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Incredible India? Say It Again
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Policy paralysis, corruption scandals and a government fearful of political backlash to any bold moves have combined with the global slowdown and worsening domestic finances in the last few months to derail Asia's third-largest economy.
India now faces the worst-case scenario that was touted earlier this year - stubbornly high inflation, slowing growth, a mounting fiscal deficit, a rupee that risks freefall -- and both policymakers and the Reserve Bank of India (RBI) have few levers to fix it.
For years, Indian entrepreneurs have boasted they can do business despite the government - adeptly working around potholed roads, clogged ports and reams of regulatory hurdles.
But government inertia - what many politicians see as "playing safe" - is taking its toll on corporate confidence.
Entrepreneurs once feted in Bollywood movies as national heroes, whose million-dollar homes and jetset lifestyles were a beacon for millions of India's aspiring middle classes, no longer seem capable of driving the $1.6 trillion economy.
"We may have seen phases of economic growth slower than this in the two post-reform decades, but never has the entrepreneurial mood been so low," wrote Shekhar Gupta, editor-in-chief of the Indian Express.
It's echoed across offices of business leaders from Mumbai to Delhi. One foreign executive described increasingly strained telephone conversations over the past year with his US-based CEO as deals became mired in red tape and ministerial inertia.
"They always understood that India was difficult to do business in. But not this difficult," said the executive, who asked not to be named as he was not authorised to speak for his company.
The banking sector is now under strain from bad loans.
Economic reforms that may bring in much-needed foreign investment, such as opening up the supermarket sector to the likes of Wal-Mart Stores Inc, have been put on hold as political parties eye important state polls next year.
Even reforms seen as no-brainers politically, such as the introduction of a digitalised national ID card or food subsidies for the poor, have faced delays as opposition parties and coalition partners smell blood ahead of a 2014 general election.
From Cocky To Fearful
India used to be full of brash business leaders.
When Tata Steel bought an Anglo-Dutch rival in 2007 for $12 billion, the newspaper headline "Empire Strikes Back" epitomised the supreme confidence of India's aggressive capitalist kingpins then on a global buying spree. Jaguar, Land Rover and other foreign brands soon followed into Indian hands.
The economy may grow at under 7 per cent this fiscal year, down from initial forecasts of 9 per cent. That's still a far cry from the around 3.5 per cent "Hindu" rate of growth that plagued the decades after India's independence from Britain in 1947.
But these last few heady years have changed expectations.
These days, growth below 7 per cent is enough for investors to delay projects, for banks to put off loans and for voters to get angry: 7 per cent is the new 2-3 per cent.
It was corruption scams surfacing over a year ago that may have started it - a potentially $39 billion scam involving selling telecoms licenses at rock-bottom prices effectively saw distracted politicians asleep at the economic wheel.
Suddenly politicians were jailed and billionaires questioned by police. It sent shudders through the political class. The invincibility of the political "untouchables" disappeared.
Inside India's famously bureaucratic ministries, middle-level civil servants passed the buck to top-level officials who in turn passed the buck to their reluctant political masters.
One defence contractor, who asked to not be named due to the sensitivity of the issue, recounted spending weeks at a top hotel, sipping drinks every evening with fellow frustrated arms dealers waiting for "imminent" defence ministry decisions that never came.
An Indian executive likened the country's economic malaise and government's reform limbo to an old village adage - a bullock knows that if it goes to work in the field it could get whipped, while the animal that lazes around far away does not.
"Once the spotlight is on, even minor mistakes become noticeable," said the vice-president of an infrastructure firm about a slowdown in decision making ever since corruption scandals broke last year. "That's why nobody wants to take decisions."
Many civil servants have been seen playing computer games during official hours when parliament sessions are adjourned or their minister goes on trips for G20 or World Bank meetings, according to one government official.
Prime Minister Manmohan Singh may be reform-minded. But with real power lying with the populist-inclined Sonia Gandhi, he has been unable or unwilling to press for new steps to modernise and open up the economy.
With Gandhi ill, reportedly with cancer, there are signs the family dynasty that has run India for decades has lost its bearings, increasingly unable to keep its coalition partners in line as parties jostle for power before the 2014 election.
The cabinet's one sudden announcement of major reform - allowing foreign firms to hold 51 percent stakes in the supermarket sector - may have been partly driven by economic panic as the rupee plummeted, with Asia's worst-performing currency suffering from capital flight to safe havens like US Treasuries.
But Singh's about-turn only 10 days later in the face of a political backlash underscored that, even at a time of alarm over the economy, politics and the concern about forthcoming elections took precedence.
Flows Slow, Confidence Ebbs
India's annual financing requirement of $119 billion is the highest in Asia, according to a Nomura report. The trade gap for the fiscal year to March 2012 is expected to widen sharply to $155-$160 billion from $104.4 billion a year ago.
Foreign funds are net sellers of about $300 million of Indian shares this year in sharp contrast to record investment of more than $29 billion in 2010, and the 30-share BSE Sensex is down more than 23 percent, making it the worst-performing major global market this year.
"Industry is geared up to deliver infrastructure in line with the strong growth pattern and the government's forecasts," said Russell Waugh, managing director of Leighton Welspun Contractors, part of Australia's Leighton Holdings <LEI.AX>.
"But the flow (of new projects) at the moment, the real flow, is not aligned with that gearing. So we're seeing most companies struggling."
Infrastructure assets, including telecoms, construction and power, which account for about 25 percent of total corporate credit, are now a key concern for banks.
Worries about rising bad loans prompted Moody's Investors Service earlier this month to cut its outlook on India's banking sector to "negative" from "stable", saying monetary tightening and a slowdown in the economy would cut bank loan growth.
The car industry - a symbol of the aspirations of millions of India's middle classes - is now an example of how slipping growth and high interest rates have hit consumer demand and investment decisions.
Car sales in India, which jumped 30 percent in the last fiscal year, have slumped due to high interest rates and rising input costs. Sales may just break even this fiscal year.
Maruti Suzuki, India's biggest automaker, is deferring an investment of $560-740 million in plants in the western state of Gujarat due to the economic gloom.
"When we will start work in Gujarat will depend on how the market improves in the future ... at the moment the general economic situation is too negative to justify it," Maruti Chairman R. C. Bhargava told Reuters. "There's no point creating excess capacity if the demand is not there."
No Quick Fix
There is no quick fix for the government, with the fiscal deficit set to beat its target of 4.6 percent of GDP. But there is little sign of efforts to help investment, including speeding up approvals of projects hit by red tape and environmental approvals.
One official, monitoring government infrastructure projects, said that of 558 government projects, 241 were delayed as of end-July, resulting in a cost overrun of some 20 percent, or more than $31 billion.
The projects, which include setting up airports, new railway lines, shipping ports, roads and power plants, have been delayed by more than two years on average due to issues of land acquisition, environmental clearance and rising costs.
Senior government officials, who declined to be named, described a finance ministry dominated by 76-year-old Pranab Mukherjee, who is more adept at bringing together unruly coalition allies than doing anything bold about the economy.
"Mukherjee is a politician first with little time for his own ministry as he is also the chief trouble shooter for the Congress party. Many bureaucrats don't even get to see him for days and have no access to him," said one.
"His style is very old world and some say not very responsive to financial markets. It's not surprising that in a crisis like what's confronting us currently, lack of imaginative leadership in the treasury department is also reflecting in the economic woes facing the country."
Mukherjee first became finance minister in 1982, way before India had begun to rethink its post-independence socialist, state-driven economic model.
For many, India will remain in limbo only until a real crisis prompts it to act - similar to the 1991 balance of payments crisis that ushered in the country's first economic reforms under Singh, who was then finance minister.
"At the end of the day, I feel you need crisis to get going again," said V Ravichander, who advises multinationals on doing business. "And even though our growth rates have fallen from 8 to 6.9 percent on the last estimate, I guess people feel 6.9 is not still low enough for us to do something about it."
But that inertia could means India faces some turbulent years ahead, exacerbated by the 2014 election that may just polarise the country further.
"The new Hindu Rate of Growth is 6 percent and on all evidence, from macroeconomic data to the empty billboards of Mumbai, we're headed there next year," wrote Gupta.
"Returning to economic stagnation like that is bad enough by itself. But this is not the forgiving India of the past. This India has tasted growth, progress, optimism and aspiration."