Is India's Economic Crash Likely in 2011?
Pakistan's economy had a hard landing in 2008. It was triggered by a balance of payments crisis brought about through precipitous decline in foreign capital inflows combined with policy inaction in response to major external shocks in terms of food and fuel prices during political transition. Is the Indian economy similarly vulnerable in 2011? Is it headed for significant slowdown in the next twelve months? And if it is, can the Indian leadership manage a soft landing through major policy actions now?
To answer these questions, let us examine the following facts:
1. India's current account deficit widened sharply to $13.7 billion in the June-quarter, which was around 3.7 per cent of GDP. The deficit was $4.5 billion in the same period year ago.
2. India's FDI has declined by a third from $34.6 billion in 2009 to $23.7 billion in 2010. Its current account deficit is being increasingly funded by short-term capital inflows (FII up 66% from $17.4 billion in 2009 to $29 billlion in 2010) rather than more durable foreign direct investment (FDI), posing a risk to external balance and funding of gap, according to a recent warning by Goldman Sachs. "Nearly 80 per cent of the capital inflows are non- FDI related. Given the excess spare capacity globally, FDI may remain weak going forward," the Goldman note said.
3. Inflation in India is running at a double digit pace as is credit expansion. India's primary articles price index was up 15.35 percent in the latest week compared with an annual rise of 13.25 percent a week earlier, data on Thursday showed. Year-over-year credit growth was 23 per cent till December 3, while deposit growth was only 15 per cent, as compared to RBI's projection of 20 per cent and 18 per cent, respectively, for 2010-11.
4. India's Food and fuel prices are continuing to rise by double digits. The food price index rose more than 12 percent, with the price of onions -- the country's most widely-eaten vegetable -- of especial concern, while the fuel price index climbed 10.74 percent. This compared with 9.46 percent and 10.67 percent respectively in the previous week.
5. The oil prices are likely to spike as the American and European economies recover in 2011, prompting Indian commerce secretary Rahul Kullar to acknowledge that “I am not sanguine. One blip on crude prices and my import bill suddenly zooms. On pro-rata basis we are looking at $ 120 billion with a caveat that if oil prices go up, it could be $ 130-135 billion”. Crude oil prices are currently running at $ 87-88 per barrel.
While China's situation is better because it enjoys significant current account surpluses and has strong capital flow controls, it is also seeing its economy overheat along with India's economy. Joseph Stiglitz, a Nobel Laureate Columbia University economist, has argued that India is more vulnerable to an asset bubble than China, saying that “strong economies that don’t yet have capital control become the focal point” for the liquidity injected by the US Federal Reserve. Stiglitz thinks that India, more than China or Brazil, should watch out for the tidal wave of money made available from the Fed’s quantitative easing. Mike Shedlock, an American investment advisor, believes that "India and China are going to overheat and crash, or their economic growth is going to slow dramatically, quite possibly both".
Indian President Pratibha Patil said last week that she is confident the economy will grow at about 9 percent in the current fiscal year ending March 2011 and would be on a sustained growth path of about 9 to 10 percent in FY12, according to Reuters. It is quite surprising that the Indian government continues to talk about increasing levels of economic growth in 2010-2011 and beyond amidst growing inflation and rising imbalances in the Indian economy. What they should be thinking about now is how to manage a soft landing by reducing liquidity and cutting India's twin deficits, rather than stepping on the accelerator and risk a big economic crash with long term negative consequences.
Related Links:
Haq's Musings
China's Trade and Investment in South Asia
India's Twin Deficits
Pakistan's Economy 2008-2010
Inflation Hits India
Goldman Sachs India Warning on Twin Deficits
India's Nov 2010 Imports, Exports
To answer these questions, let us examine the following facts:
1. India's current account deficit widened sharply to $13.7 billion in the June-quarter, which was around 3.7 per cent of GDP. The deficit was $4.5 billion in the same period year ago.
2. India's FDI has declined by a third from $34.6 billion in 2009 to $23.7 billion in 2010. Its current account deficit is being increasingly funded by short-term capital inflows (FII up 66% from $17.4 billion in 2009 to $29 billlion in 2010) rather than more durable foreign direct investment (FDI), posing a risk to external balance and funding of gap, according to a recent warning by Goldman Sachs. "Nearly 80 per cent of the capital inflows are non- FDI related. Given the excess spare capacity globally, FDI may remain weak going forward," the Goldman note said.
3. Inflation in India is running at a double digit pace as is credit expansion. India's primary articles price index was up 15.35 percent in the latest week compared with an annual rise of 13.25 percent a week earlier, data on Thursday showed. Year-over-year credit growth was 23 per cent till December 3, while deposit growth was only 15 per cent, as compared to RBI's projection of 20 per cent and 18 per cent, respectively, for 2010-11.
4. India's Food and fuel prices are continuing to rise by double digits. The food price index rose more than 12 percent, with the price of onions -- the country's most widely-eaten vegetable -- of especial concern, while the fuel price index climbed 10.74 percent. This compared with 9.46 percent and 10.67 percent respectively in the previous week.
5. The oil prices are likely to spike as the American and European economies recover in 2011, prompting Indian commerce secretary Rahul Kullar to acknowledge that “I am not sanguine. One blip on crude prices and my import bill suddenly zooms. On pro-rata basis we are looking at $ 120 billion with a caveat that if oil prices go up, it could be $ 130-135 billion”. Crude oil prices are currently running at $ 87-88 per barrel.
While China's situation is better because it enjoys significant current account surpluses and has strong capital flow controls, it is also seeing its economy overheat along with India's economy. Joseph Stiglitz, a Nobel Laureate Columbia University economist, has argued that India is more vulnerable to an asset bubble than China, saying that “strong economies that don’t yet have capital control become the focal point” for the liquidity injected by the US Federal Reserve. Stiglitz thinks that India, more than China or Brazil, should watch out for the tidal wave of money made available from the Fed’s quantitative easing. Mike Shedlock, an American investment advisor, believes that "India and China are going to overheat and crash, or their economic growth is going to slow dramatically, quite possibly both".
Indian President Pratibha Patil said last week that she is confident the economy will grow at about 9 percent in the current fiscal year ending March 2011 and would be on a sustained growth path of about 9 to 10 percent in FY12, according to Reuters. It is quite surprising that the Indian government continues to talk about increasing levels of economic growth in 2010-2011 and beyond amidst growing inflation and rising imbalances in the Indian economy. What they should be thinking about now is how to manage a soft landing by reducing liquidity and cutting India's twin deficits, rather than stepping on the accelerator and risk a big economic crash with long term negative consequences.
Related Links:
Haq's Musings
China's Trade and Investment in South Asia
India's Twin Deficits
Pakistan's Economy 2008-2010
Inflation Hits India
Goldman Sachs India Warning on Twin Deficits
India's Nov 2010 Imports, Exports
Comments
http://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/1DEVEBOP131010.pdf
NEW DELHI: India's external debt has gone up by 12.8 per cent to $295.8 billion in the first-half of the current financial year (2010-11), mainly due to increase in overseas borrowings by corporates and appreciation of rupee vis-a-vis other major currencies.
The long-term debt rose by 9.5 per cent to $229.8 billion, while the short-term debt increased by 25.8 per cent to $66 billion during April-September 2010.
External debt stood at $262.3 billion at the end of March 2010, and increased by $33.5 billion during the April-September period.
“The increase in external debt at end-September 2010 over end-March 2010 level was mainly on account of higher commercial borrowings and short-term debt,” Finance Ministry said in a statement on Friday. Rupee appreciation led to rise in external debt by $6.3 billion or 18.8 per cent of the total increase.
Among the components of long-term debt, which accounted for nearly 80 per cent of the total debt, the share of commercial borrowings stood at 27.8 per cent. The share of Government debt in total external debt stood at 24.4 per cent or $72.3 billion as against $67.1 billion at the end of March 2010.
The share of U.S. dollar in the external debt portfolio was 53.9 per cent at end-September, while that of NRI deposits 16.9 per cent. Multilateral debt accounted for 15.8 per cent of total debt at the end of September.
The share of U.S. dollar denominated debt was the highest in external debt stock at 53.9 per cent at end-September 2010 followed by rupee (18.8 per cent), the statement added.
India’s central bank may have to keep raising interest rates to combat persistent inflationary pressures, the International Monetary Fund’s mission chief to the country said.
“We see a pretty strong underlying inflationary pressure still in there,” Masahiko Takeda said on a video on the IMF’s website. Monetary policy “has been appropriately tightened,” though “in our view there’s a possibility that further monetary tightening action may be needed to contain the high inflation.”
The Reserve Bank of India said Dec. 30 that threats to growth have “receded” and inflation risks “have come to the fore,” signaling it may tighten monetary policy further after boosting interest rates the most in Asia in 2010. Governor Duvvuri Subbarao, who increased rates six times in 2010, held off on raising borrowing costs in a Dec. 16 policy announcement as a record 1.1 trillion rupees ($24.3 billion) of share sales last year caused a cash squeeze in the banking system.
IMF’s Takeda made the comments after completing an annual review of India’s economy, which was discussed by the IMF board on Dec. 22. In the board’s conclusions released today, the IMF said that the Indian economy is expected to grow 8.75 percent in the fiscal year ending March 31, and 8 percent the following year. The IMF staff report was not published.
The IMF board also said it sees inflation measures between 8.5 percent and 10.5 percent amid “little slack in the economy, the ongoing exit from the policy stimulus introduced during the crisis, and structural factors affecting food prices.”
Less Inflation
India’s benchmark wholesale-price inflation cooled to near a one-year low of 7.48 percent in November. The reading exceeds the Reserve Bank of India’s goal of between 4 percent and 4.5 percent.
The Washington-based IMF also warned that capital inflows may increase more than India’s capacity to absorb them as growth remains “among the fastest” in the world and yields in advanced economies stay low.
“While exchange rate flexibility would remain the first line of defense, reserve accumulation and macroprudential measures could be employed if strong inflows continue,” the institution’s board said in an e-mailed statement.
Risks to growth are mainly linked to global expansion, the IMF said. It said “elevated inflation, fiscal consolidation needs, and buoyant capital inflows” as “near-term challenges” that call for “careful calibration of macroeconomic policies and the diligent pursuit of ongoing reforms.”
Finance Minister Pranab Mukherjee, Home Minister P Chidambaram and Food and Agriculture Minister Sharad Pawar were among those at the talks in Delhi.
The soaring price of vegetables, milk and other eatables in the past month have taken food inflation to 18.32% - the highest in more than a year.
The agriculture minister has said the crisis is likely to continue for now.
Growing concern over food inflation has caused stocks on Indian markets to fall in value in recent days. The BBC's Sanjoy Majumder in Delhi says investors fear the Central Bank could raise interest rates as a short-term measure.
The price of onions, a staple food used in many dishes, has risen dramatically - even prompting India's government to approach long-time rival Pakistan for help.
A kilogram of onions, which usually costs 20 rupees in India, went up to 85 rupees (£1.20; $1.87) last month. It is now about 60-65 rupees a kilogram.
The government has ordered some state-run stores to sell the vegetable at 35 rupees a kilogram from Tuesday.
The price rise has been blamed on unusually heavy rains in the bulk-producing western states of Maharashtra and Gujarat and in southern states, as well as on hoarders and speculators.
Cooking oil and wheat flour have also become costlier in the last month.
Discontent over food inflation has been a major headache for the government.
High prices of essential commodities such as onions have previously sparked unrest and helped bring down the national government in 2004.
ISLAMABAD -(Dow Jones)- Pakistan's inflation rate accelerated marginally in November as food prices soar, hurt by the unprecedented floods, raising the prospects of further monetary tightening by the central bank.
The consumer price index--the main measure of price changes--rose 15.48% in November from a year earlier, said Asif Bajwa, secretary of the Federal Bureau of Statistics, during a news conference. This is quicker than the 15.43% rise in October.
The index was up 14.44% from a year earlier in July-November. Pakistan's fiscal year runs from July through June.
"The reading is slightly lower than our expectations but it could cross 16% in December due to a low base last year," said Khurram Shehzad, analyst at InvestCap Securities.
Shehzad blames the high cost of food articles, driven by a rise in sugar and potato prices, for the uptrend in inflation rate.
The data highlight intensifying price pressures in the economy fueled by a heavy damage to the farm and civil infrastructure due to the floods. Prime Minister Yousuf Raza Gilani warned inflation could soar to 20% as the government struggles to revive the economy from disastrous floods.
Prices of food and beverages rose 20.54% from a year earlier in November, compared with a 20.06% increase in the previous month. They have a 40% weight in the consumer price index.
The government had before the floods forecast economic growth at 4.5% in the current fiscal year. Economists reckon that the government will likely lower the estimate once it has a clear assessment of the extent of damage from the floods.
The State Bank of Pakistan expects economic expansion of 2%-3% in the current fiscal year. At its last monetary policy review on Nov. 29, the central bank lifted the discount rate--its main lending rate--for the third time since July as it sought to tame inflation that it said will accelerate to an average 13.5%-14.5% in the current fiscal year, higher than the previous projection of 9.5%.
Although economic growth is weak, economists say the possibility of more rate hikes cannot be ruled out as inflation continues to spiral.
A large part of the country was submerged by the floods that killed thousands and left millions homeless. The widespread damage has severely crippled the economy that was already suffering due to unceasing violence in the country.
India has announced a slew of measures to curb spiralling food prices.
The prime minister's office said the government would review import and export of essential commodities and sell onions at a restricted price.
Experts, however, say the measures are too little, too late and a repeat of already failed steps.
Meanwhile, government data released on Friday showed that the wholesale price index (WPI) had risen to 8.43% in December - the highest in a year.
This was attributed to the soaring price of vegetables, milk and other staples which took food inflation to 18.32% last month - the highest in more than a year.
Admitting that food prices had risen to "unacceptable" levels, the authorities said it was proving difficult to manage inflation.
The price of onions, a staple food used in many dishes, has risen dramatically - even prompting India's government to approach long-time rival Pakistan for help.
A kilogram of onions, which usually costs 20 rupees in India, went up to 85 rupees (£1.20; $1.87) last month. It is now about 60-65 rupees a kilo after government intervention.
The government said state-run stores would sell the vegetable at 35 rupees a kilo. The expected arrival of 1,000 tonnes of onions from Pakistan soon would also ease the situation, it said.
The price rise has been blamed on unusually heavy rains in the bulk-producing western states of Maharashtra and Gujarat and in southern states, as well as on hoarders and speculators.
The ban on export of onions, pulses, cooking oil and cheaper varieties of rice will continue. State agencies would also retail edible oil and pulses at a reasonable rate, the authorities said.
Economists said the government had shied away from taking bold steps and that the steps would be unlikely to help much.
Discontent over food inflation has been a major headache for the government.
High prices of essential commodities such as onions have previously sparked unrest and helped bring down the national government in 2004.
In December, the current account stood at a provisional surplus of $601 million, compared with a deficit of $17 million in November, the State Bank of Pakistan said.
The current account deficit for the fiscal year 2009/10 was $3.946 billion, compared with $9.261 billion in fiscal year 2008/09.
The Reserve Bank of India's decision to raise interest rates Tuesday surprised no one. Consider the context. The bank has made it clear fighting inflation is its priority and raised its own inflation forecast for the year through March to 7%, from 5.5% earlier. Paving the way for more tightening, the central bank said there is an upward bias to its projection of 8.5% annual economic growth.
But the RBI still chose to raise rates by only a quarter point. This despite the fact that, at 6.5% now, India's key lending rate is still one percentage point below its average level from the last time India was growing so fast.
The size of the increase is in line with what RBI Gov. D. Subbarao has described as "calibrated" tightening that started last March. Even if this made sense then, it no longer does, with India's economy on much more solid ground. That hasn't stopped the RBI from using concern over growth as its excuse for keeping rate increases slow.
Moreover, the moves don't seem to have worked. After slowing for just two months last year, price gains have again picked up pace. As the RBI itself notes, inflation in non-food manufactured products remains above its medium-term trend. A recent rise in global food prices will add to the pressure, given the high sensitivity of consumer prices to food inflation. India's already high consumer-price index will rise 2.1 percentage points if global food prices go up by 30%, Credit Suisse estimates.
The central bank has argued that its role is limited to preventing gains in food and energy prices from affecting prices of other goods. This would make sense if the rise in food prices in India was likely to be a short-term phenomenon that could be resolved with an adequate rainfall, as the RBI hoped it would last year. Even now, the RBI is hoping price gains will slow within the next six months.
But food prices have been rising at a double-digit rate for more than two years, reflecting that this is driven by growing demand, as incomes rise faster than crop yields can be increased or new farm infrastructure built. Growth in demand, a product of India's economic rise, is something the RBI can slow with more-aggressive rate increases.
There was relief in some quarters that Tuesday's increase wasn't bigger. Bonds, in particular, rallied following the news, indicating that traders had been bracing for something more severe. That will surely come to look like a short-sighted reaction, if the central bank finds itself having to raise interest rates higher and faster later to make up for its gradualism now.
“Amongst the delegates,” wrote stockbroker Paul Fletcher in a blog from Davos, “there is a feeling that if we hear another session on demographics or China versus India we may protest.”
Such a forthright disregard for the so-called ‘India story’ may understandably offend nationalist sentiments and bring on the ‘west versus rest’ polarization that keeps many public intellectuals in business. But the harsh truth is that India has been sold, resold and re-re-sold in so many samosa and Sula evenings that it has lost novelty. The Davos lot is aware and excited by India’s potential — who wouldn’t be at the thought of a 91 million-strong middle class by 2030?
They are also aware but a little less moved by the realization that calculating opportunity costs aren’t among the inherited attributes of the timeless “ancient civilization, new nation” (India’s self-description in the billboards of Davos).
The irritation at the mismatch between words and deeds has begun to show: the latest report by the Reserve Bank of India shows that foreign direct investment in India declined by 36% between April and September 2010 compared to the same period in 2009. This decline coincides with FDI growth of 17% in non-Arab Asia. Whispers from North Block suggest that thanks to a rampaging minister of environment, the story for the next six months may be equally discouraging.
As talk of a “governance deficit” becomes all-pervasive, ‘India inclusive’ —another promotional line in Davos—is increasingly being seen as the eyewash for ‘India elusive’.
It is not as if those quizzed by the Indian media on the 2G licences and uncompetitive interest rates are unaware of the emerging wrinkles on the face of Bharat Mata. It is an open secret that the mood in Indian business circles is distinctly downbeat. They know that the ‘India story’ is meandering.
LAHORE: Pakistan is fast heading towards higher inflation and to overcome this grim scenario; improvement in governance coupled with a drastic cut in expenditure and revenue generation is crucial.
The doom and gloom scenario needs an urgent handling. Good governance, good policies, good institutions, good macroeconomic management are the drivers of economic growth that have gone dormant for quite some time. This was the crux of the speeches delivered at Economic Dialogue 2011 held at Lahore Chamber of Commerce and Industry on Tuesday. Senior economist Dr Akmal Hussain said the country is facing its gravest economic crisis in history after 1971. He said the economy is in deep recession, poverty along with high inflation is a recipe for disaster.
Unfortunately, he added, the government has zero fiscal space. He warned that Pakistan was heading towards higher inflation if immediate improvement in governance is not accompanied with cut in expenditure and substantial increase in revenue.
The former WB Executive Abid Hassan said that the institutional decay has now started taking its toll and the government should take appropriate measures on emergent basis to stop this decay. He said that with every passing day the country is going deeper and deeper into the economic mire. “Today we have reached a situation where even an economic stimulus would not work. The government should concentrate on tax collection and controlling unnecessary expenditures. Unless and until these two measures are not taken, the economy would not be able to be back on rails,” he said. The PIDE Vice Chancellor Dr Rashid Amjad said that the present day doom and gloom scenario could be changed by overcoming the acute energy shortage being witnessed by the country. The issue of circular debt needs to be taken care of by those sitting at the helm of affairs. “PSDP has a multiplier effect on the employment and economy. It should not be cut,” he said.
Former chief Economist Planning Commission Dr Pervaiz Tahir blamed the political chaos for our economic woes and termed the dictatorship democracy cycle as mother of all ills.
Energy sector expert Munawar Baseer, ex Executive committee member Almas Hyder and LCCI President Shahzad Ali Malik while appreciating the input provided by the economists said that most of the issues and challenges faced by the country are more of political. The political leadership while realizing the sensitivity of the situation should come up with a solid solution with close coordination with the chambers. “The policies are being made in isolation without the consultation of real stakeholders and that’s why the economic situation today has become more complex and directionless,” he said. The speakers said that the business community should be involved for the sake of correct decision-making.
They urged the government to evolve a more realistic and pragmatic framework by putting an end to inter-provincial disparity and the disparities within the province. The government should re-do its priority list and concentrate on the few areas that come on the top of that priority list.
It is very unfortunate, the speakers said, that the country has become the most inhospitable for both the local and the foreign investors for security reasons.
“Our inability to reach a consensus on water issue and inability to tap hydrocarbon potential of Balochistan has virtually pushed us to the wall,” they said. staff report
The ratio of volatile capital flows—defined to include cumulative portfolio inflows and short-term debt—to the country’s forex reserves increased to 58.1% in March 2010 compared to last year’s 47.9%.
According to the Reserve Bank of India (RBI), the ratio of short-term debt to the foreign exchange reserves declined from 146.5% in March 1991 to 12.5% in March 2005, but increased slightly to 12.9% in 2006.
However, with expansion in the coverage of short-term debt, the ratio increased to 14.8% in March 2008, to 17.2% in March 2009 and 18.8% in March 2010.
The country’s foreign currency assets are invested in multi-currency, multi-asset portfolios as per the existing norms which are similar to the best international practices followed in this regard. At end of March 2010, out of the total foreign currency assets of $ 254.7 billion, $ 132.1 billion was invested in securities, $ 117.5 billion was deposited with other central banks, BIS and the International Monetary Funds (IMF) and $ 5.1 billion was placed with the External Asset Managers (EAMs).
A small portion of the reserves has been assigned to the EAMs with the main objective of gaining access to and deriving benefits from their expertise and market research, said RBI.
The rate of earnings on foreign currency assets and gold, after accounting for depreciation, decreased from 4.82% in July 2007-June 2008 to 4.16% in July 2008-June 2009.
The RBI held 557.75 tonne of gold forming about 6.0%of the total foreign exchange reserves in value terms as at the end of March 2010.
Of these, 265.49 tonne are held abroad (65.49 tonne since 1991 and further 200 tonne since November 2009) in deposits / safe custody with the Bank of England and the Bank for International Settlements.
In November 2009, the RBI concluded the purchase of 200 metric tonne of gold from the IMF, under the IMF’s limited gold sales programme. The purchase was an official sector transaction and was executed over a two week period during October 19-30, 2009 at market-based prices. As a result of this purchase, the RBI’s gold holdings have increased from 357.75 tonne to 557.75 tonne.
Following the commitment made by India as part of the G-20 framework, the RBI has agreed to purchase SDR denominated notes from IMF up to $10 billion. As on March 31, 2010, $317.9 million was invested in notes of the IMF.
International Monetary Fund designated India as a creditor under its Financial Transaction Plan (FTP) in February 2003. During April 2009 to March 2010, SDR 130 million was made available to Romania, SDR 50 million to Sri Lanka and SDR 117.93 million to Belarus.
The total purchase transactions amounted to SDR 1194.16 million as at the end March 2010. India was included in repurchase transactions of the FTP since November 2005. There were no repurchase transactions during the half year ended March 2010.
The traditional trade-based indicator of reserve adequacy- import cover of reserves- which fell to a low of three weeks of imports at end-December 1990 reached a peak of 16.9 months of imports at the end of March 2004. At the end of March 2010, the import cover stands at 11.2 months.
Asia gave birth to people power in 1986, when a sea of yellow-clad demonstrators peacefully overthrew a dictator in the Philippines. Other popular uprisings against authoritarianism followed, from Thailand, South Korea and Taiwan to Mongolia and Indonesia. Watching the events unfold in the Arab world, Asia's fledgling democracies can be forgiven for indulging in a moment of nostalgia. While revolutionary zeal may have toppled the region's strongmen, however, too few of their successors have bothered to build the institutions needed to sustain democracy beyond its first flush. Democracy through revolution is heady stuff, but it's not always a template for building lasting freedom and justice.
The withered potential of people power is best examined on its home turf. This month, the Philippines will celebrate the 25th anniversary of the start of its historic uprising. Those following the events in Egypt will find many parallels. Ferdinand Marcos, a corrupt, aging, U.S.-backed dictator, was ousted by a populace that rallied, in part, thanks to technology. (Then it was radio, not Facebook or Twitter.) But a quarter-century later, with the son of people-power heroine Corazon Aquino now serving as President, the Philippines is still beset by the poverty, cronyism and nepotism that provoked the 1986 protests. (See a brief history of people power.)
These failings are not the Philippines' alone. Across Asia, elections are held, but vote buying taints the results. Politics is dominated by the same old families. Economic growth often rewards the few rather than the many. And from Malaysia and East Timor to Taiwan and Thailand, I have met local journalists who passed information on to me because they felt it was too dangerous to write about the issues themselves. Without the crucial check of a free press — or independent legislatures and courts, for that matter — democracy exists in name only.
Still, Asia also offers heartening lessons for the Arab world. There's South Korea, for instance, which overthrew a U.S.-backed military dictatorship, then carefully constructed a prosperous democracy. And then there's Indonesia, the world's largest Muslim-majority nation. In 1998, after 32 years in power, strongman Suharto was forced out by massive street protests. Since then, change in Indonesia has occurred not in one cataclysmic jolt but instead through years of brick-by-brick nation building. That may not sound sexy, but it works. Indonesia has now peacefully cycled through several secular-minded leaders, and its civil society is flourishing. The country's problems are still immense: graft and poverty persist, as does sectarian conflict. But Egypt could do a lot worse than to follow the model of this moderate, Muslim-majority democracy
..So when Prime Minister Manmohan Singh sat down for a rare hour-long press conference in Delhi this morning, he, unsurprisingly, faced a barrage of questions on what his government was planning to do to crack down on corruption in high places. Unfortunately, say analysts, his answers did not reveal a more assertive chief executive who was fully in control of the situation.
For one, say critics, the reticent Mr Singh appeared to be more bothered by how India's image might have been damaged by the media coverage, than by the rising tide of corruption itself. He gave reassurances that the government was "dead serious" in bringing to book "all the wrongdoers regardless of the positions they occupy". When pressed further, he said: "Wrong doers will not escape this time."
But he also worried that in "projecting" (read, the media reporting) these events, "an impression has gone round that we are a scam-driven country". This was, he felt, "weakening the self confidence of the Indian people". He told the journalists: "In reporting the affairs of our nation, you should not focus excessively on negative features."
Many find Mr Singh's plea disingenuous as India remains one of the most corrupt countries in the world, and graft continues to eat away at its vitals. It hurts the poor most, widens inequity, kills initiative and saps energy out of society. For all its foibles, India's noisy and vibrant media has done more than a good job in relentlessly chasing the alleged scandals - from alleged underselling of telecom licences to purchases for last year's Commonwealth Games. India's merchants of feel-good, however, insist that to highlight corruption at the cost of the country's considerable achievements - and there are many - is wrong.
Critics say Mr Singh should not be worrying about the self-confidence of his citizens. The rising self confidence of Indian people, they say, is despite the weak and ineffectual state; and it mostly comes from the opportunities they have been able to mine for themselves in a highly competitive nation.
Indians may be inured to corruption, but the recent spate of allegations has taken their breath away. Many believe that the time has come for an all-out war against corruption, something consecutive governments have been loathe to do. So, few believe the government when it says it is moving to bring back illicit money that Indians have stashed away in foreign banks. People believe there is a silent consensus among political parties to go soft on corruption. Nothing much has changed during Mr Singh's regime, they say, despite his exhortations and promises.
Mr Singh appears to have taken refuge in the uneasy compulsions of coalition politics to try to take the heat off on the corruption charges plaguing his government - after all, a former minister who is being investigated for his alleged involvement in the telecom scandal belongs to a key ally. So he kept insisting that coalition politics had hobbled him....
Whatever happened to the Indian equity market? asks the BBC:
Back in November, the Sensex squeezed past 21,000 for a day before starting a three month, 16% fall.
In the same time, the world's main indices, the FTSE Dow and Nikkei have all gained up to 7%, two of the remaining BRIC countries have fallen no more than 7%, and Russia's RTS Index has gained 26%.
Unsurprisingly foreign funds have been fleeing Indian equities in the last three months.
India is in a pickle and two reasons spring to mind - the stock market was heavily overvalued and the Central Bank has been raising interest rates.
At the end of the year the price of the average share on the Sensex was 23 times its earning power (ie its p/e ratio was 23 x). The Shanghai Index was 18 x, Brazil's Bovespa 14 x and Russia's just 9 x (the Dow's p/e was 13 x). That kind of valuation may be fine if future growth seems assured, but there are signs it may be falling off.
'Leg down'
GDP in real terms expanded at an annual rate of 8.2% in the last quarter - slowing from the 8.9% rate recorded in April to June. Now, this isn't a serious problem and no one is suggesting that the Indian growth story is in serious trouble, but it may be more than just a blip.
Maya Bhandari, senior economist at Lombard Street Research, says that, on a seasonally adjusted basis, growth was pretty much flat. She adds: "I would expect another leg down in the market in the coming few months."
Food inflation has been entrenched for some time, which means the Reserve Bank started putting up interest rates a year ago and has since hiked them seven times.
"In the last 25 months or so, we have had negative real interest rates and the central bank is going to have its work cut out to bring down inflation. And while it may be raising rates, the bank is holding more auctions and lowering the statutory liquidity levels for banks - all of which has inflationary consequences," says Ms Bhandari.
On top of domestic inflation pressures, the Middle East and North Africa crisis sent oil prices belting up above $100 a barrel, adding to the central bank's imperative to keep the upward pressure on rates.
Rate rises?
India is the world's the fourth largest oil importer and imports over 70% of its oil requirements. Oil prices, which will stay high for as long as the Arab crisis lasts, will damage India's economy more than most of its main rivals. At the moment, most economists are pencilling in another half to one percentage point rise in rates.
Oil is also going to hurt government finances. In his March budget, Finance Minister Pranab Mukherjee estimated that the deficit would fall from an estimated 5.1% of GDP in the year ending March 31, to 4.6% next fiscal year.
But if oil prices keep on going up, the government will have to decide whether to keep on paying out fuel subsidies or deregulate diesel prices.
Keeping the deficit under control would suggest the latter.
Five state elections in the next few months would suggest the former.
London-based India investment consultancy director Deepak Lalwani points out that foreign confidence in India has also not been helped by a slew of scandals, the biggest being allegations that the 2008 sale of second-generation, or 2G, cellular licenses resulted in losses of nearly $36bn in potential revenue for the government.
Factory output in India grew by 3.6% in February compared with the same month a year ago, according to the latest figures.
Analysts had expected industrial production to grow by more than 5%.
The numbers were pulled back by an 18.4% fall in capital goods output during the month.
Manufacturing, which accounts for 80% of overall industrial output, rose by just 3.5% in February, compared with growth of 16.1% a year earlier.
However, analysts say that the numbers are not a cause of worry as of yet.
"The fact that IIP has come in lower-than-expected is not surprising, as the high-base effect is still playing a part, especially in the manufacturing sector," said D K Joshi of CRISIL in Mumbai.
"But this should start changing by the time April, May data are due," he added.
Mr Joshi also said that the weak numbers were unlikely to have any impact on the Reserve Bank of India's monetary policy.
"Monetary policy is likely to remain on tightening mode given the inflation pressure and strong private consumption," he said.
"We may see a 25 basis point hike in May from the central bank," Mr Joshi added.
India has reported weaker-than-expected growth numbers for the first three months of the year.
The country's economy grew by 7.8% in the first quarter compared with the same period last year, the latest government figures showed.
For the financial year to March, the economy grew by 8.5%, lower than the government's forecast of 8.6%.
India is one of the fastest-growing economies in the world, but has been hit hard by rising consumer prices.
Analysts say a surge in prices of essential commodities, coupled with measures to cool the economy, has started to take a toll on growth.
"Raging inflation and a gradual increase in borrowing costs has dampened domestic demand, alongside lacklustre investment sentiment," said Radhika Rao of Forecast Pte.
The central bank has increased interest rates nine times in 15 months.
The last rise on 3 May boosted the benchmark interest rate by 50 basis points to 7.25%.
"We have a situation where inflation is uncomfortably high, so the authorities are tackling it by raising interest rates," said Justin Wood of the Economist Corporate Network.
"Obviously this tightening environment has been slowing things down." he added.
Losing momentum
Continue reading the main story
“Start Quote
It is significant because it is the first quarter of sub-8% growth since the crisis”
End Quote Sonal Verma Nomura
India's economy has posted robust growth since the global financial crisis.
However, the Reserve Bank of India's monetary tightening policies have seen a loss of momentum.
Analysts say that as the central bank continues its fight against rising prices, the pace of growth is likely to be slow for some time.
"I think this loss of growth momentum will continue for industry for a quarter or two because we are not yet done with interest rate hikes," said Shubhada Rao of YES Bank.
However, analysts warned that though a slowdown in growth had been broadly expected, continued loss of momentum would have an adverse effect on the economy.
"It is significant because it is the first quarter of sub-8% growth since the crisis," said Sonal Verma of Nomura.
"The last four quarters we have been growing above 8%, so this is really a slow starting point for the next financial year," she added. .......
China's economy expanded 9.7% in the first three months of this year compared with the same period the year before.
"They would love to emulate China's growth, but we don't think they are there yet," said Mr Wood.
After posting strong growth for two consecutive years, India’s economy appears to be slowing, with high inflation and rising interest rates. But even with the slowdown, the economy is still among the world’s fastest growing.
When India’s economy grew by 7.8 percent in the first three months of the year - its slowest pace in 15 months - economists were not surprised.
D.H. Pai Panandiker, who heads the RPG Goenka Foundation in New Delhi says growth was expected to take a hit after nine interest rate hikes in just over a year by the Reserve Bank.
“Interest rate has gone up by nearly three per cent in the last one year, so that is having its toll on everything, on the market, the investment, the durable consumer market and so on,” explained Panandiker.
The higher cost of borrowing money is affecting several sectors of the economy. Car sales have slowed. Industrial production has fallen. Indian stock markets have lagged behind others in Asia.
The interest rate hikes are meant to tackle inflation, which has hovered around 10 percent for almost two years, and is among the highest in emerging economies. But efforts to control rising prices have had little impact so far.
On the other hand, surging international crude oil prices have added to India’s worries and prompted the government to raise gasoline prices by 9 percent two weeks ago. The move could further fuel inflation.
As a result, the recent interest rate hikes are expected to continue - another is expected in mid-June.
Economist Panandiker warns that the government’s estimates of about 8.5 percent growth this year are unlikely to be met.
“Some slowdown is inevitable," noted Panandiker. "This is the price we have to pay for inflation - that is lower growth. In spite of steps taken by the government, the inflation is not coming down. That is the critical part of it.”
But there is a positive prospect for the economy. Meteorologists have forecast that monsoon rains, which are critical for farmers, will be normal. A good monsoon usually helps cool food prices.
And while growth may be slowing, India is still forecast to remain the world’s second fastest growing major economy after China this year.
http://www.voanews.com/english/news/asia/south/Indias-Economy-Slowing--123090818.html
The latest quarterly profits from India's second-largest computer outsourcing company also narrowly missed market targets.
Infosys made a net profit of $384m (£243m) in the three months to 30 June, up 18% from a year earlier.
Its revenues for the quarter increased by 23% to $1.7bn.
Infosys said it added just 26 new clients during the three months and that it was having to pay higher wages to attract staff in India's competitive computer industry sector.
The company said it was being affected by global economic uncertainty.
"This is an environment where we need to be cautious. You can look at all the things which are happening," said Infosys chief operating officer SD Shibulal.
"There is still economic instability... there is the European crisis still unfolding. There is always talk about the government spending coming to an end."
http://www.bbc.co.uk/news/business-14118221
....In developments that parallel events in the other Asian powerhouse, neighboring China, rising prices have forced the government to steadily tighten monetary policy. Interest rates rose for the 10th time in 16 months last week.
But business leaders are unhappy. They say the medicine could be making the economic situation worse.
Much of the inflation in India is a function of higher oil and food prices, factors that respond poorly, if at all, to higher interest rates. Instead of depending on the central bank, the government needs to push through the kind of agricultural reforms and investment it has been talking about for years, analysts say.
“Government policy should be focused on improving agricultural productivity, but because that isn’t happening, the burden is falling more and more on monetary policy,” said Sanjay Mathur, Royal Bank of Scotland’s Asia emerging markets economist in Singapore. “Consequently, a number of sectors that shouldn’t be getting hurt are getting hurt.”
That means growth could fall back toward 7 percent, some economists warn, still faster than that of any major economy except China but below what India could achieve — and needs, if it is to pull hundreds of millions of people out of poverty.
“There is no point substituting one bad policy with another bad policy,” said Surjit Bhalla, chairman of Oxus Investments. “When the patient is down, don’t give him another kick in the pants.”
In the early 1990s, India’s government pushed through a series of economic reforms that unshackled the private sector and laid the foundation for two decades of strong growth. With that growth has come rising incomes, an expanding middle class and changing eating patterns. No longer dependent solely on rice, lentils and grains, Indians are demanding more vegetables, fruit, eggs, meat and fish.
Local agriculture has not kept pace. Farmers grow the wrong mix of crops, and about 40 percent of production is wasted before it reaches market because of inadequate distribution, warehousing and cold-storage systems.
Add to the mix a rural employment scheme that has boosted the incomes and appetites of India’s poorest, and a demographic bulge in hungry 15- to 24-year-olds, and it is little surprise that food prices are rising steadily year by year.
That in turn has pushed up wages, while production of raw materials such as coal, ores and cotton is also struggling to keep up with rising demand. Inflation hit 9.1 percent in May, and the central bank says it is expected to remain high through at least September.
To get food prices down, the government needs to promote horticulture and revolutionalize agricultural marketing and distribution, economists say. Allowing foreign companies such as Wal-Mart to set up supermarkets in India and invest in cold-storage facilities, a long-promised but still undelivered policy goal, would also help, they say.
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The Organization for Economic Cooperation and Development last week underlined the need for a new set of reforms in India to bolster growth, and no one in the finance or planning ministries seemed to disagree. The problem is getting it done.
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Higher interest rates are choking much-needed investment, which was almost flat in the first quarter of this year and grew just 4.1 percent year over year, as overall economic growth slipped to 7.8 percent.
The stock market is sliding — shares are down more than 14 percent this year, making India the worst-performing market in Asia. That in turn makes it more difficult for companies to raise the capital they need to invest.
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LONDON: Growth in all four BRIC economies has surpassed expectations in the decade since the term came into existence but India's record on productivity, FDI and reform has been the most disappointing, the chairman of Goldman Sachs Asset Management Jim O'Neill said on Tuesday.
O'Neill, who coined the term, BRIC, in December 2001 to jointly describe the four biggest developing economies, Brazil, Russia, India and China, was speaking at the London leg of the Reuters 2012 Investment Outlook Summit.
"All four countries have become bigger (economies) than I said they were going to be, even Russia. However there are important structural issues about all four and as we go into the 10-year anniversary, in some ways India is the most disappointing," said O'Neill who oversees almost a trillion dollars in assets at Goldman.
Just this week, India's government caved in to opposition pressure and put on hold a landmark reform of the retail sector that was seen opening the doors to billions of dollars in foreign direct investment in the supermarket sector.
The long-awaited measure, passed earlier this month, had been hailed as ending the government's economic reform paralysis that is widely seen as the root cause of high inflation, shrinking capital inflows and a wider current account deficit.
"India has the risk of ... if they're not careful, a balance of payments crisis. They shouldn't raise people's hopes of FDI and then in a week say, 'we're only joking'," O'Neill said. "India's inability to raise its share of global FDI is very disappointing," he said.
United Nations data shows that India received less than $20 billion in FDI in the first six months of 2011, compared to more than $60 billion in China while Brazil and Russia took in $23 billion and $33 billion respectively.
The glacial reform pace has hit India's hopes for double-digit economic growth, O'Neill said, adding: "India is as bad as Russia is on governance and corruption and, in terms of use of technology, Russia is in fact much higher than India."
On the other BRICs, O'Neill said Brazil's main problem was an overvalued currency which puts the country in danger of "Dutch disease" - a term first used to describe how North Sea oil discoveries in the 1960s triggered a surge in Dutch energy exports but also in the Dutch currency, pummelling much of the country's manufacturing. China's challenge was to effectively manage a transition to a higher-consumption economy with slower growth, he said.
O'Neill remains positive on Russia but said much depends on what Prime Minister Vladimir Putin can deliver in terms of reform following an election at the weekend that left his ruling party with a much reduced parliamentary majority.
http://m.economictimes.com/news/economy/foreign-trade/india-most-disappointing-among-bric-nations-goldmans-oneill/articleshow/11008228.cms