Metal Fatigue

Around the village of Velguem in the tiny state of Goa in southwestern India, growth acquires a different meaning during the monsoon. Vines creep up wooden electrical poles and swallow street signs. Hibiscus and jasmine drip over rusty fences that separate brightly painted homes from the roads winding through the verdant hills. Any man-made creation left at rest loses this seasonal battle with nature, and the iron-ore mine at Velguem is no exception — a deep pit in the earth whose now quiet terraces are bright green with moss.

It used to be a noisy place. In 2011 the Velguem mine produced some 1.5 million tons of iron ore, mostly for export to China. Even those not employed by the leaseholder, V.M. Salgaocar & Bro. Pvt. Ltd., benefited — by feeding and housing workers, lending money to buy trucks to haul ore, running garages and tire shops. Then it all came to an abrupt halt. The authorities say some of Goa’s mining companies operated unlicensed mines and dumped waste indiscriminately, among other violations. (V.M. Salgaocar & Bro. was accused of encroaching on unentitled land, which it denies.) After a commission reported on the alleged breaches, the state last year stopped mining, and the central government in New Delhi suspended the environmental clearances of 139 Goa mining leases. In October 2012 the Supreme Court issued a temporary order stopping all activity at the mines cited by the commission, including transport of the ore.

The ban has stripped tens of thousands of Goans of their livelihoods — and blasted another hole in India’s already weak economy. Goa alone accounts for more than a fifth of the nation’s iron ore, yielding 160 billion rupees in foreign-exchange earnings (about $2.4 billion at current rates) in the 2011 — 12 fiscal year, according to the Goa Mineral Ore Exporters’ Association. Since the Supreme Court order, India’s iron-ore exports have dropped some 70%, threatening to make the country a net importer of a resource it has in spades.

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The shutdown in Goa, as well as similar actions elsewhere in the country, has gravely hurt the national economy. The current account deficit reached a record 4.8% of GDP in fiscal year 2012 — 13, which in turn has caused the rupee to plunge. (It fell to an all-time low of 68.8 to the dollar on Aug. 28.) Partly because of the blow to mining, GDP growth slowed to 4.4% during April to June, down from 5.4% in the same quarter last year. While the latest figure is not dire (and would be the envy of Western nations), the trend is unmistakably downward. India needs higher rates of growth given its big population and the large number of youths seeking jobs. “We must create opportunities,” says Rajya Vardhan Kanoria, an executive-committee member of the Federation of Indian Chambers of Commerce and Industry. “We are missing the boat.”

Self-Inflicted Wounds
On one level, the Goa ban is about improving the regulation of a crucial industry for India. Yet, on a wider scale, the measures taken in the state also reflect an inconsistency that dogs the management of the overall economy. Poor oversight for years of the mining industry in Goa and other states contributed to corruption and a general flouting of the law. Nobody argues that illegal mining shouldn’t be tackled. But in Goa, the people affected by the ban — mining executives, transporters, sundry shopkeepers, workers — say the authorities have gone too far. India’s slow judicial system means the order shutting down Goa’s mining has yet to be addressed, though nearly a year has passed. The upshot is uncertainty, which businesspeople in particular abhor because they can’t plan. “It is a governance problem,” says Arvind Subramanian, senior fellow at the Peterson Institute for International Economics in Washington. “Conditions have to be secure and stable for investors to feel comfortable.”

Not all of India’s woes are homegrown, nor is it the only country to hit a rough patch in recent months. With the U.S. Federal Reserve expected to start tapering off a stimulus program that has pumped cash into the global economy, investors are cooling on emerging markets. Besides India, Brazil and Indonesia, among others, have also seen their currencies soften. “There are outflows of capital driven by fear of the unknown,” says India’s Economic Affairs Secretary Arvind Mayaram. He says between January and May this year inflows for India reached $19.9 billion. After May, when the Fed first hinted at throttling back, there’s been a reversal of fortune: outflows stand at up to $13 billion. But the capital flight also reflects a lack of confidence in India’s prospects. “If you’re an investor, you want to put your money where there’s going to be growth,” says Daniel Martin, an economist with Capital Economics in Singapore. “The shine has come off India.”

Once, that shine seemed permanent. In 1991, when Prime Minister Manmohan Singh was Finance Minister, he famously kick-started reforms that dismantled controls, slashed tariffs and opened the door to foreign investment. Over the next 20 years, GDP growth rose steadily, surpassing 9% in fiscal year 2005 — 06. Foreign direct investment increased 100-fold from $1.66 billion in 1990 to $171 billion in 2009. Roughly in the same time, the average income of the urban household grew by about a third. India had become a hot emerging market.

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But in the past couple of years, even as businesspeople and technocrats have preached the mantra of growth, India’s coalition government, led by the Congress Party, has been pulled between the forces of reform and regression. In one now notorious example, New Delhi green-lighted greater foreign investment in retail, only to retreat when a coalition partner said the move would harm small shopkeepers and threatened to pull out. Though the government has since gone ahead, the impression is that Congress can be held hostage. In India’s rowdy democracy, politics often trumps economics. During the recent “monsoon” session of Parliament, MPs focused on issues that could win them votes — like the creation of new state Telangana — rather than passing bills that bring investors and their dollars back — like opening the lucrative insurance sector. A single, national vision seems elusive. “If Parliament is not able to point to the direction in which the country’s economy will go,” Finance Minister Palaniappan Chidambaram told lawmakers on Aug. 27, “what kind of message will it send to the rest of the world?”

The message, of late, is negative. India’s recent disappointing economic performance is rooted in structural weaknesses not fully tackled even during the salad years: bad roads, unreliable supplies of electricity and water, difficulties securing land rights and environmental clearances, a fossilized labor market. In July, for example, South Korean steelmaker POSCO shelved plans to build a 6 million-ton plant in Karnataka state because of opposition from residents. The acquisition of land just became even harder: on Sept. 5, Parliament passed a bill requiring at least 80% of the local community to consent before private-sector development is approved. “Unlike China, [the Indian government] respects land rights, which is good,” says Martin. “But at the same time, you need to have a way to fairly compensate people and get things moving.”

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Striking a balance between the needs of business and the poor is an abiding challenge for India. The country already has the world’s largest unemployment program, which guarantees a minimum amount of work for rural Indians and will cost the government nearly $5 billion this year at current rates. Now Parliament has enacted a food-security law that will provide every person in households below a certain income threshold 5 kg of grains per month at subsidized prices. About 70% of the 1.2 billion population could qualify. The scheme, plus other food programs, will set the government back up to $18.4 billion a year at current rates. Says Subir Gokarn, director of research at Brookings India: “If you’re expanding spending without paying attention to asset creation, then you are compromising on growth.”

The Reserve Bank of India (RBI) and the Ministry of Finance have tried to stop the rupee’s slide and narrow the deficit by raising short-term interest rates and curbing imports of gold, of which Indians are the world’s biggest buyers. The measures have eased pressure on the rupee, and new RBI governor Raghuram Rajan says he will liberalize the financial system to facilitate foreign-exchange inflows. In the first four months of this year, moreover, a new multiministry committee fast-tracked more than 200 investment projects worth some $29 billion. But many say the government still needs to come up with — and agree on — a comprehensive reform agenda. Says businessman Kanoria: “There is no clear policy direction.”

Waiting for Action
Back in Goa, patience is running out. Chief Minister Manohar Parrikar implemented the suspension of the state’s mining operations. But now he is critical of the judicial delay. “If a mine is illegal, then let the courts stop it,” says Parrikar. “But you don’t call a dog mad and shoot it. You have to give him a chance to be heard.” The Supreme Court is to hear petitions seeking to lift the ban on Sept. 17 — the same day, incidentally, that the U.S. Fed is expected to meet and, perhaps, end the speculation over its stimulus.

Meanwhile, those who depend on mining suffer. Three years ago Melwin Jerome left his job as an accountant in Dubai to be part of the mining boom in the Goan village of Honda, his hometown. Jerome joined his father’s tire shop, where he sold truckers new wheels on credit. Since the ban hit last October, hundreds of customers have been unable to pay him and owe him a total of some $90,000. Since work dried up, Jerome says, “nobody has paid me.” He thinks it’s folly for the authorities to hobble a cash cow like mining in these hard times. The government created the illegal-mining problem in Goa by ignoring corruption, says Jerome, and the government has hurt the local economy. Now it’s up to the government to fix what’s broken, for him and 1.2 billion other Indians.

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