Bad Week for India

Econintersect: An earlier GEI News report, “India: Alarm Bells are Going Off” was pessimistic about India. On Wednesday 25 April S&P downgraded its outlook on India to negative from stable, citing large fiscal deficit and political constraints. Stocks, bonds and the Rupee have all been battered.  The Rupee has dropped 6.6% vs. the U.S. dollar since 3 February 2012.  The Mumbai stock market (Bombay Sensex) is down 7.0% since 21 February (and -2.6% in just the past five days ending 27 April).  U.S. dollar investors have been hit with both currency and local price setbacks with The India Fund (NYSE:IFN) down 11.6% since 21 February.

In addition to the bad news in the trading markets, a number of long term trends are equally troubling:

• India’s Balance of Payment will come under severe pressure. The much vaunted Information Technology sector will contribute less and less to the increasing burden of unfavorable foreign exchange rates. For an example of another problem, India’s bellwether Infosys is locked in a dispute with the government bureaucracy regarding visas; and other Information Technology companies are not exactly investors’ favorites either.

• Foreign institutional investment (FII) almost vanished last month.  In March FII was just $171 million, down from more than $5 billion in February; and FDI (foreign direct investment) also remains “subdued” according to The Wall street Journal.

• India does not have comprehensive energy policies. Its oil bill is a heavy drag on its Foreign Exchange. Poor coordination between various industries inhibits coordinated response to changing environment. An example is that natural gas prices have gone down but India has locked itself in on expensive forward contracts.

• As outlined in Econintersect Op Ed article, “India: Back to The Future”, the proposed move to change tax laws retroactively might have serious long term detrimental implications of scaring away international investors.

• Due to the political paralysis no new reforms are expected. In a candid statement, the Chief Economic Adviser to the Ministry of Finance says major economic reforms are unlikely before 2014 when the new Government will be elected.

A negative outcome of the downgrade is almost a given. India seems to be on autopilot in one direction – down.  For example, UBS has forecast that the rupee is headed for 56 to the dollar, an all-time low.

Sanjeev Kulkarni

Sources:

• India Needs Foreign Service:  Wall Street Journal

• India:  Rupee Continues to Strengthen GEI News

• India Fund Yahoo Finance

• S&P cuts India outlook to negative; markets hit: Reuters

• India: Alarm Bells are Going Off. Econinterect

• India: Back to the Future: Econinterect

• Infosys under US security scanner for erroneous employee verification:  NDTV

• Major reforms unlikely before 2014 polls, says chief economic advisor Kaushik Basu: The Times Of India

• India at regulatory ‘crisis point’, rupee may hot 56 against dollar:  UBS  Economic Times