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2013-07-01 11:21:38
Despite a tumbling currency, India s economy has got more stable in the past
year. But a revival in growth remains elusive
INDIA S richest man may also be its most optimistic. On June 6th Mukesh Ambani,
the boss of Reliance Industries, addressed an auditorium in Mumbai watched by
his glamorous wife in the front row and bodyguards with oiled submachine guns
in the wings. India s economy, he said, was in a funk but his faith was
unshakable . Soon the country would trigger a major transformation of the
world order . The audience rose in delight.
Such bullish talk is rare these days. It is a year since markets got jittery
about the risk of an economic crisis in India and nine months since the
government responded with reforms meant to kick-start growth. Officials,
business folk and economists hunting for signs of life have been disappointed.
Asia s third-largest economy expanded by 5% in the year to March, a decadal low
and far shy of the 8% its leaders still claim is its potential growth rate.
The prospects of a revival have only been complicated by the possible winding
down of quantitative easing (QE) in America. India has been a voracious
consumer of the hot money that has sloshed around the world in recent years,
using it to plug its balance-of-payments gap. On June 26th the rupee hit a
record low of 61 per dollar (see chart 1). It has been the weakest
emerging-market currency in the past month. Credit-default swaps on State Bank
of India, a proxy for the riskiness of India s government debt, have risen
towards the levels of a year ago. India is the riskiest big emerging economy on
this measure. Indian officials have been wheeled out to utter the dreaded
words: Don t panic.
Rupeeasy does it
Are the officials right? An apocalyptic scenario is that equity investors and
multinational firms head for the exit. They form the vast bulk of the stock of
foreign capital in India. This is unlikely. India is still growing faster than
most countries and plenty of outsiders remain beguiled. In April Unilever
offered $5 billion to buy out minority shareholders in its Indian unit. Net
outflows of equity investments have been small so far.
Foreign bondholders are far less loyal. They have withdrawn $6.5 billion since
mid-May. But the stock of external debt is a lowish 21% of GDP. Providing
existing equity investors and multinationals stay put, India can probably
handle a debt-buyers strike. Foreign reserves are 1.6 times likely financing
requirements in the next year (defined as the current-account deficit plus
short-term debt).
And although the world has got less forgiving as the end of QE looms, India s
stability has improved in some ways since last year. The government s one
unambiguous success is the public finances. Borrowing is still high but under
Palaniappan Chidambaram, the finance minister since last August, it is no
longer reckless. Control of spending and cuts in subsidies of fuel should mean
the overall deficit in the year to March 2014 is 7% of GDP, according to Chetan
Ahya of Morgan Stanley. For a while a deficit of 10% seemed possible. At this
lower level India s ratio of debt to GDP should be stable.
With an election due by May 2014, there will be pressure to boost spending. A
proposed policy to give more food to the poor could add 0.2 of a percentage
point to the deficit, analysts reckon. Still, the hope is Mr Chidambaram will
see off his wilder colleagues. When other ministers float populist policies
that would devastate the economy , Mr Chidambaram says unpleasant things , in
order to shoot them down, according to Prithviraj Chavan, an ex-minister who
now runs Maharashtra, a big western state.
Inflation also looks less scary, largely due to easing commodity prices.
Wholesale prices rose by 4.7% in May year on year, about half the rate at the
peak. Consumer-price inflation, at 9.3%, remains more stubborn, as do Indians
expectations of inflation. But both are moderating.
A rout is unlikely, then. The one-quarter decline in the rupee since 2011 may
eventually help boost India s competitiveness and spark a long-awaited boom in
Indian manufacturing that makes Godot seem punctual. This is probably the view
of India s central bank, which has not intervened much to support the currency.
But in the short term the currency gyrations do make life harder. Firms that
have taken a punt and borrowed in dollars will struggle. Dearer fuel imports
will raise inflation and the government s subsidy bill; both effects are
manageable but unhelpful, says Rajeev Malik of CLSA, a broker. The central bank
will find it harder to ease policy to spur growth. On June 13th its counterpart
in Indonesia raised rates, partly to stabilise its currency.
What of that elusive economic revival? It has proved even harder to spot than a
tiger in an Indian nature reserve. In the quarter to March GDP grew by 4.8%,
with exports, consumption and fixed investment all sluggish (see chart 2). More
recent data, such as car sales, industrial-production figures and surveys of
purchasing managers intentions, have been slack. Exports fell in May. Few
firms say activity is picking up, according to Sanjeev Prasad of Kotak, a
broker.
Consumption could bounce as the public-spending cuts ease and lower inflation
raises Indians purchasing power. But capital spending is what really matters
it boosts current growth and the economy s potential. At first glance it is
hard to discern a problem. Gross domestic savings and gross fixed investment
have dipped but are still about 30% of GDP. This is healthy enough, even by
East Asia s robust standards. Indian officials, Mr Chidambaram included, often
suggest that abundant funds and capital spending almost preordain fast growth.
Drill down deeper, however, and things are less reassuring, says Sajjid Chinoy
of J.P. Morgan. Almost half of all savings are now directed into physical
assets that bypass the financial system people buying gold, for example. The
quality of capital investment has fallen, with almost half now spent by
households, mainly on construction. The most productive kind of capital
investment, by private firms that build factories and buy machinery, has
dropped from 14% of GDP in the year to March 2008 to below 10% today.
How can the animal spirits of India Inc be revived? Firms are miffed by a lack
of land, power shortages and a surplus of red tape. Too many have shot
balance-sheets. A third of India s corporate debt sits in firms with interest
costs in excess of operating profits, according to Credit Suisse.
State-controlled banks are grappling with bad debts. Bosses are paranoid about
anti-graft probes. On June 11th investigators searched the office and home of
Naveen Jindal, the head of Jindal Steel & Power, a big industrial firm, and a
legislator for the ruling Congress party. India s national auditor claims the
firm was one of many to benefit unduly from the allocation of coal mines. Its
shares have since fallen by 25%.
The reform charade
One possible response to this malaise is a big burst of liberal reform to
restore faith that India is on the right track. Don t hold your breath. When
the government announced its package of measures last September optimists hoped
it was a moment to rival 1991, when India opened its economy to the world. It
is now clear that deep reforms are not going to happen in the near future,
reflecting both the profound ambivalence of India s ageing rulers and a tricky
political climate, with a weak coalition and an election looming (see table).
A new tax to replace a mess of local levies on goods and services has been
shelved until after the poll. The liberalisation of coal mining and electricity
distribution, both government-run bottlenecks, is not discussed. A landmark
decision to let foreign supermarkets into a backward food industry still stands
in theory, but fluid and onerous fine print means Walmart, Tesco and others are
not investing yet.
If deep reform is off the agenda, the government can still try the old approach
of cranking the bureaucratic machine harder. Mr Chidambaram, once viewed as
insufferable, is now praised by Mumbai s tycoons for taking notes as they
grumble about stalled projects. Since December a new committee headed by the
prime minister, Manmohan Singh, has tried to push forward projects tangled in
red tape: Mr Singh now personally reviews the rules for digging mud near road
projects, for instance. But the committee has not made a meaningful difference.
On The Economist s count, the fresh capital investment it has sanctioned
(rather than discussed or delegated to other bodies) amounts to 0.4% of GDP,
spread over several years.
Other measures are more useful. To resuscitate the power industry the
government is trying to allocate scarce domestic coal more efficiently among
power plants and allow them to recover the cost of expensive imported coal.
This is a sticking-plaster: for plants commissioned after March 2015 it is
still unclear where fuel will come from, says Amish Shah of Credit Suisse. But
it should help. Regulated gas prices are likely to be lifted to encourage more
investment in offshore fields. Foreign-investment rules are being further
relaxed, at least in theory. The government has yet to recapitalise dud
state-run banks but that would make a difference, too.
None of these measures will get India back to an 8% growth rate. Some are a
throwback to the pre-1991 licence Raj era, when officials tinkered
incessantly with the rules. But they might just keep India s economy chugging
along for a couple of years as the world adjusts to the end of ultra-loose
monetary policy. When the dust settles, the hope is that India s politicians
will finally be more serious about fighting graft and enacting reform.