India, the Goliath, Falls with a Thud

Ravi S Jha
Filed on October 13, 2008

NEW DELHI – India, the world’s second fastest growing economy, is in turmoil.

Till few months ago, it seemed, nothing could stop this economic behemoth. But in less than six months, growth has slipped drastically, stocks are down 60 per cent, and global stock market investors are seen fleeing.

While the business sector may blame the ruling multiparty government for failing to make timely reforms, and the global financial woes as reasons for the mayhem, the government seem unfazed of the catastrophe. Annual growth is set to come down from a sound 9 per cent to 6.5 per cent; with inflation doubling at nearly 12 per cent.

Corporate and industrial profits that surged 20 per cent is facing a steep slide.

The stock market that rose 50 per cent in 2007 with Sensex touching a record 21,000 is on a virtual precipice at 10,000. In April, the consumer demand was colossal, Indian companies were making impressive global acquisitions, and foreign investment was seen growing; today it’s the other extreme.

Economic forecasts expect India’s growth rate to plummet at 6.5 per cent — a considerable plunge for India that wants to accelerate growth, not restrain it, by any means. India, unfortunately, is reeling from large government deficits, and mounting interest rates. Believe it the words of Andrew Holland, head of proprietary trading at Merrill Lynch India, who says: “India has gone from hero to zero in six months.”

So why has India hit the wall? In the current scenario, how do people rate India’s economist prime minister Manmohan Singh?

Well, the government blames global circumstances — the oil prices, the sub-prime crisis that emaciated the flow of foreign funds, the global markets on abyss. But didn’t the government fail to initiate timely actions that could have avoided the collapse?

The deputy chairman of the planning commission Montek Singh Ahluwalia admits in an interview, “There has been a deficiency of skillful planning. What we should have done a year ago to check the impending crisis, we are forced to do it now. This will not speak well of us. But we are doing everything possible to contain the fall.”

Take the case of India handling the recent oil price swell. New Delhi imports 75 per cent of its oil to meet growing demand. The government subsidise 60 per cent of the price of such fuels, like diesel. In 2007, when inflation was low at 3 per cent, the populist Congress-led government chose to cut subsidies instead.

Veteran economists Subir Gokarn from Standard & Poor raises concerns on the government’s decision to spend $25 billion on waiving loans made to farmers and hiking bureaucrats’ salaries. “These are examples of how to ruin your growth when anxiety should be more towards safeguarding your economy owing to the global calamity,” he asserts.

The government, nevertheless, does not fail to draw attention of what world see as India.

Minister for finance P Chidambaran asserts quoting World Bank president Robert Zoellick as saying: “India is in a position to weather the global financial turmoil.” “The impact on the financial sector in Asia is limited this time,” he says pointing to what ADB President H Kuroda asserts.

However, regardless of government’s upbeat mood, the situation isn’t hunky dory. Consider this: the government has astronomical expenditures to make. There is an additional $25 billion as fertilizer subsidies, which has added $100 billion a year, a little more than 10 per cent of India’s gross domestic product.

At a time when government needs to spend $500 billion on infrastructure development and an equally sizeable amount on advancing health-care facilities and education, the economic collapse could not have come at a worse time. One approximation suggest, the government’s official debt has now gone up to 10 per cent of GDP in 2008 after it dropped below 6 per cent in 2007.

The amount of FDI inflows in 2007-08 fiscal was $24,579 million. In 2006-07, it was $15,726 million; it witnessed a growth of 56 per cent from 40 per cent over the last fiscal. But in the current year, it is all set to go down by 35 per cent.

The Merrill Lynch predicts corporate earnings growth to dip from 20 per cent in 2007 to 10 per cent.

The slowdown coupled with the global economic collapse is making India less attractive for foreigners to invest in India’s stock market, and the falling indices very much signify this trend with or without the global crisis aiding to it. The foreign investors invested $19 billion in 2007, but took out $5.5 billion out of the market fearing the collapse. What next, Mr Chidambaram?

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