Despite two very large stimulus packages, India's economy continues to hemorrhage jobs at an inordinate rate. Although expectations are that the economy will have grown at 7% year-over-year to the March 31st fiscal year end, there are looming concerns that over 1.5 million jobs could be lost from the export sector alone in the next two months.
The Indian government, like its Asian counterparts, has taken massive steps to stem the tides of economic weakness. In the face of what will be the lowest growth rate since 2003, the central bank recently cut interest rates to all-time lows in order to augment its stimulus initiatives. While India has resisted the urge to explicitly bailout specific industries, the stimulus packages are aimed at achieving this end indirectly. The rapidly-shrinking textile business is one of many export sectors feeling the pain.
It is still unclear exactly where the stimulus money will be headed, but one can only assume much of it will be focused on developing new product markets for its exported goods and cultivating domestic consumption. Due to the profound weakness in the European and U.S. markets, its two largest export markets, Indian exports are likely to come in around USD 175 Billion. This total falls well short of the government's original forecast of USD 200 Billion.
Whether or not calls for additional stimuli bear fruit, it is clear India is in the same boat as many of its Asian counterparts. Exports have declined for three straight months and further weakness is expected. In order for the country to maximize the efficacy of any existing or potential stimulus packages, India must mitigate the risk of leakage in its notoriously bureaucratic economy. That means no handouts for corrupt politicians and no regional rivalries getting in the way. What India lacks in socialist controls, it has always more than made up for with its inefficient Caste-based political system. While steps have been made to alleviate these issues, the deployment of government funds will only work if history does not repeat itself.
India's plight may sound eerily similar to those of its BRIC brethren, but there are a few positive things to remember. First, India's population remains the youngest of any emerging market in the world. The country is therefore less likely to suffer under the type of massive entitlement obligations that will eventually plague Russia and China. Second, the country's financial system had very little exposure to the toxic (cliché alert) assets that have plagued global financial institutions. There is therefore a light at the end of the tunnel for India as ICICI and its siblings face a fantastic opportunity to carve out market share when global credit markets unfreeze.
In the meantime, however, the prospects for the Rupee and Indian markets are grim. If the government chooses to compound today's problems through protectionist policies such as the 5% duty on imported steel that is being discussed, it could well squander its inherent advantages and position itself instead to be one of the last countries to emerge from this mess.
Investors today may be looking to play a future global economic recovery via the various India ETFs (EPI, PIN, INP). It's not an unreasonable notion because India's future potential as a source of economic prosperity still burns bright. Such investors should be sure to do it in the proper, limited size, though, because her politics may--likely will, in fact--get in the way.