India
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Still Playing Catch Up
By JOANNA SLATER
BOMBAY -- India's economy is in the grips of its own peculiar dilemma.
On the one hand, overall growth is likely to hit 4%-5% in the 12 months to next March. By world-wide standards, that's an admirable performance.
But for India, 4% growth would be one of the worst showings in a decade. More to the point, in a country of a billion people where poverty is rampant, it simply isn't good enough.
The chief dead weight is a large and growing fiscal deficit that leaves the government unable to pump-prime the economy, invest in infrastructure or modernize the vast agricultural sector. Worse yet, perhaps, at least in the short run, is the harsh lesson India received in the perils of monsoon-dependent farming when it suffered its worst drought in more than a decade. Because agriculture sustains two-thirds of the population and accounts for a third of GDP, the failed rains have significant economic consequences.
The first is obvious: fewer crops. But that shortfall in turn hits rural incomes, an important market for products ranging from soap to motorcycles. This second effect is more subtle and will likely drag at India's economy into next year, economists say. In one of the worst drought-hit states, Haryana, farmers said the lack of rain would force them to put off purchases, loan repayments and wedding celebrations to await a better harvest.
Industry is another source of concern in India's economic picture. For the past half year, it has posted relatively strong growth rates of 5%-6%, but experts say there's a good chance that will decelerate in the coming year. More broadly, they worry that without an increase in private investment or infrastructure spending, Indian industry will have difficulty returning to the robust growth of the mid-'90s. "We could be looking at a quickly obsolescing cycle," said Subir Gokarn, chief economist at the Credit Ratings Information Services of India, a prominent ratings agency.
Easy Credit
There are, however, plenty of positives. The country has a vibrant services sector that will continue to power economic growth, a huge pile of foreign-exchange reserves and a current account surplus.
India: Economic Overview
To find one of India's best hopes for growth, start at the shiny new branches of private banks in Bombay. Consumer loans-for cars, household appliances, and above all, new homes-have increased by an average of 27% each of the past three years, says Chetan Ahya, an economist at JM Morgan Stanley in Bombay. Mr. Ahya expects that growth to continue at 20%-25% next year as a clutch of private banks expand their branch networks and target individuals.
"It's really come of age," says Lina Bilkha, a teacher in Bombay who has taken loans for appliances and last year bought a new car with the help of a private-bank loan. Not only is it increasingly convenient, she says, but each year new types of loans become possible.
That explosive growth of consumer credit and home loans in particular is just one element that makes up the real motor of India's economy: the service sector. Representing half of India's GDP, the service sector has posted the highest growth rates of any part of the economy and is likely to continue that performance next year. From April to June, services grew 7.4%, driven by businesses like banking and insurance.
One thing that is likely to cheer industrialists is the continuation of the government's road-building program, an ambitious project to upgrade the country's key highways. The government has pledged to spend $3.3 billion, most of which remains unspent owing to various delays. In 2003, however, road-related spending is slated to move into higher gear, accelerating the performance of related industries like cement.
Politics as Usual
Other than the roads program, the government doesn't seem to have any economic aces up its sleeve. In recent months, the ruling party backed away from a much-hailed privatization program and embarked on expensive bailouts of troubled state-run financial institutions. Several key reforms, such as changes to labor laws and a bill to restrict government spending, remain in limbo.
With 10 state-level elections next year and national polls the year after that, some analysts say economic reforms may be subjugated to political imperatives. The recent controversy over the government's privatization program could be a sign of things to come: conflict among the government's own ministers jockeying to protect their turf and score political points has helped to derail, at least temporarily, the much-anticipated sales of several state-owned companies.
That kind of early electioneering also popped up in statements in early October by some of the ruling party's Hindu-nationalist allies criticizing foreign investment in India. Surprisingly, it is having a banner year: foreign direct investment hit $2.68 billion from January to July, a 69% improvement over the same period last year.
The sniping became so intense that Prime Minister Atal Bihari Vajpayee was forced to publicly restate the obvious: India is committed to furthering economic reforms, attracting more foreign investment and reducing the state's role in business. However, just like the country's economic performance, the question isn't so much the direction of change, but the speed.
--Ms. Slater is a staff reporter in The Wall Street Journal's Bombay bureau.
Write to Joanna Slater at joanna.slater@wsj.com
Updated October 28, 2002 |
