Coming on top of the Oscar success for the Indian actors of Slumdog Millionaire (admittedly a British film but produced on location in Mumbai) reports in western papers of increased venture capital investment in India, sustained economic growth and its top four position in popularity as a destination for business location all suggest business is booming in the world’s most populous economy and largest democracy.
However all that glitters is not gold wrote Shakespeare, and though he probably wasn’t thinking of India when he penned The Merchant of Venice, it could equally be applied because (not wanting to push the metaphor too far) when one opens the cask to look inside, all is not what it seems.
Yes because of the more controlled nature of the economy, India’s banks escaped the toxic debts issues crippling the western financial system. And yes with a micromanaged economy, India has moved rapidly to limit imports and boost exports in a blatant effort to protect domestic producers, in spite of WTO obligations. Consequently, India came later into the downturn than the west and was still expected by local commentators to post 7% growth this year, down only 2% from last year. But much else is crumbling behind that faÃƒÆ’Ã‚Â§ade. Job losses in the export sector will be 1.5 million by next month. Aluminum mills that were on 3-4 weeks production lead times are producing orders in 3-4 days. Textiles, jewelry and gems have been particularly badly hit because of their reliance on export markets in Europe and North America; sales dropped 20% in the month of January alone. Domestically focused industries like automobiles are also down. Meanwhile the government has announced not one but three fiscal stimulus packages over the last three months which will raise the fiscal deficit to 6% of GDP, nearly three times it’s own target of 2.5% and the highest in two decades according to Google’s AFP news. Standard & Poors estimated India’s total deficit including central, state and so-called off-budget items, would be 11.4 percent of GDP this year, up from 5.7 percent the previous year. As a result, the ratings agency has threatened to cut India’s rating from the current BBB to junk unless it gets its financial house in order. It also called its deteriorating position alarming. A reduction in India’s rating status would push up financing costs and make it harder to raise capital. At the same time, the Indian Rupee has been sliding from 39 R/$ at the beginning of 2008 to 50 now, effectively a 28% devaluation. Though this will raise Indians’ foreign financing costs it will have the benefit of boosting the country’s export competitiveness, unfortunately as Britain has found, there aren’t many buyers out there.
Like China, India needs a growth rate of at least 5% if it is to avoid mass unemployment and make any inroads into the still huge levels of poverty in the country – according to Wikipedia some 80% of the population still exist on less than $2/day, more people than sub Saharan Africa. Unlike China, India does not have vast foreign exchange reserves to stimulate domestic consumption or generate domestic activity via infrastructure projects. To do either of these things India will have to borrow, and there in lies the problem, with a junk bond status could she afford to?