India: the “fallen angel” repairs her wings, but will she fly?

Aug. 28, 2012 - PRLog -- India’s economic growth projections for the year have been cut sharply. In March, the government had projected a real Gross Domestic Product (GDP) growth rate of 7.35% - 7.85% for this fiscal year (2012-2013).

In recent weeks, several economists pared down their GDP growth projections to about 5.5%. Earlier in July, the Reserve Bank of India had already cut its growth outlook to 6.5% citing the uncertain global economic environment, weak exports, inflationary risks, fiscal deficit and falling investment.

Fresh data on industrial production has confirmed that the economy was slowing much faster than anticipated. June’s Index of Industrial Production (IIP) showed that industrial growth had dropped 1.2% from May and declined 1.8% relative to the same month last year.

Credit rating agencies seized on the economic deterioration that had been steadily building up. In June, Fitch downgraded India’s credit outlook from stable to negative, a move regarded as a precursor to a downgrade in the sovereign rating. Standard & Poor’s (S&P) threatened to downgrade the country’s sovereign rating from investment to junk grade, pointing out that there was a real risk that India could become the first “fallen angel” among the BRIC (Brazil, Russia, India, China) countries.

Some of the economic wounds are self-inflicted. Credit agencies and the business community have continually pointed to a policy paralysis. Perceived to be held hostage by coalition partners, the Government has appeared incapable of action, stumbling from one crisis to another, from one scam to another and from one civil society protest to another.

The commentary on the underlying economic risks was largely about the poor state of governance.

That perception has begun to change with the election of previous finance minister Mr. Pranab Mukherjee as President. He had appeared increasingly impervious to the charges of economic deterioration and had displayed a willingness to propose policies, such as retroactive taxes, that riled business further. Business welcomed his election to President with applause and a sigh of relief.

Getting the politics for economic correction in order is one thing. Moving the index of industrial production up is something else entirely.

The room for fiscal intervention is limited. Government is expected to miss its fiscal deficit target of 5.1% and will likely end the year at 5.6%.

There are several structural corrections and policy choices that can help make things better. Measures to enhance coal supplies with higher imports and streamlining procedures for increased domestic coal production, easing mining bans, improving coal transport, encouraging private sector involvement through short-term emergency procedures, restructuring bankrupt state owned power distribution companies – all of this could help and are necessary.

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