A month ago, at the height of a particularly drenching monsoon season, India’s newspapers were dominated by the most unlikely of front-page stories – a bitter row between two distinguished Indian economists.
Amartya Sen, a Nobel prize winner and a professor at Harvard, and Jagdish Bhagwati, who is at Columbia University, hurled toxic claims at one another in an argument over what was best for India and its economy.
Mr Bhagwati advocates growth at all costs, while Mr Sen argues the drive for growth must be accompanied by “social progress” for India’s citizens. Mr Bhagwati also made some ungentlemanly remarks about Mr Sen’s daughter, a model.
Four weeks on, the argument between the economists has disappeared from page one but arguments about India’s economy have most certainly not. Amid a freefalling rupee, fears over investment flight and general malaise about the state of the economy, some believe India is confronting the worst economic crisis for 20 years.
In the past three months the rupee has fallen by as much as 16 per cent – it currently stands at more than 100 to the pound, a record low – an economy that once grew at 10 per cent has slowed to 5 per cent and there is a mounting sense of gloom. What’s more, few think anything is going to change soon. People have lost faith.
India’s most recent and dramatic problems – the falling currency and the flight of investors – are largely the result of factors outside its control. In May, the United States Federal Reserve suggested it would soon end its buying of Treasury bonds, a move that was introduced to pump billions of dollars of cheap money into the economy.
This has lured investors, at least those looking to make short-term returns, back to the US from the emerging markets.
India, along with places such as Brazil, South Africa, Indonesia and Turkey, has been badly hit as the foreign money has been sucked out. In what was seen as evidence of panic, the financial authorities in Delhi this week announced restrictions on capital outflows.
For India, the flight of such capital is especially damaging because of the size of its current account deficit, which last year stood at $88bn (£56bn). The government is trying to reduce the deficit to around $70bn (£45bn) for this fiscal year but the gap is constantly pressured by India’s purchases of oil and gold. The government has been trying to tamp down gold imports by increasing duties.
The concerns are genuine. It was a shortage of foreign currency reserves – just 15 days’ worth – that in 1991 forced India to fly 47 tonnes of gold to the Bank of England as collateral for an emergency loan for food and fuel.
The crisis helped push then finance minister Manmohan Singh to launch a series of reforms that opened up the economy, created a new middle class and led to the startling growth rates. Last week, Mr Singh, now prime minister, said the current reserves were enough for six to seven months. “So there is no comparison. And no question of going back to the 1991 crisis,” he insisted.
Yet India also faces additional problems of having a large fiscal deficit, sitting at around 5 per cent of GDP, and high rates of inflation. Headline wholesale price index inflation climbed to almost 5.8 per cent in July while the consumer price index inflation was almost 10 per cent. Both give foreign investors further encouragement to leave.
While Delhi can do nothing to control decisions taken by the US Federal Reserve, critics say some of India’s problems are of the government’s own making.
They criticise Mr Singh for not doing more to reform the economy to lure more investment, failing to deliver on infrastructure projects that would help growth, not tackling corruption and allowing decisions such as the announcement that India would introduce retrospective taxation – a decision now reversed – that have undermined investor confidence.
With a general election scheduled to take place before May, insiders see little likelihood of anything dramatic changing.
“The confidence has been lost,” said a senior official with one Indian industry body, who asked not to be identified. “No one expects anything to happen during this interim period.”
Those who take a slightly longer-term view of India are more optimistic. They believe that in the same way the Shining India headlines of the early 2000s overhyped its potential by suggesting it was set to match China, so the fears now being voiced may be overly doomful.
One economist employed by the British foreign office said this week that “all the fundamentals” of India’s economy remained in place. Adrian Mutton, the chief executive of Sannam S4, an Indian-based market entry services company that helps international clients operate in a notoriously tricky environment, is similarly buoyant. He said companies were continuing to come to India because there were few alternative sources of revenue.
The appetite for spending among India’s new middle class, numbering anywhere between 200 million and 300 million, was still strong, he said, and there were opportunities in sectors running from higher education to retail.
“If you are looking for the short-term quick return then it’s a risky place to park your money,” he said, sitting in a US-style coffee shop in south Delhi. “But if you want to bring your business here and look at three to five years to make a profit, then now is the right time to come.”
One of his British clients is Gemini Dispersions, a Lancashire-based company that produces pigments, and exports to 70 countries, including India. Its chief executive, Jonathan Rymer, said the fall of the rupee had in effect increased the price of his products by 12 per cent to 15 per cent.
Yet he said he remained bullish about India and that within the next three years he hopes to have set up a joint venture or his own production centre here. “We see a lot of potential in India and it’s only growing,” he said.
India’s importance to the West is not just as a destination for investors. The US, in particular, has been trying to woo Delhi as a regional counterweight to China. The Prime Minister David Cameron, who has twice led large business and education delegations to India, has said be wants to cement a “special relationship” between the two countries. Britain’s trade relationship with India is worth about $24bn.
Apart from such goodwill, there are other things India has in its favour. Trade figures from July showed that India’s famously weak exports were finally getting a boost – and imports were easing – by the fact that the rupee had fallen.
Many are also hopeful too that the appointment of a new director of the central Reserve Bank of India, Raghuram Rajan, a former chief economist at the IMF who is said in 2005 to have predicted the global financial crash, will calm the situation.
He will, however, be facing major challenges from the day when he begins his job next month and he may find the task of trying to bring longer-term stability does not fix precisely with a government looking for a boost before next spring’s election.
Many believe he will be tempted to raise interest rates in an effort to halt the capital outflow and stop the fall of the rupee, even though that could further push down growth.
The removal from the front pages of the argument between Mr Bhagwati and Mr Sen is unfortunate.
With 47 per cent of children suffering from malnutrition and with hundreds of millions of people enduring lives of utter poverty – issues never raised by the visiting foreign leaders with their business delegations – India desperately needs to address the issue of where it is going, what it wishes to be, how it wants to take its place in the world.
These debates will have to wait. For now the talk in India is of a crisis. And how to make it go away.
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