India getting hit by European slowdown

Over the past couple of days I have noticed a lot of posts on the FT’s emerging markets blog about a growth slowdown in India that is occurring as a direct result of the worsening outlook in Europe.

In one piece, the FT reported that Indian auto sales are getting crushed, down 4.2% year-on-year.

“Inflation rates were always high, lending rates were always high but it was all okay because… wage inflation was always higher than economic inflation… Now the problem is that the rate of inflation is higher,” he told beyondbrics. “All the indications are that Indian industry could go down to a slowdown. If that happens they can’t maintain that double digit wage inflation and that is a worry and is spooking people, so people are being more cautious with their spending.”

In another piece, Moody’s downgraded the Indian banking sector citing an increase in bad debts as India slows due to rising rates and inflation. Asset quality is going to worsen.

Today, the FT wrote that Tata Steel was getting hit as well:

“It’s been pretty tough [for Tata Steel Europe]; the situation within Europe has never come back to the level of activities pre-financial crisis – the slowdown in demand has put pressure on the margins for this company,” said Sanjay Jain, analyst at Motilal Oswal.

I think this points to a lack of de-coupling and demonstrates we should expect slower growth in Europe and North America to have negative feedback in the emerging markets, not just in Asia but EMEA and Latam emerging markets as well.

  1. Kunal says

    Hey Edward,

    I can assure you that India’s problems have a lot more to do with governance issues than the European crisis. The worst thing for India is that even with the crisis in Europe, oil prices remain high.

    1. Edward Harrison says

      I am sure this is the case as it is for any large ‘continental size’ economy like India’s or America’s or China’s or even Germany’s. The trade flows are too small to be the dominant domestic influence. But, the trade flows are enough that the title is accurate that India is getting hit by Europe. All of the major economies are slowing at the same time.

      1. David Lazarus says

        India has a financial crisis of its own. The microcredit industry started in India, is now mired in corruption issues and excessive rates that are causing a wave of suicides of farmers across the country. It was the entry of commercial lenders to the very poor that has only worsened their plight. This is having ramifications across Indian society. Then the corruption scandals over the telecoms licenses and that again is the tip of the iceberg. These I think are the real cause of the problems in India.

        1. Edward Harrison says

          I am not sure I buy that. Kunal maybe lives there and can point to events on the ground. Likely it is as he said about interest rates and inflation slowing the economy.

          1. David Lazarus says

            Yes I can accept Kunal’s comment. I follow Indian politics as some of my family are from there.

          2. Kunal says

            Yes, I am from India, and keep shuttling between India and Hong Kong. In my opinion, the basic problem is a left-veering coalition government which has implemented a lot of expensive populist programmes over the years, which in turn have led to a high deficit and stubborn inflation. In the last year or so, another problem is that the corruption scandals that have come out have severely paralyzed the government, who are keener to salvage themselves than to push much needed reforms. In fact, to win the next elections, they are looking to implement even more hair-brained social welfare programmes before the elections in 2014, while much-needed market-oriented reforms (which are usually unpopular, at least to vested interests) are unlikely to pass because of a shaky government that might not have enough will, and numbers in Parliament. Right now, in a sense, we are getting the worst of all worlds. It is difficult to overstate how unpopular the current government is in India. It is universally despised. Unfortunately, we have no credible opposition either, which is one reason why the current government has not collapsed yet. My opinion is that until the discredited government collapses (which I predict will happen within the next year), the future is bleak. For more, you might want to google this article on ‘UPA policies are leading to a scorched earth syndrome’.

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