India in for difficult times

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India in for difficult times

By Robert M Cutler

MONTREAL - A continuing decline in India's growth rate is foreseeable on the basis of statistics available so far in 2011, and other economic indicators are stubborn.

Gross domestic product (GDP) grew 7.7% in the three months to June 30, the third successive quarter of slowing growth, and the slowest pace since the third quarter of 2009. The latest GDP growth pace, reflecting the economy in the first quarter of India's fiscal year, was established on the basis of correcting figures from a year ago to a lower level than first reported.

Indian real estate meanwhile faces a cash crisis, and there are fears that Indian banks will be adversely affected by an increasing number of bad loans. Construction was down 4.5% in the three months through June compared with a year earlier. Revenue growth in the construction sector may slow down to around 11% year on year in the quarter to September 30, CRISIL Research said this week.

Automobile sales are also down, suggesting a general contraction in consumer demand, as steel and rubber prices have risen 20% over the past year. This inflationary pinch is felt throughout the manufacturing sector. August consumption of oil products rose only 3.2% over the level a year earlier, down from July's 3.8% year-on-year figure, also signaling a deceleration in growth.

The central bank this week called for an increase in agricultural growth to 4%, compared with the current 3.9% rate. The Asian Development Bank forecasts agriculture to grow around 3%-4% in the year to next March, based on a normal monsoon. Agriculture is a "silver lining" although "its growth may not be sustained", Rajiv Kumar, secretary-general of the independent Federation of Indian Chambers of Commerce and Industry, wrote in The Hindu.

Overall exports are exceptionally strong, growing 44.2% year on year to US$24.3 billion in August, but that may well be due to a weakening rupee that brings its own set of problems. Imports grew 41.8% to $38.4 billion, leaving a trade deficit of $14.1 billion for the month.

The rupee has depreciated 9.3% against the US dollar this quarter, and has declined 6.7% so far this month alone, standing at 49.25 to the dollar in early morning Thursday trading, just below the Monday high of 49.67. It is strongly indicated that the Reserve Bank of India (RBI) would intervene to "smooth" this volatility.

RBI deputy governor Subir Gokarn called the rupee's movements "a matter of some concern" even while making the case that this was a global phenomenon with which conditions in India had little to do. "Infusing dollars is something we would consider," he said, as reported by Bloomberg News."

Inflation remains stubborn with food prices, for example, up 10.1%. Wholesale price inflation reached 9.8% in August. Gokarn estimated inflation would stay around 9-10% until at least November. The RBI less than two weeks ago raised interest rates for the 12th time in the last year and a half. Continuing rate increases will discourage investment and other indicators and do nothing to provide a recovery of the GDP growth rate.

On Tuesday, RBI governor Duvvuri Subbarao, speaking in New York, indicated a preference for a maximum 6% inflation rate, otherwise "you can't ... have higher growth." Pressure for monetary tightening remains, and public comments by RBI figures have indicated disappointment in the government's failure to tighten fiscal policy, thus weakening the battle against inflation.

The government's response to the delicate economic situation is complicated by an unsettled situation in the country's highest political ranks. The president of India's ruling Congress Party, Sonia Gandhi, returned to India three weeks ago from a trip to the US for medical reasons that remain publicly undisclosed, although it has been revealed that she underwent surgery there in late July. She has since resumed political duties, but the absence of information over her illness has clouded the overall political situation.

The veil, however, may slowly be lifting. The Indian media reported this week that she underwent an operation at New York's Sloan-Kettering Cancer Center, by coincidence, according to rumor, under the care of a doctor of Indian origin. She is now 64 years old, and her family's political dynasty no longer commands, in the words of two Reuters reporters, the "reverential awe" that it once did.

At the same time, various political and economic corruption scandals are starting to immobilize the necessary of work of some institutions of government, or at least major figures in them. The scandals are also blemishing India's image in the eyes of foreign investors, to such a degree that the country's business leaders have launched a "Credible India" campaign to counter the bad publicity.

On the financial front, the bellwether BSE Sensex 30 stock market index in Mumbai has declined 16.9% in just under 11 months, closing on Wednesday at 16,446. The benchmark is now in the middle of a persistent and well-marked downtrend channel that began early last November after it had barely topped its previous all-time high, set in January 2008, by closing at 21,005. A month ago the index was down as low as 15,849, almost 20% from the top. There remains good medium- and long-term support around the 16,000 level.

Dr Robert M Cutler (Robert M. Cutler, Consultant/Researcher/Educator in Post-Cold War International Affairs), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

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