India’s economic miracle losing its lustre: analysts

[Neo]

India’s economic miracle losing its lustre: analysts​

NEW DELHI: Booming India is reeling from a flurry of bad financial headlines, suggesting the outlook for the world’s second fastest-growing major economy is not as rosy as it was, analysts say.

Economic growth is losing pace and inflation is on the rise, meaning India’s central bank — which has hiked interest rates nine times since 2004 to tame prices — has little room to loosen monetary policy to spur activity, they say.

“The picture of very strong growth and low inflation in India is starting to give way to one of slowing growth and rising inflation,” said Robert Prior-Wandesforde, an economist at HSBC in Singapore.

Last Friday, inflation in Asia’s third-largest economy hit a nearly 10-month high of 5.02 percent, pushing through the central bank’s ceiling of five percent for this fiscal year.

Adding to the gloom has been a 25 percent slide since January 10 in India’s benchmark Sensex share index — whose 47 percent jump last year made it one of the world’s top performers — as foreign investors have bailed out.

“With the (global) economic turbulence, you’re seeing a lot of risk aversion,” said Amitabh Chakraborty, equities president of Mumbai’s Religare Securities.

Also, the Congress-led government, which faces general elections in little over a year, is storing up fiscal trouble with its 15-billion-dollar loan bailout for farmers, big civil service pay hikes and tax cuts announced late last month in its populist, poll-geared budget, economists say.

“We think the fiscal deficit will increase due to the spending pressures,” said Goldman Sachs economist Tushar Poddar.

Economic growth is forecast by the government to slow to 8.8 percent in this fiscal year to March 31, 2008 from 9.6 percent last year — the first deceleration in three years.

Some economists project growth could fall to as low as seven percent next year due to the US-led global slowdown, aggressive monetary tightening and a sharp rise in the rupee’s value against the dollar, which has hit exports.

Seven percent growth would still be enviable by anemic Western levels but is too low for India, where analysts say double-digit expansion is needed to help hundreds of millions escape a grim poverty trap.

The stock market’s slide has also cast a cloud over plans by firms to raise a projected 15 billion dollars in IPOs this year — nearly double the record 8.3 billion raised in 2007.

Already, two high-profile firms have pulled their IPOs, including Emaar MGF — a joint venture of Dubai’s Emaar, the world’s biggest property developer —- which abandoned its bid to raise 1.6 billion dollars, citing “indications of a US recession and global meltdown.”

The IPOs are key to expansion as much of the funds raised would be invested in plant and machinery, and improvements in India’s dilapidated infrastructure such as its potholed roads, shabby ports and unreliable power.

Economists as major growth constraints routinely cite lengthy blackouts even in big metropolitan centres such as New Delhi.

While India’s economy is better insulated than many other Asian nations from the global slowdown because it is not so heavily dependent on exports, it is not immune to the chill financial headwinds, analysts say.

A lot of economic growth has been driven by risk capital, especially from the United States, which is slowing as foreign investors repatriate funds amid fears of a US recession, said Religare’s Chakraborty.

For the time being, the government and central bank are making checking inflation their priority.

The central bank and the government are “signalling the risk to inflation is a bigger worry than the risk to growth,” said JP Morgan analyst Rajeev Malik.

Soaring world commodity and crude oil prices have alarmed the central bank while the government sees cutting inflation as crucial to its political fate, analysts say.

Inflation has been blamed as a key factor in several state poll drubbings for Congress, which owes its 2004 general election win to support from India’s poor masses — hardest hit by price rises.

Prime Minister Manmohan Singh last month called inflation “the cruellest tax” as it hits the poor the hardest. afp

Daily Times - Leading News Resource of Pakistan

 

[Neo]

Happyfeet, your comments on this please. I wouldn't refute the article as biased yet, there's some truth in the analysis.

Like to hear your views.

 

[Bushroda]

Neo, skepticism aside the points that have been mentioned are indeed true. Now, how these points relate to India losing its lustre is absolutely tentative. Some might say India is losing its sheen, others say India's growth is moderating. Both these instances relate to same but only it makes the former headline more sensational. India's inflation has risen in past few weeks but at the moment it is just a notch above the government target of 4.5%. So not much of bother at the moment but ofcourse a challenge for Chidambaram not to let it rise further. Stock Market has seen a bloodbath. Sensex has fallen by over 20% in last 2months but still, its the same story everywhere across the world & as long as the ghosts of US economic crisis looms there is no way that stock market is going to bounce back.

But OTOH, the economic fundamentals are strong. Investment & savings rate are each at 35% of GDP, enough to support 8.5-9% growth rate even with high inflation. Last year, India received a record $52 billions of foreign investment. FOREX reserves have gone past $300 billion last week. So, things are not apocalyptic in any way.

Infrastructure is indeed a problem especially the power sector. But, with state electricity boards being privatized & production boards being separated from Transmission & distribution it is expected to raise efficiency. Already energy giants like Reliance Energy & Tata are busy raising money through IPOs. But wherever things are left to the state the f!lth creeps in. The example is Bangalore International airport. The airport construction was undertaken by private sector & they built a world class airport ready ahead of schedule but, the expressway connecting to the airport is far from completion. Now, it takes over 3 hours to reach the new airport from the city centre. The HAL airport which was supposed to be closed down after the new airport becomes operational is now going to stay functional as noone is willing to travel 40miles to the new airport. Such is the story of India!! it is running for marathon but every 200 metres it stops to catch its breathe.

 

[ashfaque]

Indeed, there are some solid reasons that Indian economy can face a slow down in 2008. This is due to US economic recession, strong value of Rs, inflation up, and many more. Also $15B waiver of Farm loan can also impact a bit.

But all these are only analysis and speculation. There are few facts again I would like to give.
- In 2008, India is expecting 1 million new jobs in Hospitality, IT, manufacturing etc.
- Heavy reliance on the domestic market.
- There are theories too that US recession lead to more investment in India.

Though biggest short term problem is inflation. Some % of growth can be sacrificed to check inflation under 5%.

A 8 to 8.4 % over all growth in 2008 will be considered good if inflation is below 5%

 

[Always Neutral]

Happyfeet, your comments on this please. I wouldn't refute the article as biased yet, there's some truth in the analysis.

Like to hear your views.

Of course the article is a sound analysis that India is slowing down. When your top two cities figures in Forbes as in the top 10 of the dirtiest cities in the world you know these are signs of bad times ahead.

India needs to develop seamless world class infrastructure if it still wishes to grow further at the same pace.

While India will not slump in the near future its going to find it equally hard to sustain such growth for years to come.

Regards

 

[Bushroda]

Apart from Moody no other credit agency or economic survey unit has forcasted a growth rate below 8%. Mean average amongst popular economic surveys still forcasts a healthy 8.5%. India losing its lustre has more to do with it being unable to match with the standard it set for itself in last few years. For any economy in the 8+% bracket, it is said to have a very strong growth but the moment it goes past 9% it qualifies as a miracle economy. Also, the US economic slowdown isn't helping either. It is bound to reduce the cashflow into India. But that should atleast help the rupee stabalize. The trouble is global in its nature. Even China hasn't been able to escape. Its inflation stands at 9%, highest in over a decade & the GDP growth is said to barely cross 10% this year. A comparatively poor show by Chinese standards.

 

[Bushroda]

Indeed, there are some solid reasons that Indian economy can face a slow down in 2008. This is due to US economic recession, strong value of Rs, inflation up, and many more. Also $15B waiver of Farm loan can also impact a bit.

But all these are only analysis and speculation. There are few facts again I would like to give.
- In 2008, India is expecting 1 million new jobs in Hospitality, IT, manufacturing etc.
- Heavy reliance on the domestic market.
- There are theories too that US recession lead to more investment in India.

Though biggest short term problem is inflation. Some % of growth can be sacrificed to check inflation under 5%.

A 8 to 8.4 % over all growth in 2008 will be considered good if inflation is below 5%

Ashfaque,

By thumb rule for every 1 unit of growth you need 3.5 units of investment & another 3.5 units of saving. India's savings rate stand at 34.7% for the year 2007 amongst the highest in the world. With major government spending happening in Infra related projects savings rate might not increase but it is still enough to support a healthy 8%+ growth. Take a look at the article below

http://www.jcer.or.jp/eng/pdf/kenho061201e.pdf

Throughout 90s the government was happy with the 6%+ growth as the existing infrastructure was enough to support it. It was creaking but not cracking. To sustain a 9-10%+ growth rate over a long period of time needs a world class infrastructure & a constant supply of labour(both skilled & unskilled).

8%+ growth is still very good but, the age of break-neck growth is over, atleast for this decade.

 

[Malang]

Indeed, there are some solid reasons that Indian economy can face a slow down in 2008. This is due to US economic recession, strong value of Rs, inflation up, and many more. Also $15B waiver of Farm loan can also impact a bit.

US economic recession will not affect India significantly though the ensuing snowball effect can
Rupee prices are stable, and is expected to drop viz a viz other currencies... in fact Rupee appears much stronger than it actually is because of falling Dollar..
inflation is not a significant problem at the moment but inflation rates are subtracted to come up with the final rates..
15bn$ waiver will not effect much over the long term.. in fact is rather welcomed since agro-output will increas as farmers will have credit available to them

Though biggest short term problem is inflation. Some % of growth can be sacrificed to check inflation under 5%.
A 8 to 8.4 % over all growth in 2008 will be considered good if inflation is below 5%

actual growth rate is incl Inflation i.e India's gdp is growing at 13.4% @ previous years prices, but since inflation is also accounted for the gdp rate is 8.4%....

 

[Malang]

Of course the article is a sound analysis that India is slowing down.

slowing down? it is still growing and at 8% per annum implies generation of a 80-100bn$ economy per annum.... (for comparision Pakistan's gdp is 150bn$)

When your top two cities figures in Forbes as in the top 10 of the dirtiest cities in the world you know these are signs of bad times ahead.

being dirty does not imply they are deficient in any manner..

India needs to develop seamless world class infrastructure if it still wishes to grow further at the same pace.

Indian govt plans to invest almost 3-500bn$ but like all things govt. it will take a long time to spend this amount...

While India will not slump in the near future its going to find it equally hard to sustain such growth for years to come.

I feel once there is greater private sector involvement and political will India will replicate growths of China currently.

 

[Neo]

Neo, skepticism aside the points that have been mentioned are indeed true. Now, how these points relate to India losing its lustre is absolutely tentative. Some might say India is losing its sheen, others say India's growth is moderating. Both these instances relate to same but only it makes the former headline more sensational. India's inflation has risen in past few weeks but at the moment it is just a notch above the government target of 4.5%. So not much of bother at the moment but ofcourse a challenge for Chidambaram not to let it rise further. Stock Market has seen a bloodbath. Sensex has fallen by over 20% in last 2months but still, its the same story everywhere across the world & as long as the ghosts of US economic crisis looms there is no way that stock market is going to bounce back.

But OTOH, the economic fundamentals are strong. Investment & savings rate are each at 35% of GDP, enough to support 8.5-9% growth rate even with high inflation. Last year, India received a record $52 billions of foreign investment. FOREX reserves have gone past $300 billion last week. So, things are not apocalyptic in any way.

Infrastructure is indeed a problem especially the power sector. But, with state electricity boards being privatized & production boards being separated from Transmission & distribution it is expected to raise efficiency. Already energy giants like Reliance Energy & Tata are busy raising money through IPOs. But wherever things are left to the state the f!lth creeps in. The example is Bangalore International airport. The airport construction was undertaken by private sector & they built a world class airport ready ahead of schedule but, the expressway connecting to the airport is far from completion. Now, it takes over 3 hours to reach the new airport from the city centre. The HAL airport which was supposed to be closed down after the new airport becomes operational is now going to stay functional as noone is willing to travel 40miles to the new airport. Such is the story of India!! it is running for marathon but every 200 metres it stops to catch its breathe.

Thanks for your reply, I do agree on the fundamentals and your saving rate is indeed impressive but is the projected growth of 8% sunstainable?

Fifteen years since Indian economy started to take off you've come far in many fields to the envy of friends and foes but two major sectors, infrastructure and agriculture, are still neglected and I remain sceptical when I read reports suggesting a $150 billion immediate investment in modernising and expending infrastructure or the $15 billion loan waiver in the green sector, India can't deliver this in time to sustain growth, let alone reach the projected 10% growth in next decenium.

 

[Energon]

Thanks for your reply, I do agree on the fundamentals and your saving rate is indeed impressive but is the projected growth of 8% sunstainable?

Fifteen years since Indian economy started to take off you've come far in many fields to the envy of friends and foes but two major sectors, infrastructure and agriculture, are still neglected and I remain sceptical when I read reports suggesting a $150 billion immediate investment in modernising and expending infrastructure or the $15 billion loan waiver in the green sector, India can't deliver this in time to sustain growth, let alone reach the projected 10% growth in next decenium.

The thing with infrastructure is that one cannot see it's contributing effects to the general economy in a big way for at least a decade (if not more) or so until the major components are complete and functional. With India's offset policies there was a heavy reluctance to open the sector to international firms. Since then many changes have come about and numerous JVs are being set up. The other problem has been acquiring heavy industry hardware which as of right now are only being produced in limited numbers by western nations and are currently occupied on large scale projects in other rapidly developing nations like China, Korea, UAE and Brazil. However these issues too are being resolved slowly. Rest assured massive projects are ongoing and a they will only continue to grow exponentially as hardware becomes available. Nonetheless, its effects will be gradual and the full potential will not be realized until the middle of the next decade. Also it is important to keep in mind that although many changes started occurring in the early 90s, the infrastructure sector barring major cities remained untouched until the early 00s.

As far as agriculture is concerned, the problems are far more complex and layered. I also admit that I am not very well versed with this field. However, from my limited understanding of a few of the problems, the first saving grace will be the improvement of infrastructure which is the second greatest limiting factor in this sector. The greatest impediment however IMO is inadequate education (not too many official reports agree with me however). Lack of education which is the greatest contributor to low human development is at the core of plight of rural India which overwhelmingly survives off agriculture. So far the GoI hasn't managed this properly on account of many political pressures (which probably require another post). Nonetheless as far as I'm concerned the overall condition of the agricultural sector and the vast population that indulges will never improve drastically unless there is widespread education first. Unfortunately the effects of improving education (which costs a LOT of money and heartache) cannot be seen for almost 2 decades which makes relatively unattractive for politicians who rely on instant gratification for elections. This is why you will see them expunging hundreds of millions of dollars in farmer debt instead of investing tens of billions in effective rural education campaigns. Now I'm not saying that the government hasn't tried to improve education; they are trying, and so far it has been a baptism by fire. Nonetheless they have to increase these efforts a whole lot more and keep pouring money down this sinkhole until it starts making a difference.

 

[Malang]

but two major sectors, infrastructure and agriculture, are still neglected and I remain sceptical when I read reports suggesting a $150 billion immediate investment in modernising and expending infrastructure or the $15 billion loan waiver in the green sector,

the infra figures are much higher and farmer waiver is nothing out of the blue or what is not practised in other countries..

Agro sector to an extent yes is neglected but India would not like to go for capital intensive agriculture rather for labour intensive argiculture due to population constraints..
Already many corporates have invested in agro sector like Bharti, Birla, Reliance, ITC etc. and the middle men are generally being cut out giving more benefits to the farmers..

India Infra is no doubt creaking and 500bn$ figure is very palatable as India already has massive forex reserves which will be diverted here, increasing Foreign Investment in infra, and private sector involvement in the same...

Though money is being spent but the time delays are unavoidable..

an eg of Power sector: 200bn$ has been outlayed for power generation but distribution transformers are reqd for the same.. India's distribution transformer industry is inadequate and imports are not feasible either.. so this is just an example of a constraint..

there are bottlenecks but this exercise will only help the GDP esp in terms of multiplier effect during investment and greatly after targets are achieved.

another example of Steel Sector: India Inc has already lined up 125bn-150bn$ for setting up steel plants with a combined production of over 100MTPA; which will make India the second largest steel producer and trader in the world... the GDP multiplier effect of steel is 3x...

India can't deliver this in time to sustain growth, let alone reach the projected 10% growth in next decenium.

Even if India cannot hit 10% but I feel India is the only economy that will be consistently clocking 8% well into the next few decades...

 

[Neo]

The thing with infrastructure is that one cannot see it's contributing effects to the general economy in a big way for at least a decade (if not more) or so until the major components are complete and functional.

I beg to differ,the contributing affects will be the creation of millions of jobs in this sector with direct returns to the low skilled low educated labor uplifting the low income majority, right now India is too focused and reliying on the 300 million strong middle class at the cost of remaining 700+ millions of low incomes housholds.
The affects will also be visible in accessibility of your domectic market enhancing local trade and possibly regional exports since the smaller hubs become more competitive in exports rather than functioning as a transit hub for local markets.

With India's offset policies there was a heavy reluctance to open the sector to international firms. Since then many changes have come about and numerous JVs are being set up.

It will take decades of work for JV's to cover all of India, you should open this sector for FDI and full forein ownership in order to develop this sector to sustain growth.
Any further neglect wil backfire on the economy due lack of accessibility.

The other problem has been acquiring heavy industry hardware which as of right now are only being produced in limited numbers by western nations and are currently occupied on large scale projects in other rapidly developing nations like China, Korea, UAE and Brazil. However these issues too are being resolved slowly. Rest assured massive projects are ongoing and a they will only continue to grow exponentially as hardware becomes available.

Beg to differ again, India has to look into markets with excessive heavy industry hardwere direct available for exports. I'm talking about cheaper countries like Poland, Hungry, Romania, Czeck Rebublic and Ukraine.

Nonetheless, its effects will be gradual and the full potential will not be realized until the middle of the next decade. Also it is important to keep in mind that although many changes started occurring in the early 90s, the infrastructure sector barring major cities remained untouched until the early 00s.

I agree.

 

[Malang]

The thing with infrastructure is that one cannot see it's contributing effects to the general economy in a big way for at least a decade (if not more) or so until the major components are complete and functional. With India's offset policies there was a heavy reluctance to open the sector to international firms. Since then many changes have come about and numerous JVs are being set up. The other problem has been acquiring heavy industry hardware which as of right now are only being produced in limited numbers by western nations and are currently occupied on large scale projects in other rapidly developing nations like China, Korea, UAE and Brazil. However these issues too are being resolved slowly. Rest assured massive projects are ongoing and a they will only continue to grow exponentially as hardware becomes available. Nonetheless, its effects will be gradual and the full potential will not be realized until the middle of the next decade. Also it is important to keep in mind that although many changes started occurring in the early 90s, the infrastructure sector barring major cities remained untouched until the early 00s.

Excellent !! Very Informative!!

As far as agriculture is concerned, the problems are far more complex and layered. I also admit that I am not very well versed with this field. However, from my limited understanding of a few of the problems, the first saving grace will be the improvement of infrastructure which is the second greatest limiting factor in this sector. The greatest impediment however IMO is inadequate education (not too many official reports agree with me however). Lack of education which is the greatest contributor to low human development is at the core of plight of rural India which overwhelmingly survives off agriculture. So far the GoI hasn't managed this properly on account of many political pressures (which probably require another post). Nonetheless as far as I'm concerned the overall condition of the agricultural sector and the vast population that indulges will never improve drastically unless there is widespread education first. Unfortunately the effects of improving education (which costs a LOT of money and heartache) cannot be seen for almost 2 decades which makes relatively unattractive for politicians who rely on instant gratification for elections. This is why you will see them expunging hundreds of millions of dollars in farmer debt instead of investing tens of billions in effective rural education campaigns. Now I'm not saying that the government hasn't tried to improve education; they are trying, and so far it has been a baptism by fire. Nonetheless they have to increase these efforts a whole lot more and keep pouring money down this sinkhole until it starts making a difference.

I differ here..
Farmers/Agriculturists don't require city/urban education..
the basic wants of a farmer.. our timely and cheap availibility of seeds, water, electricity, fertilizer, *cides and CREDIT....

Look at Punjab and Haryana they don't necessarily have the most fertile land(W.Punjab is the more fertile one by far), nor the best climate(it is adjoining a desert), not the most educated people(jokes not withstanding)...

and now look at UP and MP they have one of the more fertile land(Drained by the Ganga-Jamuna basin), excellent climate, and again not the most educated people

but average yield in Punjab/Haryana is b/w 3-4000kg per acre amongst the best in the world (and highest per kg fertiliser used).. where as UP and MP manage anywhere b/w 15-2000kg(wheat) per acre....

This all boils down to govt support(besides farming skills) Punjab/Haryana have access to electricity, good quality seeds, land holdings are bigger and clubbed (tractors and other machinery can be used etc), Credit access is Good, Plenty of Cheap electricity and water available and sympathetic govt which partially guarantees bailouts...

so for farmers the most important infrastructure requirement is simply: cheap and plenty of electricity when needed...

then other issues are:

Land Holdings : small landholding farmers usually sell their land and become labourers for larger landholders so this is also not a very big problem...

Irrigation projects etc. are reqd but most now depend on tubewell rather than rain(since rivers and canals also depend on rain). A major help would be river linking project

Scientific Farming for eg GM seeds though Some GM seeds are unsuited but Govt officials get a commission on selling them so they fool the farmer into planting them and end result is not very good...

Insecticides,Pesticides, Fertilizers are available aplenty though they are also getting expensive

Machinery is available on easy loans/credit/rent (but requires land holding to be large and at one place usually)

Credit --> govt officials are very lax in this regard, lot of palm greasing reqd(depending on state), limited loan availability and govt charges high interest rates all are impediments often some farmers prefer to deal with moneylenders rather than the govt ... this ought to change as well..

Sympathetic --> Agro in India is still nature-dependent and govt must bail out farmers so that they are confident that if they invest or take risks they have something to fall back on...

These are few of the reasons for the lack of agro development in India as I see it...

 

[Energon]

I beg to differ,the contributing affects will be the creation of millions of jobs in this sector with direct returns to the low skilled low educated labor uplifting the low income majority, right now India is too focused and reliying on the 300 million strong middle class at the cost of remaining 700+ millions of low incomes housholds.
The affects will also be visible in accessibility of your domectic market enhancing local trade and possibly regional exports since the smaller hubs become more competitive in exports rather than functioning as a transit hub for local markets.

Improbable. Modern construction incorporating a high level of mechanization, modular assembly and highly coordinated construction management projects require a heavy core of skilled workers which as of now are unavailable on account of two reasons:
1. Most of the skilled Indian labor is currently employed in the booming construction centers of the Middle East, South East Asia and the focal developing areas within India (like the state of Maharashtra for instance).
2. The level of education among the rest of rural India (the biggest potential supplier of construction labor) is so low that it is taking a long time to bring them up to par with the necessary skill sets. Other competing industrial sectors like automotive manufacturing which requires less education and promises opportunity to remain in Rural India (closer to home) as the sector grows rapidly makes them more desirable.

Large scale construction will certainly avail jobs to the low skilled illiterate masses, but these projects cannot commence without the availability of the abovementioned category of labor which as of right now is a major problem. With the ME slowing down and the rising Rupee the construction sector will eventually be able to bring the talent from the ME back home. But until then they will have to make do with the comparatively meager human resources.

It will take decades of work for JV's to cover all of India, you should open this sector for FDI and full forein ownership in order to develop this sector to sustain growth.
Any further neglect wil backfire on the economy due lack of accessibility.

Actually this problem has pretty much been resolved. Foreign firms from all over the world are waiting to enter India in a big way and most have already struck deals with local collaborators. GE India- GE Infrastructure is by far the largest player who not only has the capacity to manage projects and acquire hardware but also arrange financing through it's sister company GE Capital.

Beg to differ again, India has to look into markets with accessive heavy industry hardwere direct available for exports. I'm talking about cheaper countries like Poland, Hungry, Romania, Czeck Rebublic and Ukraine.

The sort of equipment that is required for the designed projects requires hardware that is not available in any of these markets. As I mentioned before there are only a small number of companies (primarily of Western, Japanese and South Korean origin) who manufacture/lease the necessary hardware (required for the projects planned in India) which are only getting freed up now after their engagements elsewhere. Trust me, if cheaper equipment was available elsewhere people would have already jumped on it. In this case the supply is not sufficing the demand. L&T for instance which is just one of the many firms engaged in infrastructure development has a back order of $10.14 billion. The overall allocated funds for the next five years by various authorities throughout India is now $475 billion. The work is slow primarily because of the skilled labor and hardware shortage.

The Wharton School of Business (U-Penn) had recently put out a paper highlighting all of this. I have it saved on one of my laptops somewhere and I'll see if I can find and post it up here.