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Rapid Loss of Confidence Hits India Hard

How India's Growth Ended In Tears

It's enough to make a poor man cry and a wealthy investor sprint for the exit. From the back of a van in Delhi's chaotic Karol Bagh market, opposition politicians are selling discounted onions to disgruntled voters ahead of next year's general election.

The humble red onion, heart of the vegetable curry most Indians depend on, has more than trebled in price in the last few weeks and opposition leaders hope the increase will take a large bite into the Congress-led government's remaining support.

Peeling back its bashed, husky outer skin to its tear-jerking inner layers reveals not only the story of why its price has risen so sharply in the last month, but why the rupee has bombed in the foreign exchange markets and how India's all-action 'growth story' has become a real weepy.

Last week, as the rupee tumbled below 63 to the US dollar and crashed through the 100 rupees to the pound barrier, onions were an unaffordable 80 rupees per kilo. The government may need to import them to increase supply and push back prices, but that option will become more expensive as rupee rates fall lower every day.

The immediate cause of the increase was the heavy monsoon rains in Maharashtra which left the vegetables rotting in the ground, but the price may not have soared so high had the government been strong and decisive enough to reform its agricultural sector when it first planned to in 2009.

It hoped foreign supermarkets like Tesco and Walmart would come in and revolutionise India's backward agricultural sector. Forty per cent of all Indian produce rots on clunky bullock carts and rough baked roads before reaching the market. When they arrive, farmers get a tiny fraction on the retail price as as they pass through at least five agents, each taking their cut. Of the eighty rupees per kilo they were selling for last week, the farmer's share was just eight.

India needs new smooth roads, cold-chain storage and modern transport logistics to replace sweaty bullock carts, and direct sales from farmer to retailer to stabilise prices, increase farm incomes and reduce food inflation - one of the country's most politically sensitive issues.

The Indian government came close to collapse when it first announced its plan to allow foreign supermarkets to set up shop in late 2011. But it backed down after a key coalition partner threatened to resign and bring down the government with it.

By the time the government decided to push through the reform regardless last year, all the main supermarkets had been frightened off by the instability they had seen, and requirements to source 30pc of their goods from local suppliers.

The speed of India's sudden decline has taken many, including hopeful 'partners' like Britain, by surprise. Barely three years ago, as Britain and the United States were staring at the worst recession in eight decades, India's economy was growing at 8.5pc, a pound could buy only 65 rupees and ministers casually talked of double digit growth by 2011.

They planned to spend a trillion dollars on upgrading roads, building new airports, ports, and faster trains. The spoke of opening up their pension, banking, legal, defence and education sectors, and creating new low-tax special economic zones where firms could set up base without going through the dense undergrowth of Indian bureaucracy.

Since then, very few of those trillion dollars have been spent, major power projects have been halted, and bills to lift other barriers to foreign investment are gathering dust as India's opposition regularly walks out of parliament in protest. Special Economic Zones have been abandoned and GDP has plunged to 5pc - not enough to maintain living standards when India's population becomes the world's largest within the next 15 years.

So, like Tesco and other supermarket chains, potential investors are holding back and watching.

Subodh Agarwal, co-founder of Mergers and Acquisition specialists Euromax Capital, made his fortune as an early champion of the Indian growth story. He began from Mumbai, India's financial capital, and eventually set up shop in London, Singapore and Dubai, playing a role in the great Indian take-away which saw some of its biggest firms buy British business icons like Corus Steel, Jaguar Land Rover and Whyte and Mackay distillers.

Today, he thinks he may have to close his loss-making Mumbai office, and blames the government for frittering away a golden opportunity. "Even Indians are not investing in India. Indians have lost faith in their own economy because of non-governance," he said.

It has failed to encourage longer term investment in essential infrastructure and instead made it easier for speculators to dip in and out. He believes the government should have introduced bonds for investors in infrastructure development but instead penalised major investors like the British mobile phone giant Vodafone, which was hit with an unexpected $2 billion tax bill after it acquired Indian rival Hutch in 2007.

It was just one of a series of decisions which made investors fear their money may not be safe in India.

That fear has frightened away investors when it has never needed them more to reduce a current account deficit which has "ballooned" to 4.8pc. Inflation is just under 9pc but will now rise steadily as the rupee continues to fall. Mr Agarwal believes the rupee will continue its slump to 77 to the dollar and beyond, pushing inflation to above 13pc within a few weeks. He believes India's hopes of recovery depend on a strong, decisive government emerging from the next election.

"We need a stable government to develop a long term financial plan and policies to encourage long term money, say dollar infrastructure bonds," he said. Investors will wait until the market has bottomed out, and the country's leadership offers strong governance. The crisis is "entirely political" he said. Most political analysts however expect the next government to be another fragile coalition.

G.P Hinduja, whose family group owns Ashok Leyland, one of India's largest truck and car manufacturers, said the fundamentals of the Indian economy remained sound, but negative perceptions of the government had thrown India into a negative cycle.

It appears that the government failed to see the warning signs of problems ahead when investment by Indian firms started to slow and taken continued growth for granted.

"Reforms got slowed down as a result, retrogressive steps such as retrospective application of tax laws were taken, large investment projects were held up for environmental and other reasons, with the government unable to take tough decisions because of coalition compulsions. Along with this, scams in various areas were exposed," he said.

The government needs to breakout of the vicious circle it's now in by clearing a number if major infrastructure projects, reassure international firms it will not apply laws retroactively, and resist pressure to reject environmental clearances for mining and industrial projects.

India's Current Account Deficit could be reduced by issuing sovereign bonds and a "voluntary disclosure scheme to incentivise money held abroad to return," he said.

With the election expected early next year, however, few decision makers are thinking of the long term, and neither are the voters who crowded around the Bharatiya Janata

Party's vegetable van in Karol Bagh last week to buy onions at a bargain 35 rupees a kilo. Like their political rulers, they're getting what they can while it's going.


Read more: How India's Growth Ended In Tears - Business Insider
 
too many IFFFs whose probability is less then the probability of a a meteor striking the earth and ending civilisation.

lol
 
Well this is really ironic. People at major western news predict India would win out China's economic performance in "long term" and predicted China's crash since like 2000. Are those people and their cheerleaders now embarrassed? Political bias clouded their judgment. I wonder how long is considered "long term," till aliens invade the Earth? lol

Prediction is stupid and pointless since so many events could happen. But prediction does make some people feel good just like opium.
 
Well this is really ironic. People at major western news predict India would win out China's economic performance in "long term" and predicted China's crash since like 2000. Are those people and their cheerleaders now embarrassed? Political bias clouded their judgment. I wonder how long is considered "long term," till aliens invade the Earth? lol

Prediction is stupid and pointless since so many events could happen. But prediction does make some people feel good just like opium.

Long term by western standard is indefinite, i remember when they say India would 1st overtake China in the 2010s, then 2030 (the rise of superpower India, you know the white servants etc...). Then citibank came out and said by PPP India would be top dog in 2050, and the latest estimate puts it as late as 2070 / 2090. All of this was done before the economic woes India has today.
 
There does not appear to be any quick fix to the falling rupee and declining investor confidence....
 
actually when the rupee stabilizes around 60 mark it will attract more investors... and also it's good for our exports...

We have been hearing about the upcoming Indian export boom every month since the Rupee fell from 45 to 60. But no export boom. In fact I think Indian exports are shrinking annualised. Anyone have the numbers?
 
Return of the India doom story expert.

Funny to see so many zombies jumping up an down on a normal economic cycle that has impacted pretty much all of the world.

Including their own country!
 
[Bregs];4691032 said:
In next couple of months Rs is expected to settle around 57-59 slab, the economies dependent largely on FII inflows face this sort problem when world markets are in limbo specially major FII contributors like US N Europe but here again costly $ is good for exporters specially IT sector, jewellery and textiles, leather, chemical, pharmaceuticals and raw material etc,

Also you forgot to mention(neighbors will not understand this), you said in a couple of months, exactly in a couple of months elections will be declared. That will open up the hidden maal horded by our political parties. They will spend it like there is no end. That is huge huge amount of cash. That will be do or die situation for political parties. Once it comes into market it will definitely prop up economy. Now we are in a liquidity crunch.
 
Funny to see so many zombies jumping up an down on a normal economic cycle that has impacted pretty much all of the world.

Including their own country!

Wondering if they are so one dimensional in real life or it is just their online personality. If it is the former, I feel bad for them.
 
India is just experiencing the rapid deflating of the false hot air that pumped it up for the last couple years.
 
Wondering if they are so one dimensional in real life or it is just their online personality. If it is the former, I feel bad for them.

I agree, What a tremendous waste it would be...
 
Will India's ruling politicians muster the courage to swallow the bitter pill so close to the upcoming elections in 2014?

You don't need to be a rocket scientist to figure that out!! :P
 
Here's Jayanti Ghosh's Op Ed in the Guardian:

So now India is the latest casualty among emerging economies. Over the past 10 days, the rupee has slid to its lowest-ever rate, and the Indian economy may well be on the verge of a full-blown currency crisis. In this febrile situation, it is open season for rumours and pessimistic predictions, which then become self-fulfilling.

This means that even if there is a slight market rally, investors quickly work themselves into even more gloom. Each hurriedly announced policy measure (raising duties on gold imports, some controls on capital outflows, liberalising rules for capital inflows and so on) has had the opposite of the desired effect. Everything the government does seems to be too little, too late – or even counterproductive.

These are all classic features of the panic phase of a financial market cycle. This doesn't mean that a crash is inevitable, but clearly it is possible. The real surprise in all this is that investors and Indian policymakers are surprised. For some reason, they apparently did not foresee this turn of events, even though the story of every financial crisis of the past, and many in the very recent past, should have caused some nostrils to twitch at least a year or two ago.

The Indian economy has been in trouble for quite a while already, and only wilful blindness could have led to ignorance on this. Output growth has been decelerating for several years, and private investment has fallen for 10 consecutive quarters. Industrial production has declined over the past year. But consumer price inflation is still in double digits, providing all the essential elements of stagflation (rising prices with slowing income growth).

At the moment the external sector is the weakest link. Exports are limping along but imports have ballooned (including all kinds of non-essential imports like gold), so both trade and current account deficits are at historically high levels. They are largely financed by volatile short-term capital. This has already started leaving the country: since June more than $12bn has been withdrawn by portfolio investors alone.

This situation is the result of internal and external imbalances that have been building up for years. The Indian economic boom was based on a debt-driven consumption and investment spree that mainly relied on short-term capital inflows. This generated asset booms in areas such as construction and real estate, rather than in traded goods. And it created a sense of financial euphoria that led to massive over-extension of credit to both companies and households, to compound the problem.

Sadly, this boom was also "wasted" in that it did not lead to significant improvements in the lives of the majority, as public expenditure on basic infrastructure, as well as nutrition, health, sanitation and education did not rise adequately.

We should know by now that such a debt-driven bubble is an unsustainable process that must end in tears, but those who pointed this out were derided as killjoys with no understanding of India's potential. Something similar is occurring in a number of other Asian economies that are also feeling the pain at present, such as Indonesia – while the Brazilian economy shows some similar features. The current Indian problems may be extreme, but they reflect what should now be a familiar process in all major regions of the world.....

None of the experts saw India's debt bubble coming. Sound familiar? | Jayati Ghosh | Comment is free | The Guardian
 

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