Corruption and cronyism put the breaks on India’s growth

Corruption is harming India’s manufacturing. Dave Morris

With the economies of developed countries picking up, India risks being left behind as concerns grow over its economy and the viability of investing in its markets and companies.

Investors are now turning their attention back to the US and Western Europe as the economic giants start to come round from five years in a virtual coma. The life support of quantitative easing has worked to a degree, but with that now being wound down there is less cash sloshing around and emerging markets are missing out. Despite some very stringent rules controlling the flow of rupee out of the country, India has been unable to stop its currency plunging this year.

But India’s biggest problem is what underlies this malaise: corruption and cronyism. The country has seen its economy grow to the point where its major companies have stretched out into the rest of the world. Foreign investment has in turn been invited into the region, but with that investment has come a level of scrutiny that has revealed the extent just how corrupt India’s economy is.

Many will argue it has always been there, but the level of scrutiny and foreign investment has not. India has to reform and take an iron grip on this corruption or risk losing further confidence from investors. Until this is solved investors will continue to pull out of the country.

Almost every day there is a story about corruption in the Indian media. Sectors such as mining, real estate and telecoms have been particularly affected.

Given the improving economic news in the developed world, foreign investors will be eager to find a more secure and trustworthy place for their money. The continual diet of corruption has battered the image of India as a reliable investment destination and low investor confidence has led to less capital formation, less employment, less tax collection and less consumption. All of these have a combined effect on driving the decline of the rupee.

India has benefited from the poor performance of the US and Europe in recent years and from liquidity given by the US Federal Reserve and the UK’s central bank. But now it is payback time.

During the good times the Indian government had a chance to take stock and implement much-needed economic reforms, especially in the manufacturing sector. But it did nothing. Time is now running out to implement these changes to stay ahead of the other emerging markets.

India cannot rely on its cost-effectiveness for much longer, it has to invest in its infrastructure and skills to find a new advantage on the world stage. The increased competition and slipping competitiveness has hit Indian manufacturing exports and has has seen a surge in the import of manufactured items, in turn increasing the current account deficit for the country. An increased current account deficit depletes India’s foreign exchange reserves and pushes the decline of the rupee further.

Ironically the falling rupee is good news for exporters, and maybe this is India’s best hope. With reforms to address corruption and reinvigorate manufacturing, a strong export sector could turn the economy around. But this will require proper government intervention which still seems a way off.