Growth in Asia’s third largest economy looks buoyant from the shores of blighted markets in the west, but India’s ruling-Congress party is firing warning flares from the deck of a listing ship.
Pranab Mukherjee, India’s finance minister, has this week warned of faltering economies in leading emerging markets, reflecting a growing sense of pessimism at home about falling growth and high inflation.
He, among others, is rattled by the currency falling to record lows of 54 rupees to the dollar, an exit of foreign capital and statements by prominent business people that they would sooner invest abroad than in India. Analysts openly state that India’s high-growth economy is running out of steam after a shift of expectations from 9 per cent to 7 percent.
A year characterised by corruption scandals and unsightly bickering in parliament is beginning to tell on economic performance. The currency and benchmark local stock indices are among the region’s worst performers.
“The year 2011 will probably go down in history as the year of the perfect storm for India,” says Rajeev Malik, economist at CLSA, the Singapore-based stockbrokers. “Whatever could go wrong, did go wrong.”
Jim O’Neill, chairman of Goldman Sachs Asset Management, calls India’s performance – in spite of its domestically driven, sheltered economy – “disappointing”.
So great is the concern about slowing growth that the central bank is likely to consider cutting rates at its monetary policy review meeting on Friday, as a drastic measure to regain momentum and trigger greater investment in the economy.
Data at the end of last month that showed economic growth had slipped below 7 percent in the quarter to the end of September have knocked the Congress-led government sideways. The reading put India perilously out of touch with the double digit growth that policymakers have chased for the past three years.
Now Mr Mukherjee and his senior advisers fear wilting job creation in an economy that needs to absorb millions of college graduates every year.
“The slowdown in industrial growth is of particular concern and its impact on employment,” Mr Mukherjee told the Delhi economic conclave, a meeting of policymakers, on Thursday.
He has called for emergency measures to boost the economy and prevent the country returning to what was called the Hindu rate of growth of the 1970s and 1980s, nearer 5 percent.
There is little room to manoeuvre. Borrowing costs have risen to counter high inflation, and fiscal deficit targets are under strain. They are likely to come under additional pressure the closer the government comes to parliamentary elections in 2014.
Economists warn that, once growth starts ebbing, turning the tide to return to higher rates is more difficult. Some now boldly predict that India’s transformation into a high growth economy to rival China is fading fast.
“This time the ‘Indian miracle’ has been killed,” says Lord Meghnad Desai, emeritus professor at the London School of Economics and a regular commentator on Indian affairs.
“When and if India regains its growth momentum is anyone’s guess. In the meantime, welcome back the Hindu rate of growth.”
Parliamentarians despairingly complain about a lack of leadership in their ranks that has stymied economic policymaking. N.K. Singh, a former finance secretary and an opposition member of the upper house, says: “Things look bleak. There are so many logjams. There really is no coherent game plan.”
Still, Mr Mukherjee is not short of advice on how to ensure the dip in performance is temporary.
Chanda Kochhar, the chief executive of ICICI Bank and an ardent promoter of India’s economic success, believes the country’s strong domestic consumption will carry the day. As top priorities for the government, she identifies incentivising investment, boosting agricultural output and fiscal consolidation.
Mr Mukherjee has called for “innovative remedies”.
Optimism is not widely shared about what orthodox measures a hamstrung government can do at a time when global financial volatility is on the rise.
Nirvikar Singh, a professor at the University of California, calls India a fiscal “outlier” that has less room to manoeuvre to support growth than many of its peers, such as China and Brazil. “India is in a more difficult place than many other emerging economies,” he says.