India Stuck in a Rut
It feels like only yesterday that India was a shoo-in to be the next China, set to grow at warp speed before joining the world’s economic superleague. On Friday, however, the government dropped a bombshell on its eager investors!
Gross domestic product (GDP) is a country’s scorecard for prosperity. That might explain why markets haven’t stood still since India’s GDP sagged to its lowest in years (5.8%). On paper, India is supposed to be the next a global powerhouse, already an emerging market where billions of people (and rupees) can be set loose with free-market principles. Investors had bought into that growth story, until things started taking a turn for the worse. Consumers have stopped spending, regulation has started tightening, and millions have been left out of a job. With foreign investors in reverse gear, the government needs to act fast!
To bring Indian entrepreneurs back into the fold, the country’s central bank has been on a rate-cutting spree this year, lowering the cost of borrowing money. The Reserve Bank of India has trimmed back interest rates not once, not twice, but four times! It doesn’t end there, either! On Monday, those quasi-independent central bankers dug out over $25 billion in extra funding for the government. Loosening up the money supply should oil up the economy, but there are no guarantees, and some think this central bank is beating a dead horse.
Western investors are staring down The Reserve Bank of India, desperate not to see it answer every beck and call of the Indian government. As a political tool, plugging the leak in GDP will become a much more elusive task. The markets are standing at a safe distance, but who dares wins.