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Resource centre on India's rural distress
 
 

Rebound in India Leaves Some to Struggle by Heather Timmons


When the Indian government met the largest economic crisis the world has faced in nearly 80 years with tax cuts, aid for rural workers and interest rate cuts, critics said it was not enough.

Now, though, it looks as if the policy makers may have offered too much.

India’s $1 trillion economy, largely insulated from the global crisis by low reliance on exports and a heavily regulated banking system, has exceeded expectations and is on target for more than 6 percent growth in gross domestic product this year.

Inflation, not slowdown, may be the biggest danger India faces. Industrial output is above its pre-crisis peak, and inflation is already well into double-digits, said Maya Bhandari, an economist with Lombard Street Research, in London. Unless monetary policy is significantly tightened, “inflation is poised to shoot through the roof,” she said in a report this month.

Between last October and April, the Reserve Bank of India cut its policy rates six times, trimming a total of four percentage points from both the repo rate, at which commercial banks borrow from the central bank, and the cash reserve ratio, the cash they must hold against customer’s deposits. The Reserve Bank undertook “the mother of all monetary easing to successfully counter the hit triggered by the Lehman crisis last year,” said Macquarie Securities in a note this month.

Monetary loosening was joined in December by what officials called “Step One” of a three-part stimulus plan: a tax cut of 4 percentage points on nearly all goods except petroleum products; $1.5 billion in small business funding and cuts in gas prices. In January, the government more than doubled, to $15 billion, the limit on foreign investor buying of rupee-denominated financial investments, and increased lending to states. In February, it trimmed service and excise taxes by 2 percentage points.

The 2009 budget, in July, raised government spending by 36 percent, to 10.2 trillion rupees, or $220 billion, with a focus on improving India’s shoddy infrastructure and providing jobs in rural areas. Spending to counter rural unemployment rose 144 percent to $8.1 billion; spending by the Ministry of Highways and Road Transport increased 17 percent to $4.4 billion and fertilizer subsidies for farmers were raised.

Much of this money has yet to be spent, but some indicators show that G.D.P. growth is on target to meet or exceed economists’ estimates of 6 percent this year. After several months of layoffs and shrinking contracts, India’s flagship industry, information technology, has started hiring again; auto sales, helped by tax breaks worth several hundred dollars on even the cheapest cars, are booming; industrial production growth hit a near-two-year high in August, with output up 10.4 percent from a year earlier, and the Bombay Stock Exchange’s Sensex index this month hit the psychologically important 17,000 mark, up 115 percent from one-year lows in March.

Still, critics of India’s response to the global crisis say it has been unfocused and has failed to fix structural flaws standing in the way of the country’s economic superpower ambitions.

“They didn’t have a holistic picture” of what should be done, said Rajiv Luthra, managing partner of Luthra & Luthra, a New Delhi law firm that advises on foreign investment, infrastructure and energy projects.

“Where there is a big meltdown in the economy, rulers should try to build it upward,” he said, arguing that more money could have gone to low-income housing, construction jobs for semiskilled workers, education and infrastructure.

Big exporters, meanwhile, including textile, jewelry and crafts manufacturers — often small and midsize businesses but employing in total hundreds of millions of people — have missed out on government aid despite being hit by the one-two punch of a global recession and a dropping dollar, which makes their goods more expensive in many markets.

“We are desperate,” said Rakesh Vaid, head of Usha Fabs clothing exporters in Gurgaon, India, and chairman of the Apparel Export Promotion Council, a garment exporters’ trade group.

Whether policy makers will help them out is not yet clear: but it would be “a mistake to think that the world economy has recovered,” Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, said this month.