Posted by: John Elliott | March 13, 2008

Is India’s economy losing its shine?

The business mood is gloomy in India this week as fears about the economy slowing gather pace. An announcement Wednesday that year-on-year industrial growth dropped by more than half in January – 11.6% recorded a year ago to 5.3% – pushed the stock market into the sharpest of today’s Asia falls. The key Mumbai Sensex finished 4.85% down at 15,346, almost the lowest for six months and far below the dreamy 21,000 levels of just two months ago.

Finance Minister Palaniappan Chidambaram said – inevitably – that one month’s figures should not be seen as too depressing. That is the sort of comment that politicians make when things are going badly, but rarely say when they are going well. And he would not want to say anything else just 12 days after announcing his budget, which did not seem to acknowledge serious declines.

Of course Chidambaram is right, up to a point. But the figures continue a trend that has built up over many months, with tight monetary policy and high interest rates pushing average industrial growth down to 8.7% between last April and January, compared with 11.2% a year earlier.

Especially worrying is a decline in capital goods production trends with growth down to 2.1% in January compared with 16.3% in January 2007. Consumer durables growth has gone into a negative figure of minus 3.1%, pushed by a decline in sales of motor scooters that weigh heavy in the statistical model.

This is not good news for a government that is looking for an opportunity later this year to call a general election ahead of the possibly final date of May next year. November is being talked about as a possible date – after the fortunes of the Congress Party, which leads the current coalition government, have been tested in state assembly elections in Karnataka and perhaps elsewhere.

With highly experienced officials such as Chidambaram and Prime Minister Manmohan Singh in key top positions, the government is expected to produce a buoyant economy that benefits the poor and boosts business. That image might be hard to sustain as the year progresses, especially with inflation at around 5%, which is close to the politically uncomfortable figure of about 6%. Slowing growth might help to curb some prices, but inflation has a momentum of its own, driven by sharp increases in the cost to consumers of basic foods such as rice, wheat and edible oils – all items that touch the pockets of the poor.

The government is well aware that, like its predecessor, it will be judged in the election by how the poor, and especially the 75% of the population in rural areas, have fared. That is why Chidambaram’s budget contained loan wavers and concessions costing an estimated $15 billion over three years for 40 million farmers who have defaulted or are having serious problems with repayments.

The overall effect of this idea is now being questioned, partly because it could encourage others to default and also encourage state government to introduce similar costly concessions.

But the key criticism is how the tens of millions of farmers who have struggled to keep up with payments, and so do not qualify for Chidambaram’s largesse, will feel when they see defaulters being baled out. That could generate a bigger anti-Congress vote than the one that might be generated by the loan write-offs.

It’s never easy to help the poor in India. More than half the aid that is pumped down to rural areas is lost and never reaches its intended destinations. And now this new initiative could misfire – just as the pace of inflation increases and growth slows.


Responses

  1. Sir;

    The shine is tarnished. In today’s “Times of India”, the major IT firms have just sent or are sending letters to 100,000 IT recruits from last year’s class, saying “don’t join yet, wait three months to one year or maybe never to join.” Blame is on the USA economy, client demands for a reduction of bench srength and cost pressures.

    100,000 of the best educated and brightest Indians now have their careers on hold. Next year’s recruits will just join a longer line of “waiters”.

    Steve

  2. India seems to be following US with a 6 months lag

    – Growth slowdown – GDP growth for 08-09 likely to be in sub 5% range. IIP might go negative at 12 mths. Not so preposterous. That’s how recessions start. Next 3 months will decide if its only going to be slowdown or a full blown recession in India.

    – Oil price hike – India buying at $100 now compared to $ 60 range not too long in past. Will suck big part of disposable incomes with the population

    We are now in a stage where US was 6 mhts back (including the self denials)

  3. Good observations . But

    “Who told elephants don’t catch cold”.

    Yes . The market has crashed , but the good news is “now” the world is looking closely to India’s numbers, this itself is a big moral victory for the Indian economy.

    Of course growth cannot happen without its share of struggle. This is the right time to invest in India , once the general elections are over, the opportunity cost will be heavy.

    http://jaiz.wordpress.com

  4. The phenomena of gobbling up most of aid fund by the distribution system itself is a major barrier for helping the ultra poor people of India and elsewhere in the third world cuntries. There should be a better way to streamline this process and India should set an example here.

  5. ” Shine is relative ” .

    When world was doing well , India was doing well , When world economy is going through a rough patch, India too is following the trend

    The Shine was never there to lose . India is as it was earlier in 90s

  6. People also forget good things done by politicians. Unfortunately Politicians forget this fact.

  7. As always when the bad news comes, it comes in a spate. Everything seems to be going wrong now, and the silver lining is barely visible.

    I suspect, however, that the Rs 60,000 crore loan waiver bonanza and the impending implementation of the Sixth Pay Commission Report will turn things around to a great extent, unless of course global cues get worse.

    I agree that the loan waiver may actually backfire – a fair outcome of one more manifestly blatant effort to purchase votes.

    http://www.vinodksharma.blogspot.com


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