Not long ago it was the toast of investors, but India’s appeal has taken a hit, with bearish sentiment building thanks to worries over stubbornly high inflation and widespread political corruption.
Investor ardor for Asia’s third-largest economy has been cooled by a litany of bad news, from slowing growth, rising prices and spiraling interest rates to paralysis on economic reforms and a string of high-profile graft scandals.
Last week, global business information agency Dun and Bradstreet reported that its India business optimism index had fallen by a hefty 22 percent quarter-on-quarter.
Photo: AFP
“There has been a confluence of bad news dragging down sentiment,” Kaushal Sampat, Dun and Bradstreet’s India chief executive, told reporters.
The bad news comes as the government battles multiple corruption scandals that forced the resignation of a second Cabinet minister last week over accusations he abused his power while he held the telecoms portfolio.
“There are so many political fires, it makes it hard for the government to focus on the economic challenges such as reforms needed to spur growth,” Sampat said.
Data for the January to March quarter showed annual economic growth of 7.9 percent — the slowest in five quarters. The key manufacturing sector grew by 5.5 percent, its weakest pace in 18 months.
Quarterly net direct tax collections have fallen 17 percent year-on-year as economic activity decelerates.
Economists blame the downturn on stubbornly high inflation, which the 10 interest rate hikes since March last year have failed to tame. Price pressures are now spreading from food and energy to manufacturing.
“The continual rise in credit costs and high inflation have hurt both investment and consumption,” said Deepak Lalwani, head of London----based India-focused investment consultancy Lalcap.
Factory output has slowed in both India and China, the fastest-growing major global economies, as central bankers have boosted lending rates to fight inflation.
As one sign of waning investor appetite, funds raised through initial public offerings in India slumped by more than 80 percent year-on-year in the first half of the year to US$780 million, according to global data supplier Dealogic.
India’s benchmark Sensex index has already fallen 8.5 percent this year, after rising 17 percent last year, making it one of the worst-performing globally.
The forthcoming quarterly earnings season “will not be a pretty picture,” said Apurva Shah of Mumbai brokerage Prabhudas Lilladher, blaming weakening consumer demand and higher borrowing costs.
The government is expected to officially lower its growth forecast for this year to next year in the coming days from 9 percent to about 8 percent to 8.5 percent — higher than most economists’ expectations.
This week, international ratings agency Fitch cut its growth forecast for India’s economy this year to 7.7 percent from 8.3 percent, citing inflation as a key concern.
While growth of 7 percent to 8 percent would be envied by western economies, experts say India needs at least 10 percent expansion to lift hundreds of millions of Indians out of crushing poverty and the slowdown is seen as unlikely to put an end to rate hikes, with economists predicting further increases in the coming months.
The central bank has made it “crystal clear” it is “prepared to sacrifice some growth in the short term to protect the medium-term prospects of the economy,” said Credit Suisse economist Robert Prior-Wandesforde, who projects 7.5 percent growth this year and next.
Longer-term, economists say India’s so-called “growth story” driven by its vast consumer market and service-led economy is still intact.
However, a lack of economic reforms is hampering progress, and as the government careens from crisis to crisis, it is not expected to pass important pro-market legislation.
Economists have long prescribed reforms such as reducing government control, liberalizing the financial sector, simplifying archaic tax laws and loosening labor-market rules as key to boosting growth, creating jobs and alleviating poverty.
“We are so close [to achieving double-digit growth],” Sampat said. “If we had the right supportive economic ecosystem ... 10 percent growth would not have evaded us.”
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