The lack of foreign funds is telling

Sumit Sapra is a member of that ambitious, impatient generation of young Indians who rode the crest of the global economy. In five years, he changed jobs three times, quadrupling his salary along the way.

Even when satisfied with his position, he kept his resume posted on job sites, in case better offers came along. And he splurged. In three years, he bought three cars, moving up a notch in luxury each time. For weekend jaunts, he bought a motorcycle.

Sapra’s last and best-paying job was at the Indian headquarters of the financial services arm of General Electric, investing western money in Indian energy projects. But last December, foreign money dried up and Sapra, with a prestigious degree, was laid off.
“Earlier it was money chasing a few projects,” Sapra, 30, said of the change that seemed to come virtually overnight. “Now it’s the other way around.”

Not long ago, Indian leaders confidently predicted this country would emerge largely unscathed from the global economic crisis. It is now becoming clear that that view was too optimistic, nowhere more so than in this city south of New Delhi that
was once the symbol of India’s economic boom.

A few short years ago, construction sites here buzzed 24 hours a day, crews working through the night, cramming down food from onsite trucks during breaks in the twilight. Now real estate sites lie fallow. The once-booming art market has slowed to a crawl. And charmed professionals with coveted degrees, like Sumit Sapra, are unemployed or taking pay cuts to hold on to their jobs.

India’s phenomenal growth of the last five years was powered in large part by huge injections of cash and investment. Investment accounted for about 39% of the country’s gross domestic product in the 2008 fiscal, up from 25% five years ago. At its peak, more than a third of investment came from abroad, according to Credit Suisse.

But in the last three months of last year, foreign loans and direct investment fell by nearly a third, to their lowest level in more than two years.

In a recent report, the International Monetary Fund said Indian companies were among the world’s most vulnerable, after American firms, because they borrowed aggressively during the boom. Using data from Moody’s, the credit rating firm, the IMF estimated in a recent report that defaults among non-financial South Asian firms could climb to 20% in the coming year, up from an expectation of 4.2% a year earlier. American firms, in comparison, are expected to default on loans at a rate of 23%.

The decline in foreign investment has taken a big toll on sectors like real estate, manufacturing, infrastructure and even art, which was bolstered by demand from globalisation’s nouveau riche here and abroad.

In the last quarter of 2008, the economy’s growth rate plummeted to about 5.3%, the lowest in five years. While consumer demand, particularly in the countryside, has kept the economy growing, the sudden slowing in the flow of foreign funds will make it harder for the country to grow fast enough to pull hundreds of millions of people out of stifling poverty.

“If India wants to go back to the 8-9% growth rate, private investment and low cost of capital is essential,” said Jahangir Aziz, the chief economist for India at JPMorgan Chase.

Indian policymakers say they believe the country will grow at 6% in the coming year, but the IMF forecasts growth of 4.5%.

To help fill the gap left by foreign investment, the government is spending more on infrastructure and social programs. The Reserve Bank of India, India’s central bank, has slashed its benchmark interest rates, but the cost of private loans has not fallen by as much.

After a wrenching 58% drop in the Indian stock market last year, the market is up 42% since its March low and some foreign money has started to flow into equities. But economists like Aziz say the government needs to do a lot more, though few expect bigger interventions until the current elections end and a new government takes power in late May or early June.