India's economy: not as bad as it looks?

India has been hailed as an emerging powerhouse based on growth rates before the credit crunch of 2008, but the current downturn has made investors increasingly cautious.

India's stock market has lost 20 percent since last November and financial analysts and investors are growing increasingly cautious, but the country's economic rulers insist there is nothing to worry about.

Asia’s third-largest economy managed to weather the downturn of 2008 better than most, based on its robust domestic market. But since then, India has suffered some jolts, such as galloping inflation, a downgrading of its growth forecast, a string of corruption scandals that undermined its credibility, and resulting delays in government decision making.

"I think the mood now is worse than the ground reality warrants," says chief economic adviser to the Indian government, Kaushik Basu. "Yes the Indian economy will probably grow not quite as fast as we were expecting this year. But even if India grows at 8 percent, it will be among the five or six fastest growing countries in the world."

Still for India, a country that was hailed as an emerging powerhouse based on growth rates as high as 9 percent before the credit crunch of in 2008 saw growth plunge to 6.8 percent, the fact that the country has joined much of the rest of the world in experiencing the economic downturn has shaken investor confidence.

Dr. Basu insists it's not as bad as is may seem. There are a few factors indicating that things will turn around, he says, such as the fact that Indians save and invest almost a third of the national income. "That's a level seen by South Korea, Taiwan, Singapore, at the height of their rapid growths. It's the kind of figure you would see in those remarkably performing East Asian countries through the ‘80s and ‘90s. That India would ever be saving and investing as heavily was unthinkable just 15 years ago." Other factors include strong exports, and indications that foreign direct investment is on the upswing.

Candid on India's corruption

If something were to seriously threaten India's growth, by scaring away investors, say observers, it is corruption.

Basu is on sabbatical from his post as professor of economics at New York state's Cornell University for a two-year stint advising the Indian government on how to best frame policy to meet the needs of its 1.2 billion people. As a result he can afford to be candid on the hot topic of corruption.

"We need to improve our governance in a big way," he says. "The corruption scandals have tainted India's reputation. However there is no indication that corruption has increased, in fact the evidence is that awareness has increased. And this is good and bad: There is a lot of corruption and that is a dreadful thing, I really do believe that for a country such as ours that it should be number one on the agenda of what we try to tackle."

Analyst Gagan Rendev of financial services company Religare Securities agrees, “If you look at the market over the past 12 months or so, you’ll see that India has been one of the most underperforming markets in the developing world, even among developed countries.”

“The reasons for this include reasons of issues with governance, of decisions not being taken which would have enabled the growth of the country’s economy, fears over the monsoon, and the fact that the Reserve Bank of India has been hiking interest rate for the past 18 months," Mr. Rendev says, adding, “But the good thing is that a lot of this is coming to a close.”

Enter, inflation

The other pressing issue is that of inflation. Prices in India have been rising steadily, and inflation is hovering at just below 10 percent – and likely to reach double digits soon.

New Delhi taxi driver Balbir Singh says it is becoming increasingly hard to feed his family. He earns around 40,000 rupees per month ($800), which is considered a middle class income, but with seven people depending on him, it is not enough he says.

“Food prices are high, cooking gas prices have gone up by 100 rupees a bottle, and the cost of fuel for the car has risen by 10 rupees a liter over the past year. So yes, it’s very expensive,” says Mr. Singh.

Basu points out the pitfalls of unequal growth, saying, “What we are seeing in India is there has been very vibrant growth over the last 15 years, particularly in the past seven years, but inequality and poverty are not coming down fast enough. That to me is the biggest challenge for India. Here, we need very intelligent design, we need civil society activism, we need good professional policy to attend to the problems of policy and inequality. So indeed, there is a lot of work to be done on that.”