India's Economy Hits the Wall
Growth is slipping, stocks are down 40%, and foreign stock market investors are fleeing. Business blames the ruling coalition for failing to make reforms
Just six months ago, India was looking good. Annual growth was 9%, corporate profits were surging 20%, the stock market had risen 50% in 2007, consumer demand was huge, local companies were making ambitious international acquisitions, and foreign investment was growing. Nothing, it seemed, could stop the forward march of this Asian nation.

But stop it has. In the past month, India has joined the list of the wounded. The country is reeling from 11.4% inflation, large government deficits, and rising interest rates. Foreign investment in India's stock market is fleeing, the rupee is falling, and the stock market is down over 40% from the year's highs. Most economic forecasts expect growth to slow to 7%—a big drop for a country that needs to accelerate growth, not reduce it. "India has gone from hero to zero in six months," says Andrew Holland, head of proprietary trading at Merrill Lynch India (MER) in Mumbai. Many in India worry that the country's hard-earned investment-grade rating will soon be lost and that the gilded growth story has come to an end.

Global circumstances—soaring oil prices and the subprime crisis that dried up the flow of foreign funds—are certainly to blame. But so is New Delhi. Much of the crisis India faces today could have been avoided by skillful planning. India imports 75% of its oil to meet demand, which have grown exponentially as its economy expands. The government also subsidizes 60% of the price of such fuels as diesel. In 2007, when inflation was a low 3%, economists such as Standard & Poor's Subir Gokarn urged New Delhi to start cutting subsidies. Instead, the populist ruling Congress government spent $25 billion on waiving loans made to farmers and hiking bureaucrats' salaries.
Botched Opportunities

Now those expenditures, plus an additional $25 billion on upcoming fertilizer subsidies, is adding $100 billion a year—or 10% of India's gross domestic product, or equivalent to the country's entire collection of income taxes—to the national bill. This at a time when India needs urgently to spend $500 billion on new infrastructure and more on upgrading education and health-care facilities. The government's official debt, which dropped below 6% of gross domestic product last year, will now be closer to 10% this year. "Starting last year, the government missed key opportunities" to fix the economy, says Gokarn. In fact, he adds, "there has been no significant reform done at all in the past four years"—the time the Congress coalition has been in power.

Even the most bullish on India are hard-pressed to recall any significant economic reforms made in the recent past. A plan to build 30 Special Economic Zones is virtually suspended because New Delhi has not sorted out how to acquire the necessary land, a major issue in both urban and rural India, without a major social and political upheaval. Agriculture, distorted by fertilizer subsidies and technologically laggard, is woefully unproductive. Simple and nonpolitical reforms, like strengthening the legal system and adding more judges to the courtrooms, have been ignored.

A June 16 report by Goldman Sachs' (GS) Jim O'Neill and Tushar Poddar, Ten Things for India to Achieve Its 2050 Potential, is a grim reminder that India has fallen to the bottom of the four BRIC nations (Brazil, Russia, India, and China) in its growth scores, due largely to government inertia. The report states that India's rice yields are a third those of China and half of Vietnam's. While 60% of the country's labor force is employed in agriculture, farming contributes less than 1% to overall growth. The report urges India to improve governance, raise educational achievement, and control inflation. It also advises reining in profligate expenditures, liberalizing its financial markets, increasing agricultural productivity, and improving infrastructure, the environment, and energy use.

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http://www.businessweek.com/globalbiz/content/jul2008/gb2008071_743900.htm?chan=top+news_top+news+index_top+story

If the rupee becomes stronger, it will hit the profit margin of the IT firms which may start cutting down. When lakhs of people are depending on IT jobs, that would create chaos.

Indian stock market is a joke. Prices fluctuate for no apparent reason. Years back Infy went all the way to Rs. 14,000 for no reason. In the end, lakhs of small investors burnt their fingers.

Govt controls the price of petrol and diesel. In fact Indian govt is losing crores every day for the subsidies n petrol and diesel. If it was not controlled by the govt., then the petrol would be more than Rs. 80 per litre.

So many subsidies. Fertilizer, power, water, etc. Even rich farmers are getting subsidies. Someone has to pay for it. Well the govt paying.


dio

Despite having the No.1 economist the country has produced as PM and the most experienced Havard educated man as the FM, the country is experiencing total chaos with inflation likely to touch 14%. The reasons are not far to seek. During the last 4.5 years, as the Congress did not have the majority, it has to rope in all and sundry to run the government. Everyone including the congressmen themselves followed the single policy of "make hay when the sun shines", as they did not know how long the government was going to last. Secondly the communist support with 60MPs was a big drag as their boss across the border do not want India to prosper. Thirdly, learned people like the PM, FM, the english news media were all subservient to the cause of miniscule percentage of rich people. The masses consisting of poverty line and lower middle class were totally neglected. All government decisions are not to displease those who are in Forbes list, top ten rich, people building skyscraper residences with helipad etc. Just only during the last 2 years a cursory look at vehicles waiting at the traffic signal in any metropolis would have told what forbade us. We could see Toyota Innova, Ford Ikon etc, with just one or two inside occupying space of a Mahindra van capable of carrying 15 passengers. This was never India and it can never be. Only the people at the top did not understand.

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Originally posted by ramar2005

Despite having the No.1 economist the country has produced as PM and the most experienced Havard educated man as the FM, the country is experiencing total chaos with inflation likely to touch 14%. The reasons are not far to seek. During the last 4.5 years, as the Congress did not have the majority, it has to rope in all and sundry to run the government. Everyone including the congressmen themselves followed the single policy of "make hay when the sun shines", as they did not know how long the government was going to last. Secondly the communist support with 60MPs was a big drag as their boss across the border do not want India to prosper. Thirdly, learned people like the PM, FM, the english news media were all subservient to the cause of miniscule percentage of rich people. The masses consisting of poverty line and lower middle class were totally neglected. All government decisions are not to displease those who are in Forbes list, top ten rich, people building skyscraper residences with helipad etc. Just only during the last 2 years a cursory look at vehicles waiting at the traffic signal in any metropolis would have told what forbade us. We could see Toyota Innova, Ford Ikon etc, with just one or two inside occupying space of a Mahindra van capable of carrying 15 passengers. This was never India and it can never be. Only the people at the top did not understand.

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