South Asian Insider
How serious is India's economic slowdown ?
At the end of last year, India was still the world’s fastest growing major economy. It has since surrendered that title back to China, and its slump only appears to be getting worse. Gross domestic product growth fell to a five-year low of 5.8% in the first quarter of 2019, and economists surveyed by Reuters predict data due Friday will show another drop in the second quarter. India’s automotive industry has already shed hundreds of thousands of jobs, and consumer goods companies like Unilever (UL) are reportedly slashing prices because of slowing demand. “It is definitely a slowdown,” said Anuradha Saha, a professor of economics at Ashoka University, describing the situation as “grave.” Quick fixes The government has scrambled to boost the economy. Last week, India unveiled tax breaks for startups, cheaper home and car loans, and an injection of 700 billion rupees ($9.8 billion) into state-run banks, among other measures. A few days later, it followed with an announcement that rules on foreign investment would be eased, opening up India’s huge coal industry. It also said it would relax local sourcing regulations that have blocked companies like Apple (AAPL) and other global retailers from opening stores. But those short term solutions may not do enough to address deeper concerns about India’s economic health. “These are what I would call slightly quicker fixes for boosting growth,” said Shilan Shah, senior India economist at Capital Economics. Without other changes, they risk a spike in inflation if demand outpaces supply, he added. One of India’s most urgent needs is to reform its labor market, according to Saha of Ashoka University. Changes in labor rules that would make it easier to hire and fire workers — touted since Prime Minister Narendra Modi was first elected in 2014 — have not happened. Meanwhile, unemployment is at its highest level in decades. Possibly the government is looking for quick fixes, and [foreign investment] seems like a very quick fix but it’s not going to solve the long-term problem,” Saha said. Raiding the reserves:The government this week also got a bit more firepower from India’s central bank to fight its economic battle. The Reserve Bank of India, which has cut interest rates four times this year, announced Monday that it would transfer excess reserves of 1.76 trillion rupees ($24.5 billion) to the government. The decision comes months after the bank’s former governor, Urjit Patel, abruptly quit after reportedly pushing back against the government over using central bank reserves to boost growth. The government replaced Patel within barely 24 hours with Shaktikanta Das, a former finance ministry official, prompting questions about the central bank’s autonomy. Saha, the Ashoka University professor, says more coordination between the central bank and the government is essential to a “well-functioning economy,” but all eyes will now be on how the money is used. “If the slowdown is as serious as we see, asking for the RBI’s help is a prudent measure,” she said. But the central bank’s intervention reignites questions about its independence and whether it could be forced to focus on boosting the government’s growth credentials rather than the long term health of India’s economy. “It’s a fairly worrying sign, on top of everything else that’s been happening,” said Shah, the Capital Economics analyst. “It’s quite clear that the government has strong-armed the [central bank] into handing over money.” While the transfer to the government still leaves the central bank with plenty of capital, it could set a dangerous precedent. “Once the precedent is set, there’s nothing to stop the government from raiding the RBI again and again and again,” Shah said. Top Indian government officials are engaged in a vociferous public debate over the state of the country’s economy. Rajiv Kumar, the head of the government’s think tank Niti Aayog, recently claimed that the current slowdown was unprecedented in 70 years of independent India and called for immediate policy interventions in specific industries. The Chief Economic Adviser, K Subramanian, disagreed with the idea of industry-specific incentives and argued for structural reforms in land and labour markets. Members of Prime Minister Narendra Modi’s economic advisory council sound inchoate, resorting to social media and opinion editorials to counter one another. In essence, the quibble among the members of the economic team of Mr Modi and his government is not about whether India is facing an economic slowdown or not, but about how grave the current economic crisis is. This is a remarkable reversal in stance of the same group of economists who, until a few months ago, waxed eloquent about how India was the fastest growing economy in the world, generating seven million jobs a year. To put all this in context, it was less than just two years ago, in November 2017, that the global ratings agency Moody’s upgraded India’s sovereign ratings - an independent assessment of the creditworthiness of a country - for the first time in 14 years. Justifying the upgrade, Moody’s had then argued that the economy was undergoing dramatic “structural” reforms under Mr Modi. In the two years since, Moody’s has downgraded its 2019 GDP growth forecast for India thrice - from 7.5% to 7.4% to 6.8% to 6.2%. The immediate questions that arise now are: is India’s economic condition really that grim and, if yes, how did it deteriorate so rapidly? One of India’s most celebrated entrepreneurs, the founder of the largest coffee store chain, Café Coffee Day, recently killed himself, ostensibly due to unmanageable debt, slowing growth and alleged harassment by tax authorities. The auto industry is expected to shed close to a million direct and indirect jobs due to a decline in vehicle sales. Sales growth of men’s inner wear clothing, a key barometer of consumption popularised by former Federal Reserve Chair Alan Greenspan, is negative. Consumption demand that accounts for two-thirds of India’s GDP is fast losing steam. To make matters worse, Finance Minister Nirmala Sitharaman presented her first budget recently with some ominous tax proposals that threatened foreign capital flows and dented investor confidence. It sparked criticism and Ms Sitharaman was forced to roll back many of her proposals. So, it is indeed true that India is facing a sharp economic downturn and severe loss of business confidence. The alarm over the economic condition is not merely a reflection of a slowdown in GDP growth but also the poor quality of growth. Private sector investment, the mainstay of sustainable growth in any economy, is at a 15-year low. In other words, there is almost no investment in new projects by the private sector. The situation is so bad that many Indian industrialists have complained loudly about the state of the economy, the distrust of the government towards businesses and harassment by tax authorities. But India’s economic slowdown is neither sudden nor a surprise. Behind the fawning headlines in the press over the past five years about the robustness of India’s growth was a vulnerable economy, straddled with massive bad loans in the financial sector, disguised further by a macroeconomic bonanza from low global oil prices. India’s largest import is oil and the fortuitous decline in oil prices between 2014 and 2016 added a full percentage point to headline GDP growth, masking the real problems. Confusing luck with skill, the government was callous about fixing the choked financial system.To make matters worse, Mr Modi embarked on a quixotic move in 2016 to withdraw all high-value banknotes from circulation overnight. This effectively removed 85% of all currency notes from the economy. This move destroyed supply chains and impacted agriculture, construction and manufacturing that together account for three-quarters of all employment in the country. Before the economy could recover from the currency ban shock, the government enacted a transition to a new indirect taxation system of the Goods and Services Tax (GST) in 2017. The GST rollout wasn’t smooth and many small businesses initially struggled to understand it. Such massive external shocks to the economy, coupled with a reversal in low oil prices, dealt the final blow to the economy. Millions of Indians started to lose their jobs and rural wages remained stagnant. This, in turn, impacted consumption, slowing down the economy sharply. Not easy.The wobbly state of the economy has also thrown government finances in disarray: tax revenues are much below expectations. On Monday, the government got a much-needed breather when India’s central bank announced a $24bn (£19bn) one-time payout for the cash-starved government. (This amount is more than the dividend paid by the central bank to the government in all five years of the Congress rule between 2009 and 2014.) The solutions to the economic crisis are not easy. Indian industry, fed and fattened with government protection through decades, is once again clamoring for tax cuts and financial incentives. But it is not clear that such benefits will revive private sector investment and domestic consumption immediately. For all the hype about the Make in India programme, hailed as the harbinger of the country’s emergence as a manufacturing power, India’s dependence on China for goods has only doubled in the past five years. India today imports from China the equivalent of 6,000 rupees ($83; £68) worth of goods for every Indian, which has doubled from 3,000 rupees in 2014. India’s exports have remained stuck at 2011 levels and not grown. So, India is neither making goods for itself nor for the world. Ornamental tax and other fiscal incentives to specific industries are not suddenly going to make Indian manufacturers competitive and stop India’s addiction for affordable Chinese goods. If any, the trade spat between China and the United States only saw countries such as Vietnam and Bangladesh benefit and not India. More currency or trade tariffs are not the solutions either. The central bank has lowered interest rates and there is some push to lowering the cost of capital for industry. But again, Indian industry will invest more only when demand for goods and services increases. And demand will increase only when wages increase, or there is money in the hands of people. So, the only immediate solution for India seems to be to boost consumption through a stimulus given directly to people, in the classical Keynesian mould. Of course, such a stimulus should be combined with reforms to boost business morale and confidence. In sum, India’s economic picture is not pretty. It is important for India’s political leadership to see this not-so-pretty picture and not hide behind rose tinted glasses. Prime Minister Modi has a unique electoral mandate to embark on bold moves to truly transform the economy and pull India out of the woods. How will Modi handle India’s economy ? Narendra Modi has secured a historic second election victory. Indian stocks and the rupee rose to welcome the news: another parliamentary majority for the BJP party could grant Mr Modi the opportunity to make promised reforms a reality. But once the euphoria around his emphatic win at the polls has faded, there will remain some tough economic challenges in his in-tray. What did he do in his first term? The economic record for Mr Modi’s first term in office is mixed. He initiated some bold reforms, such as a new bankruptcy law, to help tackle a rise bad debts that was putting pressure on the banking sector. His government reduced red tape, helping move India to 77th in the World Bank’s 2019 Doing Business ranking, an improvement from 134th place when he first took office in 2014. India also became the world’s fastest growing economy during that first term. But his biggest gamble, banning more than three quarters of the rupee notes in circulation in order to battle corruption, misfired and delivered a significant blow to economic growth. Without replacement notes ready in time, India’s gigantic informal economy was temporarily crippled - leading to job losses. The roll out of a new national sales tax didn’t go smoothly either. In the long run the new tax is expected to boost economic growth by streamlining a multitude of complicated taxes into a single tax. But in the short term glitches around its introduction had a severe impact on millions of small and medium-sized businesses. What should we expect in his second term? As Mr Modi gets his feet back under the desk for his second term, economists like Surjit Bhalla believe that his increased majority will give Mr Modi more freedom to take tough decisions. “Given the size of the mandate, we can expect bolder reforms during the next five years,” says Mr Bhalla, who served on the prime minister’s economic advisory council during Mr Modi’s first term. But the scale of India’s problems matches that mandate. Economic growth slowed to 6.6% in the three months to December 2018, the slowest rate for six quarters. According to a leaked government report, unemployment touched a 45-year high between 2016 and 2017. What will he do about jobs? Experts say that Mr Modi needs to spur flagging private sector investment in order to boost job creation. His flagship Make in India programme, aimed at giving manufacturing a big boost, has yielded mixed results so far. Ajit Ranade, chief economist of Mumbai-based, Aditya Birla Group, believes that focusing on overseas markets is the key to creating more employment opportunities. “Exports and manufacturing are intertwined. Unless exports grow the manufacturing sector won’t expand,” he says. The new government should focus on labour-intensive sectors like construction, tourism, textiles and agricultural products, he adds. Can Modi boost growth? Unlike China, India’s economic growth has been driven by domestic consumption over the last fifteen years. But data released over the last few months suggests that consumer spending is slowing. Sales of cars and SUVs have slumped to a seven-year low. Tractor, motorbike and scooter sales are down. Demand for bank credit has sputtered. Hindustan Unilever has reported slower revenue growth in the most recent quarter. All of these are important benchmarks for measuring consumer appetite. Mr Modi’s party promised in its manifesto that it would cut income tax to ensure more cash and greater purchasing power stayed in the hands of middle-income families. However, given the current state of government finances, that may not be possible immediately. India’s 3.4% budget deficit - the gap between government expenditure and revenue - may restrict Mr Modi’s options. “The widening fiscal deficit is a slow-acting poison,” says Mr Ranade. He believes this will hold back medium and long-term growth. Will he help farmers? The agrarian crisis was a constant challenge for Mr Modi during his first term. Farmers across the country protested on the streets, demanding higher prices for their crops. Small-scale farmers have been promised more support, but structural changes to the way the market works might be preferable to measures that will put additional pressure on the government’s already stretched budget, argues Ila Patnaik, a former economic advisor to the government of India. She would like to see the end of the system whereby farmers are required to sell their products to state-owned agencies at a fixed price. “We need to free up the farmers so that they can sell products to whoever they want. This will also encourage them to move to high value products,” she says. Will Modi push privatization? One of his headline election pledges was a promise to spend $1.44 trillion to build roads, railways and other infrastructure. But such an eye-watering sum will have to come from somewhere. Many observers expect privatisation to play a key role. Mr Modi made slow progress on his pledges to sell off government enterprises in his first term. The government did initiate the process of selling a majority stake in national carrier Air India, but with a tepid response from investors, the plan failed to take off. Mr Bhalla expects Mr Modi to pursue privatization more aggressively in his second term. “The next two years is a good time for the government to [speed up] the process of privatization,” he argues. And he believes a willingness to embrace bolder policies could entice more foreign investors to put their money in India. “During his first term, Mr Modi has shown the appetite to take up tough reforms and he will definitely try to take even bigger risks during his second term,” he says. Now Crisil lowers India’s GDP growth forecast to 6.3%, says slowdown deeper than suspected Rating agency Crisil has also downgraded its GDP forecast for India for the 2020 fiscal year from 6.9% to 6.3%. Crisil has lowered India’s growth forecast from 6.9% to 6.3% At 5%, India reported its slowest GDP growth in 6 years Crisil said slowdown is deeper and more broad-based than suspected Domestic rating agency Crisil on Wednesday cut India’s GDP growth forecast to 6.3 per cent for fiscal year 2020 from its earlier forecast of 6.9 per cent. This comes after the GDP growth was at its slowest in almost 6 years and grew only at 5 per cent in the first quarter. The agency has said that lower GDP growth forecast corroborates that India’s economic slowdown is deeper and more broad-based than suspected. In its statement, Crisil has said, “We expect growth to get some lift from the low base effect of 6.3 per cent in the second half of the FY19.” Earlier, Moody’s too had revised India’s GDP growth forecast for the current year to 6.2 per cent, saying the economy remains sluggish due to a combination of factors such as weak hiring, distress among rural households and tighter financial conditions. The GDP growth forecast for 2019 calendar year was revised downwards from its previous estimation of 6.8 per cent. The same for 2020 was also lowered by a similar 0.6 percentage points to 6.7 per cent, Moody’s said in a statement, a few weeks ago. GDP growth rate had hit a five-year low of 5.8 per cent in the January-March quarter and the government is slated to announce the first quarter (April-June) growth number on August 30. The Reserve Bank of India (RBI) too had earlier this month lowered GDP growth estimate for the current fiscal that began on April 1 to 6.9 per cent from previous estimate of 7 per cent citing demand and investment slowdown. On the other hand at a press conference on Sunday, Finance Minister Nirmala Sitharaman refused to answer questions to acknowledge the economic slowdown facing the country. The Modi government has come under severe criticism by the Opposition over the low growth rate. Former Prime Minister Manmohan Singh issued a statement on Sunday saying the current slowdown is a result of the “man-made disasters” caused by the government. India’s stock market hit by slowdown woes India’s stock market performance turned negative in all popular time frame. Either you take five days, a month, three months or a year, the Bombay Stock Exchange (BSE) delivered a negative return, thanks to deepening slowdown, especially the plunge in the first-quarter Gross Domestic Product (GDP) to 5 per cent. In contrast, markets such as China and United States have delivered healthy returns. In the last one year, trading data shows that China’s Shanghai Composite Index and USA’s Dow Jones Industrial Average have delivered 9.36 per cent and 0.59 per cent return respectively. In August, the market was not so bad, but last Tuesday’s blues wiped out all gains of investors. However, after losing 770 points or two per cent on Tuesday, S&P BSE Sensex gained 0.44 per cent to settle at 36,725 on Wednesday. Indian exchanges have reflected weak investor sentiments in recent days. One of the most significant factors of this is the official GDP data, which indicates that India’s economic growth has slowed down to 5 per cent, the weakest in the last 25 quarters or six years. Market experts said that the big blow to the stock market was weak domestic data. According to the official data, the growth of eight core industries dropped to 2.1 per cent in July due to contraction in coal, crude oil, natural gas and refinery products. Dr Ravi Singh, research head of Karvy Stock Broking, told India Today, The weakening of rupee added more fuel to the sentiments. Lack of clarity, over-taxation of foreign portfolio investors, continuous foreign institutional investor selling and poor corporate earnings have also contributed to the weak market sentiment. Despite the recent stimulus, foreign portfolio investments (FPIs) continue in selling mode. Headwinds to FPI flows into India will continue over the near-to-medium term despite the accommodative global monetary policy stance and the central government’s efforts to alleviate uncertainty regarding the higher surcharge, Arindam Som, an analyst with India Ratings and Research, said. As the biggest movers of the stock market, FPIs already have withdrawal of more than Rs 30,000 crore from the stock market between July and August.
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