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India's Economy Hits the Wall

Growth is slipping, stocks are down 40%, and foreign stock marketinvestors are fleeing. Business blames the ruling coalition for failingto make reforms

Just six months ago, India was looking good. Annualgrowth was 9%, corporate profits were surging 20%, the stock market hadrisen 50% in 2007, consumer demand was huge, local companies weremaking ambitious international acquisitions, and foreign investment wasgrowing. Nothing, it seemed, could stop the forward march of this Asiannation.

But stop it has. In the past month, India has joined thelist of the wounded. The country is reeling from 11.4% inflation, largegovernment deficits, and rising interest rates. Foreign investment isfleeing, the rupee is falling, and the stock market is down over 40%from the year's highs. Most economic forecasts expect growth to slow to7%—a big drop for a country that needs to accelerate growth, not reduceit. "India has gone from hero to zero in six months," says AndrewHolland, head of proprietary trading at Merrill Lynch India (MER) inMumbai. Many in India worry that the country's hard-earnedinvestment-grade rating will soon be lost and that the gilded growthstory has come to an end.

Global circumstances—soaring oilprices and the subprime crisis that dried up the flow of foreignfunds—are certainly to blame. But so is New Delhi. Much of the crisisIndia faces today could have been avoided by skillful planning. Indiaimports 75% of its oil to meet demand, which have grown exponentiallyas its economy expands. The government also subsidizes 60% of the priceof such fuels as diesel. In 2007, when inflation was a low 3%,economists such as Standard & Poor's Subir Gokarn urged New Delhito start cutting subsidies. Instead, the populist ruling Congressgovernment spent $25 billion on waiving loans made to farmers andhiking bureaucrats' salaries.
Botched Opportunities

Now thoseexpenditures, plus an additional $25 billion on upcoming fertilizersubsidies, is adding $100 billion a year—or 10% of India's grossdomestic product, or equivalent to the country's entire collection ofincome taxes—to the national bill. This at a time when India needsurgently to spend $500 billion on new infrastructure and more onupgrading education and health-care facilities. The government'sofficial debt, which dropped below 6% of gross domestic product lastyear, will now be closer to 10% this year. "Starting last year, thegovernment missed key opportunities" to fix the economy, says Gokarn.In fact, he adds, "there has been no significant reform done at all inthe past four years"—the time the Congress coalition has been in power.

Eventhe most bullish on India are hard-pressed to recall any significanteconomic reforms made in the recent past. A plan to build 30 SpecialEconomic Zones is virtually suspended because New Delhi has not sortedout how to acquire the necessary land, a major issue in both urban andrural India, without a major social and political upheaval.Agriculture, distorted by fertilizer subsidies and technologicallylaggard, is woefully unproductive. Simple and nonpolitical reforms,like strengthening the legal system and adding more judges to thecourtrooms, have been ignored.

A June 16 report by GoldmanSachs' (GS) Jim O'Neill and Tushar Poddar, Ten Things for India toAchieve Its 2050 Potential, is a grim reminder that India has fallen tothe bottom of the four BRIC nations (Brazil, Russia, India, and China)in its growth scores, due largely to government inertia. The reportstates that India's rice yields are a third those of China and half ofVietnam's. While 60% of the country's labor force is employed inagriculture, farming contributes less than 1% to overall growth. Thereport urges India to improve governance, raise educationalachievement, and control inflation. It also advises reining inprofligate expenditures, liberalizing its financial markets, increasingagricultural productivity, and improving infrastructure, theenvironment, and energy use. "The will to implement all these needsleadership," points out Poddar. "We have a government in New Delhi withthe best brains, the dream team," he says, referring to Oxford-educatedPrime Minister Manmohan Singh and Harvard-educated Finance Minister P.Chidambaram. "If they don't deliver, then what?"Disillusioned Business
More worried thanmost are India's businessmen, who have turned in stellar performanceswith their investment and entrepreneurial drive and begun to look likemultinational players. For them, there's plenty at stake. But lack ofinfrastructure, from new ports to roads, along with an undevelopedcorporate bond market and high prices for real estate, commodities, andtalent, are causing them to hit "choke points and structuralimpediments all over. We will lose years," says Bombay investor ChetanParikh of of Jeetay Investments.

Sanjay Kirloskar, chiefexecutive of Kirloskar Brothers (KRBR.BO), a premier $470 million makerof water pumps, already has $100 million in overseas contracts. Yet fewinfrastructure contracts have come from New Delhi. Kirloskar had hopedto be part of a grand project linking India's rivers, but those planshave been on hold for four years. "The infrastructure growth we hadhoped for has not come about," he says. "Instead, we will now expandoverseas more than in India."

Such constraints on growth at homewill have an impact. Corporate earnings growth is likely to dip, saysMerrill Lynch's Holland, who now predicts just 10% growth, instead ofthe previous year's 20%. That slowdown makes it less attractive forforeigners to invest in India's stock market. Already this year,foreigners have taken $5.5 billion out of the market, compared with the$19 billion they invested last year. Gagan Banga, chief executive ofIndia Bulls Financial Services, an emerging finance and real estategiant, points admiringly to China's ability to maintain its growthmomentum for a decade, while India's has not been able to hold up foreven three years. "Serious companies are going to grow at a much slowerpace, and some may even de-grow this year," he says. Unless majorpolicy decisions are made by New Delhi immediately to keep the economyon the growth path, he says, "India will slow down even further."

NewDelhi defends its four year reign in India. "We've had 9% growth forfour years in a row," says Sanjaya Baru, media adviser to PrimeMinister Singh. "That is unprecedented." He attributes it to theincreasing rate of investment, up from 28% of GDP to 35% currently,"close to most ASEAN economies," though he admits that a large part isfrom the private sector. "Yes, there is a fiscal problem, but there's aprice to be paid for coalition politics," adds Baru. So having growthdrop "from 9% to 7% is not grim."Social Backlash?
Chetan Modi, head ofMoody's India, says the increasingly high cost of doing business inIndia may force global investors who had set up base inIndia—especially financial-services players—to move to more affordableand efficient hubs, such as Singapore and Hong Kong. If the economyslows and inflation continues to accelerate, says Sherman Chan,economist at Moody's Economy.com, "social unrest is possible."

Infact, India is becoming a dangerous social cauldron. The wealthharvested by the reforms of previous governments has made itselfevident in the luxury cars and apartments in India's big cities,leaving much of India full of aspirations but few means to achievethem. There is a severe shortage of colleges, yet a plan to build 1,500universities gathers dust. The Communists in the ruling coalition areagainst both globalization and industrialization, so without newfactories being built, employment growth has been almost stagnant,rising to just 2%—a disappointing rate in a country where an estimated14 million youths enter the workforce every year, but just 1 millionget jobs in the regulated, above-ground economy.

Meanwhile, fewexpect any bold moves New Delhi, especially with national elections duein 2009 and five important state elections scheduled before the end ofthis year. Thus far, the ruling Congress party's record has been poor;it has lost almost every state election this year and is likely to loseall five of the upcoming ones.

The big hope for a return to thecourse of reform in India, businessmen hope, will be a new governmentin New Delhi next year. The gravest danger is that India's messycoalition politics will bring into power another indecisive alliancethat will keep the country in policy limbo for another five years. Ifso, says S&P's Gokarn, it's a meltdown scenario: growth slippingbelow 6.5%, accelerating the chances of India reverting to its 1991status when it was plunged into a balance-of-payments crisis.

 
SOURCE : Business Week, 1er juillet 2008 (cliquez ci-dessus sur le turban de Manmohan Singh, le Premier ministre indien)...TOUT AUSSI INTÉRESSANT...

India's Rich Get the Personal Touch

Like the wealthy anywhere else, affluent Indians love to buy luxurious cars, clothes, and accessories. They also want exceptional service.

One evening not too long ago, India's top fashion designers, Abu Jani and Sandeep Khosla, invited 35 members of the country's moneyed class over for dinner at their home in a posh suburb of Mumbai. The affair was elegant and understated: The guests sipped a 1999 Dom Perignon as they were served home-cooked Goan fish curry and rice. "We are the present-day maharajahs—in thought, at least—so we reconnected with friends from all walks of life over a luxurious meal," says Khosla.

The sumptuous repast was one of the eight organized by Moët Hennessey (LVMH.PA) over the past year to give potential customers a taste of its wine and spirits in an exclusive setting.

For Moët and other luxury purveyors, India is a land of enormous promise. Sure, two-thirds of India's 1.1 billion population lives in the hinterland with little access or means to such luxury, but there are almost 100,000 dollar-millionaires in the country. American Express (AXP) predicts that India's millionaire brigade will balloon by 12.8% a year for the next three years. Its nouveau riche could spend $30 billion on high-end goods by 2015, according to consulting firm A.T. Kearney. They now spend about $4 billion, while the Chinese spend more than $5 billion. A survey by by A.C. Nielsen early this year shows that India is the third most brand-conscious place in the world after Greece and Hong Kong.
Money to Spend

Some of the desire is mixed up with India's royal past, and the tradition of luxury that was the culture of the maharajas, who would commission Hermès or Vuitton for bespoke products, like Hermès saris. But a lot of it is simply the exuberance of a new, economically and culturally open India with some money to spend on high-quality foreign items perceived as unique, sometimes for the first time in generations.

What Moët and the others are discovering, though, is that the most effective way to reach India's increasingly aspirational middle class is customer by customer. "Indians love to be served," says Vijay Murjani, managing director of the Murjani Group, which for the past year has been selling items from Gucci, Jimmy Choo, La Perla, and Bottega Veneta in a boutique in Mumbai's five-star Trident Hotel.

The marketing executives are doing what they usually do to get attention: They hold their glittering store launches, which are largely in Mumbai and New Delhi, and only now opening in other Indian metros like Bangalore, Hyderabad and Chennai. They negotiate with socialites and celebrities for endorsements, and pamper their regular customers, and advertise in glossy fashion magazines.
Reaching Out

In India, though, they have found that nothing works as well as intimate consumer contact. As Mumbai-based image consultant Chaya Momaya, dressed for work in a Roberto Cavalli shirt, Dolce & Gabbana jeans, a Valentino belt, and Stuart Weitzman sandals, says: "I like to be fussed over."

Such pampered clientele is still limited to the rich, who in the past made their luxury purchases while traveling to the brands' home markets of Paris, London, or New York. But the market is gradually opening up to the aspirants and the middle classes, who may not wear the brands every day, but yearn for bespoke Louis Vuitton luggage for trousseaus, Dom Perignon at wedding receptions, Hermès scarves, Boss suits and Jimmy Choos during honeymoons.

So the stores are adapting for India. The Moschino store in India, for instance, displays both the top end Moschino brand alongside its less expensive variant, Cheap and Chic. In all the big markets, the Moschino brands are housed in separate stores. A big middle-class favorite at the Murjani store is Gucci. While $5,000 bags get the big displays, there are also small-ticket items like $50 mobile-phone straps and key chains, and $200 ties for the aspiring middle class.
Well Suited

Whenever Hugo Boss boutiques receive new suit styles, the staff call on their clientele of businessmen and upwardly mobile professionals at their homes and offices. Salespeople help the customers select styles and colors while expert tailors make adjustments then and there. "The Indian luxury market is not yet mature, so we still need to seek customers," says Harish Chandra, country head of Hugo Boss in India. He claims that the consumer insights that arise from such encounters are useful to source fabrics and styles, further enhancing the client relationship. When Hugo Boss entered India in 2003, it got a set of suits from each of its 15 international style cuts. It soon realized that the average Indian male is heavier than his overseas counterpart, and does not fit into most cuts. Boss now imports about nine styles including the much preferred two- and three-button, double-vent suits. It also began with cashmere suits for people in both Delhi and Mumbai. It has now restricted cashmere for the colder Delhi, with lightweight fabric for tropical Mumbai.

The Swiss skin-care company La Prairie organizes ladies-only lunches to show its products in women's homes. And every couple of months, La Prairie invites regular shoppers at a department-store chain in Mumbai to receive free facials. "We are constantly working at ways to get closer to our consumer," says Beena Patel, the director of La Prairie India.

In some cases, that means traveling to small, wealthy towns far from India's massive urban centers. Fashion brands are organizing trunk shows where people of means in places such as Jallandar and Chandigarh in northern India can try on the latest designs. Mercedes takes road trips, too, regularly dispatching invitations to the elite in towns around the country to attend local car meets. There, would-be buyers can test-drive Mercedes' entire portfolio of cars, ranging from the C-series to the top-end $1.7 million Maybach. Moreover, they can ask questions of Mercedes executives—all in one go. "You build a rapport with people and find out what they need and want," says Manas Dewan, deputy general manager of Mercedes. He's been to five cities in the past eight months. Nandini Lakshman  SOURCE : Business Week, 2 juillet 2008 (cliquez sur le voile ci-dessus).