India hits the wall...
Source Jim Devine
Date 08/07/04/08:51
July 1, 2008

India's Economy Hits the Wall
Growth is slipping, stocks are down 40%, and foreign stock market
investors are fleeing. Business blames the ruling coalition for
failing to make reforms
by Manjeet Kripalani

JUST SIX MONTHS ago, India was looking good. Annual growth was 9%,
corporate profits were surging 20%, the stock market had risen 50% in
2007, consumer demand was huge, local companies were making ambitious
international acquisitions, and foreign investment was growing.
Nothing, it seemed, could stop the forward march of this Asian nation.

But stop it has. In the past month, India has joined the list of the
wounded. The country is reeling from 11.4% inflation, large government
deficits, and rising interest rates. Foreign investment is fleeing,
the rupee is falling, and the stock market is down over 40% from the
year's highs. Most economic forecasts expect growth to slow to 7%—a
big drop for a country that needs to accelerate growth, not reduce it.
"India has gone from hero to zero in six months," says Andrew Holland,
head of proprietary trading at Merrill Lynch India (MER) in Mumbai.
Many in India worry that the country's hard-earned investment-grade
rating will soon be lost and that the gilded growth story has come to
an end.

Global circumstances—soaring oil prices and the subprime crisis that
dried up the flow of foreign funds—are certainly to blame. But so is
New Delhi. Much of the crisis India faces today could have been
avoided by skillful planning. India imports 75% of its oil to meet
demand, which have grown exponentially as its economy expands. The
government also subsidizes 60% of the price of such fuels as diesel.
In 2007, when inflation was a low 3%, economists such as Standard &
Poor's Subir Gokarn urged New Delhi to start cutting subsidies.
Instead, the populist ruling Congress government spent $25 billion on
waiving loans made to farmers and hiking bureaucrats' salaries.

Botched Opportunities

Now those expenditures, plus an additional $25 billion on upcoming
fertilizer subsidies, is adding $100 billion a year—or 10% of India's
gross domestic product, or equivalent to the country's entire
collection of income taxes—to the national bill. This at a time when
India needs urgently to spend $500 billion on new infrastructure and
more on upgrading education and health-care facilities. The
government's official debt, which dropped below 6% of gross domestic
product last year, will now be closer to 10% this year. "Starting last
year, the government missed key opportunities" to fix the economy,
says Gokarn. In fact, he adds, "there has been no significant reform
done at all in the past four years"—the time the Congress coalition
has been in power.

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