Problems Facing Indian Economy

1. Inflation. Fuelled by rising wages, property prices and food prices inflation in India is an increasing problem. Inflation is currently between 6-7%. A record 98% of Indian firms report operating close to full capacity (2)With economic growth of 9.2% per annum inflationary pressures are likely to increase, especially with supply side constraints such as infrastructure. The wholesale-price index (WPI), rose to an annualised 6.6% in Janu 2007 (1) 2. Poor educational standards. Although India has benefited from a high % of English speakers. (important for call centre industry) there is still high levels of illiteracy amongst the population. It is worse in rural areas and amongst women. Over 50% of Indian women are illiterate 3. Poor Infrastructure. Many Indians lack basic amenities lack access to running water. Indian public services are creaking under the strain of bureaucracy and inefficiency. Over 40% of Indian fruit rots before it reaches the market; this is one example of the supply constraints and inefficiencys facing the Indian economy. 4. Balance of Payments deterioration. Although India has built up large amounts of foreign currency reserves the current account deficit has deteriorate in recent months. This deterioration is a result of the overheating of the economy. Aggregate Supply cannot meet Aggregate demand so consumers are sucking in imports. Excluding workers remittances Indias current account deficit is approaching 5% of GDP

5. High levels of debt. Buoyed by a property boom the amount of lending in India has grown by 30% in the past year. However there are concerns about the risk of such loans. If they are dependent on rising property prices it could be problematic. Furthermore if inflation increases further it may force the RBI to increase interest rates. If interest rates rise substantially it will leave those indebted facing rising interest payments and potentially reducing consumer spending in the future

6. Inequality has risen rather than decreased. It is hoped that economic growth would help drag the Indian poor above the poverty line. However so far economic growth has been highly uneven benefiting the skilled and wealthy disproportionately. Many of Indias rural poor are yet to receive any tangible benefit from the Indias economic growth. More than 78 million homes do not have electricity. 33% (268million) of the population live on less than $1 per day. Furthermore with the spread of television in Indian villages the poor are increasingly aware of the disparity between rich and poor. (3)

7. Large Budget Deficit.

India has one of the largest budget deficits in the developing world. Excluding subsidies it amounts to nearly 8% of GDP. Although it is fallen a little in the past year. It still allows little scope for increasing investment in public services like health and education.

8. Rigid labour Laws. As an example Firms employing more than 100 people cannot fire workers without government permission. The effect of this is to discourage firms from expanding to over 100 people. It also discourages foreign investment. Trades Unions have an important political power base and governments often shy away from tackling potentially politically sensitive labour laws.

Falling rupee adds to slowing Indian economy and high inflation

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MUMBAI: For several months, India has suffered the double misfortune of a slowing economy and high inflation. Now, it has another problem: a rapidly depreciating currency. The value of the rupee has fallen nearly 14 per cent, to 52.21 against the dollar, since the end of August as investors have stepped back from the Indian economy and many traders have stepped up bets against the currency. Less than three months ago, the rupee was trading at 45.79 to the dollar. Foreign investment in India, which has a big need for foreign capital because it imports more than it exports, has been falling sharply since June, when the country took in $6.5 billion. In September, it took in just $616 million. During that time, many analysts and investors have grown more concerned about the growth prospects of the Indian economy. Some analysts now predict the country might grow 7.2 per cent in the current fiscal year, down from 8.5 per cent last year. Partly in response to the concerns about growth, Prime Minister Manmohan Singh's Cabinet voted on Thursday to allow foreign retailers to invest in stores in the country in spite of significant political opposition. Analysts said the long-delayed proposal should help lure more foreign investment into the country, though not right away, especially given the stringent conditions that policymakers imposed on foreign investors. The rupee was up just 0.3 per cent against the dollar Friday after the decision to open the retail market. While many currencies have recently depreciated against the dollar, the rupee has fallen more than most. It is the worst-performing Asian currency this year, and some analysts are predicting that it could fall further. Strategists at HSBC said in a note issued Thursday that the rupee could fall to 58 against the dollar. "We do not yet see light at the end of the tunnel," Paul Mackel, the head of Asian currency research at HSBC, wrote. Analysts say the depreciation of the rupee could exacerbate inflation, which has been at or above 10 per cent for more than a year, by sharply increasing the cost of oil and other commodities that India imports and has to pay for in dollars. That would also worsen the government's large fiscal deficit, because the country heavily subsidizes imported fuel and fertilizers. For Indian exporters, including software outsourcing companies like TCS and Infosys, a weaker rupee could help increase sales because it would make their products and services cheaper. But analysts say those gains would be muted because Western customers are not spending much. Moreover, higher exports would not fully offset the rising cost of imports because India has an annual trade deficit of more than $80 billion. Ayush Lohia, the chief executive of Lohia Auto Industries, a maker of electric bikes and scooters, said his costs for components like motors, controllers and plastic shot up 15 per cent in recent weeks. He has not yet raised the price of his products, which sell for Rs 25,000, or $480, to Rs 31,000 in New Delhi, because he is worried about losing sales.

With Economy Slowing, the Indian Rupee Tumbles

By VIKAS BAJAJ Published: November 25, 2011

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MUMBAI, India For several months, India has suffered the double misfortune of a slowing economy and high inflation. Now, it has another problem: a rapidly depreciating currency.
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India to Ease Retail Rules for Foreign Companies (November 25, 2011)

The value of the rupee has fallen nearly 14 percent, to 52.21 against the dollar , since the end of August as investors have stepped back from the Indian economy and many traders have stepped up bets against the currency. Less than three months ago, the rupee was trading at 45.79 to the dollar. Foreign investment in India, which has a big need for foreign capital because it imports more than it exports, has been falling sharply since June, when the country took in $6.5 billion. In September, it took in just $616 million. During that time, many analysts and investors have grown more concerned about the growth prospects of the Indian economy. Some analysts now predict the country might grow 7.2 percent in the current fiscal year, down from 8.5 percent last year. Partly in response to the concerns about growth, the cabinet of Prime Minister Manmohan Singh voted on Thursday to allow foreign retailers to invest in stores in the

country in spite of significant political opposition. Analysts said the long-delayed proposal should help lure more foreign investment into the country, though not right away, especially given the stringent conditions that policy makers imposed on foreign investors. The rupee was up just 0.3 percent against the dollar Friday after the decision to open the retail market. While many currencies have recently depreciated against the dollar, the rupee has fallen more than most. It is the worst-performing Asian currency this year, and some analysts are predicting that it could fall further. Strategists at HSBC said in a note issued Thursday that the rupee could fall to 58 against the dollar. We do not yet see light at the end of the tunnel, Paul Mackel, the head of Asian currency research at HSBC, wrote. Analysts say the depreciation of the rupee could worsen inflation, which has been at or above 10 percent for more than a year, by sharply increasing the cost of oil and other commodities that India imports and has to pay for in dollars. That would also deepen the governments already large fiscal deficit, because the country heavily subsidizes imported fuel and fertilizers. For Indian exporters, including software outsourcing companies like TCS and Infosys, a weaker rupee could help increase sales because it would make their products and services cheaper. But analysts say those gains would be muted because Western customers are not spending much. Moreover, higher exports would not fully offset the rising cost of imports because India has an annual trade deficit of more than $80 billion. Ayush Lohia, the chief executive of Lohia Auto Industries, a maker of electric bikes and scooters, said his costs for components like motors, controllers and plastic had shot up 15 percent in recent weeks. He has not yet raised the price of his products, which sell for 25,000 to 31,000 rupees ($480 to $590) in New Delhi, because he is worried about losing sales. We are just waiting to see if it will come down from the current level so that there will be no reason to increase prices right now, he said. I am just praying to God that the dollar can go down below 50 rupees. Analysts say investors have bet heavily against the rupee in recent weeks after officials at the central bank, the Reserve Bank of India, suggested they would not intervene to limit the currencys slide.

The Indian rupees fall has been too much, too soon, and R.B.I.s own guidance has added to the depreciation pressure by giving a green light to speculators to bet against the currency, said Rajeev Malik, an economist at the investment firm CLSA. The central bank, however, has since stepped in to try to check the sharp depreciation by selling dollars and buying rupees, analysts say. The bank has also said it will sell dollars to state-owned oil companies so that they will not have to buy them on the open market, which would further drive down the value of the rupee. In the longer term, the governments decision to allow foreign retailers in the country should help, if companies like Wal-Mart, Tesco and Ikea inject money into the Indian economy to set up new stores, warehouses and other facilities. But the flow will be measured and drawn out, analysts said. Indias commerce minister, Anand Sharma, told reporters in New Delhi on Friday that foreign retailers that sell multiple brands of clothing could set up stores only in cities with more than one million people; there are 53 such cities in the country. Mr. Sharma also said those retailers would have to invest a minimum of $100 million, put 50 percent of their investment in back-end infrastructure and buy 30 percent of the goods they sold from small companies. Also, each of Indias 28 states would have to individually allow foreign-owned retail stores in their territory. The step which we have taken is an investment in the present and the future of this country, Mr. Sharma said. Retailers have welcomed the move. Ikea, the Swedish furniture and home furnishings retailer that had previously said it wanted to set up stores here, said in an e-mail that it would expect to present more information shortly about our intention to establish retail operations. Because it sells only one brand of products, the company would be able to own 100 percent of its Indian operation under Indias new rules. Rajan Bharti Mittal, a vice chairman of the Bharti Group, Wal-Marts Indian partner, said in an interview that the conditions imposed by the government on retailers that sell more than one brand were acceptable. He said Bharti and Wal-Mart would soon start discussing how best to take advantage of the new rules.