Indian economy starts to slow down

India’s economic boom, which was resilient enough to shrug off the global financial crisis, is beginning to falter, hampered by stubbornly high inflation and years of political paralysis, economists and business leaders say.

In developments that parallel events in the other Asian powerhouse, neighboring China, rising prices have forced the government to steadily tighten monetary policy. Interest rates rose for the 10th time in 16 months last week.

But business leaders are unhappy. They say the medicine could be making the economic situation worse.

Much of the inflation in India is a function of higher oil and food prices, factors that respond poorly, if at all, to higher interest rates. Instead of depending on the central bank, the government needs to push through the kind of agricultural reforms and investment it has been talking about for years, analysts say.

“Government policy should be focused on improving agricultural productivity, but because that isn’t happening, the burden is falling more and more on monetary policy,” said Sanjay Mathur, Royal Bank of Scotland’s Asia emerging markets economist in Singapore. “Consequently, a number of sectors that shouldn’t be getting hurt are getting hurt.”

That means growth could fall back toward 7 percent, some economists warn, still faster than that of any major economy except China but below what India could achieve — and needs, if it is to pull hundreds of millions of people out of poverty.

“There is no point substituting one bad policy with another bad policy,” said Surjit Bhalla, chairman of Oxus Investments. “When the patient is down, don’t give him another kick in the pants.”

In the early 1990s, India’s government pushed through a series of economic reforms that unshackled the private sector and laid the foundation for two decades of strong growth. With that growth has come rising incomes, an expanding middle class and changing eating patterns. No longer dependent solely on rice, lentils and grains, Indians are demanding more vegetables, fruit, eggs, meat and fish.

Local agriculture has not kept pace. Farmers grow the wrong mix of crops, and about 40 percent of production is wasted before it reaches market because of inadequate distribution, warehousing and cold-storage systems.

Add to the mix a rural employment scheme that has boosted the incomes and appetites of India’s poorest, and a demographic bulge in hungry 15- to 24-year-olds, and it is little surprise that food prices are rising steadily year by year.

That in turn has pushed up wages, while production of raw materials such as coal, ores and cotton is also struggling to keep up with rising demand. Inflation hit 9.1 percent in May, and the central bank says it is expected to remain high through at least September.

To get food prices down, the government needs to promote horticulture and revolutionalize agricultural marketing and distribution, economists say. Allowing foreign companies such as Wal-Mart to set up supermarkets in India and invest in cold-storage facilities, a long-promised but still undelivered policy goal, would also help, they say.

Investment in infrastructure and raw materials production, as well as a new law to make it easier to acquire farmland for industrial use, could also remove some of the supply bottlenecks that push up prices.

The Organization for Economic Cooperation and Development last week underlined the need for a new set of reforms in India to bolster growth, and no one in the finance or planning ministries seemed to disagree. The problem is getting it done.

The fragmentation of Indian politics over the past two decades has meant that no party can govern alone and instead must depend on regionally based coalition partners, often with populist agendas.

“The composition of Parliament is such that real things that need to be done are just not getting attention,” said D.H. Pai Panandiker, president of RPG Foundation, a think tank. “Reform is very necessary. It was very much expected, but it is unlikely to come in the near future.”

Others blame Prime Minister Manmohan Singh for lacking leadership and vision. The ruling coalition has seemed paralyzed, beset by corruption allegations and not tackling promised reforms.

Higher interest rates are choking much-needed investment, which was almost flat in the first quarter of this year and grew just 4.1 percent year over year, as overall economic growth slipped to 7.8 percent.

The stock market is sliding — shares are down more than 14 percent this year, making India the worst-performing market in Asia. That in turn makes it more difficult for companies to raise the capital they need to invest.

Long-term borrowing rates of up to 8 percent are among the highest in the world, said Bhalla, who argued that last week’s monetary tightening seemed like overkill.

“There are important reforms which are needed,” said Kaushik Basu, chief economic adviser in the Finance Ministry. “There was a huge build-up [from 1991 to 1993] of really important reforms that took place then, and now there is a small build-up of reforms waiting to be undertaken, and I do believe we should take them.”

Basu said he expects growth to slow in the short term and inflation to abate, allowing the government to renew its focus on longer-term growth. But Mathur at RBS said stronger government action could lead to a “different growth and inflation mix.”

“In the absence of reform,” he said, “the risk is that growth gravitates towards 7 percent, which given India’s savings rate and labor force growth, is actually a pretty pathetic number.”

Simon Denyer is The Post’s bureau chief in China. He served previously as bureau chief in India and as a Reuters bureau chief in Washington, India and Pakistan.
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