Pranab to sell India's growth story on US visit

Finance Minister Pranab Mukherjee's two-day visit to Washington beginning Monday will be focused on reassuring foreign investors that India continues to be an attractive investment destination , as its medium and long-term growth story remains intact, officials say.

"The focus is on business. During the two-day stay, the finance minister will hold meetings with business honchos and top US economic policy makers," a finance ministry official, who didn't want to be quoted, told IANS.

Mukherjee is scheduled to hold roundtable meetings with chief executives of top US and Indian companies Tuesday. He will also address a luncheon meeting of the India-US CEO forum.

The finance minister will be accompanied by top officials, including his chief economic advisor Kaushik Basu, economic affairs secretary R. Gopalan and Reserve Bank of India Governor Duvvuri Subbaro.

Mukherjee's visit comes in the backdrop of a series of scams and corruption scandals, stubbornly high inflation, decline in industrial output growth and sharp decline in the flow of foreign direct investment. All these have raised a question mark on India's growth story.

"The current spate of corruption scandals has made a big dent on India's global image. It is negatively affecting the flow of foreign direct investment. Businesses are apprehensive," Rajeev Peshawaria, chief executive officer of Kuala Lumpur-based ICLIF Leadership and Governance Centre, told media.

Peshawaria said cleaning up its image and reassuring foreign investors on the growth story were among the major challenges facing Prime Minister Manmohan Singh's government.

"Definitely, India's time for growth has come. Everybody is looking at India as this is the place to invest in. But there are certain things that are holding them back," he said.

Foreign direct investment ( FDI )) in India declined 25.67 percent to $18.3 billion during the first 11 months of fiscal 2010-11 as compared to $24.62 billion during the corresponding period of the previous year.

Inflation has remained stubbornly high, near double-digit, during the last one and half years despite an aggressive monetary tightening by the Reserve Bank of India.

On the first day of his visit June 27, Mukherjee will address the India-US economic and financial partnership summit in Washington. The event is being organised by the Confederation of Indian Industry (CII) and the US-based Brookings Institution.

Mukherjee will also hold discussions with key US economic policy makers including Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben S. Bernanke and Securities and Exchange Commission Chairman Mary L. Schapiro.

Economic growth still weak

The U.S. economy was a little stronger than originally believed but still struggling in the first three months of the year, according to the government's final reading on the first quarter.

Gross domestic product, the broadest measure of the nation's economic activity, grew at an annual rate of 1.9% in the quarter, the Commerce Department reported Friday.

That's up from the previous estimate of 1.8%. Economists surveyed by Briefing.com had forecast no change from the prior reading.

But growth of 1.9% is still disappointingly weak, and there is widespread concern that the economy has slowed even more since the end of March. Hiring ground to a near halt in May and consumer spending and manufacturing slowed.

New economic stimulus: lower oil prices

Economic growth of 3% or better is generally considered necessary to spur the level of hiring by employers needed to make a big dent in the unemployment rate. The U.S. economy typically grows at a 3.6% rate during an economic expansion.

On Wednesday, the Federal Reserve significantly cut its economic growth forecasts, and raised its unemployment and inflation estimates for the rest of this year as well as for 2012. Fed Chairman Ben Bernanke said he was frustrated by the fact that declines in unemployment will be slow and painful.

Another drag on growth in the first half of the year was a jump in the price of food and energy, which sapped consumers' ability to spend more on other goods.

Since the GDP reading is adjusted for inflation, higher prices means the economy has to grow faster just to keep pace with inflation.

Many economists have been cutting their forecasts for growth in the second quarter and the rest of 2011.

A CNNMoney survey earlier this month found that top economists are forecasting growth of just 2.3% in the second quarter, which is down from estimates of 3% only a month earlier.

Economists also see a greater risk of another recession, although they still believe that's a long-shot.

"Recent data suggests that the economy has slowed further since the first quarter, and some leading indicators are pointing to softness in the latter half of the year as well," said Jim Baird, chief investment strategist for Plante Moran Financial Advisors.

Bernanke said Wednesday he believed that some of the current weakness in the economy is due to temporary factors, such as the spike in oil prices following political turmoil in the Middle East and supply chain disruptions caused by the Japanese earthquake.

But he admitted he couldn't say how much of the weakness is due to those temporary factors and how much are more serious, longer-lasting issues such as consumers still struggling with too much debt and continued weakness in housing.

Economists said Friday's report leaves that key question still unanswered.

"We are not yet prepared to write-off a solid second half economic performance, particularly if the labor market regains momentum next quarter," wrote Carl Riccadonna, senior U.S. economist for Deutsche Bank.

"In the near term, it will be critical to determine if economic output in general and factory output in particular are stabilizing as the supply disruptions ease, and also if households and small businesses respond swiftly to lower gas prices."

John Silvia, chief economist with Wells Fargo Securities, also said he's still hopeful that the economy could rebound in the second half of the year.

But with growth so weak, he's worried that the economy would be vulnerable to any other shocks that might occur, such as a default of Greek sovereign debt, a new oil price spike due to more political turmoil in the Middle East or a U.S. government shutdown due to the debate over raising the debt ceiling.

"You can't get a shock to the system and walk away from that," he said.

A rebound is a best case scenario, Silvia added. But it's been a while since the economy enjoyed a best case scenario

Is U.S. Economy like Greece?

EW YORK (CNNMoney) -- Deficit hawks often cite Greece's debt nightmare as a cautionary tale for the United States.

But is the United States really like Greece?

The differences between the countries, after all, give the United States some built-in advantages when it comes to managing its debt.

The U.S. economy? Gargantuan. Greece's economy? Tiny.

Plus, the United States' earning capacity is greater since it has a more diverse economy than Greece does, said Barry Anderson, who used to run a budgeting and public expenditures division at the Organization for Economic Cooperation and Development.

The pain of Greece's crisis

There are also big differences in the countries' currencies.

The dollar is the world's reserve currency and is managed by a single government.

The euro, by contrast, is used by 15 sovereign countries. Therefore, Greece's monetary policy is set not according to Greece's needs but by the needs of stronger economies -- especially Germany -- that prefer higher interest rates as a bulwark against inflation.

The OECD, meanwhile, estimates that U.S. net debt will reach 75% of the country's economy this year. That number includes federal, state and local debt but excludes debt owed to government trust funds such as Social Security.

Greece's debt, by contrast, will be around 125%.

"The real fundamental similarity is trend. Both [countries' fiscal situations] are bad and getting worse," Anderson said.

That's because both the United States and Greece have aging populations and mature economies that aren't likely to grow as much as they have in the past.

Simply assuming that the United States will remain forever immune from the perils of too much debt is not a winning strategy, deficit hawks warn.

Of course, that's a hard case to make when investors embrace Treasuries every time they get spooked by turmoil in Europe. Events in Greece in recent days have driven the 10-year Treasury yield below 3%.

In other words, the United States continues to get the benefit of being a "safe haven" compared to the rest of the world.

But experts believe that investors won't always give Americans the benefit of the doubt.

"The markets do react late, but when they react they react pretty sharply," said Carlos Cottarelli, director of fiscal affairs at the International Monetary Fund, during a Committee for a Responsible Federal Budget conference this week.

A little over a year ago, investors' fears that Greece would ever default were considerably lower than they are today. So it's not surprising that the yield on 10-year Greek bonds is now pushing 18%, up from 6% at the start of 2010, according to Bloomberg markets data.

But even if U.S. rates don't rise soon -- and some say they won't because investors fear slower economic growth -- that doesn't mean markets can't find other ways to hurt the United States, Anderson said.

Investors might choose to punish the dollar if they start to believe Congress doesn't have the political will to do what's required to put the U.S. budget on a more sustainable track.

And a substantially weaker dollar would have all sorts of negative repercussions, including a possible credit downgrade from ratings agencies, said Michael Pond, managing director of fixed income strategy at Barclays Capital, at the CRFB conference.

The bottom line: The U.S. is not Greece in many ways. But it's also not immune from the punishing effects of debt.