Indian troubles

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It seems Southeast Asia is headed for a particularly cold financial winter this time around. Pakistan’s tale of stagflation and the government’s inability to stem investor outflow is echoed in a much louder tone across the eastern border in India. Departing from solid investment profiles of its BRIC peers, India was the only country in the grouping that noted a decline in foreign direct investment in ’10. With the Indian rupee in an even more furious downfall than its Pakistani counterpart, New Delhi’s business model has just been exposed as fatally hostage to exogenous liquidity shocks, a simply unsustainable model in the present recession-ruined environment for trade-dependant economies.
Surprisingly, India’s economic make-up has started betraying an unnerving dichotomy, at once boasting the world’s most inviting market, but with a centre too weak to fend off the recent vicious attack that rubbished the initiative attracting foreign investment in retail. In addition to embarrassing Manmohan Sing’s rhetoric about reforms, the move exposes insurmountable political cleavages. Deficits are mounting, foreign reserves are insufficient to provide forward cover, inflation is menacingly high and despite a tight monetary policy, the rupee is falling. To top it all, Congress has no friends in the polity. And with the middle and lower income groups subject to increasing austerity, there is little likelihood of India’s democratic credentials weakening enough to cover the ruling party’s inefficiency when comes time for people to go to the polls.
It is perhaps ironic that while most of India’s troubles are home-cooked – high deficits, weak central bank position, insufficient reserves, no coordination across parties – its most damaging blow might come from far away in Europe. The euro narrative is weakening by the week, and with it stability in European economies, meaning increasingly reduced export earnings which New Delhi desperately relies on. Mr Singh’s government must initiate a serious overhaul of the entire economy, or prepare to depart and let another take the burden, or let a collapse in India bring down the whole region with it.