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Indian Economy Collapsing!

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Bombay Bombs
User ID: 380168
8/4/2008 5:01 PM
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Indian Economy Collapsing!

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August 4, 2008

India struggles to regain control as elephant economy does about-turn

Rhys Blakely in Bombay

The rise of India's economy is often compared to the progress of an elephant - slow and plodding when compared with the dragon of China, but invested with a heavy sense of inevitability. In the past six months, however, the elephant has performed a disconcerting about-turn.

In January India appeared to be in excellent shape. Annual GDP growth was close to 9 per cent, corporate profitability had risen by 20 per cent in a year and the stock market had surged 50 per cent. The elephant was trundling along at full speed.

Seven months later, Bombay's benchmark Sensex index has lost 40 per cent of its value and foreign investors are fleeing the market.

Andrew Holland, head of proprietary trading at Merrill Lynch in Bombay, said: “This time last year the talk was of India decoupling from the troubles of the rest of the world economy. Now it's clear that India has its own problems. It has gone from hero to zero.”

The bad news has been unrelenting. The rupee has plunged amid fears that India's fiscal deficit is spiralling out of control. In response, the country's fragile coalition Government has made massive populist handouts in the run-up to a general election that must be held before May.

Fitch, the ratings agency, recently downgraded the outlook on India's sovereign debt, taking it only one step from junk status.

Goldman Sachs has just lowered its GDP growth forecast for 2008 to 7.5 per cent - a rude awakening for a nation that was gunning for double figures. Robert Prior-Wandesforde, the HSBC economist, said: “Just as many forecasters and markets were too optimistic in 2005-07, effectively running with the view that whatever China could do, India could do better, there are now some that are suggesting that it can do nothing right.”

In the teeth of this downturn, interest rates were increased this week for the third time in two months, to 9 per cent, a move that will further dent the spending power of India's beleaguered consumers.

There is little chance of the Reserve Bank of India softening its new ultra-hawkish stance soon, either. Inflation is running at close to 12 per cent, more than double the unofficial 5.5 per cent target and up threefold since the start of the year.

Last Wednesday's quarterly figures from Tata Motors, the new owner of Land Rover and Jaguar, illustrated how companies are suffering: profits slumped 30 per cent as the price of steel soared.

Amid the gloom, the sub-continent's cheerleaders are spelling out afresh that India's rise is not inevitable.

Jim O'Neill, the Goldman Sachs chief economist, is perhaps the most important evangelist India has. He coined the now-famous acronym Bric (Brazil, Russia, India, China) in a paper that spelled out the potential of the emerging world giants in 2003.

It audaciously suggested that, under certain conditions, India's economy could surge past that of the United States by 2050.

“Many clients have often regarded this projection as a fact,” Mr O'Neill said, making clear that he does not. He has written a new report emphasising that India's advance to economic superpower status depends on radical improvements in areas ranging from fiscal discipline to primary education standards to crop yields.

In the shorter term India must pray that the global oil market subsides. The country imports 70 per cent of the oil it uses and heavily subsidises domestic fuel prices to keep them within reach of its vast poor population.

“Given the inflation challenge, the fiscal and current account position, one might say oil prices are the most critical thing for India in the next six months or so,” Mr O'Neill said. “Oil at $150 would be quite bad news.”

Meanwhile, the elephant analogy still seems apt - after all, those who get on an elephant should expect a bumpy ride.

“This is a long-term growth story,” Alan Rosling, an executive director at Tata & Sons, said. “As ever in India, there will be plenty of messiness along the way.”

[link to business.timesonline.co.uk]

Anonymous Coward
User ID: 479008
8/4/2008 5:37 PM

Re: Indian Economy Collapsing!	Quote
Better bump ! Someone might even read this...

FAR
User ID: 412806
8/4/2008 5:39 PM

Re: Indian Economy Collapsing!

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India has the most Gold to (indian rupee/dollar) ratio.

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Nay verily man becomes grossly overweening, whenever he believes himself to be self-sufficient: for behold unto thy sustainer all must return.
Quran 96:3-8

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