Friday, May 18, 2012

Why is the West Giving India a bad report card?

The India Report Card!

Suddenly there is a rash of stories saying the Indian growth story has run out of steam. India is a laggard among BRICS. It’s under rating Watch. Standard & Poor slashes its India Outlook.

Compare that to reports emanating from the same Western media a few months back: India to overtake China by 2030. India - the next El Dorado. India Story intact amidst global slowdown.

What went wrong in just a few months?

The whole world is reeling from the European crisis. Growth has slowed down everywhere including in China. So has it in India. But India still remains the second fastest growing major economy posting growth rates of near 7 per cent annually. It’s where jobs and money are still being made and it remains a stable democracy. India’s debt compared to most countries is still more than manageable.

Though the rupee touched an all time low of nearly 55 to the dollar, pushed by stock market sales by FIIs panicking about a Greek default, officials pointed out that India received record FDI inflows of $ 50 billion in 2011-12, nearly 55 per cent more than the previous year besides $ 9 billion in net inflows from FIIs.

India is again projected to grow by a tad over 7 per cent in the current financial year. In comparision, the Euro zone grew 1.4 per cent in 2011 while US grew by 1.7 per cent through calendar 2011.

But India still has the lowest rating for any of the BRICS emerging economies - Brazil, Russia, India, China and South Africa. China's growth rate is undoubatbly higher as is its infrastructure, but Russia grew by about 4.2 per cent and is expected to grow by less than that this year. While Brazil grew by just 2.75 per cent and South Africa by a little better at 3.5 per cent.  

The fall in rupee’s value against the US greenback, was similar to what others experienced. Both the Rupee and Brazilian Real fell 21 per cent in the last year while the South African Rand followed closely posting losses of 18 per cent.

A Reserve Bank of India report issued earlier this month, says corporate India has shown a 34 per cent increase in their order book position for the quarter April-June 2012. A situation, any economy would give its right eye to be able to boast of.

Then what could be the real reason?

Many allege India’s plan to float a BRICS development bank on the lines of World Bank and ADB which will be controlled by the now emerging economic powers and its stone walling of opening up its markets to Western banks, insurance companies and retailers could be the cause of  a spate of negative reports by rating agencies and others.

Large global development banks and funds like the World Bank, IMF and ADB control the levers of high finance. These banks in turn are controlled by those who paid to set them up in the first place - Read US, UK, France, Germany, Japan etc. Whoever has more votes has more say in who manages the vast funds these banks have and who can get loans and at what terms. This in turn forces Presidents and prime ministers to line up in the corridors of power in capitals who control votes in these banks. A new global scale development bank not controlled by the US or Europe threatens this power structure.
With European and US economies in a tailspin, banks and retailers there are more than keen in trying to prise open the fast growing Indian market. A succession of Western leaders including the US and French presidents and the British Premier have flown down to New Delhi to lobby for opening up the financial and retail markets, but without much success as yet. 

“Soon after India said it did not have a political consensus on opening up the market to western retail giants, things started to stack up against us,” say officials in India’s Finance Ministry. 

Last month a Standard and Poor's team invited for a presentation on why India should be given a rating upgrade actually gave a negative outlook to the country!

Funnily India’s rating is the same as Tunisia! “We had actually invited the S&P team to India to explain why we should be rated higher than Tunisia and then they downgraded their outlook … this was a shocker,” officials said. Tunisia’s economy was recently ravaged by a civil war and is expected to grow by just over 2 per cent in 2012, according to the IMF after having shrunk by 2 per cent last year, with unemployment soaring to 19 per cent of the population.

Will India give in to Western Pressures?

One doubts it. India wants to open up retail markets, though it’s perhaps not so sure of the benefits of opening up the banking sector to failed Wall Street and City of London banks. But to do either it needs a political consensus. It’s after all not a dictatorship like China.

Either of two things could happen – India could show some flexibility and deftly negotiate Western greed as it did in the case of anti-black money rules which hit portfolio investments Or it could harden its stance as it did on the Vodafone case.

In the case of General Anti Avoidance Rules which threatened foreign institutional investors pouring in dollars into Indian bourses through tax havens, the government put the legislation on the backburner, without renouncing it and indicated it would come out with a softer version later.

But in the case of Vodafone – where the British telecom major refused to pay over $ 2 billion in taxes it was supposed to deduct at source before paying Hutch for its acquisition of its Indian telecom operation – the government decided to bring in legislation which specifically allows it to tax the deal.

Hutch and Vodafone used a number of shell companies and routed the sale through tax havens which they believed would let them turn into a tax free deal. Indian taxmen thought otherwise and the government, despite high profile lobbying by British Chancellor for the Exchequer Osborne and protests by chambers representing multinationals, decided to back up their taxmen’s claims.