Friday, June 1, 2012

India's Shine Starts Wearing Off

In continuation of yesterday's post on the "Global Economy" is this one on the "Indian Economy", which forms Part-2 of my presentation at CRN Virtual Expo. India is surrounded by the same dark clouds currently, as the rest of the world. In the section which follows, I have attempted to outline various factors that have become a major source of worry, over the past year.


UPA-II completes 3 years in power

In the aftermath of various scams, exposure of various corrupt politicians and public servants and the Anna Hazare movement, the UPA-II government seems to have lost its ability to take decisions. A government whose arrival 3 years ago had been hailed by industry and markets; which was expected to take several long pending policy decisions without the fear of convincing its erstwhile Left allies – seems to have failed the Indian electorate miserably.

Several much awaited policies and implementations like the GST, Multi-brand retail, removal of subsidies on petroleum products and fertilizers, Banking & Insurance reforms are still in a state of suspended animation, while the government continues muddling though regressive policies on taxation of overseas investment retrospectively.

India's economic growth has slumped to a near three-year low and its current account deficit is the highest since 1980, a gap that is difficult to control when the rupee is at a record low. The government has projected a budget deficit of 5.9 per cent of GDP, which Moody's Investor Service says is credit negative. Inflation is the highest among the BRICS group of major developing countries and industrial production has contracted unexpectedly in March.

Industrial growth turns negative

India’s industrial production as represented by IIP index turned negative in March, falling 3.5% on the back of contraction in mining & manufacturing output. There was also a slowdown in electricity and capital goods output fell by 21.5%. The broad trend points towards a slowdown, with cumulative growth for FY 12 standing at 2.8% year-on-year as against that for FY 11 at 8.2%.

No end in sight to corruption & scams

In late 1989 a horrified nation voted out the ruling Congress & late PM Rajiv Gandhi on account of their alleged involvement in a 64 crore kickback from Bofors. Today, from the number of scams reported, even corporators and magistrates get paid much more and we are no longer shocked. Whether or not the CAG has its numbers right, the scams unearthed now have mind-boggling figures in comparison – From the  Rs. 176,000 crore 2G spectrum scam of 2010 to last week’s Rs. 1,070,000 crore Coal mining scam. Indian money in Swiss Banks is estimated at over US$ 1.5 trillion, which is more than its GDP. A lot can be done, but, will it?

Interest rates hamper new investment

With tight liquidity and high interest rates, businesses have drastically cut down on capital expenditure on new & expansion projects. This obviously brings down the business prospects of the feeder industries which are various suppliers & vendors, leading to a consequent slowdown in their business.

Policy paralysis adds to Industry woes

With all the hue & cry about corruption, honest public servants and fence sitters feel more comfortable holding back decisions on new projects & purchases, lest their actions are also probed by investigating agencies. As a result of this, the infrastructure & capital equipment industry is already reeling, while others are feeling the heat.

Inflation continues to bother

The steep fall in the Indian Rupee has increased input costs of imported components, commodities and equipment, at a time when the consumer is looking to cut expenses owing to double digit food inflation. As a result of this consumption is bound to suffer.

Outcome of recent  elections threatens stability of  Congress

After the recent 5 state Indian Assembly elections, in which over 24 million people voted, it became apparent that the electorate had lost faith in the ruling party. Possibilities of a mid-term poll loom large, with the fear that there is no national political party that seems ready to take over the reins of this country.

Oil prices big cause of worry

Among the largest users of crude, India lies roughly at the 12th place, using about 2 million barrels per day of which about 80% is imported. Worse, this demand is rising by an implicit 4% per annum, when the global demand is slowing down to about 1.8% per annum. The loss to our Balance of Payments in 2011 on account of crude imports alone was in excess of US$ 50 billion. Crude rises, we lose; crude falls but rupee also falls, so we lose again.

Foreign investors turn cautious

After the GAAR rules, the retrospective taxes sought to be imposed on Vodafone, Cairns and several other foreign investors, the revocation of one hundred and twenty two 2G Spectrum licences issued to operators like Telenor, Etisalat and others, FIIs have turned very cautious on India. They are unsure of what else could be revoked retrospectively and to compound their worries the fall in Rupee and Stock Markets has taken away most of the gains on investments made here in the past 5 to 6 years.

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