back lash, the country has not yet seen a real inflationary hit yet.
As for the economy - the combination of the US slowdown, an over-heated stock market, high interest rates, and a consistent lack of reform from the ruling Congress government in New Delhi, are taking their toll. Industrial production has almost halved to 5.3% now from Jan 2007; ditto with manufacturing growth which is down over 50% from last January’s 12.3%. Consumer durables, which were leading the great domestic consumption story, have seen decelerating growth. What’s in imminent danger are the huge capital expansion plans from corporate India – not only from the continuing lack of infrastructure that’s creating more chokepoints than ever before, but also from the foreign money that’s feeling the pressure of a looming US recession and is unlikely to pour it as liberally into India has it has before. In addition, Indians are leveraged – home and consumer loans are aplenty, and in a deteriorating environment, will be hard to maintain.
Corporate India grumbles about how expensive it is to do business in India – apart from low-end labour, everything is expensive. Real estate, interest rates, talent. Even food is now becoming dear. How to stay competitive with China or anyone else?
This glum mood can be made to lift – with a little imagination from New Delhi. For the past four years, the administration has hidden behind India’s dazzling growth story, reflected in its sky-high stock market which attracted so much foreign attention. It’s not been pressured to reform, and it hasn’t.
Now, however, it’s the time of reckoning. There’s been no reform in key sectors like agriculture (resulting in crop failures, farmer suicides and poor distribution of food), infrastructure (causing blockages in transport, real estate, town planning), education (creating a severe skills shortage) and healthcare (malnutrition and poor health is stunting the physical and mental capacities of young rural Indians). Just at the time the economy needs an extra internal edge to help it ride out this global malaise, India will surely be held back.
However, no one is expecting a change. The Congress party, which leads the coalition in Delhi, is weak, populist, and preparing for elections in 2009 – maybe earlier. Reform is the last thing on its mind. It’s a shame; for India’s hard-earned growth will simply slip away.