[While India’s long-term prospects remain strong, many economists and analysts say the country’s central government needs to act quickly to ensure the short-term problems do not intensify. While slower growth could help curb inflation, critics are not confident the government has the policy finesse to address either problem adequately.]
By Heather Timmons and Lydia Polgreen
NEW DELHI — India’s central government, convulsed by a series of corruption scandals, is under increasing pressure to deal with the potentially conflicting challenges of rising inflation and slowing growth.
But any effort to deal with the underlying problems that plague the Indian economy runs directly into powerful political interests.
On Tuesday, India’s government said inflation increased 9.1 percent in May, compared with a year earlier, a higher rate than expected.
That came atop troubling economic data indicating India’s gross domestic product growth had slowed, as companies spent less, foreign investment dropped and bad loans piled up at some banks.
While India’s long-term prospects remain strong, many economists and analysts say the country’s central government needs to act quickly to ensure the short-term problems do not intensify. While slower growth could help curb inflation, critics are not confident the government has the policy finesse to address either problem adequately.
India faces “an unpleasant trinity of moderating growth, high inflation and monetary tightening,” said Rajeev Malik, senior economist for the investment bank CLSA in Singapore. “It is very important that the government get its act together and begin to do something.”
In the first three months of this year, India’s annual growth rate of gross domestic product slipped to 7.8 percent — down from an 8.3 percent annual rate in the fourth quarter of last year, and short of analysts’ predictions.
The central government, led by Prime Minister Manmohan Singh, has been rocked by allegations of corruption and investigations into sweetheart deals worth billions of dollars between government ministers and businesses of various types — most notably one involving the award of wireless communications licenses. The scandals have paralyzed decision-making and stalled development projects.
India, the second-fastest growing major economy after China, continues to have long-term forces that should be in its favor.
The country’s youthful population, growing middle class and increased demand — whether for refrigerators and cars, or housing and highways — mean it could become the world’s third-largest economy after China and the United States by 2030, Standard Chartered predicted this month. India’s economy currently is currently ranked 10th, according to the International Monetary Fund.
Still, a recent flurry of negative economic indicators has set the stage for a rocky year. Inflation is a worry in most emerging markets, but critics say lapses and policy missteps by the central government have made the problem especially bad in India.
On Tuesday, the Organization for Economic Cooperation and Development, a group of leading free-market democracies, released a generally upbeat report on India’s economic prospects. But it warned that without deeper policy overhauls the country would struggle to sustain its growth targets.
“Moving to a new level of growth will require renewing the momentum of reforms,” said Ángel Gurría, secretary general of the O.E.C.D. He called for lower barriers to international trade and investment, as well as revamping of the financial sector and the labor market.
Each of those issues is enveloped in a political thicket, though. And the current government has shown little willingness to even try changes. The O.E.C.D. report highlighted India’s low spending on health — just 1 percent of the country’s G.D.P. — and the contrast to the country’s high spending on energy subsidies, at 9 percent of G.D.P.
Local investment growth slowed in the second half of the fiscal year that ended March 31 to 4.1 percent, down from a 14.7 percent rate at the beginning of the year.
Just as worrisome for an emerging economy, foreign investment in the first three months of 2011 fell 32 percent from the comparable period a year earlier, down to $3.4 billion, on top of a steep drop for all of 2010.
Meanwhile, bad loans are creeping up at some of India’s government-run banks, particularly at the largest, State Bank of India. In the quarter that ended March 31, the bank doubled the amount of provisions for nonperforming assets from the previous quarter, according to Enam Securities in Mumbai.
Car sales, one of India’s fastest-growing economic indicators, slowed in May to their slowest rate in two years, according to the Society of Automobile Manufacturers.
Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, acknowledged that the economy was growing slower than the target annual rate of 9 to 9.5 percent set by officials.
He said that getting policy reforms on the agenda had been difficult. Reaching growth targets, he said, “is not going to happen automatically — there are things that need to be done.”
Inflation, meanwhile, threatens to become a bigger problem if agricultural productivity does not improve, said C. Rangarajan, head of the prime minister’s Economic Advisory Council.
On Thursday, the Reserve Bank of India is expected to raise its key borrowing rate for the 10th time since March 2010 — to 7.5 percent, from the current 7.25 percent. The move may further curb growth but have little effect on inflation, analysts said, because a big inflationary force involves structural problems in India’s food distribution, subsidies and infrastructure.
Revising interest rates is generally considered a blunt instrument even in organized economies. In India, where the economy is complicated by factors as diverse as fuel subsidies and infrastructure bottlenecks, the central bank’s capacity for precision is even more limited.
Even as food prices skyrocket, the government has failed to fix an agricultural distribution system that means about 40 percent of India’s farm output rots before it is eaten, analysts note.
“You still need to develop your farm-to-fork model,” said Rohini Malkani, an economist with Citigroup in Mumbai, citing need for improvements in warehousing and transportation. Although the government has noted and discussed these problems, progress has been very limited, she said.
The central government’s inaction on infrastructure and food distribution is helping drive up inflation — even as the government is making the problem worse through farmer-friendly policies like raising minimum prices for food and grains.
“Part of the inflation problem is the government’s doing,” said Mr. Malik of CLSA. “They’ve chosen to improve the terms of trade for the rural economy,” he said, “and it is coming at the cost of the urban economy.”
But Kaushik Basu, the government’s chief economic adviser, said in an interview Monday that inflation was a problem all developing countries were facing. “If you look at emerging economies around the world,” Mr. Basu said, “India’s performance looks pretty run of the mill.”
He said recent skepticism about India’s growth prospects was overblown.
“Just like you have irrational exuberance, occasionally you have irrational pessimism as well,” he said. “My own view is that for the full year, growth will be a little less than what we were forecasting. But all the long-run indicators like investment and savings are going in the right direction.”
The government’s critics, however, take a harsher view. “The last two years have been a lost opportunity” for India’s governing United Progressive Alliance party, Citigroup said this month in a research report.
The party’s victory in 2009 fueled high expectations of a strong change-oriented agenda, which would address issues like banking regulation, land acquisition and pension reform. “Two years down the road,” Citigroup said, “the U.P.A. has disappointed on most counts.”
INDIA AIMS $1 BILLION AT SACRED BUT FILTHY GANGES
[Indian officials and representatives of the World Bank said Tuesday that they hoped the new project would be more successful. They cited the greater amount of money being invested, the broader focus on regional environmental health and a planned public education campaign.]
By Nida Najar
One-third of India’s 1.2 billion people live along the banks of the 1,560-mile-long river, many of them relying on it for drinking, cooking and washing. Millions more visit for ritual baths to cleanse themselves of sin. But untreated sewage, agricultural runoff and industrial waste have fouled its waters for decades, and hydroelectric projects and dams threaten to choke off its waters in spots.
On Tuesday, a religious leader on a hunger strike over the effect of illegal mining on the state of the river, Swami Nigamanand, died after spending weeks in a coma..
The long-awaited loan is part of a government project that aims to halt the discharge of untreated wastewater into the river by 2020. The project, founded in 2009, replaced the 1986 Ganga Action Plan, the last large-scale attempt to address the pollution. That initiative was able to introduce waste water treatment in certain areas, it failed to halt raw waste disposal into the Ganges. Critics said it was inadequately financed and poorly managed.
Indian officials and representatives of the World Bank said Tuesday that they hoped the new project would be more successful. They cited the greater amount of money being invested, the broader focus on regional environmental health and a planned public education campaign.
“What we’re trying to do is take a step back and not look at just one sector — waste water — but take a larger sectoral approach,” said Genevieve Connors, a water resources specialist for the World Bank who is involved in the project.
But she noted that the task of cleaning a river was enormous, saying it “takes decades and costs hundreds of billions of dollars.”
Indian officials acknowledge that the Ganges is just one of many rivers that present public health problems. “Most of India’s rivers have become sewers,” said the environment minister, Jairam Ramesh. “We have to now really bring water into rivers.”
Japan helped to finance a cleanup project in the Yamuna River, the largest tributary to the Ganges, in 1993. But that project has largely failed to make a dent in the river’s pollution.
