India hails supercharged economy By CNN's Geoff Hiscock, Asia Business Editor Wednesday, April 21, 2004 Posted: 5:19 AM EDT (0919 GMT)
(CNN) -- India's mammoth election is taking place against a background of supercharged economic growth stemming from one of the best monsoons seen in a decade.
India ranks as the world's 12th largest economy -- and the third largest in Asia behind Japan and China -- with total GDP of around $560 billion. Agriculture accounts for about a quarter of that figure.
The key question for the country's 1.2 billion people is whether this year's 8 percent growth rate is sustainable, or simply a one-off piece of monsoon magic that has given the massive agricultural sector a temporary lift.
Opinions among analysts are mixed, but all agree that structural reform must continue if India is to have any chance of maintaining the growth spurt.
Amit Mitra, Secretary-General of the Federation of Indian Chambers of Commerce and Industry, told CNN Wednesday that among the further reforms needed were flexible labor laws, lower power costs, lower interest rates and better infrastructure - particularly for roads and ports.
As well, he said Indian needed a fresh agricultural revolution that would benefit the 50 percent of the population who live in rural areas.
Mitra said India's recent economic growth was "phenomenal", and with inflation under control at less than 5 percent, the overall outlook was bright.
He said Indian business was now more confident of its capabilities, and was prepared to make more offshore investments.
The Indian government recently raised to 8.1 percent its estimate of GDP growth for the year that ended March 31, following a spectacular 10 percent year-on-year jump in the December 2003 quarter.
Growth is moderating, but should still reach 6.5 percent for the year to March 2005, according to the latest forecast by Adit Jain of regional analysts IMA Asia.
A beneficiary of this bright economic picture is Prime Minister Atal Behari Vajpayee's ruling coalition government, led by the Hindu nationalist Bharatiya Janata Party.
Campaign slogan
Vajpayee is expected to win a new term thanks in part to a booming economy.
INDIA'S GROWTH
Recent GDP rates
2000-01: 3.9 percent
2001-02: 5.5 percent
2002-03: 4.6 percent
2003-04: 8.1 percent
2004-05: 6.5 percent (F)
Source: IMA AsiaThe BJP, which takes the campaign slogan "India shining", is expected to win a new five-year term and continue the reform program begun in the 1990s.
Vajpayee's main opposition comes from the Congress party, led by Italian-born Sonia Gandhi. It has closed the gap in recent weeks but is thought unlikely to secure enough seats to head a coalition.
One analyst who questions the sustainability of India's high growth is Simon Commander of the London Business School. He told CNN this week that the recent 8 percent figure was heavily dependent on the boost to agriculture from the last monsoon.
He said factors such as rising public debt and a big government deficit made for a "huge fiscal challenge". The government was still too large and inefficient, he said.
According to IMA Asia, India's competitiveness as a global manufacturer is just starting to emerge.
"Together with strong services exports, this should further bolster the balance of payments," it said in a recent commentary on the Indian economy.
But like Commander, IMA Asia warned of the risk of India's growing public debt. It said the International Monetary Fund and ratings agencies had pointed to the uncontrolled growth in public debt as "a major systemic risk."
"Massive interest payments on debt are already suppressing public sector investment while relatively high pricing on the bonds used to finance the government is slowing the reduction in India's domestic interest rates," it said.
IMA Asia said India's business operating conditions were likely to remain among the worst in Asia.
It cited high levels of bureaucracy and corruption, combined with poor services such as power and transport.
"Companies whose business plans rely on government decisions (utilities pricing etc) will face considerable risks," it said.
But optimism prevails after the monsoon-driven boom. A recent survey by ACNielsen shows Indian consumers are more optimistic than any others in Asia.
IMA Asia points to the growth of India's consumer market as a final macro factor to consider.
"There is a clear upward trend in Indian society as poor families move into the middle class, and middle class anilities move into an emerging class of wealthy Indians," it said.
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