NY Times - A Summer of Troubles Saps India’s Sense of Confidence

[East Asia United]

A Summer of Troubles Saps India’s Sense of Confidence
By GARDINER HARRIS and BETTINA WASSENER
Published: August 18, 2013

NEW DELHI — For the last 10 years, India seemed poised to take its place alongside China as one of the dominant economic and strategic powerhouses of Asia. Its economy was surging, its military was strengthening, and its leaders were striding across the world stage.

But a summer of difficulties has dented India’s confidence, and a growing chorus of critics is starting to ask whether India’s rise may take years, and perhaps decades, longer than many had hoped.

“There is a growing sense of desperation out there, particularly among the young,” said Ramachandra Guha, one of India’s leading historians.

Three events last week crystallized those new worries. On Wednesday, one of India’s most advanced submarines, the Sindhurakshak, exploded and sank at its berth in Mumbai, almost certainly killing 18 of the 21 sailors on its night watch.

On Friday, a top Indian general announced that India had killed 28 people in recent weeks in and around the Line of Control in Kashmir as part of the worst fighting between India and Pakistan since a 2003 cease-fire.

Also Friday, the Sensex, the Indian stock index, plunged nearly 4 percent, while the value of the rupee continued to fall, reaching just under 62 rupees per dollar, a record low. The rupee and stocks fell again on Monday.

Each event was unrelated to the others, but together they paint a picture of a country that is rapidly losing its swagger. India’s growing economic worries are perhaps its most challenging.

“India is now the sick man of Asia,” said Rajiv Biswas, Asia-Pacific chief economist at the financial information provider IHS Global Insight. “They are in a crisis.”

In part, the problems are age-old: stifling red tape, creaky infrastructure and a seeming inability to push through much-needed changes and investment decisions. For years, investors largely overlooked those problems because of the promise of a market of 1.2 billion people. Money poured into India, allowing it to paper over a chronic deficit in its current account, a measure of foreign trade and investment.

But after more than a decade of largely futile efforts not only to tap into India’s domestic market but also to use the country’s vast employee base to manufacture exports for the rest of Asia, many major foreign companies are beginning to lose patience. And just as they are starting to lose heart, a reviving American economy has led investors to shift funds from emerging-market economies back to the United States.

The Indian government recently loosened restrictions on direct foreign investment, expecting a number of major retailers like Walmart and other companies to come rushing in. The companies have instead stayed away, worried not only by the government’s constant policy changes but also by the widespread and endemic corruption in Indian society.

The government has followed with a series of increasingly desperate policy announcements in recent weeks in hopes of turning things around, including an increase in import duties on gold and silver and attempts to defend the currency without raising interest rates too high.

Then Wednesday night, the government announced measures to restrict the amounts that individuals and local companies could invest overseas without seeking approval. It was an astonishing move in a country where a growing number of companies have global operations and ambitions.

The Indian stock markets were closed Thursday because of the nation’s Independence Day, but shares swooned at Friday’s opening. Stocks lost another 1.5 percent Monday, and many analysts predicted that the markets will continue to decline.

“I think things will get much worse before they get better,” said Sonal Varma, an India economist at Nomura Securities in Mumbai. “The government is between a rock and a hard place.”

The problem for India, analysts say, is that the country has small and poorly performing manufacturing and mining sectors, which would normally benefit from a weakening currency. Meanwhile, India must buy its oil, much of its coal and other crucial goods like computers in largely dollar-denominated trades that have become nearly 40 percent more expensive over the past two years.

That is helping feed inflation, which jumped in July to an annual rate of 5.79 percent from 4.86 percent in June, far above what analysts had expected.

The Reserve Bank of India, the central bank, has recently responded to the rupee’s weakness by raising interest rates, but those moves have already begun to hurt a huge swath of India’s corporate sector. Growth rates had already slowed to 5 percent in the most recent quarter, and India now has a far harder time meeting its current-account deficit.

Analysts fear that higher inflation, softening growth, a falling currency and waning investor confidence could spin into a vicious cycle that will be difficult to contain.

“There’s a risk of a spiral downward,” said Mr. Biswas, the IHS Global economist. “It will be very hard to break.”

The submarine explosion revealed once again the vast strategic challenges that the Indian military faces and how far behind China it has fallen. India still relies on Russia for more than 60 percent of its defense equipment needs, and its army, air force and navy have vital Russian equipment that is often decades old and of increasingly poor quality.

The Sindhurakshak is one of 10 Russian-made Kilo-class submarines that India has as part of its front-line maritime defenses, but only six of India’s submarines are operational at any given time — far fewer than are needed to protect the nation’s vast coastline.

Indeed, India has fewer than 100 ships, compared with China’s 260. India is the world’s largest weapons importer, but with its economy under stress and foreign currency reserves increasingly precious, that level of purchases will be increasingly hard to sustain.

The country’s efforts to build its own weapons have largely been disastrous, and a growing number of corruption scandals have tainted its foreign purchases, including a recent deal to buy helicopters from Italy.

Unable to build or buy, India is becoming dangerously short of vital defense equipment, analysts say.

Meanwhile, the country’s bitter rivalry with Pakistan continues. Many analysts say that India is unlikely to achieve prominence on the world stage until it reaches some sort of resolution with Pakistan of disputes that have lasted for decades over Kashmir and other issues.

http://www.nytimes.com/2013/08/19/business/global/a-summer-of-troubles-saps-indias-confidence.html?pagewanted=all