Bears circle India's slowing economy

NEW DELHI, (AFP):Not long ago it was the toast of investors, but India's appeal has taken a hit, with bearish sentiment building thanks to worries over stubbornly high inflation and widespread political corruption.

Investor ardour for Asia's third-largest economy has been cooled by a litany of bad news, from slowing growth, rising prices and spiralling interest rates to paralysis on economic reforms and a string of high-profile graft scandals.

Last week, global business information agency Dun and Bradstreet reported that its India business optimism index had fallen by a hefty 22 percent quarter-on-quarter.

“There has been a confluence of bad news dragging down sentiment,” Kaushal Sampat, Dun and Bradstreet's India chief executive, told AFP.

The bad news comes as the government battles multiple corruption scandals that forced the resignation of a second cabinet minister last week over accusations he abused his power while he held the telecom portfolio.

“There are so many political fires, it makes it hard for the government to focus on the economic challenges such as reforms needed to spur growth,” says Sampat.

Data for the January to March quarter showed annual economic growth of 7.9 percent -- the slowest in five quarters. The key manufacturing sector grew by 5.5 percent, its weakest pace in 18 months.

Quarterly net direct tax collections have fallen 17 percent year-on-year as economic activity decelerates.

Economists blame the downturn on stubbornly high inflation, which 10 interest rate hikes since March 2010 have failed to tame. Price pressures are now spreading from food and energy to manufacturing.

“The continual rise in credit costs and high inflation have hurt both investment and consumption,” says Deepak Lalwani, head of London-based India-focused investment consultancy Lalcap.

Factory output has slowed in both India and China, the fastest-growing major global economies, as central bankers have boosted lending rates to fight inflation.

As one sign of waning investor appetite, funds raised through initial public offerings (IPOs) in India slumped by more than 80 percent year-on-year in the first half of the year to $780 million, according to global data supplier Dealogic.

That compares with a rise in worldwide IPO fundraising by 14 percent in the same period to $114 billion, swelled by large US and Hong Kong listings.

India's benchmark Sensex index has already fallen 8.5 percent this year, after rising 17 percent last year, making it one of the worst-performing globally.

The forthcoming quarterly earnings season “will not be a pretty picture,” says Apurva Shah, head of institutional equities at Mumbai brokerage Prabhudas Lilladher, blaming weakening consumer demand and higher borrowing costs.

The government is expected to officially lower its growth forecast for 2011-12 in the coming days from nine percent to around eight to 8.5 percent -- still higher than most private economists' expectations.

This week, international ratings agency Fitch cut its 2011 growth forecast for India's economy to 7.7 percent from 8.3 percent, citing inflation as a key concern.

The economy is going through a “soft patch” that “could last a while”, HDFC Bank chief economist Abheek Barua says.

While growth of seven to eight percent would be envied by western economies, experts say India needs at least 10 percent expansion to lift hundreds of millions of Indians out of crushing poverty.

And the slowdown is seen as unlikely to put an end to rate hikes, with economists predicting further increases in the coming months.

The central bank has made it “crystal clear” it is “prepared to sacrifice some growth in the short term to protect the medium-term prospects of the economy,” says Credit Suisse economist Robert Prior-Wandesforde, who projects growth of 7.5 percent for this year and next.

Longer-term, economists say India's so-called “growth story” driven by its vast consumer market and service-led economy is still intact.

But a lack of economic reforms is hampering the country's progress, and with the government careening from crisis to crisis, it is not expected to pass any important pro-market legislation.

Economists have long prescribed reforms such as reducing government control, liberalising the financial sector, simplifying archaic tax laws and loosening labour market rules as key to boosting growth, creating jobs and alleviating poverty.

“We are so close (to achieving double-digit growth),” says Dun and Bradstreet's Sampat.

“If we had the right supportive economic ecosystem and big-ticket reforms, 10 percent growth would not have evaded us,” he adds.

“It's really disappointing.”