India′s economy enters a downward spiral | Asia| An in-depth look at news from across the continent | DW | 20.07.2012
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India's economy enters a downward spiral

India's presidential elections are taking place at a tough time for the economy and the government. The enthusiasm for reform of the earlier years seems to have vanished.

India's economy grew at a rate of 6.5 percent last financial year and if this sounds like a lot by European standards, it was the slowest rate in nine years. There seems to be no end in sight for the downwards spiral with the International Monetary Fund (IMF) forecasting growth of 6.1 percent only this year.

IMF chief economist Olivier Blanchard recently predicted that the emerging economies would probably make a "soft landing" but that the growth rates would remain lower than in the past 10 years.

Although developed nations would be overjoyed, this is not enough for India says the head of the German Chamber of Commerce in Mumbai, Bernhard Steinrücke. "The economy has to grow at a rate of 9 percent again. Not only to finance the high budget deficit but also to help occupy India's big population, especially young people," he said.

Who is to blame?

Indian Prime Minister Manmohan Singh has blamed the euro crisis for the weak growth rate because the EU is India's most important trade partner, with China and the US running close behind.


Some blame the euro crisis for the downturn in the Indian economy

Steinrücke, however, says that the structure of Indian politics and the government coalition with its 12 parties are to blame. "The smaller parties always create problems and that's why the government cannot make any of the decisions that need to be made - especially when it comes to stimulating the economy."

The business community and investors have made their demands clear - they want the government to build upon the policies that helped India's economy grow at the beginning of the 1990s - opening up internationally and liberalization.

There is still a lot to do, says Peter Braun from the German Asia-Pacific Business Association. "The Indian market needs to be opened further, and individual sectors need to be liberalized. These include finance, the energy sector and the railway sector, which are still highly regulated, as well as retail."

Controversial liberalization

The example of retail, which is estimated to be worth some 500 billion dollars, shows however how contested liberalization is in India. Last year, the government was forced to retract its decision to allow foreign direct investment in the sector after there was uproar throughout the country. The sector is dominated by small shops and traders, who cannot compete with giant international chains such as Walmart, Carrefour, Tesco or Metro.

There was uproar among the population and Manmohan Singh was forced to reverse his decision after smaller parties in the coalition exerted pressure. The consequences were that foreign investment in India sunk by 40 percent by comparison with the previous year.

Furthermore, the government has been hit by a series of corruption scandals. Government officials, including a former minister, were accused of undercharging 2G mobile telephony companies for licenses. The state is thought to have lost 35 billion US dollars. In February, the Supreme Court ruled that all 122 licenses were invalid. The position of Manmohan Singh has been weakened as he is accused of not acting early enough.

Indian Prime Minister Manmohan Singh

Manmohan Singh's term has been battered by a series of scandals

Great imbalances

Moreover, there is a huge gap between India's prospering middle class and the poor. Over half of the population of 1.2 billion live in villages where there is little work or income.

Steinrücke does not trust the schemes the government has introduced to create jobs in a bid to garner votes. One of these guarantees each Indian 100 days of paid work per year. "They cost a lot of money and don't bring anything," he says, adding that the subsidies have a negative impact on the economy's dynamism.

The government's reluctance to liberalize the economy further reflects the impression of a large part of the population that only a small urban elite has profited. This is supported by the results of last year's Human Development Index in which India ranked 134. In 1994, it was at place 135.

Author: Andreas Becker / act
Editor: Arun Chowdhury

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