India’s Economy Slows, With Global Implications
The New York Times
By JIM YARDLEY and VIKAS BAJAJ
Published:
May 29, 2012
NEW DELHI — India’s
coalition government just celebrated the third anniversary of its tenure with a
self-congratulatory banquet that could not have been more poorly timed: India’s
currency, the rupee, is falling; investment is down; inflation is rising; and
deficits are eating away at government coffers.
While short-term
growth has slowed but not ground to a halt, India’s problems have dampened
hopes that it, along with China and other non-Western economies, might help
revive the global economy, as happened after the 2008 financial crisis.
Instead, India is now facing a political reckoning, as the country’s elected
leaders must address difficult, politically unpopular decisions — or risk even
deeper problems.
“When India was being
run comparatively well in 2008, they seemed to cope with these external shocks,
at least from a financial perspective,” said Glenn Levine, a senior economist
at Moody’s Analytics in Sydney, Australia. “I think people are starting to
question the long-term Indian story. That is the difference now.”
India’s difficulties
come as the global economy is wobbling once again. Europe is grappling with a sovereign debt crisis that could shatter
the continent’s economic and political union. The United States is still not
producing enough new jobs. China’s growth has weakened, with a real estate
downturn and stalling exports, while important emerging economies like Brazil
are slowing down, adding to pessimism about the world economy at a critical
time.
India is often viewed
as a rising global powerhouse and, not too long ago, Indian officials were
predicting growth rates of 9 percent or higher. The Obama administration, eager
to tap into such a booming market and envisioning India as a regional
counterweight to China, trumpeted the United States-India partnership. Some
analysts even saw the global downturn as an opportunity for India, making it
more attractive for foreign investors wary of putting money into declining
advanced industrial countries.
Today, India’s
economy is still expanding, with growth projected between 6 percent and 7
percent this year. And analysts say India’s long-term strengths remain
significant. It has one of the world’s youngest populations, and polls
consistently show they are overwhelmingly optimistic about their future.
Meanwhile, India’s businesses are competing more aggressively on the global
stage.
But the slowdown has
punctured the once bubbly mood in the business and political classes and
brought sharp criticism of the government. Indian business leaders, foreign
investors and analysts say India’s strengths are being undermined by growing
political dysfunction: the populist tendencies of Indian politicians, a lack of
action by top leaders and allegations of corruption that have undermined the
authority of policy makers.
India is desperate
for investment in mining, roads, ports, urban housing and other areas, but
Indian businesses and foreign investors are starting to shy away. Indian
corporations, unable to obtain governmental licenses or permissions for
projects, are investing overseas instead. Foreigners are also pulling back;
their investment in Indian stocks and bonds totaled only $16 billion in the last
fiscal year, compared with $30 billion the year before. The trend accelerated
in recent months after the Finance Ministry, trying to stem a rising budget
deficit, proposed a raft of new taxes on foreign institutions doing business in
India.
“A quiet crisis of
confidence is building up,” said Pratap Bhanu Mehta, president of the Center
for Policy Research in New Delhi. “There is no certainty over the regulatory
regime. There is no certainty over the tax regime.”
Indians have long thrived amid
adversity, often by creatively — at times, illegally — subverting onerous
regulations with a workaround ethos that has spurred economic activity. Even
today, industries like pharmaceuticals, information technology and consumer
goods, which do not need many licenses and official approvals, are prospering.
But those sectors tied to the government, including mining, construction and
manufacturing, are struggling.
“We have consciously kept away from businesses where we would have needed
lots of permissions,” said Ajay Piramal, who heads a Mumbai-based conglomerate
focused on pharmaceuticals.
At the core of the
political uncertainties is the weakened status of the Indian National Congress
Party, which leads the coalition government, known as the United Progressive
Alliance. Since 2004, the government has operated under an unorthodox
partnership between Sonia Gandhi, president of the Congress Party and the
governing coalition, and Manmohan
Singh, her handpicked prime minister.
The division of
duties worked during the government’s first term. Mrs. Gandhi managed the
coalition partners, rode herd on the Congress Party, championed safety net
programs for the poor and oversaw election strategy; Mr. Singh, a quiet economist
considered a father of India’s reform era, moved India closer to the United
States and oversaw a booming economy where growth topped 9 percent.
In 2009, voters
returned the U.P.A. to power amid expectations that India, having shrugged off
the 2008 global recession,
was on an inevitably upward growth track. But analysts say the contradictions
in the Singh-Gandhi partnership have since been exposed. Mr. Singh holds the
most politically powerful job in the country, yet is seemingly reluctant to
wield power and often must seek approval on policy questions from Mrs. Gandhi.
She oversees an advisory panel largely consisting of social activists that her
critics regard as a shadow government.
The result has been a
lack of a clear political agenda emanating from the top, analysts and business
leaders say, allowing the bureaucracy to fall back into its traditional
resistance to making decisions. When officials do act, they often change course
after encountering political opposition.
“The last year was
wasted,” said Sanjaya Baru, a former spokesman for the prime minister who is
now at a research institute. “We’ve had a crisis of leadership on the economic
side.”
Moreover, the
government has been on the defensive since a series of corruption scandals,
dormant for several years, exploded into public view. Attempts by technocrats
to push through a so-called “second generation” of deeper economic changes were
undermined by the inability of the Congress Party to corral its coalition
partners.
In December, Mr.
Singh’s cabinet announced that foreign retailers like Walmart would be allowed
for the first time to open stores in the country with local partners. But Mr.
Singh was forced to reverse course after an ally, Mamata Banerjee, the chief
minister of the state of West Bengal, balked and threatened to bring down the
government.
Then in March, facing
pressures to raise revenues and stem the rising fiscal deficit, Pranab Mukherjee,
the finance minister, released a budget that proposed new taxes on foreign
entities in India, including levies on past deals that the Indian Supreme Court
had ruled were not taxable in the country. Foreign investors were stunned, and
analysts say the outflow of capital is one reason the rupee has tumbled 13
percent since the end of February.
“We are fed up and
our investors are not keen to even talk about India,” said a senior executive
at an American bank in Mumbai, asking not to be identified so he could speak
bluntly. “They are sick and tired.”
Kaushik Basu, the
government’s chief economic adviser, acknowledged that the government had made
mistakes and had missed opportunities to better position India as the global
economic landscape shifts. Yet he said that the rising pessimism was
unwarranted and that India was still growing, still had high investment and
savings rates, and should take advantage of the depreciation of the rupee to
push exports. He said India’s problems were no worse than those in other
emerging economies.
“It is a difficult
stage,” Mr. Basu said in an interview. “But I do remain very, very optimistic.
Six months and we will pull up.”
In the meantime, the
immediate challenges are piling up. This month, in a move to raise revenues,
the government raised gasoline prices, drawing public fury. Now the question,
analysts say, is whether the administration can muster the political courage to
trim the bigger subsidies affecting diesel fuel and cooking gas.
Mr. Singh warned last
week that the government would have to make some unpopular decisions. Many
experts, however, say they expect more stalemate.
“It has always been tough,” said Mr.
Levine, the Moody’s economist, “but there is a sense, at the moment, that it’s
too difficult. For the time being people are just giving up on it.”
Jim Yardley reported from New Delhi, and Vikas Bajaj from
Mumbai, India.
