Tuesday, June 5, 2012

India’s Economy is Growing at 5.3% - So Why is That Terrible News

It’s the Slowest Growth in Nine Years – And Portends Much Slower Growth in the Future

When Your Customers Are in Trouble; You Are in Trouble

Given that much of Europe is in recession and that the U. S. is experiencing mediocre growth and employment India’s just announced growth rate of 5.3% would seem to be welcome news.  It is not. 

This Cannot Be Good
India's economy grew at its slowest pace in almost a decade in the year's first three months, further evidence of its growth story turning sour amid global uncertainty and its government's failure to push through reforms.

Gross domestic product in the quarter grew 5.3% from a year earlier, its slowest quarterly pace since early 2003. The rise was below economists' forecasts of 6.1% and much lower than above-8% levels India has registered in recent years.

Like Germany and China, India is heavily dependent upon exports to stimulate its growth.  But exports can only come if the countries of Europe and America have strong economies and are buying India made goods and services.  So the slump in the Western countries is now spreading to the once high growth areas of Asia.

Even worse for India is that is has a huge budget deficit and needs to spend even more in order to bring its awful infrastructure up to minimal standards necessary for a functioning economy.  And even with a strong export market India has a high trade deficit due to the need to import energy.

Foreign and local companies complain that New Delhi's massive spending on welfare programs, which are politically popular, has created an unsustainable budget deficit and exacerbated inflation. Massive oil imports have widened the trade deficit, weakening the rupee currency and pushing up the cost of imported goods.

Austerity doesn’t wear well in India, as its high centers of poverty are dependent upon government support for people’s very survival.

Prime Minister Manmohan Singh's Congress party-led coalition—in power since 2004—has largely failed to take politically difficult actions to cut expenditures. Instead, it attempted this year to raise money through a proposal to retroactively tax acquisitions involving foreign companies.
It has also backtracked on promises to open up the local retail sector and other industries to overseas investors, adding to concerns about the business climate.

Even where the government has taken limited action to pare the deficit it has faced widespread opposition. A nationwide business shutdown Thursday to protest last week's 11.5% increase in gasoline prices shows the extent of popular anger at the smallest reforms. The shutdown was organized by the political opposition but also drew support from parties inside Mr. Singh's unruly coalition.

Yes it would be nice if countries like India could take up some of the economic slack now being felt in the U. S. and Europe.  Ain’t gonna happen. So now there's another reason for everyone to be not cheerful.

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