India's Structural Economic Slowdown

7/21/13
India's Structural Economic Slowdown - Business Insider
What's The Matter With India?

MAMTA BADKAR
JUN. 2, 2013, 5:36 PM

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India's GDP climbed4.8% year-overyear in the January-March quarter.

This was the slowest pace of
growth in a decade.
For the fiscal year ending March 31,
growth was 5%, down from 6.2% the
previous year.
Economic growth has been slowing
for nearly three years.
India has massive potential,
and in the early part of the
century was identified by
Goldman's Jim O'Neil as one of
the BRICs. So what explains the
persistently mediocre
performance? At the moment
there are certain cyclical
issues, but big picture, the
country suffers from
corruption, horrible
www.businessinsider.com/india-economic-slowdown-2013-5
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infrastructure, and protectionism.

On the cyclical front we have problems like declining consumer confidence,
declining industrial output, poor monsoons, and weakness in the rupee.
"Supply and policy obstacles have seen growth decelerate and investment and
industrial output slump, with the stasis compounded by weak global demand," said
ADB Chief Economist Changyong Rhee in an April report. "Policymakers need to
remove structural hurdles to faster growth, and while there have been some
encouraging recent reforms, more is needed."
Let's look at some of the deeper rooted issues like the nation's current account
deficit woes, slow pace of economic reforms, and decline in investment because of
corruption.
The Current Account Deficit Problem
Current account deficit (when the value of imports exceeds that of exports) fears
have been central to India's economic slump.
The current account deficit reached a record high of 6.7% of GDP in the last quarter
and has been blamed for weakening the Indian rupee. Remember, India isn't a
heavily export dependent nation exports account for about 25% of GDP in India,
compared with about 31% in China.
Gold and oil imports have been blamed for rise in current account deficit. And after
raising import duties on gold twice in 2012, India is again mulling curbs on gold
imports. Moody's analyst Atsi Sheth has previously said "policies that trigger private
investment and curb inflationary pressures in the near-term are more likely to help
narrow the account deficit."
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Morgan Stanley
India's central bank governor Duvvuri Subbarao has said that inflation and the
current account deficit have limited the monetary policy tools available to the
central bank. But cooling inflation has eased some pressure.
And India is also struggling to curb its fiscal deficit. "While there was justification
for running a high fiscal deficit for a short period of a year or so after the credit
crisis to support confidence in growth, continuing with it for four consecutive years
has hurt the economy," write Morgan Stanley analysts Chetan Ahya and Upasana
Chacra.
Slow pace of economic reforms weighing on growth
The slump in investment in the past few years has highlighted the need for
economic reform aimed at drawing in foreign investment. The measures rolled out
in the FY13-14 budget disappointed markets on this front. One of the biggest
disappointments at the time was the failure to deliver on bigger issues like a cut
on withholding taxes on debt investments.
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In May, the government finally gave markets what they wanted. It announced that
foreign institutional investors (FIIs) and qualified foreign investors (QFIs) would
be subject to a withholding rate of 5%, down from 20% on income from government
and corporate bonds, from June 1 to May 31, 2015.
But India is still considered very protectionist. The back-and-forth on allowing
51% foreign direct investment in multi-brand retail that impacts retailers like
Walmart is probably the most well known. That had an unhappy resolution with the
central government approving the measure but putting the onus on state
governments by allowing them to decide whether they would let foreign retailers set
up shop.
More recently, pharma giant Pfizer criticized India for its "protectionist intellectual
property regime" to the U.S. House Committee, according to the Financial Times. At
the same hearing, a lobby of U.S. tech companies criticized India for its
preferential market access policy.
There are also calls for reform around other bills like the Direct Taxes Code (DTC),
the Land Acquisition Bill, and the Mines and Minerals Bill.
The DTC Bill would replace the existing income tax act to include many companies
and individuals that slipped through the tax net before.
The Land Acquisition Bill, one of the more controversial ones, aims to classify the
manner in which the government can obtain land from farmers for infrastructure
projects.
Protests over seized land have
caused many projects to be stalled.
And analysts say that getting these
projects back on track, and getting
new projects in the pipeline, are key
to driving growth.
The Mines and Minerals
(Development and Regulation) Bill is
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another important economic reform.

The most controversial clause in the bill requires miners to share their profits with
the community that is affected by their work, according to the The Statesman. Coal
miners would be required to share 26% of their profits.
Major corruption and poor infrastructure
India's mining sector is the perfect example of the kind of corruption that India has
to crackdown on if it hopes to draw investment, increase supply, and drive growth.
The Coalgate Scandal as it is popularly known emerged from a report by India's
Comptroller and Auditor General (CAG) that accused the ruling UPA government of
selling coal fields to top industrialists without using competitive bidding practices,
and giving them "undue benefits." The CAG claimed this cost the government
billions of dollars in revenue.
But this isn't the only corruption scandal that has delivered a blow to India's
economy. In recent years we saw corruption around the Commonwealth Games, the
telecom scam, and most recently in cricket, with the Indian Premier League.
India ranked 94 on Transparency International's 2012 Corruption Perceptions
Index. This was below three of its BRICs counterparts, Brazil, China, and South
Africa. Only Russia ranked lower at 133. Rampant corruption has been a major
deterrent to foreign companies looking to invest in India.
The nation's infrastructure problems act as
another huge deterrent.
The World Economic Forums Global
Competitiveness Report for 2012-2013 ranked
India 70 out 144 for infrastructure.
World Economic Forum
"Inadequate supply of infrastructure,"

"corruption," and "inefficient government bureaucracy," were cited as the top three
most problematic factors for doing business.
Some 600 million people were left without power last year. And corruption has
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largely contributed to the power shortages. A report from the Herald Net at the time
pointed out that "transmission and distribution losses in some states are as much as
50 percent because of theft and corruption by employees in the power industry."
Besides the Coalgate scandal, India's coal mafia have also been blamed for its power
outages, since lack of coal has kept many power stations idle.
In fact, India has missed every annual target to increase electricity production
capacity since 1951, according to a Bloomberg report. The country has seen the gap
between demand and supply of power jump to 10.2 percent in March this year, from
7.7 percent in March 2011,according to The New York Times.
The economy is bottoming out but elections still stand in the way
The one silver lining is that experts think the economy is bottoming out.
Morgan Stanley analysts Chetan Ahya and Upasana Chacra argue that the decline
post the financial crisis that was due to a "bad growth mix," of high fiscal deficit,
strong growth in rural wages, and low investment, and that this is starting to
reverse.
What's more? Investor sentiment on India has
picked up. Bank of America's latest fund
manager survey showed that investors were net
38% overweight in May, compared with 27%
underweight in April.
While the government has been trying to push
through reforms and review growth ahead of
the 2014 general elections, some argue that the
elections will be an obstacle to reviving
economic growth.
BAML
"However, and despite some recent legislative successes (eg, raising administered
fuel prices and easing restrictions on foreign investment in some sectors), we expect
his efforts to be increasingly hindered by electoral considerations from here on,"6/7
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says Nomura's Alastair Newton.

With India set to account for one fifth of the world's working age population, the
country's burgeoning youth can only hope that its leaders get serious about reviving
and reforming the economy.
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7/21/13