Is the Indian economy stalling?
by Jonathan Saxty
(submitted 2012-04-25)
India's inflation is little changed, making the interest-rate-cutting task of the Reserve Bank of India (RBI) more complicated. Consumer prices in India rose by 6.89% from a year earlier, compared with 6.95% in the previous month. The RBI has been under pressure to cut its interest rates amid a slowdown in India's economy.
While India's industrial production was hoped to grow at around 6.6%, it only managed to grow at 4.1% from a year earlier, in February. Growth was dampened by weak demand for consumer goods and exports, as well as high interest rates. January's figure was revised from 6.8% to 1.14%.
In an article in the Evening Standard, BBC journalist Mihir Bose said that "India really has outgrown the need for UK aid." Bose begins by reminding readers that "giving aid is a colossal failure to understand how the country has changed." Not so fast.
The herculean growth rates of the last few years have dropped dramatically. While India had been posting Chinese levels of growth (9-10%), this has now fallen to around 5-7%. GDP growth slipped to 6.9% and industrial production decline 5.1% in late 2011.
Worries about illegal mining have reduced iron ore extraction in Karnataka and Goa. Meanwhile approvals for new projects have hit obstacles. Foreign direct investment slumped from $24bn to $19bn in 2011.
Chandrajit Banerjee, director-general of the Confederation of Indian Industry, said business was "extremely concerned" about the country's growth trajectory. He warned that under-investment and high borrowing costs threatened to curb India's economy.
"There are very few developments in the country, which can be termed as confidence boosters," Mr Banerjee said. "The current situation of the Indian economy is induced largely by domestic issues … the corrective actions are very much in the hands of domestic policymakers."
Bose continues that "there are more billionaires in India than in this country [the UK]. Since India gained independence in 1947, Indians have squirrelled away more than £900 billion in Swiss bank accounts, more than the rest of the world combined."
Is Bose seriously gloating about the fact that some Indians have siphoned off nearly £1 trillion into Swiss bank accounts? As Akash Kapur wrote in India Becoming, more Indians have mobile phones than access to lavatories, 93% of Indians still work in the black economy and 70% of surface water is polluted.
According to UNICEF, one in three of the world's malnourished children are in India; 50 per cent of all childhood deaths are attributed to malnutrition; around 46 per cent of all children below the age of three are too small for their age and 47 per cent are underweight and at least 16 per cent are wasted.
Ratan Tata, the chairman of the Tata Group has ruled out new acquisitions and told his employees to brace for austerity. He is turning to other growing Asian countries such as Malaysia, Indonesia and Thailand rather than India.
Rohini Malkani, an economist at Citigroup said India was enduring a tough fiscal year with a cocktail of domestic and global challenges. "Tough times don't always last, but they can last long enough to do more damage to the economic structure and momentum," she said.
"We have seen India growth expectations come off from 9 per cent levels to 7 per cent, with growing doubts on whether even a 7 per cent rate can hold," said Malkani. India suffers from gross under-investment, which is badly needed to supply more power and modernise India's infrastructure.
Gross fixed capital formation fell for the first time in two years in 2011, contracting 0.6%. Robert Prior-Wandesforde, an economist at Credit Suisse said that aggressive benchmark lending rate rises were "taking chunks out" of India's growth.
According to a recent article in the International Business Times, "foreign fund inflows - a major driver of Indian stocks - dried up in 2011 with net outflows in excess of $450 million, from record inflows of more than $29 billion in 2010. As a result, the BSE Sensex fell by almost 25 percent in 2011 making it among the world's worst performers. In the same period, the rupee lost about 19 percent of its value against the U.S. dollar owing to the capital flight from the economy."
In this country where, according to the Times of India young Indians still prefer to work abroad, no other country has seen quite the migration of human and financial capital as India has. Incidents like financial irregularities in the Commonwealth Games or the war widows scandal are still overshadowed by everyday corruption: the bureaucrat, official and tax collector engaging in corruption to supplement what are otherwise meagre incomes.
This year, agriculture is expected to grow just 2.5% (compared with 7% the previous year), manufacturing by 3.9% (compared with 7.6% the previous year) and mining could decline by 2.2% (compared with growth of 5% the previous year). Standard and Poor's also warned there could be a downgrade in India's investment-grade credit rating.
International trade organisations representing 250,000 companies have warned India's Prime Minister Manmohan Singh that new tax proposals are leading foreign investors to question their investments in India, according to Reuters. Foreign direct investment slumped from US$24bn to US$19bn in 2011 as the economy grew the weakest in nearly three years.
The letter went on to say that plans to expand the definition of "royalty" retrospectively to 1976 would affect companies such as Ericsson. "There appears to be an assumption, often expressed by Indian tax authorities, that India's ability to attract foreign investment is not affected by its taxation policies and practices. This simply is not the case."
"India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world."
While India's industrial production was hoped to grow at around 6.6%, it only managed to grow at 4.1% from a year earlier, in February. Growth was dampened by weak demand for consumer goods and exports, as well as high interest rates. January's figure was revised from 6.8% to 1.14%.
In an article in the Evening Standard, BBC journalist Mihir Bose said that "India really has outgrown the need for UK aid." Bose begins by reminding readers that "giving aid is a colossal failure to understand how the country has changed." Not so fast.
The herculean growth rates of the last few years have dropped dramatically. While India had been posting Chinese levels of growth (9-10%), this has now fallen to around 5-7%. GDP growth slipped to 6.9% and industrial production decline 5.1% in late 2011.
Worries about illegal mining have reduced iron ore extraction in Karnataka and Goa. Meanwhile approvals for new projects have hit obstacles. Foreign direct investment slumped from $24bn to $19bn in 2011.
Chandrajit Banerjee, director-general of the Confederation of Indian Industry, said business was "extremely concerned" about the country's growth trajectory. He warned that under-investment and high borrowing costs threatened to curb India's economy.
"There are very few developments in the country, which can be termed as confidence boosters," Mr Banerjee said. "The current situation of the Indian economy is induced largely by domestic issues … the corrective actions are very much in the hands of domestic policymakers."
Bose continues that "there are more billionaires in India than in this country [the UK]. Since India gained independence in 1947, Indians have squirrelled away more than £900 billion in Swiss bank accounts, more than the rest of the world combined."
Is Bose seriously gloating about the fact that some Indians have siphoned off nearly £1 trillion into Swiss bank accounts? As Akash Kapur wrote in India Becoming, more Indians have mobile phones than access to lavatories, 93% of Indians still work in the black economy and 70% of surface water is polluted.
According to UNICEF, one in three of the world's malnourished children are in India; 50 per cent of all childhood deaths are attributed to malnutrition; around 46 per cent of all children below the age of three are too small for their age and 47 per cent are underweight and at least 16 per cent are wasted.
Ratan Tata, the chairman of the Tata Group has ruled out new acquisitions and told his employees to brace for austerity. He is turning to other growing Asian countries such as Malaysia, Indonesia and Thailand rather than India.
Rohini Malkani, an economist at Citigroup said India was enduring a tough fiscal year with a cocktail of domestic and global challenges. "Tough times don't always last, but they can last long enough to do more damage to the economic structure and momentum," she said.
"We have seen India growth expectations come off from 9 per cent levels to 7 per cent, with growing doubts on whether even a 7 per cent rate can hold," said Malkani. India suffers from gross under-investment, which is badly needed to supply more power and modernise India's infrastructure.
Gross fixed capital formation fell for the first time in two years in 2011, contracting 0.6%. Robert Prior-Wandesforde, an economist at Credit Suisse said that aggressive benchmark lending rate rises were "taking chunks out" of India's growth.
According to a recent article in the International Business Times, "foreign fund inflows - a major driver of Indian stocks - dried up in 2011 with net outflows in excess of $450 million, from record inflows of more than $29 billion in 2010. As a result, the BSE Sensex fell by almost 25 percent in 2011 making it among the world's worst performers. In the same period, the rupee lost about 19 percent of its value against the U.S. dollar owing to the capital flight from the economy."
In this country where, according to the Times of India young Indians still prefer to work abroad, no other country has seen quite the migration of human and financial capital as India has. Incidents like financial irregularities in the Commonwealth Games or the war widows scandal are still overshadowed by everyday corruption: the bureaucrat, official and tax collector engaging in corruption to supplement what are otherwise meagre incomes.
This year, agriculture is expected to grow just 2.5% (compared with 7% the previous year), manufacturing by 3.9% (compared with 7.6% the previous year) and mining could decline by 2.2% (compared with growth of 5% the previous year). Standard and Poor's also warned there could be a downgrade in India's investment-grade credit rating.
International trade organisations representing 250,000 companies have warned India's Prime Minister Manmohan Singh that new tax proposals are leading foreign investors to question their investments in India, according to Reuters. Foreign direct investment slumped from US$24bn to US$19bn in 2011 as the economy grew the weakest in nearly three years.
The letter went on to say that plans to expand the definition of "royalty" retrospectively to 1976 would affect companies such as Ericsson. "There appears to be an assumption, often expressed by Indian tax authorities, that India's ability to attract foreign investment is not affected by its taxation policies and practices. This simply is not the case."
"India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world."
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