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.     

The Elephant slows down

The charge of India’s bull elephant economy slowed down to a 2-year weakest of 6.9 per cent in the second quarter of this financial year.
A long year of what many critics described as policy paralysis and rising interest rates weighted down the $1.73 trillion economy’s growth with manufacturing growing by as little as 2.7 per cent after growing by 8.2 per cent in the same period last year. A falling Indian rupee trading at Rs 52.16 to the dollar,  down by 18 per cent since August 1 this year, has also not helped bolster industry’s confidence. Fuel, machinery and spares imported by paying dollars, now need more rupees to purchase.
For almost a year, industry captains had been arguing vehemently that high interest rates were killing consumer demand and combined with a policy paralysis in government reducing India Inc.’s appetite for investment and that this would ultimately slowdown the economy.
Interest rates have been tweaked upwards some 14 times since  March 2010 by the Reserve Bank of India in a bid to batter down rising prices.  High food and fuel prices had seen headline inflation at near double digits for most weeks of this year, forcing the country’s central banker – Reserve Bank of India – to hike the rate at which it lends to banks to 8.5 per cent. This in turn translated to actual lending rates to consumers and businesses of between 12-18 per cent. 
All this, took its toll on consumer demand - sales of cars for instance shrank by some 23.8 per cent in October alone, a festive month when traditionally buying is considered auspicious. At the same time, high cost loans saw investment by companies and the government declining 0.6 per cent during the July to September 2011 period. Many firms including airlines such as Kingfisher and Air India, unable to pay interest on their loans started asking their banks to lower interest rates and to convert loans into equity.
“Inflation, policy induced high interest rate structure, combined with the fact that banks are unable to lend properly because of rising bad loans has slowed down growth,” said Prof N.R.Bhanumurthy from the prestigious government funded think tank - National Institute of Public Finance & Policy. A crisis in the Euro-zone and slow recovery of the American and Japanese economies, major markets for the Asian giant, has meant India’s exports  have slowed down – export growth in October was just 10.8 per cent compared to 36.36 per cent in September with little real expectations of a pick up in the months ahead.
India’s chief economic advisor Kausik Basu, was quoted  by wire agencies as agreeing on a slowdown in policy making. “There is some slowdown in decision making,” Basu was quoted as saying while explaining the causes of the slowdown which he also blamed on a global recession and inflation at home. An open letter written by captains of industry including IT Czar Azim Premji, Keshub Mahindra of M&M, Anu Aga of Thermax and HDFC's Deepak Parekh had also complained of a “growing governance deficit”
The rising chorus of complaints on this, however saw the government take a slew of policy decisions in the last few weeks – reservation for small businesses in government purchases, relaxation in norms on foreign borrowings, increased incentives for exports, allowing foreign investment in retail, clearance to opening up pension funds to foreign investors, among others. But economists say the long delay in policy decisions had by then taken its toll on the domestic investment climate.   
A global recession in 2008-9 had seen the Indian economy which had till then grown at an average of 9 per cent for three straight years, slowing down to 6.8 per cent. But since then, India’s economy, had picked up to grow by 8 per cent in 2009-2010 and 8.5 per cent in 2010-2011.
This year’s growth rate had originally been pegged at 9 per cent and then recast at 8-8.25 per cent, a couple of months back by finance minister Pranab Mukherjee. But somewhere down the line, the combination of tight money, slow policy decision making, high inflation, cheaper rupee impacted the India Growth story.   
The NIPFP has in a note said it expects growth to remain modest in the next two quarters too and the economy could end the financial year with a growth rate of just 7.2 per cent, far lower than what is being forecast by government circles – 7.5-7.75 per cent. Said Bhanumurthy “but the real worry is that our forecast says that the slowdown will persist next year too with GDP growth crawling up 20 basis points to 7.4 per cent in 2011-2012.”
Not that India alone has suffered. Of the much touted BRICS economies, China grew it slowest since 2009 by growing 9.1 per cent in the July-September quarter while South Africa’s economy expanded by a dismal 1.4 per cent during the same period. Brazil is expected to grow between 3-4 per cent this year. The silver lining however is that “among major economies India will still remain the second fastest growing one after China,” according to Bhanumurthy.