Falling Economic Tide in India Is Exposing Its Chronic Troubles

Santosh Verma for The New York Times

Workers at an aluminum wire factory in Mumbai.

MUMBAI â€" India had seemed tantalizingly close to embarking on the same dash for economic growth that has lifted hundreds of millions of people out of poverty in China and across East Asia.

Ansons Electro Mechanical Works in Mumbai has kept fewer than 50 workers at each factory to avoid regulations.

Its economy now stands in disarray, with the prospect of worse to come in the next few months.

Vinod Vanigota, a Mumbai wholesaler of imported computer hard drives, said sales dropped by a quarter in the last two weeks. The rupee, India’s currency, has been so volatile in recent days that he began revising his price lists every half-hour.

Business activity at Chip Com Traders, where he is the managing director and co-owner, has slowed so sharply that trucking companies plead for business. “One of the companies called today and said, ‘Don’t you have a parcel of any sort for us to deliver today?’ ” Mr. Vanigota said.

The economic decline has laid bare chronic problems, little remarked upon during the recent boom. An antiquated infrastructure, a sclerotic job market, exorbitant real estate costs and bloated state-owned enterprises never allowed manufacturing, especially manufacturing for export, to grow strong.

The rupee fell further and faster in August against the dollar than any of the world’s 77 other internationally traded currencies as investors in affluent countries took their money home for higher returns. It was down 20 percent since May, a period in which the stock market followed suit and fell almost 8 percent.

The real estate market is teetering after soaring to vertiginous heights over the last few years. Cranes on Mumbai’s skyline perch nearly immobilized as developers struggle for cash.

The things the emerging middle class coveted, Chevrolets, iPhones and foreign vacations, have all jumped sharply in price in recent weeks.

The price increases threaten to worsen consumer price inflation â€" already among the highest in Asia at an annual rate of almost 10 percent â€" and widen the country’s already large international trade deficit and government budget deficit.

India’s government is now bracing the country for a swift increase in the price of diesel fuel and other imported necessities priced in dollars. Diesel is the lifeblood of the Indian economy, from the trucks that crawl along the country’s jammed, potholed roads to the backyard generators that struggle to compensate for the high-cost yet unreliable electricity grid.

Some economists say that they hope India will have only a V-shaped economic downturn, with a rebound starting by early next year if a weak rupee rejuvenates India’s struggling exporters.

“India is not Greece â€" we never binged on debt on a grand scale,” said Ajay Shah, a prominent economist at the National Institute of Public Finance and Policy in New Delhi.

The root of the problem is India’s failure to create a vibrant industrial base with the strength to export. As Western buyers scour Asia for alternatives to increasingly expensive Chinese factories, India and its enfeebled manufacturing sector are mostly ignored.

Soeb Z. Bandukwala, a managing director of Ansons Electro Mechanical Works, a maker of water pumps and electric motors, wonders how a recovery can arrive, given India’s structural problems. He runs a business that has been in his family since 1967 and has grown to four factories.

Yet he keeps each factory at fewer than 50 workers and has maintained some metal grinding machines and other equipment in use since the 1970s without replacement. His worry is that if he exceeds 50 workers or surpasses certain benchmarks for total investment, he will become subject to extensive labor legislation.

“There is a fear, and the fear is the labor laws,” said Mr. Bandukwala, who is also a regional leader in the Confederation of Indian Industry.

Infrastructure is also a problem. Ansons is only 35 miles from the port through which it exports machinery to Europe. Yet trucks require four to seven hours to reach the port because promised expressways have never been built.

Speeds barely faster than walking at least help protect pumps and motors from harm. “If the speed is greater, damage will take place because of the potholes,” Mr. Bandukwala said.

Neha Thirani Bagri contributed reporting.

A version of this article appears in print on September 5, 2013, on page A1 of the New York edition with the headline: Falling Economic Tide in India Is Exposing Its Chronic Troubles.