Even as the economic scene in India is getting grimmer, investors are betting the new finance minister would help steer the ship through troubled waters and halt the slide in growth. Ground realities, however, tell us those expectations could be misplaced.
Industrial output in June slumped 1.8 per cent from a year earlier, government data showed, with capital goods production — a key barometer for investment in the coming months — plunging 27.9 per cent. Capital goods have showed growth only once in the past 10 months.
Quarterly earnings from companies have also been disappointing, with profit margins facing enormous pressure. State-run oil refiners like Indian Oil Corp, Bharat Petroleum, and Hindustan Petroleum reported massive losses as they were forced to sell fuel at government-set low prices while the cost of crude oil they import rose, partly due to the rupee’s sharp depreciation.
Shares in Bharti Airtel, India’s largest mobile services company that is 30 per cent owned by Singapore Telecommunications, crashed to their lowest in six years after the firm reported declining profits for a 10th consecutive quarter.
To add to the woes, drought has ravaged at least half a dozen states, withering crops, fuelling food inflation, and denting incomes in the rural heartland — a key driver of demand for goods from motorcycles to soaps.
Little surprise then that there has been a spate of downgrades in growth forecasts by foreign brokerages and rating agencies over the past week to around 5.5 per cent for the financial year ending next March, which would be the weakest in a decade.
“There has been little policy response from either the Reserve Bank of India or the government and with the global uncertainty dragging on, we see nothing on the horizon to lift the economy from its funk,” Glenn Levine, senior economist at Moody’s Analytics, said.
If drought conditions worsen, growth could slow to 4.9 per cent, wrote Citigroup economist Rohini Malkani, whose forecast now stands at 5.4 per cent.
What makes the outlook bleaker is the lack of leadership in the government and its inability to push reforms and weakened financial condition.
“Unfortunately, the scope for counter-cyclical fiscal and monetary support today is almost non-existent,” wrote Rajeev Malik, economist at CLSA.
Yet, the top-30 Sensex rose 2.1 per cent last week as investors clung to hopes new finance minister P. Chidambaram, widely seen as market-friendly and reform-minded, would jumpstart stalled policies to revive growth. The Harvard-educated 66-year-old fed those expectations by signalling a reversal to controversial tax proposals that had spooked foreign investors.
“Uppermost in my mind is the duty to regain the confidence of all stakeholders,” Chidambaram said in his first comments after taking over the finance ministry.
He also shunted out some officials who were closely associated with the moves to impose retrospective taxes on companies such as Vodafone after the Supreme Court ruled in the British company’s favour in a tax dispute. Another proposal to tax foreign fund investments from tax-havens such as Mauritius has also been buried.
Chidambaram won his oars in the 1990s by presenting a “dream budget” that scrapped state controls and further opened up the economy, paving the way for rapid growth. Although known as pro-business, he was also the author of populist measures in a later budget.
The government has appointed Raghuram Rajan, who teaches at the University of Chicago’s Booth School of Business, as the chief economic adviser. Rajan, a former chief economist at the International Monetary Fund, is an ardent critic of India’s unsustainable subsidies and a supporter of reforms.
The problem, however, is not a lack of ideas. It is the political will to put those to practice. Sonia Gandhi, who wields real power with no responsibility in the government, is a diehard populist with an eye on garnering votes.
“If Manmohan Singh, who had a considerable legacy as a reformer, was not able to contain Sonia Gandhi’s impulses, why would Chidambaram do any better,” wrote Surjit Bhalla, the outspoken chairman of New Delhi-based consultancy Oxus Investments.
“It is likely that like other reformers before him, Chidambaram would also be made to drink from the poisoned chalice.”
Events to watch out are: Tata Steel and Coal India results on Monday, earnings from Reliance Power, Reliance Infrastructure, and July inflation data on Tuesday.
— The writer is a journalist based in India.