India’s falling economic tide exposes chronic problems

India’s falling economic tide exposes chronic problems
Rent control and other land regulations make it difficult to tear down and replace dilapidated buildings in India. So cities like Mumbai have ended up with stretches of old, low-rise buildings interspersed by the occasional skyscrapers that were somehow built, like The Imperial residential towers. Photo: Bloomberg
Published: 4:03 AM, September 6, 2013
Updated: 2:50 AM, September 7, 2013
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MUMBAI — India had seemed tantalisingly close to embarking on the same dash for economic growth that has lifted hundreds of millions of people out of poverty in China and East Asia.

But its economy now stands in disarray, with the prospect of worse to come in the next few months.

Mr Vinod Vanigota, a Mumbai wholesaler of imported computer hard drives, said sales dropped by a quarter in the last two weeks. The rupee, India’s currency, has been so volatile in recent days that he began revising his price lists every half-hour.

Business activity at Chip Com Traders, where he is Managing Director and co-owner, has slowed so sharply that trucking companies plead for business. “One of the companies called today and said, ‘Don’t you have a parcel of any sort for us to deliver today?’” Mr Vanigota said.

The economic decline has laid bare chronic problems, little remarked upon during the recent boom. An antiquated infrastructure, a sclerotic job market, exorbitant real estate costs and bloated state-owned enterprises never allowed manufacturing, especially for export, to grow strong.

The rupee has been down 20 per cent since May, a period in which the stock market followed suit and fell almost 8 per cent.

The real estate market is teetering after soaring to vertiginous heights over the last few years. Cranes on Mumbai’s skyline perch nearly immobilised as developers struggle for cash.

The things the emerging middle class coveted, Chevrolets, iPhones and foreign vacations, have all jumped in price in recent weeks. The increases threaten to worsen consumer price inflation — already among the highest in Asia at an annual rate of almost 10 per cent — and widen the country’s already large international trade deficit and government budget deficit.

India’s government is now bracing the country for a swift increase in the cost of diesel fuel and other imported necessities priced in dollars. Diesel is the lifeblood of the Indian economy, from the trucks that crawl along the country’s jammed, potholed roads to the backyard generators that struggle to compensate for the high-cost yet unreliable electricity grid.

The root of the problem is India’s failure to create a vibrant industrial base with the strength to export. As Western buyers scour Asia for alternatives to increasingly pricey Chinese factories, India and its enfeebled manufacturing sector are mostly ignored.

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