India Back to "Hindu Growth Rate" in 2012?

The "Hindu rate of growth" is a derogatory description of the low annual growth rate of the pre-1991 Indian economy, which stagnated around 3.5% from 1950s to 1980s, while per capita income growth averaged 1.3%. In what appears to be an exaggeration, the Financial Times in its latest issue has an article titled "India’s abject return to talk of Hindu growth rates".

Written by James Lamont, the FT story says that "India trails in terms of attracting foreign capital and beating inflation.... some economists and industrialists fear India’s economy could shrink back towards what was derisively called the “Hindu rate of growth” from initial projections of 9 to 7 per cent this year."

With the India story unraveling due to big corruption scandals and governance deficit this year, the FDI fell by 28%, the second consecutive year of decline and the first such large decline since the opening up of the economy in 1991-92. As a result of this decline, the present level of $27 billion of FDI inflows is the lowest in four years.

Spurred by a tidal wave of hot money from the US Federal Reserve stimulus, the big drop in Indian FDI has been largely offset by the surge in FII in the last two years. In fact, the outflow of $15 billion was more than made up by inflows of $29 billion — their highest ever — in 2009-10. This level was largely maintained in 2010-11 as well, with a small increase. These hot money inflows continue to be a source of instability in the face of the Indian Central Bankers attempts to cool rising inflation. Such hot money inflows accounted for 58% of India's forex reserves in March 2010 compared to 47.9% in 2009, according to the Financial Express.

Even after the central bank boosting interest rates six times this year to 8.25 percent, India’s benchmark wholesale-price inflation has accelerated to a 13-month high of 9.78 percent in August 2011, according to Bloomberg.

It is very likely that the Indian central bankers will continue to maintain a tight money policy in the foreseeable future, and slow down the economy further to fight continuing inflation. I do think, however, that the Indian policymakers will try and orchestrate a soft landing in 2011-12, while still maintaining significantly higher gdp growth rates than the pre-1991 "Hindu rate of growth".

Related Links:

Haq's Musings

India Story Unraveling

India Soft Landing in 2011?

Inaction Against Corruption in South Asia

2G Corruption Scandal in India

Musharraf at Davos 2008

Imran Khan at Davos 2011

Delhi in Davos: How India Built its Brand at the World Economic Forum

FDI India, Pakistan, China and Vietnam 2003-2010

China's Trade and Investment in South Asia

India and Pakistan at Davos 2009

India's Twin Deficits

Pakistan's Economy 2008-2010


Riaz Haq said…
Here's a news report on India's slowing car sales:

Passenger car sales in India grew at a scorching 30% in 2010-11 (April-March). But with rising interest rates on auto loans and a sharp rise in petrol prices, car sales this year have slowed down to a crawl.

In fact passenger car sales crashed 16% in July and 10% in August, according to data by Society of Indian Auto Manufacturers (SIAM). Strike at Maruti Suzuki’s plant in Manesar, which had hit output of one of its most selling cars, the Swift hatchback, has only added to the pressure on overall industry sales.

SIAM has already cut its growth forecast for car sales to 10-12% from earlier 16-18%. Last month it said it would further downgrade growth forecast for the full year.

Research firm Crisil painted a bleak picture earlier in the week, saying it expects "growth in passenger vehicles to decelerate sharply to 2-4% with domestic cars growing at a mere 0-3% as against earlier forecast of a growth of 8-10%."

Crisil said its latest downgrade was prompted by Rs 3 rise in petrol price and 25 basis points hike in interest rates by Reserve Bank of India in September.

Other analysts, like Nikhil Deshpande of Pinc Research and Sejal Jhunjhunwala of Way2Wealth Securities too agree that sentiments are not looking good this year, despite the ongoing festive season.

"Automakers had expected car sales to pickup in the festive season. But there were two conditions -- interest rate hike cycle would peak out and fuel prices wouldn’t rise. But there has been no respite on either front," Deshpande told

No wonder then the automakers are going all out to tempt customers now, with more offers this year than last year, in the hope that people will spend impulsively during Dassera-Diwali. Fiat India, for instance, is offering benefits up to Rs 1.30 lakh on its Linea sedan, and Rs 75,000 on the Punto hatchback. Fiat’s offer includes insurance at Rs 1, exchange benefits, gift cheque and free road side assistance for 50 months.
Riaz Haq said…
Here's an excerpt from a NY Times story on India's slowing economy:

Most countries would be thrilled to have a growth rate of more than 7 percent, but for India, which strode at a 9 percent pace before the financial crisis of 2008 and hit 8.5 percent last year, it would be a significant letdown. Slower growth would mean fewer Indians climbing out of poverty and could help spur greater social unrest.

And it would pose yet another challenge to the global economy, which is increasingly depending on emerging markets like India and China to make up for stagnation in the West.

The Indian slowdown was in the making long before most analysts were concerned about a double-dip recession in industrialized nations. Private investment has been sliding since late last year and once-robust car sales have decreased in recent months. Indian stocks began falling in November and are now down more than 24 percent from their high. Moreover, inflation has been hovering at nearly 10 percent even after the Reserve Bank of India raised interest rates 11 times in less than two years.

“Today, the economy is running on the engine speed achieved some time ago,” said R. Gopalakrishnan, an executive director at the Tata Group, India’s largest business conglomerate. Stressing that he was speaking for himself and not his company, he added, “It’s not sputtering to an end, but it’s slowing down.”

The new economic worries are occurring while the Indian government has been preoccupied with the biggest protests the country has seen in nearly two decades.
Now, analysts said, the government is unlikely to act on the land and retail measures for several months, if not longer. Even as markets elsewhere were relatively stable, India’s benchmark Nifty stock index fell 1.9 percent on Friday, to its lowest level in 14 months.

Furthermore, many analysts say the government is unlikely to push big reforms next year because India’s largest and one of its poorest states, Uttar Pradesh, will go to the polls in 2012. Federal elections are due in 2014.

Still, some business leaders say the corruption movement has demonstrated that the government, which is run by a coalition led by the Congress Party, may no longer be able to postpone difficult policy decisions. Many of the most vocal protesters at Mr. Hazare’s rallies have been people 25 or younger — a group that makes up about half India’s population.

“The middle class has been created; it wasn’t there 30 years ago,” said Mr. Gopalakrishnan, the Tata executive. “And their aspirations have been created. There is an energy there that has come out of human passion. Being standstill and letting this putter out is not an option.”
Riaz Haq said…
Here are some interesting excerpts from an Outlook India interview with Prof Aswath Damodaran of NYU Stern School of Business:

What risks do the present crisis hold for developing economies like India, grappling for well over a year to curb inflation?

If you are a developing economy you are like a growth company, which is far more dependent on the economy because everything gets magnified. Developing countries are far more exposed to global real economic growth because so much of the value comes from future growth. It is like a mature company is less affected by a recession than a growth company; mature economies are less affected than developing economies by a slowing global economy. Everybody gets hurt, but developing economies in a strange way can get hurt more because everything gets magnified at their level.

So, is India’s current pace of economic growth sustainable?

A scaling effect is going to kick in. It is one thing to grow at 9 per cent a year when you are a smaller economy, but as you get larger people have to get realistic. Policymakers have to realise that planning for 6 per cent real growth for the next 10 years is absurd. As the country scales up, you have got to get more realistic about real growth and have policies in place for what to do as real growth slows down, because it will. It will in India and it will in China. It has got nothing to do with the quality of the policies, it is a fact that as the economy becomes larger maintaining those growth rates is going to be unrealistic.

As we speak, corruption has become a major cause for protests in India....

The way I think about corruption is that it is like paying an unofficial tax. What corruption has done is it has raised the effective tax rate for businesses operating in India from 33.99 per cent to 41, 42, 43 per cent and that lowers investment. It lowers real growth. It has always been a deterrent and it will continue to be so. I think it is important that corruption be dealt with, but you can’t deal with it with an ombudsman, or a group that gets together and says let’s catch corrupt politicians, because it is entrenched in the system. It is built into the system because the salaries of many public servants are set with the implicit assumption that they can supplement that salary by getting paid on the side. It’s almost like waiters in the US get paid a low minimum wage because the assumption is that people will tip them 15 per cent so they can make up that money. It is not going to be easy to take out of the system because you have to revisit the way in which public servants get salaries.
Riaz Haq said…
Here are some excerpts from Forbes story on Pakistan's electricity crisis:

Analysts say Pakistan's chronic electricity shortages are largely the result of the government not charging consumers enough and of customers, including the government, not paying their bills. There are also problems with outdated transmission systems and bureaucratic infighting that has stalled power generation projects.

The U.S. is working with the Pakistani government to increase the power supply by constructing and rehabilitating six power plants, according to the U.S. Embassy. This extra energy will eradicate 20 percent of Pakistan's existing energy shortage, it said.

But many analysts say a lasting solution to the country's power crisis must involve politically painful increases in electricity prices and forcing customers to pay their bills.
The country's main opposition leader, former Prime Minister Nawaz Sharif, lashed out at the government over the electricity shortages.

"The country is facing a severe power crisis, but the government is sleeping and doing nothing for the last 15 months over this issue," Sharif told reporters in Bahawalpur, another city in Punjab.

Pakistani Prime Minister Yousuf Raza Gilani sought to deflect blame away from his government in an address to parliament on Monday, pointing his finger at the United States. He said that the U.S. should help Pakistan solve its energy crisis if it wanted better ties.

Pakistan and the U.S. are nominally close allies in the war against Islamist extremists, and Islamabad has received billions of dollars in military and civilian aid over the past decade, including money to help the country's energy sector.

But the two countries have often clashed, and Pakistani officials regularly criticize the U.S. to divert attention away from their own government's performance.
Riaz Haq said…
Here's a BBC report on IMF's downbeat forecast of Asian growth:

The International Monetary Fund (IMF) has cut its growth forecasts for Asia over worries about eurozone debt and new fears for the US economy.

The IMF said risks for Asia were "decidedly tilted to the downside" because of these concerns over its two major export zones.

It said gross domestic product (GDP) growth across Asia would average 6.3% in 2011, and 6.7% in 2012.

In April, it had predicted close to 7% growth in both years.

The body warned about a risk of capital outflows from the region, and the possibility that oversees investors may reverse the large positions they have built in Asian markets since 2009.

In addition, inflation is still high in a number of Asian countries, the IMF said.

But it believes consumer prices could ease after peaking this year, as food and energy prices "gradually moderate".

The IMF also said that Asian policymakers were faced with "a delicate balancing act".

"They need to guard against risks to growth but also limit the adverse impact of prolonged easy financial conditions on inflation," it noted.
Riaz Haq said…
Moody's downgrades India's banks, according to WSJ:

MUMBAI -- Global ratings firm Moody's Investors Service Wednesday changed its outlook for India's banking system to negative from stable, flagging concerns of a possible rise in bad loans, capitalization constraints and pressure on profitability in a tough environment.

The action, however, is in contrast with the stable outlook assigned to the financial strength rating of 14 out of the 15 banks rated by Moody's.

"India's economic momentum is slowing because of high inflation, monetary tightening and rapidly rising interest rates," said Vineet ...
Riaz Haq said…
Here's a Bloomberg report on Indian equities' performance:

Nov. 29 (Bloomberg) -- India’s benchmark stock index, the third-worst performer in Asia this year, may be hurt the most among emerging-markets equities from global risk aversion because of a slowing economy and a weak rupee, according to Tata Asset Management Ltd.

“India’s in a difficult spot,” Venugopal Manghat, the Mumbai-based co-head of equities at the money manager, said in an interview yesterday. “Our macros are probably the worst or are worsening at a more worrying pace than any other economy in the emerging-markets space.” His Tata Balanced Fund has beaten 91 percent of its peers in the past three years, data compiled by Bloomberg show.
In India, overseas investors pulled out $842 million from equities last week, the biggest weekly outflow in six months, data from the regulator show. That sent the rupee to a record low of 52.73 on Nov. 22. The currency gained 0.6 percent to 51.965 yesterday, paring this year’s drop to 14 percent, the worst performance among Asian currencies.

“We could have further pressure from the global end, which means risk aversion could go up and currencies could depreciate further,” Manghat, 40, said.

The Reserve Bank of India, which has lifted interest rates 13 times since March 2010 to curb inflation that has exceeded 9 percent since December, last month cut its growth forecast to 7.6 percent from 8 percent. Morgan Stanley reduced its growth estimate for India to 7 percent for the year ending March 31 from 7.2 percent, according to an e-mailed report yesterday.\---------------
Shares of Indian consumer-goods producers, automakers and private lenders may fare better than the overall market in the next six months, said Manghat. The Tata Balanced Fund had 13.2 percent of its assets in consumer non-durable companies, 10.6 percent in banks and 6.8 percent in automakers at the end of October, the fund’s fact sheet shows.

“Consumption is a secular story and will be a big driver for the Indian economy,” he said. “India is significantly under-banked, significantly low in terms of penetration and private banks are more nimble, faster at decision-making, and are better structured to make good use of this opportunity.”

The fund has returned 26 percent annually for the past three years, data compiled by Bloomberg show.
Riaz Haq said…
Goldman Sachs' Jim O'Neill, who coined BRIC, says India's performance most disappointing, according to Economic Times:

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.
Riaz Haq said…
Here's Hindustan Times on Mukherjee's anxiety over Indian economy:

"The economy is in a difficult situation but that does not mean that we
shall have to start eating lizards,” Mukherjee said in the Lok Sabha, the lower house of Parliament.

India's economic growth slumped to 6.9% in the July-September quarter against the budgetary target of 9% growth for 2011-12. During the first half of the fiscal, the economy grew by 7.3%.

Mukherjee said the projection of 9% growth during the budget was not a pipe dream, but the unexpected high prices of oil and other commodities coupled with a slowdown in global economies, notably in Europe and the US, had hit the Indian economy hard.

"The hard fact is there are certain situation on which you do not have a control but you have to face the consequences,” he said.

The finance minister said because of the high oil and other commodities prices in the international market, expenditure on oil, fertiliser and food subsidies has increased exponentially, widening the fiscal deficit. He said fertiliser subsidies were likely to increase to Rs 90,000 crore against the budgetary target of Rs 40,000 crore.

"During the budget in February, average oil price of Indian basket I assumed $90 per barrel. However, oil price has been consistently at around $110 per barrel,” he said.

However, Mukherjee emphasised that the basic fundamentals of the Indian economy were strong. “Basic fundamentals of the Indian economy are still strong. Rate of savings is high. Yes, it is not as high as 35-36% but it is around 33-33.5%. Rate of Investment is around 34-35% despite depression.”

He said the proposed reforms could help improve the situation.

“I do believe that things can improve if the institutions strengthened, if Parliament functions, if this house debates, discusses and decides for which it is meant, you will see the atmosphere will change,” he said.

Mukherjee said the slowdown in growth was a cause of anxiety.

“From 2004-05 to 2007-08, we grew at 9%. Therefore we placed our standards high and from there we have come down. That's why it is my anxiety,” he said.

Indian economy grew 8.5% in 2010-11. In the union budget, Mukherjee said growth target was 9%, plus minus 0.25% for 2011-12. However, the growth declined to 7.7% in first quarter and it slumped further to 6.9% in the second.

"There was a time when these%age could have been an object of celebration when we place it in perspective on the economic development and growth of this country. From 1951 to 1979 we grew at a rate of 3.5%, whole of 1980s we grew at 5%, whole of 1990s we grew at 5.6%, even in the first half of the last decade we grew at around 6%,” he said.
Riaz Haq said…
India faces serious financial crisis, reports Economic Times:

Unlike most of its Asian peers, India has recently been running large current account and fiscal deficits. That means it must attract sufficient foreign money -- namely U.S. dollars -- to close the gap, and a weaker home currency makes that costlier.

This is a perennial problem for India. The current situation is so worrisome because India is grappling with big internal and external economic threats simultaneously. Growth is slowing. Inflation remains high. Political paralysis has stymied domestic reforms.

The RBI, the last line of defence against a currency meltdown, has cautiously begun to support the rupee, but its firepower may be more limited than its $300 billion in reserves would suggest.

Beyond India's borders, Europe is the biggest worry. As its banks deleverage, investment money has flooded out of India's markets. If Europe's debt troubles deteriorate, India could be hit with a balance of payments crisis as severe as the one that forced a sharp devaluation in 1991.

The rupee, which has dropped 16 percent in the past four months, got a reprieve last week after the world's big six central banks banded together to try to ease dollar funding strains, helping it to snap a four-week losing trend.

But analysts widely expect the rupee, trading on Monday at 51.26 per dollar, to resume its slide.

"The Indian currency will be the first casualty of a deterioration in the euro zone crisis," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

If Europe's crisis deepens, India's trade deficit would widen even more rapidly, and it would have even more trouble attracting foreign capital.

"Risk appetite will obviously collapse and gradually the currency crisis is likely to take the shape of a balance of payments crisis," Nitsure said.

Worries about India have spiked in tandem with concern over Europe. UBS hosted a client conference call about India on November 29, which it announced with an email headlined "India explodes." Deutsche Bank sent out a report on November 24 entitled, "India's time of reckoning."

"Suddenly everything seems to be coming to a head in India," UBS wrote. "Growth is disappearing, the rupee is in disarray, and inflation is stuck at near-record levels. Investor sentiment has gone from cautious to outright scared."

India's current account deficit swelled to $14.1 billion in its fiscal first quarter, nearly triple the previous quarter's tally. The full-year gap is expected to be around $54 billion.

Its fiscal deficit hit $58.7 billion in the April-to-October period. The government in February projected a deficit equal to 4.6 percent of gross domestic product for the fiscal year ending in March 2012, although the finance minister said on Friday that it would be difficult to hit that target.

India relies heavily on portfolio inflows -- foreign purchases of shares and bonds -- as a means of covering its current account gap. Those flows are fickle.

Foreign portfolio investors have sold a net $50 million worth of equities so far in 2011 , in sharp contrast to the $29 billion they invested in 2010, data from the Securities and Exchange Board of India's website showed. In November alone, foreign funds pulled $661 million out of Indian stocks.

"The Indian economy is one of the most vulnerable to liquidity shocks in the region, not helped the least by deficits in its key balances," said Radhika Rao, an economist with Forecast PTE in Singapore.--------..
Riaz Haq said…
Here's an excerpt from a Bloomberg piece written by Pankaj Mishra:

A few years ago, one of India’s private airlines started operating a flight from Delhi to the Himalayan city of Shimla, a few miles from my village. The brisk descent in a small turboprop aircraft isn’t for those with a fear of flying. The runway on a table-top mountain seemed particularly short last week, when the plane, breaking free of the fog over Delhi, came down to a wintry Himalayan mist.

Still, cutting down journey times to a fraction, the flight seemed too good to be true; and, having endured many very long drives up and down winding mountain roads, I became one of its keenest and more regular customers.

The airline was subsequently bought by Kingfisher Airlines Ltd. (KAIR), one of the New India’s iconic corporate brands. Owned by Vijay Mallya, a man fond of horse racing and swimsuit calendars, Kingfisher simply ran out of money earlier this year, reflecting more broadly the troubles of most private airlines in India. They are struggling despite the favor shown to them by the government, which has systematically denuded the publicly owned Air India Ltd.
The metaphor of highways has been deployed frequently to describe India’s potential, most famously by Thomas Friedman, who claimed in 2005 that India “is like a highway full of potholes,” but “off in the distance, the road seems to smooth out, and if it does, this country will be a dynamo.”

Like many other popular metaphors about India -- tiger, elephant, cellphone -- this one isn’t wholly mistaken. Indian highways rank highly among the infrastructure projects crucial to sustaining the country’s rapid economic growth (INQGGDPY), which is threatened by inflation, declining industrial production, a weakening currency (the rupee has dropped about 15 percent against the dollar this year) and corruption scandals that implicate some of India’s most well-known politicians and businessmen.

The question that Friedman asked in 2005 has grown more urgent: “Is that smoother road in the distance a mirage or the real thing?” Or, to put it differently: Did the perennial gap between illusion and reality somehow widen imperceptibly in the New India?
Education Racket

The answer to this question seemed obvious on the half- built highway to Delhi. The most conspicuous sights along the roadside were the placards for shiny new private educational institutions. They seem -- if you have never been inside one or met any of their alumni and looked only at the (misspelled) signboards promising professional success -- to be hectically preparing the basis for India’s “demographic dividend”: an overwhelmingly youthful population (WPOPINDI) that will soon become producers and consumers in the global economy.

In actuality, while most state-funded schools and colleges are barely functional, private education in India is largely a money-making racket. In September this year, a study of schools in the biggest states discovered that India’s peers in adult literacy are Afghanistan and Papua New Guinea.

Hundreds of millions of poorly educated and unemployable youth increasingly find themselves drawn to some peculiar forms of entrepreneurship. Twice on the highway from Shimla to Delhi, we were flagged down by groups of young men collecting “taxes.”

I have often come across these soft forms of banditry on the country roads of Uttar Pradesh and Bihar, two of India’s poorest and most populous states. The only difference here was that the young men seemed better educated, more resourceful and authoritative. One of the groups that stopped us near the Indian capital, less than a mile from an authentic police checkpoint, even had a jeep with the words “Delhi Municipal Toll” painted on the windshield......
Riaz Haq said…
Here's Economist magazine on the travails of Indian infrastructure development:

ONE recent evening in Mumbai a tangerine Lamborghini could be seen taxiing past a sign prohibiting bullock carts, wheeling left and then letting rip on the Sea Link toll-bridge, one of the city’s few bits of decent infrastructure. For three miles all the driver’s Michael Schumacher fantasies must have came true. But by the fourth he drove off the bridge back into reality: roads whose surfaces often wash away during the monsoon and whose repair is said to be in the hands of mafias. The supercar returned to rickshaw speed.

For the past half decade India’s infrastructure industry has enjoyed a Sea Link moment; a blast of growth when one could imagine that the private sector could deliver all the new roads, bridges, power stations and airports that the country needs so badly. The government says the boom will continue. Over the next five years it predicts that infrastructure investment will reach a new high relative to GDP, with some $1 trillion spent, half of it by the private sector. The trouble with this rosy prediction is that the balance-sheets of many Indian infrastructure firms are as potholed as the roads they resurface.
Exclude state-owned and telecoms firms and leverage is worse (see table). From public disclosures it is impossible to work out the liquidity position of these firms, but it is likely that most will have to refinance existing credit lines in today’s far less forgiving world, a process not helped by high local rates and a weak rupee.

It looks like a mess. Shareholders have taken a beating, with the market value of those 70-odd stocks having fallen by some two-fifths since March 2011. India’s banks may be next in line for a thrashing. The Reserve Bank of India (RBI), the regulator, reckons they have 13% of their loan book in infrastructure (vaguely reassuringly, the RBI’s implied absolute debt figure roughly matches the $130 billion of gross debt of the 70 listed firms). Thus far non-performing loans are low—so low it suggests banks are fibbing. But the RBI is probably right that a rickety infrastructure sector does not endanger the banking system.
What it does endanger is India’s growth prospects. Those new airports, roads and bridges are essential. And the country does not need financial zombies, slashing their investment in order to shore up dodgy balance-sheets.

Some reckon the solution is to develop a bond market, so that more debt can be raised. But while a more sophisticated capital market might mean more funds available and might even reduce the amount of financial engineering going on, it is not the solution to today’s predicament.

Instead, two things need to happen. The government needs to unsnarl stalled projects. And infrastructure firms need to raise lots more equity—not debt. That might dilute the stakes which are held by some of the magnates who control these businesses, but would be a fair price to pay to resuscitate the balance-sheet of a vital industry. Even on selfish grounds it makes sense, hastening the day when an honest Indian oligarch can at last put the pedal to metal in his supercar for more than three miles in a row.
Riaz Haq said…
Here's an Indian media assessment of economy in 2011:

A weak economy exposed to an extended euro zone crisis, growing strain on the government coalition, and looming state elections that mean progress on tough reforms are unlikely.

Here are some of the risks to watch in 2012 in the world's largest democracy.

RATINGS (Unchanged since December unless stated):




The cost of insuring against default on 5-year sovereign debt, in common with debt markets elsewhere in the world see-sawed violently in the second half of 2011, closing the year at 108.5 basis points, up 41.5 since January.

Following is a summary of key political risks in India:

Economic malaise

With a 25% drop in 2011, the Sensex stock market was the world's worst performing among major economies. The rupee was the year's worst performer in Asia with a 16% fall, and all eyes are on the current account deficit as funds flow the wrong way and the oil import bill rises.

Growth in the second quarter of the 2012 fiscal year fell to 6.9%, the lowest rate for more than two years, while industrial output retreated in October for the first time since 2009.

Asia's No. 3 economy is sitting on a comfortable cushion of USD 300 billion foreign reserves and a confidence building USD 15 billion currency swap line with Japan was unveiled in December, so quick comparisons with India's 1991 payments crisis are premature.

But the avalanche of gloomy economic news has hit investor confidence and the political situation is not helping matters, with rifts in the government coalition making it hard to pass legislation to increase foreign investment in the economy.

A reversal late in the year on a flagship reform to allow foreign supermarkets to operate in India was a huge blow for the government of Prime Minister Manmohan Singh.

Like peers Brazil and China, the room for government-led stimulus is limited. In December, Goldman Sachs' Jim O'Neill called India the most disappointing of the BRICS countries, and warned of a risk of a balance of payments crisis if policymakers were not careful.

As ever, India's dependence on imported, then subsidised energy is a weakness, with high prices adding to pressure both on the current account and fiscal deficit. A drawn out crisis in Europe could exacerbate the capital outflows and further moderate exports.

December brought some much-needed relief in the form of a sharp fall in food price inflation. That raises expectations of monetary loosening soon to help stoke flagging growth but structural factors are likely to keep prices rising at a fast pace in the medium term.

With hopes dashed for benefits from global supermarket supply chain expertise, India will have to find new ways to reduce food wastage and increase productivity...
Riaz Haq said…
Here are some excepts of a BBC Op Ed on Indian economy titled "Five things wrong with India's economy":

After several official predictions that India would grow by 7-8% in 2011-12, the finance minister finally admitted in his Budget 2012 speech that the growth would be 6.9%.

The actual figure may be lower at 6.5%, thanks to the statistical error in sugar production, which dragged down January's industrial production growth figure from 6.8% to 1.1%.

Although ratings agency Standard and Poor's estimate for 2012-13 is 5% or above, Indian economists feel they won't be surprised if the economy grows by just 4%.

"If things remain the way they are, in terms of policy decisions, investments and sentiments, I would go to the extent that the figure may be 3%," says a senior economist with a leading business association.
Wholesale price inflation, which is under 7%, could increase to 9-10% over the next few months.

Food inflation is still high at double-digit levels, and any hike in fuel (petrol and diesel) prices in the near future will spur inflation.

A combination of low growth and high inflation, or near-stagflation, would be India's worst economic nightmare come true.
In 2011-12, the fiscal deficit zoomed from a projected 4.6% of GDP to 5.9%. Although Budget 2012 predicted it would come down to 5.1% in 2012-13, most economists remain sceptical.

Low growth rates, lower-than-estimated government revenues, and higher-than-expected expenditures, especially on welfare schemes for rural employment and the right to food, may force the deficit to go up in 2012-13, as happened in the previous financial year.

Although exports grew by 20% in 2011-12, imports rose at a faster pace, and the trade deficit went up to $185 billion, the highest ever in the country's history.

Since August 2011, foreign exchange reserves have dipped from $322bn to $293bn due to the higher trade deficit and other foreign exchange outflows.
Coalition compulsions, a united opposition and corruption allegations have forced the government to backtrack on key economic reforms, including foreign direct investment (FDI) in multi-brand organised retail.
In 2011-12, the domestic private sector was wary of huge investment commitments; many firms delayed or postponed plans to invest in expansion or building new factories.

An April 2012 overview of the Reserve Bank of India (RBI) stated that "consultations with industry and banks suggest that new project investment continue to be sluggish"
Riaz Haq said…
Here's an FT report titled "Indian tortoise slips into reverse":

Not so long ago there was excited chatter in India about the possibility of the country overhauling China to become the world’s fastest growing large economy. But the Indian tortoise, far from gaining on the Chinese hare, is going backwards. Growth has not edged into double digits. Instead it has sagged back towards 6 per cent. In recent days, three investment banks have downgraded their view of India’s prospects. Morgan Stanley says the slowdown, the result of policy paralysis and a worsening external environment, could be deep and prolonged.

The symbol of India’s fall from grace is the rupee. It has sunk more than 17 per cent against the dollar this year to its lowest level on record. That ought at least to have helped exports. In fact they have shrunk, along with industrial output, which fell 3.5 per cent in March.

The weaker rupee has made oil and other imports more expensive. That has widened an already worrying current account deficit of about 4 per cent of gross domestic product. Nor will the weak rupee help inflation, which has never been brought properly under control and is now nudging 7 per cent again.

The Reserve Bank of India, the only part of economic administration that is semi-functioning, is in a classic dilemma.
All this is unsettling. If foreign investors take fright, India’s balance of payments situation could quickly deteriorate. Standard & Poor’s has warned it may downgrade the rating on India’s sovereign debt unless Delhi can get the fiscal deficit under control. India also needs faster growth to help bring hundreds of millions of people out of abject poverty.

Mr Singh, who used to be lauded as the architect of economic reforms, is now routinely derided. More than a prime minister, he is characterised as an errand boy for Sonia Gandhi, the Congress party leader. Indeed, the 79-year-old Mr Singh seems to have lost all ambition, as well as any grip over the administration he might once have had.

Yet Mr Singh has little to lose. He should lay everything on the line and give economic liberalisation one last push. He may lose the premiership in the attempt. But that would be infinitely better for the country – and for his legacy – than going out meekly as the head of a do-nothing government.
Riaz Haq said…
Here's a Wall Street Journal story on falling Indian rupee:

For almost a year, India's central bank has spent billions of dollars to support the beleaguered rupee. And yet the currency is Asia's worst-performing against the U.S. dollar over the past year.

The fruitless efforts by the Reserve Bank of India shows how central banks, especially in emerging markets, often are powerless to manage pressures on their currencies if international market forces are ranged against them.

The rupee has been declining partly because of flight of capital from emerging markets, but also because of concerns over India's deteriorating financial health. The country's current-account deficit recently hit its highest level ever, and the federal government's heavy spending has widened its budget deficit.
Things worsened for the rupee after March, when the Indian government introduced tax rules in the federal budget that could potentially hurt foreign investors. Spooked, foreign funds pulled money out of the economy.

Between April and June, for instance, foreign institutional investors pulled out $350 million from Indian stocks versus net inflows of $1.15 billion in the same period a year earlier.

Meanwhile, the bank came under intense pressure from the government to cut rates. Growth in India fell to 5.3% in the first three months of 2012, its slowest rate in almost a decade.

In April, the central bank cut rates for the first time in three years. But it hasn't followed with additional cuts, citing inflation and currency risks.

In May, the bank stepped up its actions, ordering exporters to convert half their foreign-currency earnings held onshore into rupees within two weeks. The move failed to lift the rupee as exporters were able to keep their earnings overseas.

At other times, the government has raised hopes of enacting strong measures to boost the rupee, or foreign inflows, but failed to deliver.

"There have been a lot of dashed expectations," said Killol Pandya, head of fixed income at Daiwa Asset Management in Mumbai.

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