October 4, 2022

India’s troubled economy

4 min read

BACK in 2014 when Narendra Modi was first elected, he was supposed to transform the perennially under-performing Indian economy. The Gujarat-born leader promised to replicate his home state’s success across the republic – unleashing a torrent of jobs and opportunities for all.

Instead, five years on and after a deeply divisive election, India – according to a National Statistical Office (NSO) survey – is facing rising poverty, especially in the rural areas, as well as an unprecedented fall in consumer spending – for the first time in over four decades.

The 2017-18 survey captures the extent to which two poorly conceived policy initiatives – a bungled goods and service tax (GST) and demonetisation have devastated much of small-town India.

Given the poorly performing economy, the Prime Minister and his BJP cohorts switched strategies for the recent election. The 2019 campaign was fought on an aggressively Hindutva and anti-minority platform. They also ramped up the perceived threat of Pakistan and terrorism, launching a cross-border air strike on Balakot in February during the election period. After the polls, in August, New Delhi ordered a brutal lock down of the majority Muslim state of Jammu and Kashmir – comparable to what the Chinese are doing in Xinjiang with the Uighurs and of course the Israelis in the West Bank and Gaza.

Meanwhile the economy is deeply troubled.

Manufacturing is haemorrhaging. The slogan “Make in India” has been conveniently forgotten – despite the vast opportunities (most of which have been scooped up by the Vietnamese and other ASEAN nations) presented by the US-China trade wars. Indeed, the decision to pull out of the RCEP trade deal underlies the republic’s inability to compete globally, reinforcing India’s inward-looking stance.

The once booming auto-manufacturing sector (which is estimated to constitute some 40% of manufacturing output and 7% of overall GDP) is in reverse with a staggering 23% year-on-year decline. Motorbike sales have also plummeted 16% between April and September this year.

Nonetheless, Modi is determined to talk up his goals, claiming that the economy will hit US$5 trillion by 2024 – almost double the current US$2.7 trillion levels. However, in order to achieve these targets, India will require at least 9% GDP growth per annum – an unlikely feat, given that the global credit rating agency, Moody’s has recently cut the republic’s growth forecasts to 5.6% for 2019.

Of course, it’s entirely possible that the toxic smog shrouding much of northern India, and especially the capital could well be the reason for the administration’s myopia.

But the bad news doesn’t end there.

The financial sector appears to be facing Armageddon.

Multiple scandals, defaults and closures – including Punjab & Maharashtra Cooperative Bank and the shadow bank, Dewan Housing Finance Corp – have shaken the industry badly.

Indeed, the thousands of poorly regulated shadow banks (ie: non-bank providers of financial services) are now seen as a major threat to the economy not unlike the situation in China. Moreover, given the current parlous state of government coffers the chances of a bailout are almost zero.

Of course, India is fortunate in having some of the most experienced and brilliant global CEOs, ranging from Microsoft’s Satya Nadella, MasterCard’s Ajaypal Singh Banga to Google’s Sundar Pichai. Surely, they would be ready to assist in the event of a major credit and/or fiscal crisis?

However, such is the Hindutva dominance that there appears to be a resistance to outside ideas – witness the exclusion of former Reserve Bank of India’s Raghuram Rajan and Nobel Laureate for Economics Amartya Sen.

Of course, not everyone is suffering.

Some players are doing exceptionally well. Reliance Jio (the telecom operator) owned by India’s richest man, Mukesh Ambani (who happens to be Gujarati) is continuing to decimate competitors with its free data and voice call packages. Indeed, the British partner in its rival, Vodafone Idea has recently slashed the value of their 45% stake to zero.

The Adanis (who also happen to be Gujarati) experienced a dramatic 611% surge in profitability earlier this year at their Adani Enterprises – mining and infrastructure corporate vehicle. They are now expanding into airport infrastructure having secured a 23% stake in Mumbai International Airport Limited as well as a slew of modernisation contracts across the country.

Adding to the gloom is a recent spike in the price of onions – a critical ingredient in virtually all Indian cooking. Climate change has led to unpredictable weather patterns and heavy rains have resulted in a collapse in local harvests, prompting the authorities to release government stocks and ban imports – suppressing prices and angering farmers in Maharashtra where, coincidentally the BJP experienced a significant drop in support in last month’s state polls.

However, the oscillations in onion prices are hardly new. What is worrisome is the BJP’s failure to manage such simple but highly critical supply and demand issues. Inevitably, this raises troubling questions about the capability and competence of their administration.

India is important for all of us in Southeast Asia. We need and want the republic to prosper and grow. Unfortunately, we can’t be sure that Narendra Modi’s BJP government has a solid grasp of what it takes to lead this Asian giant.