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India story: plot weakens

So, what’s behind the sudden turnabout in an economy, which until not so long ago was the destination global investors flocked to? HT reports. Economic challenges

business Updated: Apr 28, 2012 01:20 IST
HT Correspondent
HT Correspondent
Hindustan Times
indian economy,poor and standard's,news

In a small office in South Delhi’s Masjid Moth area 34-year old Shantanu cracks open his laptop and logs into his email. He pauses over a particular mail that draws his attention. A client has regretted to call off a discussion on a potential deal on outsourcing its internal data base administration to Interactive 12, a boutique firm Shantanu and his childhood buddy Maharshi had set up five years ago.

“This is disappointing,” Shantanu said. “Clients are slashing budgets and small firms like ours are the worst affected as we don’t have a large portfolio to bank on,” he said, motioning his hands towards a rising stack of folders representing the deals that failed to go through in the last three months even after fleshing out the finer details with clients.

Such instances, experts said, mirror the sluggishness of the Indian economy that has come to characterise the world’s largest democracy over the last several months.

On Wednesday, global credit ratings major Standard and Poor’s (S&P) cut India’s growth outlook from ‘stable’ to ‘negative’ hurting its image as a surging economic power.

So, what’s behind the sudden turnabout in an economy, which until not so long ago was the destination global investors flocked to?

Experts said, domestic uncertainty that is hurting India’s growth prospects more than external factors such as spike in commodity and oil prices that pretty much taken as given.

“The real issue in India is not that the problems are unknown or that the solutions are unclear; it is that solutions are not being implemented given the government’s policy paralysis and political constraints,” said Rajeev Malik, senior economist at Singapore-based broking and research firm CLSA.

Most recently, the budget provision to empower taxmen to scrutinise older corporate deals has sparked fears among global and domestic investors, who say this would choke foreign investment into India. This is widely seen as fallout of the long-running dispute of $2.2 billion (R11,200 crore) between the Indian government and UK-based telecom major Vodafone.

Last year, political compulsions had coerced the government to quickly bottle up the flurry of reformist intent including allowing foreign direct investment in multi-brand retail and pensions.

Political compulsions aside, such decisions are hurting the prospects of many small and medium enterprises such as those run by Shantanu. “We were hoping to execute IT-services projects that mega stores would have thrown up. We would have hired more consultants and engineers. But these plans are certainly not moving now,” he said.

In 2010, US President Barack Obama visited India with the largest ever business delegation to accompany a US head of state to a foreign country — a sign that India mattered to the world’s largest economy.

But image seems to have taken a hit.

US-based Moody’s Analytics has termed the national government as the “single biggest drag” on India’s business activity.

"The single biggest factor weighing on the outlook is the Indian government. In all economies it is impossible to separate the economic from the political outlook, and that is particularly the case in India," Moody’s Analytics Senior Economist Glenn Levine said in a commentary.

“Some of our member companies had already begun reevaluating their investments in India,” said a joint letter by seven leading industry associations from the United States, United Kingdom, Japan, Hong Kong and Canada to Prime Minister Manmohan Singh last month.

If MNCs turn against India, it will hurt job prospects of millions of middle class families whose spending and enterprise were the two main engines of the India-growth story.

While finance minister Pranab Mukherjee may be correct in stating that it's not yet time to press the panic button, waning investment can fast trigger the worrying cycle of lesser income and lower spending

“Investor sentiments have been dented because of policy reversals by the government, taxation issues, which adds to the uncertainty in the portfolio flows,” said Indranil Pan, chief economist, Kotak Mahindra Bank.

First Published: Apr 27, 2012 22:11 IST