SPY EYES

“India shall rise, inevitably so” –a bold narrative of promised prosperity and rise to economic glory was constructed on a somewhat flimsy premise of hitherto persisting positive trends carrying on. Till 2010, India was deemed to be an unstoppable force on its way to becoming an economic powerhouse- propaganda machines built on this hypothesis and made it a part of popular discourse.

India, where 269.3 million out of a total population of 1.2 billion people are still estimated to be living below the poverty line (2012 statistic), experienced a wave of giddy optimism that transcended its borders and demanded the world’s attention. Investors looking for destinations other than robust economies of the West suddenly had a new favorite guided in part by an idiosyncratic bullish outlook and tempted by the appeal of futurism. Speculation was thrilling in that it mapped out India’s tomorrows in shades of grey: fact and fiction were meshed together to spin out a bombastic tale of economic triumph rooted deeply in ancient folklore.

Bharat has forever been mahaan- out of her bosom have sprung the world’s most ancient religions, the richest of cultures and civilizations: the subcontinent, the golden sparrow, as old as history itself. Should it not follow then that such a country be destined for economic supremacy? The corollary is inevitable for a people so deeply nationalistic, so passionately patriotic that they bring Little India to nooks and corners outside of her borders.

However, the world’s largest democracy found its confidence crumbling as growth averaging about 8% over the past 9 years was cut by almost half.  The rupee which appears to have gained some semblance of stability in the past few days after dropping by nearly 20% to 68.85 to the dollar by the end of August still stood at 62.07/08 per dollar on September26 falling by 0.5% after 3 weeks of gains. The Prime Minister’s economic advisory council now expects the economy to expand by 5.3% for the current fiscal year as opposed to the earlier projection of 6.4%. It has expressed its concerns over the possibility of keeping the fiscal deficit within the budget target of 4.8% of GDP especially with the fiscal deficit during the first four months of the current financial year already having reached 62.8% of the budgetary provision for the entire year.

Finance Minister P. Chidambaram is strongly advocating the provision of cheaper loans to exporters to reduce the wide current account deficit by way of boosting export income. Moody’s Analytics, however, has observed that India’s growing current account deficit cannot be fixed by beefing up exports alone as this would allow structural deficiencies to persist. The agency further underlined the need to regain investor confidence and curtail imports.

For a long time now, the team at the helm of affairs has been criticised heavily for its performance: dubbed an ostrich sarkaar for policy inaction and complacency, it is finding it increasingly hard to maintain its credibility. The claims of the economic slowdown being a ‘temporary affair’ have also recently been nullified by Raghuram Rajan’s maiden policy announcement wherein he raised the repurchase rate by 25 points sending the Sensex and the national currency in a downward spiral. Time will tell if Rajan has made the right choice by giving the utmost priority to curbing inflation rather than continuing with the GDP growth focus but the message is loud and clear: an independent thinker has taken charge even though he may still not be able to fix India’s dwindling economy all on his own.

While it is argued that the economic slowdown in India is reflective of the trends in the global economy and the situation will not change any time soon, it also goes without saying that the country suffers from a mélange of domestic problems such as red tapism, weak infrastructure, corruption and macroeconomic imbalances. With the country heading towards elections in 2014, there is little incentive for the ruling party to take hard, unpopular decisions in an attempt to squeez the fiscal deficit. The government finds itself inevitably caught between the devil and the deep blue sea: it can either choose to set the fiscal house in order by cutting food subsidies for instance (where it risks wide-scale resentment as two-thirds of its population) or, it can continue to be the ostrich sarkaar and engage itself with operating on the defensive as the opposition (clearly working towards a different goal) plays on that bit of insecurity and enriches its propaganda campaign.

The Manmohan administration is scrambling to control damage in its last days. Giants like Fidelity, Morgan Stanley, Royal Bank of Scotland, and New York Life have either cut down on investment or left the country for good; over the past year or so, even the most optimistic of investors have begun to doubt India’s economic miracle saga and are looking for other investment destinations. Rampant red-tapism still stands in the way of achieving progress despite efforts on multiple fronts to make things easier by single-window clearances for investments, helping with acquisition of land at below market prices and softer rules and regulations in general. Going back to the time of 8% growth seems to be a delusional dream now given that last year, FDI decreased by fell by 21% to $36.9 billion and over the last two months foreign mutual funds have also shown a depressing trend resulting in nearly $10 billion being pulled out of Indian stocks and bonds. In a period of 3 months, ArcelorMittal and Posco have pulled out investment worth $12.6 billion from Indian stocks and Bonds.

Political paralysis has come at a heady cost earning criticism from opponents and believers-alike. The government has allowed itself to be blackmailed by regional parties threatening to withdraw support from the coalition over major reform issues. Thus the notion that “economic growth in the country has been in spite the government, rather than because of the government” is justified yet what previously allowed the UPA the leverage to underperform is out of the picture: perhaps what Ruchir Sharma pointed out in his book “Breakout Nations: In Pursuit of the Next Economic Miracles” is closer to reality than most Indians would like it to be: “the era of easy money and easy growth is over”.

“The biggest fault line in India was that they completely misinterpreted the last decade’s boom. It was a rising tide of global liquidity and a very strong emerging market boom that lifted all emerging markets, and India benefited in equal measure. But in India I think we mistook that boom for being our boom.” says Sharma.

With Diwali or the ‘Festival of Lights’ just around the corner, India has fewer reasons to light up and rejoice. It will not be an easy job to appease Goddess Lakshmi this year after having eyed God’s gold (estimated to be around 35,000 tonnes) to help alleviate financial woes in addition to having grown increasingly complacent. As the RBI proceeded with data collection, Hindu groups and the BJP especially issued sharp criticism leading the former to “no proposal under its consideration to convert idle gold into bullion at this juncture”. The common man has been kept out of the loop quite strategically or so it was hoped: the breakout narrative was fed to him by the state-controlled media reinforcing anchored in all values tied to being Indian but today he shakes his head in disappointment as the government tries to pacify him with placebo pills.

By Enum Naseer