Indian Economy Forecast,The slowdown puts the onus on the government to start rebuilding India’s rickety infrastructure,

IN 1571 the Mughal emperor Akbar moved his court from Agra to Fatehpur Sikri, where he built a sandstone palace in the middle of nowhere. In the 1980s a similar urge gripped K.P. Singh, chairman of DLF, India’s biggest developer. His father-in-law had built 23 neighbourhoods in Delhi. Mr Singh started work on a new city ten miles away, in the wheat fields of Gurgaon.

Nowhere in India embodies the country’s aspirations as starkly as the town he founded. DLF’s concoction has attracted copycat developers and almost 150 of the world’s Fortune 500 companies. In the Aralias, the city’s most exclusive apartment block, 6,000 square feet can cost up to 100m rupees ($2m). That buys a view of Gurgaon’s golf course, judged India’s best, where members stir their fresh lime sodas with swizzle sticks shaped like long irons.

But just as Fatehpur Sikri was eventually abandoned for lack of water, so some of Gurgaon’s developers are suffering from a lack of liquidity. Even DLF has suspended construction of 12m square feet of office-space across India and 4m square feet of retail space. Rajeev Talwar, the group’s executive director, says it may also slow down some residential projects.

Reactions like this are taking their toll on India’s economy. Output grew by 5.3% in the fourth quarter of 2008, compared with the same quarter a year ago, its slowest pace for four years. The figure was well below expectations. On March 4th the Reserve Bank of India (RBI) responded by cutting its rates by half a percentage point, on top of the 3.5 points cut since October.


India had felt one step removed from the global slowdown. Compared with its neighbours in Asia, it relies little on exports, which amount to only 21.2% of GDP. And it relies less than the overstretched economies of eastern Europe on foreign capital: its gross saving rate reached 37.7% of GDP in the past fiscal year.

But India does not mobilise its saving well. Households account for almost two-thirds of it. But they put more than half of their spare funds into physical assets, such as homes, rather than the financial system. Of the remainder, 11% is held in cash and 55% is deposited in the banks, which are now lending almost a third of their deposits to the government.

Thus despite India’s prodigious thrift, its companies miss foreign investors now they have fled. Of the $135 billion they raised in the fiscal year to March 2008, $40 billion came from foreign lenders and $22 billion came from a stockmarket buoyed by foreign enthusiasm, according to Tushar Poddar of Goldman Sachs. DLF itself raised $2.2 billion in June 2007 in what was then India’s biggest initial public offering.

Those sources of funds have now dwindled, forcing companies to turn to the country’s banks. In a report in January, the RBI calculated that the flow of credit from India’s banks had increased by $7.6 billion so far this fiscal year, compared with the same period of the previous year. But this failed to compensate for the $26.8 billion shortfall in funds from other sources, such as foreign loans and public issues. “We are ourselves now changing over to public-sector banks,” says DLF’s Mr Talwar, but it is not easy. “You’ve got to convince the banks…It is a little time-consuming.”

Fear and loafing
India’s banks are flush with cash, but they are also cautious, fearing a rise in the non-performing loans that crippled them in the 1990s. They may also be tempted by “lazy banking”, holding safe government securities, which should increase in price if the RBI keeps cutting rates.

If the banks insist on buying such bonds, then it will fall to the government to borrow and spend what is needed to keep India’s economy turning. It is doing its best. The central government had budgeted a fiscal deficit of 2.5% of GDP for this fiscal year. Last month it admitted the gap would be 6%. Add the red ink of the state governments and various expenses reported “below the line” and the deficit will exceed 11% of GDP this year. On February 24th Standard & Poor’s put a negative outlook on India’s credit rating (BBB-, the lowest investment grade). The same day, the government cut taxes again.

The economy is enjoying a fortuitous fiscal boost from measures taken long before the crisis ballooned. The central government’s legions of employees, for example, have received a pay rise that will be matched by some of the state governments in the next fiscal year. Small farmers had their debts cancelled, and money has flowed to rural districts thanks to India’s employment-guarantee act, which is supposed to offer 100 days of work to every household that needs it.

The government has also announced three stimulus packages. It will spend an extra 200 billion rupees this year on the schools, roads, power plants and other development priorities set out in its latest five-year plan. It has also told the India Infrastructure Finance Company Limited (IIFCL), a government-owned financial company, to sell bonds worth 400 billion rupees. The first tranches of bonds, offering 6.85% and a sovereign guarantee, were oversubscribed. The IIFCL will lend this money to banks, which will then pass it to infrastructure projects worth as much as 1 trillion rupees.

In other countries, fiscal stimulants are raising the spectre of “bridges to nowhere”. But in India, extra infrastructure is sorely needed. During the boom, India’s industry expanded faster than the electricity grid’s capacity to power it; its air traffic outgrew its airports; and cars rolled off the production lines faster than the roads could accommodate them. In DLF’s Aralias in Gurgaon, each flat is allotted three spaces in the car park underneath. But many residents buy more.
The company looks after the roads, storm drains, sewer system and the flora within “DLF City”. But outside, the state authorities have struggled to keep pace. Gurgaon’s roadsides are disfigured by deep trenches, where the trunk sewer line waits to be laid.

Now that India’s economy is slowing and competition for men, materials and money is slackening, India’s public infrastructure may have a chance to catch up. In Gurgaon the Delhi Metro Rail Corporation is building an elevated railway that will connect the upstart city to the capital. It is a public project backed by the governments of India, Delhi and the neighbouring state. It is also now the busiest construction site in the city.