Paralysis in India Exacts a Heavy Toll ; Economic Growth Stalls as Inflation and Deficits Test Coalition's Resolve

By Jim Yardley; Vikas Bajaj | International Herald Tribune, May 3, 2012 | Go to article overview

Paralysis in India Exacts a Heavy Toll ; Economic Growth Stalls as Inflation and Deficits Test Coalition's Resolve


Jim Yardley; Vikas Bajaj, International Herald Tribune


Populist tendencies and a lack of action by top leaders, as well as allegations of corruption, are undermining Indians' optimism and growing competitiveness, many say.

India's coalition government just celebrated the third anniversary of its tenure with a self-congratulatory banquet that could not have been more poorly timed: India's currency, the rupee, is collapsing; investment and growth rates are falling; inflation is rising; and deficits are eating away at government coffers.

India's burgeoning problems have dampened hopes that it, along with China and other non-Western economies, might help revive global growth, as happened after the 2008 financial crisis. Instead, India is now facing a political reckoning, as the country's elected leaders must address difficult, politically unpopular decisions or risk even deeper problems.

"When India was being run comparatively well, in 2008, they seemed to cope with these external shocks, at least from a financial perspective," said Glenn Levine, a senior economist at Moody's Analytics in Sydney. "I think people are starting to question the long-term Indian story. That is the difference now."

India's difficulties come as the global economy is wobbling once again. Europe is grappling with a sovereign debt crisis that could shatter the Continent's economic and political union. The United States is still not generating enough new jobs. China's growth has weakened, with a real estate downturn and stalling exports, while important emerging economies like Brazil's are slowing down, raising grim prospects for the world economy at a critical time.

India is often viewed as a rising global powerhouse, and not too long ago Indian officials were predicting growth rates of 9 percent or higher. The administration of U.S. President Barack Obama, eager to tap into such a booming market and envisioning India as a regional counterweight to China, trumpeted the U.S.-India partnership. Some analysts even saw the global downturn as an opportunity for India, making it more attractive for foreign investors wary of putting money into declining advanced industrial countries.

Today, India's economy is still expanding, with growth projected between 6 percent and 7 percent this year. And analysts say India's long-term strengths remain significant. It has one of the world's youngest populations and polls consistently show that Indians are overwhelmingly optimistic about their future. Meanwhile, India's businesses are competing more aggressively on the global stage.

But the slowdown has punctured the once-bubbly mood in the business and political classes and brought sharp criticism of the government. Indian business leaders, foreign investors and analysts say the country's strengths are being undermined by growing political dysfunction: the populist tendencies of Indian politicians, a lack of action by top leaders and allegations of corruption have blunted the authority of policy makers.

India is desperate for investment in mining, roads, ports, urban housing and other areas, but Indian businesses and foreign investors are starting to shy away. Indian corporations, unable to obtain governmental licenses or permissions for projects, are investing overseas instead. Foreigners also are pulling back, as their investment in Indian stocks and bonds totaled $16 billion in the last fiscal year, compared with $30 billion the year before. The trend has accelerated in recent months after the Finance Ministry, trying to stem a rising budget deficit, proposed new taxes on foreign institutions doing business in India.

"A quiet crisis of confidence is building up," said Pratap Bhanu Mehta, president of the Center for Policy Research in New Delhi. "There is no certainty over the regulatory regime. There is no certainty over the tax regime."

Indians have long thrived amid adversity, often by creatively -- at times, illegally -- subverting onerous regulations with a workaround ethos that has encouraged economic activity. …

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