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 They have withdrawn $6.5 billion since mid-May.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.