Not a day goes by in India's hyperactive media environment without screaming headlines suggesting that the country's economy is spinning out of control and going into the abyss. In fact, if you just stopped at the headlines, you'd think the country was on the verge of a major economic meltdown along the lines of the 1991 foreign-exchange crisis in the wake of the first Gulf War, which caused oil prices to skyrocket and the government's reserves of foreign currency almost to dry up. That was the occasion when India had to mortgage its precious gold reserves and knock on the International Monetary Fund's door with a begging bowl. That indeed was the crisis that set off the first wave of economic liberalization that turned India from potentially becoming a basket case into one of the most successful and fastest-growing large economies in the world.
The gloom-and-doom scenario is not without some basis in fact: There are good reasons to be worried about India's economy. Growth has sputtered to a ten-year low of about 5 per cent, which is nothing less than a disaster for an economy whose default rate of growth, based on fundamentals, shouldn't be much below 8 per cent and which had almost touched 10 per cent during the boom years. The fiscal and current-account deficits have widened. The current-account deficit hit an all time high of $88.2-billion in 2012-13, approximately 4.8 per cent of GDP. According to Morgan Stanley, India's current-account deficit is third-highest in the world in absolute terms, just after the United States and the U.K., and highest among emerging economies such as Brazil, South Africa and Indonesia. The fiscal deficit, which is 4.8 per cent of GDP, is also a source of concern.
Adding to the cocktail of high twin deficits, there problem of continuing high inflation, persistently running at around 10 per cent, and the failure of the government to push forward on key economic-reform measures, preferring instead vote-winning populist welfare and redistribution schemes. Also factor in bureaucratic delays in project approval and India's endemic corruption problems, and both foreign and domestic investors are spooked and want to get their money out while the going's good. Investors lack any confidence in measures that would boost the economy in the runup to next year's general elections. Belt-tightening and tough economic medicine may be the right economics, but they seldom make for good politics in a large, populous democracy with many poor voters for whom welfare schemes resonate more than investment-friendly economic reforms.
All of this makes for a perfect storm for the country's currency, the rupee. The currency has depreciated sharply in recent months, losing about 20 per cent of its value since May. This makes makes it one of Asia's worst-performing currencies.
Still, India's economic situation is not unique among emerging markets, where most currencies have fallen on the back of high deficits, high inflation and a loss of investor confidence. When the U.S. Federal Reserve hinted in May it would be tightening its monetary policy, easing off on its quantitative easing, long-term interest rates went up in the United States, causing capital to flow out from these emerging economies and back to the safe haven of the U.S.
Just three years ago, the mood couldn't have been more different. While growth was slowing and corruption was an issue, there was an overall faith and confidence in the India story. The evaporation of that investor confidence seems to be the key difference, apart from weakening fundamentals.
In the midst of this uncertainty and grim economic outlook, the government showed where its priorities were by passing two key pieces of legislation in the lower house of Parliament. The Food Security Bill, a right-to-food law widely acknowledged as a pet project of the governing Congress party's president Sonia Gandhi, seeks to provide subsidized food grains to almost 70 per cent of the country's 1.2 billion people. The bill, when implemented, is expected to cost the exchequer $20-billion annually, worsening an already bad fiscal situation.
Closely following on the heels of the Food Security Bill, last week the lower house of parliament passed the Land Acquisition Bill, overhauling the country's colonial Land Acquisition Act of 1894. The bill, which is said to be the brainchild of Ms. Gandhi's son Rahul, who is vice-president of the Congress party and a possible prime ministerial candidate, sets clear rules and guidelines in acquiring land which could make the process less chaotic, less convoluted and a lot more transparent.
All of this sounds good. But it also stipulates that landowners, many of whom are farmers, should get greater compensation, four times the market rate in rural areas and twice in urban areas, requiring consent from 80 per cent of landowners for private projects and 70 per cent for public-private partnerships. You could argue that this policy is fair and equitable to farmers, but Indian industry has balked, voicing concerns that this could result in major delays in procuring land and greatly raising the cost of doing business, providing a further damper on new investments and infrastructure projects.
It's often said in India that politicians care more about the price of onions than they do about the price of the rupee. That's a metaphor for saying that it's the price of the staples, which will have an impact on the pocketbook of the poor, will be most electorally salient. While the rupee's slide is being talked about on English-language TV talk shows and fills op-ed columns in English papers, it's not clear that these issues are as yet resonating in the countryside – where the votes are.
Has the India growth story fizzled out? Is it all doom and gloom?
It would be premature to count India out. Next year's elections, if they bring greater political certainty, should free the hand of whichever coalition of parties comes to power to press ahead with long-overdue reforms. If the elections turn up a hung parliament, as polls suggest, with a ragtag band of leftist and regional parties holding the balance, then all bets will be off, at least for a few more years.
Rupa Subramanya is based in Mumbai and co-author of Indianomix: Making Sense of Modern India . She is on Twitter @rupasubramanya