Shine off economy as gloomy warnings begin to pile up

Shine off economy as gloomy warnings begin to pile up
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First Published: Mon, Aug 18 2008. 12 02 AM IST

Cause for concern: A file photo of Sarojini Nagar market, New Delhi. Rising prices of food and commodities have provoked alarm in the government, which fears a backlash in the general election due nex
Cause for concern: A file photo of Sarojini Nagar market, New Delhi. Rising prices of food and commodities have provoked alarm in the government, which fears a backlash in the general election due nex
Updated: Mon, Aug 18 2008. 12 02 AM IST
New Delhi: Until a few months ago, the most popular buzz phrase for India was “economic miracle,” with the nation appearing impervious to the financial turmoil engulfing the developed world.
But now the “India story” is losing traction, with inflation at a 16-year high and economic expansion slowing, prompting an exit by foreign investors as gloomy warnings pile up.
Cause for concern: A file photo of Sarojini Nagar market, New Delhi. Rising prices of food and commodities have provoked alarm in the government, which fears a backlash in the general election due next year. Photograph: Madhu Kaparrath / Mint
“A number of factors inimical to growth have intensified,” the government’s economic advisory council said last week, citing a world economy hit by the “twin onslaught” of the US subprime mortgage crisis and an oil price surge. No country can “expect to emerge unscathed”, it cautioned.
Inflation, currently at 12.44%, will “remain in double digits through 2008” as a result of the surge in oil and other commodity prices, said Goldman Sachs economist Tushar Poddar, who sees more monetary tightening to tame prices, which will brake domestic growth further. Some economists forecast inflation, which has nearly trebled from a year ago, could hit 15%.
All this has provoked alarm in the government which fears a backlash in the general election due for May as India’s poor masses, hardest hit by inflation, vent their anger through the ballot box. “It’s the economy, stupid,” said Mail Today columnist Mahesh Rangarajan, referring to the slogan used in Bill Clinton’s 1992 US presidential election campaign. “No other issue is likely to dominate the political scene” as much in the coming months, he said.
The government has shifted gears, saying it is giving priority to subduing prices over boosting growth. While official growth forecasts for FY09 range from 7.7 to 8% — down from 9% last year and 9.6% the previous year—some brokerages see it as low as 7%. That’s still strong by anaemic Western levels but not enough to lift India’s millions from poverty.
Downbeat data has fed pessimism. Industrial output grew by just 5.4% in June, a sharp fall from 8.9% a year earlier. The trade deficit has widened to record levels and the reluctance of the government to pass on global oil price rises to consumers and a host of pre-election goodies are swelling the fiscal deficit.
Prime Minister Manmohan Singh’s cabinet has approved an average 21% salary hike for five million government employees along with debt relief of Rs71,680 crore for poor farmers. Global ratings agency Fitch has cut India’s currency outlook to negative, citing a worsening fiscal deficit.
The warnings mark a change in analysts’ expectations that India would escape the ravages of the international financial upheaval due to its largely domestically driven economy and the fact it was “decoupled” from US financial woes.
To put back some of the shine on the economy, the government is seeking to crank up economic reforms as it heads into the final stretch of its mandate.
But the administration led by Singh, faces a tough challenge to accomplish any “big bang” reforms. “Time is short and market conditions are not good,” said Deepak Lalwani, director at London’s Astaire Securities. After a blistering bull run, India’s stock market has been the worst large emerging market performer this year.
The biggest ticket item on the anvil is a government plan to raise as much as $10 billion from selling up to a 10% stake in state-run Bharat Sanchar Nigam Ltd. The initial public offering would be India’s largest and will improve the government’s fiscal position but faces opposition from BSNL’s union.
In any event, the foreign honeymoon with India seems over. As of last week, overseas funds had sold Indian stocks worth a net $6.52 billion this year. During the same period last year, they had bought a net $9.6 billion.
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First Published: Mon, Aug 18 2008. 12 02 AM IST