Adding Insult to India

India has one of the most dynamic economies on earth. Punctuated by a large number of solid educational institutions, from the legendary Indian Institutes of Technology – the most selective engineering schools on earth – to a rising standard among all of her colleges and universities to a a shared fluency in English (the only language that is spoken uniformly across India, at least among the educated classes), India has a young and most-often optimistic population that truly believes their time is coming if not here already. Ever since 1991, when the Narasima Rao (1921-2004, pictured above) government normalized the currency to trade freely in international markets, privatized major segments of industry and opened the door to international investment, India has experienced some of the highest economic growth rates on the planet. With more conservative banks and financial institutions, as over-leveraging plagued most of the Western world sending economies crashing in 2008 and the years following, India escaped relatively unscathed.

But Indian politics (which, despite a massive “international” perception, is primarily governed by local issues), a proclivity towards government corruption that permeates almost every nook and cranny of elected and appointed office bolstered by a regulatory bureaucracy where permits are required for almost any activity and vast pools of administrative discretion invite payoffs, and local control of infrastructure and core industries necessary to sustain growth have taken the recently projected 9% annual GDP growth and dropped it, by some estimates, by as much as a third. The Indian growth engine may be running out of steam. Indeed, with about 400+ million of her 1.2 billion people part of the economic success inherent in the growth statistics, elections are often governed by the populist (and anti-business) demands of the vast remaining majority.

“India is desperate for investment in mining, roads, ports, urban housing and other areas, but Indian businesses and foreign investors are starting to shy away. Indian corporations, unable to obtain governmental licenses or permissions for projects, are investing overseas instead. Foreigners are also pulling back; their investment in Indian stocks and bonds totaled only $16 billion in the last fiscal year, compared with $30 billion the year before. The trend accelerated in recent months after the Finance Ministry, trying to stem a rising budget deficit, proposed a raft of new taxes on foreign institutions doing business in India.

“‘A quiet crisis of confidence is building up,’ said Pratap Bhanu Mehta, president of the Center for Policy Research in New Delhi. ‘There is no certainty over the regulatory regime. There is no certainty over the tax regime.’… Indians have long thrived amid adversity, often by creatively — at times, illegally — subverting onerous regulations with a workaround ethos that has spurred economic activity. Even today, industries like pharmaceuticals, information technology and consumer goods, which do not need many licenses and official approvals, are prospering. But those sectors tied to the government, including mining, construction and manufacturing, are struggling.” New York Times, May 29^th.

With power at the top split in a seemingly unworkable coalition – known as the United Progressive Alliance led by Sonja Gandhi’s Congress Party – the direction from above lacks the clout to effect the kind of change necessary to rekindle economic growth. Gandhi’s Prime Minister, Manmohan Singh, an economist known for his abilities to generate economic reform, has been stymied by powerful local interests, often xenophobic and populist, in his efforts to stimulate new growth and investment. “In December, Mr. Singh’s cabinet announced that foreign retailers like Walmart would be allowed for the first time to open stores in the country with local partners. But Mr. Singh was forced to reverse course after an ally, Mamata Banerjee, the chief minister of the state of West Bengal, balked and threatened to bring down the government.

“Then in March, facing pressures to raise revenues and stem the rising fiscal deficit, Pranab Mukherjee, the finance minister, released a budget that proposed new taxes on foreign entities in India, including levies on past deals that the Indian Supreme Court had ruled were not taxable in the country. Foreign investors were stunned, and analysts say the outflow of capital is one reason the rupee has tumbled 13 percent since the end of February…. ‘We are fed up and our investors are not keen to even talk about India,’ said a senior executive at an American bank in Mumbai, asking not to be identified so he could speak bluntly. ‘They are sick and tired.’” NY Times. With headlines screaming about a litany of major bribery and corruption scandals, the central government is further hindered from passing the kinds of next-level economic reforms needed to restart this massive economy.

Make no mistake that India’s readjusted projected growth rates, between 6% and 7%, are still staggeringly high by Western standards, but the slowdown in India’s and China’s earlier growth will most definitely put a damper on global economic recovery. With Europe mired in a debt crisis and the United States facing November elections with very different potential economic directions, instability and anxiety seem to be what are concerning finance ministers from almost every nation on earth these days. While India will probably restart its economic reform movement… someday… it may require a major downward fall in hard money generated before the road blocks to the next generation of necessary economic reforms are able to begin to be lifted.

I’m Peter Dekom, and the economic vagaries of distant nations often have a direct and immediate impact on our own near-term economic prospects.