India’s government is under greater pressure to improve the economic environment as general elections loom next year. The polls are seen as a touchstone for the current ruling elite that faces a multitude of issues, with the rupee clearly being the biggest impediment for the Indian economy going forward.
The current factors putting pressure on India’s fiscal and trade balance are commodity inflation and fuel costs, both a result of the rupee’s continuous slide against the US dollar. “What is going to happen is that the central bank will have limited room to provide stimulus to combat the slowdown. The depreciation in the rupee will have a macroeconomic impact,” says Atsi Sheth, Vice President, Sovereign Risk Group, Moody’s Investors Service.
Moody’s, one of the most significant rating agencies worldwide, currently has a stable outlook on India’s Baa3 rating, its lowest investment grade rating. While at present it does not intend to lower it, the developments in India that are constantly evolving and the uncertainty of recovery are taken into account, the agency says.
Moving backwards
On July 10, the International Monetary Fund (IMF) cut India’s growth outlook for the fiscal year 2013-14 to 5.6 per cent from the 5.8 per cent it projected in April 2013, saying slowing credit growth and the prospect of US Federal Reserve’s unwinding easy-money policies are aggravating a slowdown in emerging markets. Nine days later, Deutsche Bank slashed India’s economic growth forecast for the current fiscal year to 5 per cent from 6 per cent earlier, saying that recent data show that industrial production, trade and business sentiment have deteriorated.
“We feel that a growth turnaround will take longer than we had expected earlier,” Deutsche Bank said in a research report released on July 19 at a press conference in Mumbai. It added, “The weak trend of capital goods imports suggests that the rate cut cycle (of the central bank) has not yet managed to turn around investment sentiment.” The lower growth forecast followed other GDP downgrades by Macquarie and Bank of America-Merrill Lynch earlier in July.
There are three main factors shaping India’s GDP outlook and all of them are tied to the state of the global economy.
Dollar versus rupee
The first is — as always — action by the US Federal Reserve. With massive cash injections meant as monetary stimulus, many foreign investors are now considering pulling their cash out of emerging markets, including India, in favour of higher returns in the US. The same is happening with Japan under premiere Shinzo Abe’s radical fiscal recovery measures, a situation that puts the entire South and Southeast Asian regions under pressure.
“Investment money is literally sucked up from the capital markets to restore balance in major economies in the US and Japan and withheld from emerging markets with their relatively fragile economies that would need it in an equal way to maintain their growth pattern,” says Karun Cheewatra, assistant professor at the Faculty of Economics at Bangkok’s Chulalongkorn University.
The outflow of money and the depreciation of currency has, for the same reason, happened in Thailand over the past two months, causing the Thai baht to fall significantly before the slump could be softened through a few monetary measures. Huge economies such as India, and also Indonesia, might have to struggle longer, Cheewatra says, with their currencies literally in free fall over the past months and no turnaround in sight.
In June alone, the rupee tumbled 4.9 per cent, making it the worst performer among 78 global currencies, as investors pulled money out of Indian stocks and bonds. As of August 5, the Indian rupee stood at around 60.9 to the US dollar, as compared to 53.13 in February, the strongest rate in 2013 so far.
Bumping up investments
The second problem that India’s economy has been facing is the slowing down of foreign direct investments or FDIs, a situation that now has been countered with new FDI regulations. India recently stepped up its incentives for foreign investors particularly in several key sectors such as defence, telecom and insurance.
However, while FDI is welcome in most sectors in India and investors have learned to cope with accompanying factors such as corruption and bureaucratic inefficiency, the role of domestic investments also needs to be strengthened through a planned wave of public stimulus investments in infrastructure and towards the development of industries.
This should cover the receding private sector that has become wary of investing in the absence of visible signs of growth, or, more alarmingly, due to missing clearances and payments. Examples of public stimulus investments are, among others, the Delhi Metro, the Delhi-Mumbai and the Chennai-Bangalore economic corridors or several railway upgrade projects.
Inner turmoil
Lastly, a determining factor of India’s future GDP growth is an economy now facing bitter reality. Over the past decade or so, India has been measured by its high-octane growth, says Aninda Mitra, an Indian economist based in Singapore.
But with growth slowing rapidly and the rupee seemingly in free fall, underlying problems that have been covered by national economic success are now coming to light again: endemic corruption, widespread tax dodging, shifting government rules and poor infrastructure, among others. These issues have re-emerged as the great irritants they have always been, but they were ignored during the jubilant era of double-digit growth in the past.
With shrinking purchasing power, Indians who still can afford to invest are looking overseas, mainly to less affected and still thriving Southeast Asian economies or toward the Gulf countries. However, 65 per cent of India’s population is below the age of 35 and hasn’t had the opportunity to amass the wealth for private investments.
Prem Prakash, an Indian journalist and chairman of Asia News International, an influential news group, sums up: “A responsible visionary leader needs to lead the country out of this mess. India is the world’s youngest country and yet, its parliament is crowded with aged politicians. It needs to become secure and free of corruption and bribery. Only then can India’s sick economy be revived.”
Is India’s Looking East policy a solution for its sliding economy?
India’s Looking East policy was introduced in the nineties — it was developed during Prime Minister P.V. Narasimha Rao’s time and has been pursued up to now by Manmohan Singh. The policy brought a free trade agreement with Thailand and closer commercial relations with the Philippines, Singapore, Vietnam and Cambodia. Singh has shown new efforts through his trips to Thailand and Japan in June 2013, during which he invited the Thai private sector to invest in India’s economic corridors and the Japanese to look at India’s energy sector. Singh also signed a deal on civil nuclear co-operation in Tokyo.
India, with a slight delay, has also shown growing interest in the newly-opened economy of Myanmar, where top Indian companies are preparing to invest about $2.6 billion (about Dh9.5 billion) in a host of industries, including telecom, energy and aviation. Another country India has been looking at closely in recent times is Vietnam, where India’s Export-Import Bank has launched several projects and where the Indian Chamber of Commerce and Industry has kicked off a number of joint ventures in the textile and food sectors.
The Philippines has invited India to invest in its pharma, health care and biotechnology sectors. Tata Motors said in July that it considers the 240 million-people nation of Indonesia as its largest future export market.
