With the Sensex down 66 per cent in dollar terms since January 8, many western investors are already aware they may have mistaken the 2004-2007 credit-fuelled surge in asset prices for a structural transformation of the economy. Sustainable growth that includes the country's marginalised dalit and Muslim underclasses has proved all too elusive. Perhaps if foreign investors had made an effort to see more of India than just the poolside bar of the Taj, perhaps by spending time in the Muslim ghettoes of Juhapura and Mumbra, or Naxalite-infested states such as Chhattisgarh and Orissa, Wednesday's events might have come as less of a shock.
Not even the most pessimistic, however, foresee a return of the pre-1991 reform era “Hindu rate of growth”. But ministerial boasts of perpetual double-digit expansion that would see India overhaul China now ring hollow. The Congress-led coalition, which failed to reform during the good times, must now take the blame for the parlous condition of the public finances as growth tacks down to perhaps just 5-6 per cent next year. Down 24 per cent against the dollar this year, the rupee could now weaken further if sudden portfolio outflows and a tailing off of FDI [foreign direct investments] make it harder to finance a widening current account deficit. A bad end to a bad year.