India's economy loses its luster

India's rise looks to be on the skids for now.

President Obama came to India in November 2010 hoping to hitch America's recovery to the Asian nation's inexpensive labor and emerging middle-class con-sumers. Indians talked of a future when millions of their own would be lifted out of deep poverty.

What a difference a year makes. It's not just that India's economic growth has skidded to a halt. A series of key government reforms have stalled while an anticorruption campaign has created uncertainty about what tainted money lies beneath balance sheets. Investors are fleeing.

"Foreign investors are as nervous as we have ever seen them about India's global investment environment," says Nick Paulson-Ellis, India head for Espirito Santos Securities. "Many United States investors have pulled out entirely."

In 2011, foreign institutional investment totaled just a fifth of what it was in 2010, and India's benchmark stock index, the SENSEX, lost a quarter of its value.

If a crisis of confidence in India delays or derails the country's climb, the US faces a setback in its efforts to find a new China – one more interested in buying US goods and sharing democratic values. And for Indians, the price of under-performance means another generation – this time nearly one-sixth of humanity – burdened by widespread poverty.

"The two-point swing in growth this year from the projected 8 to 9 percent to 7 percent is a very big deal," says Gurcharan Das, an Indian economist and author. "Each percentage point is about 10 million new jobs."

While the US would be thankful to be staring at 6.9 percent growth, some experts say India needs at least 9 percent growth to keep pace with its population.

A number of factors, including a paralyzed government, corruption, high inflation, and a depreciating rupee are behind the slowdown.

The chairman of Goldman Sachs Asset Management, Jim O'Neill, who coined the acronym BRIC (Brazil, Russia, India, and China) to describe the four biggest developing economies, is also raising the alarm. At a 2012 investment outlook summit in December, he said that the BRIC economies are performing at a higher level than he had predicted in 2001, but that India is the most disappointing performer and suffers from a severe lack of leadership.

"India is as bad as Russia on governance and corruption and, in terms of technology, Russia is in fact much higher than India," said Mr. O'Neill.

However, economist Mr. Das, who forecast India's boom in the 1990s, suggests this is just a bump in the road.

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