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'Perfect storm' puts India's economy on the rocks

An Indian man bathes on a street as a rickshaw driver pedals past on a cold morning in New Delhi, Dec. 28, 2011. Economic growth in the world's most-populous nation is expected to drop below 6 per cent.

Kevin Frayer/Associated Press/Kevin Frayer/Associated Press

"Under six." Unthinkable a year ago, this is the muttered phrase on the lips of India's business leaders these days: that the country could post gross domestic product growth of less than 6 per cent this fiscal year.

"It's a crisis – we're going to be looking at 5.5, but you wouldn't know it from the way these guys are acting," said the CEO of the Indian branch of one of the world's largest Internet companies, referring to the central government; he would not speak on the record for fear of souring an already fraught relationship with that government.

In many of the world's major economies, 5.5-per-cent growth sounds like a dream, but it's barely half of what was predicted for India at the start of the fiscal year back in April.

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The country needs the near-double-digit growth if the half of its citizens who continue to live in stark poverty are to get jobs and see change in their lives, and the Indian National Congress-led government needs to see it if they are to have any hope of winning re-election.

But a vicious mix of external and internal factors has combined to savage the prospects for this year, and there are signs the coming six months will be worse.

The ongoing turmoil in the global economy has not been kind to India: manufacturing and exports are way down, and the rupee has lost nearly 20 per cent of its value since the spring.

But the worst of the problems are homegrown, starting with a perceived paralysis on the part of government. The current session of Parliament has been hijacked by debate over corruption, and theatrics staged by an opposition that smells blood. The business community was hoping to see at least a dozen pieces of major economic reform legislation – particularly pertaining to land acquisition and tax policy – passed this session; it appears that at best one or two laws will be.

The government has a critical leadership vacuum: Congress president Sonia Gandhi is ill, reportedly with cancer, and has been away from the helm. Her son and presumed heir Rahul Gandhi has failed fully to step to the forefront. But the Prime Minister, Manmohan Singh, has stayed silent through the parliamentary turmoil and is rarely seen, leading to an overall impression that he is a hapless figurehead.

The sense of rudderlessness has seeped into the bureaucracy, where implementation of critical infrastructure projects has stalled: the national highways project has been effectively shelved; coal-fired power plants are perpetually short of fuel because of poor central planning; ports, railways and new planned cities are all stalled.

Rajeev Malik, a leading analyst of India's economy, calls it all a "perfect storm" and said the consequences, in the near term, are grim.

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"Under six – is it possible? Sure. Is it for certain? No, not if government gets its act together. But India is a supertanker, not a yacht, and it takes a lot to move it," he said. Already there are clear signs that state electoral battles are going to preoccupy government for the first half of next year.

"Things could be improved but we would have to see a fairly aggressive turnaround as far as government is concerned," Mr. Malik said. "And there is no sign of that happening, and with the state election calendar it's unlikely to happen."

Mr. Malik's firm, CLSA, is predicting 6.7-per-cent growth for 2012 and – a downward trajectory – 6.3-per-cent average growth for 2013, with some quarters potentially below six.

The Reserve Bank of India has kept interest rates resolutely high, while government social policy has led to high inflation – the highest in any of the BRIC countries, near 10 per cent a month – and a mounting fiscal deficit. The government said this week that the fiscal deficit would overshoot the projected target of 4.6 per cent; the next day the cabinet approved a "right-to-food" bill, said to be a particular project of Ms. Gandhi's, which will theoretically deliver subsidized grains to about two-thirds of the population and will cost the government an estimated $17.5-billion (U.S.).

The focus of government, however, is corruption – with popular anger simmering over a series of scandals, and street-level demands for the creation of an anti-corruption watchdog that has monopolized this session of parliament.

The old ways, of paying bribes to win contracts and greasing the track for approvals, are suddenly in question, but no one knows how the new game works, or wants to be the person who takes the next step, said an executive with an Israeli telecommunications firm with several major projects here. So his firm's myriad applications for permissions and approvals from government are in limbo. "We have done basically nothing for six months," he said. "My guys are just sitting."

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Investor confidence took a hard blow earlier this month when the government introduced, with fanfare, plans to allow 51-per-cent foreign ownership in the multibrand retail sector – and then days later had to hastily scrap those plans, when the opposition rebelled (claiming it would squash small Indian business) and the Congress party's own coalition allies refused to back the initiative.

The business community is becoming increasingly strident in its criticism: in October, 14 of the country's top business leaders sent government an open letter bemoaning the climate: "Policy uncertainties and delays in approvals are forcing many large corporate entities to seek out opportunities in other geographies," it warned. Last month, Mukesh Ambani, chair of Reliance Industries, one of the country's largest firms, told a meeting of the World Economic Forum that the government must "move a lot faster" in decision-making. At the same venue, a major industrialist, Niranjan Hirandandani, said in an outburst to reporters, "It's almost becoming impossible to do business in India."

The Prime Minister responded four days ago with a sharp scolding at the Council of Trade and Industry in the presence of some of the country's leading business figures, saying they were damaging the country with their negative attitude.

That only confirmed the sense he is badly out of touch. "What's the Prime Minister thinking?" said the CEO of a mid-size financial services and real estate company in Delhi, who would not speak on the record because he is not authorized to address political issues. "Of course we're negative."

The potential spending power of India's population will keep the long-term outlook positive, said Rajeev Malik, but a population that has tasted what it is like to grow at 8 per cent is not going to be content with six, or less.

Jayati Ghosh, a professor at the Centre for Economic Studies and Planning in Delhi, called the focus on the GDP growth figure a distraction.

"If a large part of your GDP growth is construction or financial services or otherwise part of a bubble – if a lot of it is unsustainable – but very little of it is employment-generating, then that number is immaterial," she said. The solution will be public-sector spending in sectors such as health which will create jobs and drive consumption, she said.

"Five-point-five growth like that, that is real – that would be fine. But that will take policy and action from government. And we're not seeing it."

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About the Author
Latin America Bureau Chief

Stephanie Nolen is the Latin America correspondent for The Globe and Mail. After years as a roving correspondent that included coverage of the wars in Iraq and Afghanistan, Stephanie moved to Johannesburg in 2003 to open a new bureau for The Globe, to report on what she believed was the world's biggest uncovered story, Africa's AIDS pandemic. More

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