Hardly “Incredible India”

NEW DELHI, (Reuters) – Frustrated executives  while away time in five-star hotels waiting for deals that never  come, and civil servants play video games in their offices –  growing signs of the reform limbo and crisis of confidence  behind India’s economic malaise.

Policy paralysis, corruption scandals and a government  fearful of political backlash to any bold moves have combined  with the global slowdown and worsening domestic finances in the  last few months to derail Asia’s third-largest economy.

India now faces the worst-case scenario that was touted  earlier this year – stubbornly high inflation, slowing growth, a  mounting fiscal deficit, a rupee that risks freefall — and both   policymakers and the central bank have few levers to fix it.

For years, Indian entrepreneurs have boasted they can do  business despite the government – adeptly working around  potholed roads, clogged ports and reams of regulatory hurdles.

But government inertia – what many politicians see as  “playing safe” – is taking its toll on corporate confidence.

Entrepreneurs once feted in Bollywood movies as national  heroes, whose million-dollar homes and jetset lifestyles were a  beacon for millions of India’s aspiring middle classes, no  longer seem capable of driving the $1.6 trillion economy.

“We may have seen phases of economic growth slower than this  in the two post-reform decades, but never has the  entrepreneurial mood been so low,” wrote Shekhar Gupta,  editor-in-chief of the Indian Express.

It’s echoed across offices of business leaders from Mumbai  to Delhi. One foreign executive described increasingly strained  telephone conversations over the past year with his U.S.-based  CEO as deals became mired in red tape and ministerial inertia.

“They always understood that India was difficult to do  business in. But not this difficult,” said the executive, who  asked not to be named as he was not authorised to speak for his  company.
The banking sector is now under strain from bad loans.

Economic reforms that may bring in much-needed foreign  investment, such as opening up the supermarket sector to the  likes of Wal-Mart Stores Inc, have been put on hold as  political parties eye important state polls next year.

Even reforms seen as no-brainers politically, such as the  introduction of a digitalised national ID card or food subsidies  for the poor, have faced delays as opposition parties and  coalition partners smell blood ahead of a 2014 general election.

FROM COCKY
TO FEARFUL

India used to be full of brash business leaders.

When Tata Steel bought an Anglo-Dutch rival in  2007 for $12 billion, the newspaper headline “Empire Strikes  Back” epitomised the supreme confidence of India’s aggressive  capitalist kingpins then on a global buying spree. Jaguar, Land  Rover and other foreign brands soon followed into Indian hands.

The economy may grow at under 7 percent this fiscal year,   down from initial forecasts of 9 percent. That’s still a far cry  from the around 3.5 percent “Hindu” rate of growth that plagued  the decades after India’s independence from Britain in 1947.

But these last few heady years have changed expectations.

These days, growth below 7 percent is enough for investors  to delay projects, for banks to put off loans and for voters to  get angry: 7 percent is the new 2-3 percent.

It was corruption scams surfacing over a year ago that may  have started it – a potentially $39 billion scam involving  selling telecoms licenses at rock-bottom prices effectively saw  distracted politicians asleep at the economic wheel.

Suddenly politicians were jailed and billionaires questioned  by police. It sent shudders through the political class. The  invincibility of the political “untouchables” disappeared.

Inside India’s famously bureaucratic ministries,  middle-level civil servants passed the buck to top-level  officials who in turn passed the buck to their reluctant  political masters.

One defence contractor, who asked to not be named due to the  sensitivity of the issue, recounted spending weeks at a top  hotel, sipping drinks every evening with fellow frustrated arms  dealers waiting for “imminent” defence ministry decisions that  never came.

An Indian executive likened the country’s economic malaise  and government’s reform limbo to an old village adage – a  bullock knows that if it goes to work in the field it could get  whipped, while the animal that lazes around far away does not.

“Once the spotlight is on, even minor mistakes become  noticeable,” said the vice-president of an infrastructure firm  about a slowdown in decision making ever since corruption  scandals broke last year. “That’s why nobody wants to take  decisions.”

Many civil servants have been seen playing computer games  during official hours when parliament sessions are adjourned or  their minister goes on trips for G20 or World Bank meetings,  according to one government official.

Prime Minister Manmohan Singh may be reform-minded. But with  real power lying with the populist-inclined Sonia Gandhi, he has  been unable or unwilling to press for new steps to modernise and  open up the economy.

With Gandhi ill, reportedly with cancer, there are signs the  family dynasty that has run India for decades has lost its  bearings, increasingly unable to keep its coalition partners in  line as parties jostle for power before the 2014 election.

The cabinet’s one sudden announcement of major reform –  allowing foreign firms to hold 51 percent stakes in the  supermarket sector – may have been partly driven by economic  panic as the rupee plummeted, with Asia’s worst-performing  currency suffering from capital flight to safe havens like U.S.  Treasuries.

But Singh’s about-turn only 10 days later in the face of a  political backlash underscored that, even at a time of alarm  over the economy, politics and the concern about forthcoming  elections took precedence.

 FLOWS SLOW,
CONFIDENCE EBBS

India’s annual financing requirement of $119 billion is the  highest in Asia, according to a Nomura report. The trade gap for  the fiscal year to March 2012 is expected to widen sharply to  $155-$160 billion from $104.4 billion a year ago.

Foreign funds are net sellers of about $300 million of  Indian shares this year in sharp contrast to record investment  of more than $29 billion in 2010, and India’s 30-share benchmark  index is down more than 23 percent, making it the  worst-performing major global market this year.

“Industry is geared up to deliver infrastructure  in line with the strong growth pattern and the government’s  forecasts,” said Russell Waugh, managing director of Leighton  Welspun Contractors, part of Australia’s Leighton Holdings  .

“But the flow (of new projects) at the moment, the real  flow, is not aligned with that gearing. So we’re seeing most  companies struggling.”

Infrastructure assets, including telecoms, construction and  power, which account for about 25 percent of total corporate  credit, are now a key concern for banks.

Worries about rising bad loans prompted Moody’s Investors  Service earlier this month to cut its outlook on India’s banking  sector to “negative” from “stable”, saying monetary tightening  and a slowdown in the economy would cut bank loan growth.

The car industry – a symbol of the aspirations of millions  of India’s middle classes – is now an example of how slipping  growth and high interest rates have hit consumer demand and  investment decisions.

Car sales in India, which jumped 30 percent in the last  fiscal year, have slumped due to high interest rates and rising  input costs. Sales may just break even this fiscal year.

Maruti Suzuki, India’s biggest automaker, is  deferring an investment of $560-740 million in plants in the  western state of Gujarat due to the economic gloom.

“When we will start work in Gujarat will depend on how the market improves in the future … at the moment the general  economic situation is too negative to justify it,” Maruti  Chairman R. C. Bhargava told Reuters. “There’s no point creating  excess capacity if the demand is not there.”

NO QUICK FIX     
There is no quick fix for the government, with the fiscal  deficit set to beat its target of 4.6 percent of GDP. But there  is little sign of efforts to help investment, including speeding  up approvals of projects hit by red tape and environmental  approvals.

One official, monitoring government infrastructure projects,  said that of 558 federal government projects, 241 were delayed  as of end-July, resulting in a cost overrun of some 20 percent,  or more than $31 billion.

The projects, which include setting up airports, new railway  lines, shipping ports, roads and power plants, have been delayed  by more than two years on average due to issues of land  acquisition, environmental clearance and rising costs.

Senior government officials, who declined to be named,  described a finance ministry dominated by 76-year-old Pranab  Mukherjee, who is more adept at bringing together unruly  coalition allies than doing anything bold about the economy.

“Mukherjee is a politician first with little time for his  own ministry as he is also the chief trouble shooter for the  Congress party. Many bureaucrats don’t even get to see him for  days and have no access to him,” said one.

“His style is very old world and some say not very  responsive to financial markets. It’s not surprising that in a  crisis like what’s confronting us currently, lack of imaginative  leadership in the treasury department is also reflecting in the  economic woes facing the country.”

Mukherjee first became finance minister in 1982, way before  India had begun to rethink its post-independence socialist,  state-driven economic model.

For many, India will remain in limbo only until a real  crisis prompts it to act – similar to the 1991 balace of  payments crisis that ushered in the country’s first economic  reforms under Singh, who was then finance minister.

“At the end of the day, I feel you need crisis to get going  again,” said V Ravichander, who advises multinationals on doing  business. “And even though our growth rates have fallen from 8  to 6.9 percent on the last estimate, I guess people feel 6.9 is  not still low enough for us to do something about it.”

But that inertia could means India faces some turbulent  years ahead, exacerbated by the 2014 election that may just  polarise the country further.

“The new Hindu Rate of Growth is 6 percent and on all  evidence, from macroeconomic data to the empty billboards of  Mumbai, we’re headed there next year,” wrote Gupta.

“Returning to economic stagnation like that is bad enough by  itself. But this is not the forgiving India of the past. This  India has tasted growth, progress, optimism and aspiration.”

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