This is supposed to be India’s century, but the dangers of complacency have been starkly underlined with inflation hitting a 13-year high and stellar economic growth expected to tail off.
India is far from alone in struggling with higher global oil and food prices, but as the stock market crumbles, economists are wondering if some of the shine has not come off the India story, if the miracle was partly a myth.
As elections approach, it is also a major headache for India’s unruly coalition government, which must be rueing its failure to take tough decisions last year to raise fuel prices and tighten monetary policy before things spun out of control.
”It was a gross miscalculation,” said DK Joshi, principal economist at domestic ratings agency CRISIL in Mumbai.
”In the middle of last year, inflation was 3,5% to 4%. That was the right time to start passing on higher crude prices to the economy,” he said.
”It was complacency, and some opposition from coalition partners.”
India raised heavily subsidised fuel prices earlier this month, but only by a fraction of the global rise. Even so, its headline inflation rate soared to over 11%.
After a populist budget in April and fuel tax cuts, the country’s fiscal outlook is also deteriorating and of increasing concern to investors. A target to reduce the deficit to 2,5% of gross domestic product now looks unattainable.
Finance Minister Palaniappan Chidambaram said ”no one in his wildest dreams” expected crude oil prices to rise nearly 40% since he presented his budget in April.
Yet last year the Finance Ministry downplayed the central bank’s concerns the economy was overheating. The Asian Age newspaper said what many people feel: on inflation, the government ”failed to act in time”.
Others say the government should have abandoned the outdated idea of controlling and subsidising fuel prices long ago.
Either way, the central bank is likely to raise interest rates, in a bid to contain inflation by curbing economic growth.
Inflated sense of well-being
But the problem is not whether Indian authorities misread the economic cycle, analysts say.
It is that hard decisions are tough in a country ruled by disparate coalitions, where the need for some decisive policies is obscured by an often inflated sense of well-being.
In a sense India’s economy is still coasting on the back of reforms that began in 1991.
Manmohan Singh was finance minister at the time, but as prime minister he is said to be enormously frustrated that he has failed to build on those reforms in the past four years, because of opposition from the government’s communist allies.
Reforms of the labour market, power and financial sectors have been stymied. Efforts to improve ports, highways and other infrastructure have failed to keep pace with demand.
”His view is that all this euphoria over the Indian Century is overstated,” Vir Sanghvi wrote in a Hindustan Times column.
”We have only a small window to establish ourselves as one of the superpowers of the future. With the coming of the global recession, that window is already closing.”
Corporate India is much stronger than ever before, and no one is suggesting India’s economic emergence is a mirage. But some of the euphoria is beginning to cool.
The stock market is more than 30% off its peak, and fickle foreign investors have sold $5,9-billion in Indian shares so far this year, after buying a record $17,4-billion in 2007.
Fund flows come and go, but Goldman Sachs takes a longer-term view. In a new report, it says India still has a lot to do to realise its enormous potential.
”Having potential and actually realising it are two different things,” it warned.
Governance, basic education, infrastructure and agricultural productivity need to be dramatically improved, while trade and the financial sector need to be liberalised.
It recommends inflation targeting and a more credible fiscal policy too.
The fault lies not just with this government — its predecessors are also accused of failing to address some of India’s most pressing problems of infrastructure and inequality.
But Goldman Sachs says India’s growth environment scores below major emerging market competitors Brazil, China and Russia, and in many areas below the average of developing states.
”Everybody started believing the rhetoric, that India is going to be a global force, be a superpower and so on,” said one of the report’s authors, Tushar Poddar, adding complacency was a real risk. ”That is one of the reasons for our report.”
CRISIL’s Joshi shares that view, stressing the importance of broadening education and spreading the benefits of India’s economic growth away from a relatively small elite.
Politically and economically, that’s vital to India’s future, he said.
”But we will have to wait for another crisis, otherwise nobody will wake up,” he said. — Reuters