A dismal view of Indian Economy



2G storm in a teacup exaggerated by jackass media. India’s slowdown and government complacency – The Economist

India’s slowdown
Stopping the spiral
Jun 11th 2012, 6:45 by P.F. | MUMBAI

IN LAST week’s leader on India’s economy we referred to the government as acting with Brezhnev-grade complacency. That was probably a bit too harsh. In the last few days I’ve listened to two energetic government bigwigs—officials rather than politicians—talk about the slowdown and what to do about it. Here’s what they had to say.

The first official shall remain nameless. He was certainly complacent at times. So for example, the latest GDP figures showing year-on-year growth of 5.3% were probably a statistical error, in his view. “These numbers are probably going to be revised. But it’s too late. What matters is the first number [released], which make an impression.” The scandal over the award of the 2G licences in 2008 was a storm in a tea cup and exaggerated by a “jackass media who are constantly after your blood” (anyone who has read the Supreme Court’s judgment on this scandal is unlikely to be nearly so forgiving of the scandalous parties). The graft scandals surrounding the government were “mostly misrepresentations”. And the government’s medium-term growth targets are likely to remain in the region of 8%. That is well above private economists’ view, which is nearer 6%, and the Reserve Bank of India’s too: it reckons trend growth is probably at about 7%. But there was also realism. Asked what he would do if he had a magic wand, this official replied, “go back to 2009 and start again”. Several things started to go wrong at that point, he said. There was a poor monsoon, hurting farmers. Rather than cutting the fiscal deficit it had run up in to offset the effects of the global financial crisis, the government kept spending freely. “We left it in the system when it wasn’t needed,” the official says of the stimulus. That helped keep inflation high and stubborn.

By mid-2010, the official went on, a series of scams had become public which left the government in an “effective state of siege”. That meant reforms were harder to pass and the machine was too distracted to operate the levers of government properly, or to solve bottlenecks such as a shortage of electricity. The final straw came in 2011 with the balance of payments ballooning, thanks to higher oil prices but also Indians’ purchases of gold (reflecting their fear of inflation and mistrust of banks), and then the budget in 2012 which carelessly messed around with the tax rules for foreign investors and scared some off, making funding that deficit harder.

What now? This official’s premise is that India should try to kick-start growth with a surge of spending on infrastructure. That might spur private firms to invest more generally, which would in turn get the economic show back on the road. The government is trying to bang heads together, and enjoying some success with the easier bits of infrastructure development, such as roads. A bigger challenge will be the power sector, where the entire supply chain, from digging up coal to the sale of electricity to consumers, is riddled with problems. As well as on energy, he said, the government would have a “surge” on building ports, airports, railways and urban infrastructure.

The official was much vaguer on those reforms that require the cabinet to reach agreement, or the government to command parliament. So for example the cutting of wasteful oil subsidies (which help explain India’s budget deficit), “will happen sooner or later”, but not for a few months. That’s a pretty limp prediction. Likewise, the loosening of foreign-direct-investment rules will happen—at some point. “The politics will clear in the next few months.” Finally, the passing of the Goods and Services Tax (GST), an especially big reform, will happen “not before next year”—and even then may not be possible.

As a member of the jackass media, I left the meeting with the feeling that one part of the state machine, the politicians, was still not working. However another part, the bureaucracy, was trying to raise its game. The big question is whether the old levers, which the highest bureaucrats so like to pull, are still connected to anything. The economy stands halfway between a command-and-control system and a free market. That means it probably cannot be revived by clever officials alone.

The second official whom I heard talking about the slowdown is typically brilliant—Kaushik Basu (pictured above), the chief economic adviser to the government of India. But he is also a believer in markets and free trade, which is less common. After a stint in the government hot-house, which has not been without its controversies, he is due to return to Cornell University, where he is a professor. On Friday evening he was in Mumbai, at an event convened by Exim bank. Mr Basu, an independent soul, began bluntly. Domestic problems, rather than the global economy’s woes, explain much of the slowdown he said, and “it is not responsible for us to shy away from that…we owe it to our country to point out that fact.”

Mr Basu called for the Reserve Bank of India—whose top brass were represented by a pair sitting in the front row, on rather fetching white sofas—to cut interest rates. But beyond this he simply stated that just as “spirals of optimism” take place in markets and economies, so to do “spirals of despair”. India is suffering from the second type of spiral today and it is not clear what might break it. But eventually something will come along—“India is going to come out on top. Give us a few years,” he said.

The bulk of Mr Basu’s comments were aimed at the medium term and amounted to a staunch defence of opening up the economy. “Openness and growth for India have gone hand in hand…globalisation for India has been for the better.” To reap the benefits of trade, it is essential to concentrate on contracts, trust and integrity, things that India tends to “give short shrift to”. Reading between the lines Mr Basu’s speech can be seen as a defence of reform as a means to raising living standards—and a call to India to clean up its act. “At the top level the leadership understands these principles very well,” said Mr Basu. If so, what a shame the top politicians are so terrified of saying the same thing aloud. The failure of India’s leaders to advocate reform before its citizens is one reason why there is so little consensus in favour of it among the public today.

(Picture credit: AFP) http://www.economist.com/blogs/banyan/2012/06/indias-slowdown

India’s slowdown
Farewell to Incredible India
Bereft of leaders, an Asian giant is destined for a period of lower growth. The human cost will be immense
Jun 9th 2012 | from the print edition

IN A world economy as troubled as today’s, news that India’s growth rate has fallen to 5.3% may not seem important. But the rate is the lowest in seven years, and the sputtering of India’s economic miracle carries social costs that could surpass the pain in the euro zone. The near double-digit pace of growth that India enjoyed in 2004-08, if sustained, promised to lift hundreds of millions of Indians out of poverty—and quickly. Jobs would be created for all the young people who will reach working age in the coming decades, one of the biggest, and potentially scariest, demographic bulges the world has seen.

But now, after a slump in the currency, a drying up of private investment and those GDP figures, the miracle feels like a mirage. Whether India can return to a path of high growth depends on its politicians—and, in the end, its voters. The omens, frankly, are not good.

Some of this crunch reflects the rest of the world’s woes. The Congress-led coalition government, with Brezhnev-grade complacency, insists things will bounce back. But India’s slowdown is due mainly to problems at home and has been looming for a while. The state is borrowing too much, crowding out private firms and keeping inflation high. It has not passed a big reform for years. Graft, confusion and red tape have infuriated domestic businesses and harmed investment. A high-handed view of foreign investors has made a big current-account deficit harder to finance, and the rupee has plunged.

In office but not in power

The remedies, agreed on not just by foreign investors and liberal newspapers but also by Manmohan Singh’s government, are blindingly obvious. A combined budget deficit of nearly a tenth of GDP must be tamed, particularly by cutting wasteful fuel subsidies. India must reform tax and foreign-investment rules. It must speed up big industrial and infrastructure projects. It must confront corruption. None of these tasks is insurmountable. Most are supposedly government policy.

Why, then, does Mr Singh not act? Vacillation plays a role. But so do two deeper political problems. First, the state machine has still not been modernised. It is neither capable of overcoming red tape and vested interests nor keen to relax its grip over the bits of the economy it still controls. The things that do work in India—a corruption-busting supreme court, the leading IT firms, a scheme to give electronic identities to all—are often independent of, or bypass, the decrepit state.

Second, as the bureaucracy has degenerated, politics has fragmented. The two big parties, the ruling Congress and the opposition Bharatiya Janata Party (BJP), are losing support to regional ones. For all the talk of aspirations, voters do not seem to connect reform with progress. India’s liberalisers over the past two decades, including Mr Singh himself, have reformed by stealth. That now looks like a liability. No popular consensus exists in favour of change or tough decisions.

As a result, when the government tries to clear bottlenecks, feuding and overlapping bureaucracies can get in the way. When it suggests raising fuel prices, it faces protests and backs down. When it tries to pass reforms on foreign investment, its populist coalition partners threaten to pull the plug. It does not help that the ageing Mr Singh has little clout of his own: he reports to the ailing Sonia Gandhi, the dynastic chief of Congress. With a packed electoral timetable before general elections in 2014, Congress does not want to take risks.

Is it time for a change at the top? Mr Singh has plainly run out of steam, but there are no appealing candidates to replace him. Mrs Gandhi’s son, Rahul, has been a disappointment. What about a change of government? The opposition BJP is split and has been wildly inconsistent about reform. Its best administrator, Narendra Modi, chief minister of Gujarat, is divisive and authoritarian. If it formed a government tomorrow, the BJP would also have to rely on fickle smaller parties.

Some reformers pray for a financial crisis that will shake the politicians from their stupor, as happened in 1991, allowing Mr Singh to sneak through his changes. Though India’s banks face bad debts, its cloistered financial system, high foreign-exchange reserves and capable central bank mean it is not about to keel over. A short, sharp shock would indeed be useful, but a full-blown crisis should not be wished for, because of the harm that it would do to the poor.

Instead the dreary conclusion is that India’s feeble politics are now ushering in several years of feebler economic growth. Indeed, the politicians’ most complacent belief is that voters will just put up with lower growth—because they supposedly care only about state handouts, the next meal, cricket and religion. But as Indians discover that slower growth means fewer jobs and more poverty, they will become angry. Perhaps that might be no bad thing, if it makes them vote for change.


India’s telecoms scandal
What a scandal says about government and business in India
Feb 11th 2012 | MUMBAI | from the print edition

AS SCANDALS go, it is a corker. It involves secret recordings of lobbyists talking to tycoons about ministers, fraudulent documents, unrelated firms that share the same e-mail address, clueless foreigners piling into a vast market, bank drafts with dates that make no sense, PR flacks taped schmoozing hacks with honking traffic in the background, front companies named after Russian rivers, an apparently helpless prime minister, people under arrest and something between $8 billion and $20 billion pinched from the public purse.

India’s telecoms scandal has been rumbling since 2008, when 122 mobile licences covering a third of India’s 2G spectrum were awarded to eight companies. (India today has 14 mobile-phone firms in all.) A constant drip of disclosures since then has numbed the public’s outrage. But on February 2nd India’s Supreme Court cancelled all 122 licences. Its 94-page ruling is required reading for anyone interested in doing business in India.

From a business perspective, two conclusions can be drawn. The first is a cheering one: India’s legal system seems to be working just fine at the very top. The second is less sunny: the mobile-phone industry faces turmoil. There is also a worrying question: is the smell from the telecoms business a sign of a deeper rot?Politically, the scandal’s effects are not yet known. Andimuthu Raja, the telecoms minister at the time, is in jail. His trial could reveal all manner of dirt. The coalition government, led by the Congress party, is shaken, though its supporters hope no other big scalps will be claimed. State elections, the results of which are due on March 6th, will measure voters’ wrath.

From cell phones to prison cells

Along with outsourcing, mobile telecoms is India’s biggest industrial success story. Every emerging economy has seen a mobile boom, but India’s was huge. It spawned a national champion: Bharti Airtel (which is untainted by the affair). Indian firms rewrote the rule book, cutting tariffs lower than others had dared and outsourcing parts of their operations. The spread of phones to slums and villages created a social revolution.

That boom, though, contained the seeds of the scandal. Mobile spectrum, which was in short supply, became very valuable. Between 1994 and 2007 four phases of licensing took place. The government tried different ways of allocating airwaves, from beauty parades and auctions to operators making upfront payments to the state. (Most rich countries stick with auctions, since they are simple, transparent and hard to cheat.)

By 2007 the process had become a shambles. Applications for licences languished in government files. On September 23rd 2007 the Department of Telecommunications was sitting on 167 of them. (India’s regime splits the country into 23 regions, so each firm typically seeks multiple licences.) The next day the department said any further applications would need to be received by October 1st. Another 408 applications were hurriedly made.

What happened next, according to the Supreme Court, “leaves no room for doubt that everything was stage-managed”. The deadline was retroactively changed. Those on the shortlist announced on January 10th 2008 were given just hours to respond to the news. Of the 16 firms on that list, 13 mysteriously already had bank drafts ready to pay the nominal upfront fee, which were dated before the public announcement had been made, according to India’s Comptroller and Auditor General (CAG). It reckoned they were given advance notice. It also noted that 13 of the 16 firms made “false and fictitious” statements about their finances.

Safeguards failed. Requests for advice from other arms of the state circulated, but behind this mirage of due process, the Department of Telecommunications was out of control. To evade scrutiny from its critics inside the government, the department delayed a meeting and announced its decision before the rescheduled date. In 2007 Mr Raja, the safari-suited telecoms minister, received a cringingly meek letter from the prime minister, Manmohan Singh, expressing concern. Within hours he bashed out a dismissive reply and carried on regardless. Of the 122 licences granted, 85 went to six new entrants, including several property firms, two of which promptly made fortunes by selling stakes in the licences to foreigners. CAG found that a year later none of the six had met its obligation to roll out a network.

For the telecoms industry the judgment creates chaos. The cancelled spectrum must be returned within four months, and then auctioned off. After a bout of mergers it is now in the hands of eight firms and affects 67m customers (7% of India’s total) and 30% of 2G spectrum capacity, according to Deepti Chaturvedi of CLSA, a broker. Six of those firms could fail without the suspect licences (see table). One executive reckons the total capital invested by those half-dozen in acquiring customers and kit might amount to $10 billion.

Their legal position appears weak: a buyer of illegitimately acquired goods has no one to blame but himself. Worryingly, though, the Indian government is making soothing noises to these firms, as if the way to improve India’s investment climate is to rescue foolish investors.

If principle wins out, the best these firms can expect is to be allowed to sell their customers and kit to the remaining operators and be refunded the modest fees they paid to the government; or, if they are still keen and not incriminated by other cases, to be allowed to bid in fresh spectrum auctions. The court has demanded those auctions take place as soon as possible. To be credible they should be open to all operators, and the highest bidders should win, subject to antitrust limits. This may benefit the big fish. But even after the exit of smaller fry there would still be six or seven big firms competing—plenty by global standards. India has proved it can hold clean auctions: a 3G one in 2010 was widely praised.

By insisting that an auction is the only fair way to allocate spectrum, the Supreme Court has cast into question other licences granted before 2009 by different means, including those of Reliance Communications and the Tata group, two giant firms. And there are grave doubts about the telecoms bureaucracy. “There is no reason to believe much has changed,” says one executive. “They have completely lost the plot,” says another.

Once a freewheeling industry, mobile is fast maturing, with sedate growth and high levels of debt, partly as a result of those 3G auctions in 2010. All operators bar one, Bharti Airtel, make weak returns on capital in India. Yet for bureaucrats, mobile is still something to be controlled. The Department of Telecommunications and TRAI, the regulator, want to lean on operators to buy more of their kit from local manufacturers. They are also talking about officials setting tariffs. Reports of the death of the licence Raj were greatly exaggerated, it seems.

On February 3rd the prime minister, who is widely held to be clean, said the country had moved “substantially forward” in dealing with corruption, but that there was still “a long way” to go. He hopes to pass an anti-corruption bill—though this has so far been blocked by bickering in parliament. Some Indians think that all this is a healthy sign of a free and noisy democracy at last getting to grips with a problem. Some protest that the scale of graft has been exaggerated.

Yet after the 2G scandal that is surely a complacent view. It has taken the courts, not the political system, to act. Industry seems to be gripped by a culture of denial. Executives make pious statements in public and sling mud in private. There is anecdotal evidence that corruption is rife in most industries that interact with the government: those that require licences, access to natural resources or changes in the law.

One government mandarin talks of a vast backlog of vital projects, such as mines and industrial plants, some of them half-finished, that break current rules and are possibly bent. Officials don’t know whether to turn a blind eye or blow their whistles and cause mayhem. The suspicion of widespread graft is corrosive for business. Is it safe to take over another firm or is it a legal time bomb? Do investors dare give cash to an indebted company with a ripe reputation but a promising project? Can a foreign firm ever be sure that its Indian partner is clean? These are uncomfortable questions.



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s