Until a few months ago, the most popular buzz phrase for India was “economic miracle,” with the nation appearing impervious to the financial turmoil engulfing the developed world.
But now the “India story” is losing traction, with inflation at 13-year highs and economic expansion slowing, prompting an exit by foreign investors as gloomy warnings pile up.
“A number of factors inimical to growth have intensified,” the government’s Economic Advisory Council said last week, citing a world economy hit by the “twin onslaught” of the US subprime mortgage crisis and an oil price surge.
No country can “expect to emerge unscathed,” it cautioned.
Inflation, currently at 12.44 percent, will “remain in double digits through 2008” as a result of the surge in oil and other commodity prices, said Goldman Sachs economist Tushar Poddar, who sees more monetary tightening to tame prices, which will brake domestic growth further. Some economists forecast inflation, which has nearly tripled from a year ago, could hit at least 15 percent.
All this has provoked alarm in the government, which fears a backlash in general elections due by next May as India’s poor masses, hardest hit by inflation, vent their anger through the ballot box.
“It’s the economy, stupid,” said Mail Today columnist Mahesh Rangarajan, referring to the slogan used during former US president Bill Clinton’s 1992 presidential campaign.
“No other issue is likely to dominate the political scene” as much in the coming months, he said.
The government has already shifted gears, saying it is giving priority to subduing prices over boosting growth.
While official growth forecasts for the year to next March range from 7.7 to 8 percent — down from the 9 percent expansion last year and 9.6 percent the previous year — some brokerages see it as low as 7 percent.
That’s still strong by anemic Western levels, but not enough to lift India’s hundreds of millions from poverty.
Downbeat data has fed pessimism. Industrial output grew by just 5.4 percent in June, a sharp fall from 8.9 percent a year earlier. The trade deficit has widened to record levels and the reluctance of the government to pass on global oil price rises to consumers as well as a host of pre-election goodies are swelling the fiscal deficit.
Indian Prime Minister Manmohan Singh’s Cabinet has approved an average 21 percent salary hike for 5 million government employees along with debt relief of US$15.05 billion for poor farmers.
Global ratings agency Fitch has cut India’s currency outlook to negative, citing a worsening fiscal deficit.
The warnings mark a change in analysts’ expectations that India would be able to escape the ravages of the global financial upheaval due to its still largely domestically driven economy and the fact it was “decoupled” from US financial woes.
To put back some of the shine on the economy, the government is seeking to crank up economic reforms as it heads into the final stretch of its mandate.
But the administration led by Singh — who as finance minister in the 1990s initiated the changes that led to India’s inward-looking economy finally opening up to the world — faces a tough challenge to accomplish any “big bang” reforms.
“Time is short and market conditions are not good,” said Deepak Lalwani, director at London’s Astaire Securities.
After a blistering bull run, India’s stock market has been the worst large emerging market performer this year.
The biggest-ticket item on the anvil is a government plan to raise as much as US$10 billion from selling up to a 10 percent stake in state-run BSNL, the nation’s largest telephone company.
The initial public offer would be India’s largest and improve the government’s fiscal position but faces huge opposition from BSNL’s union.
In any event, the foreign honeymoon with India seems over. As of last week, overseas funds had sold Indian stocks worth a net US$6.52 billion this year. During the same period last year, they had bought a net US$9.6 billion.
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