India’s Economy Slows Down Just When It Was Supposed to Speed Up
Industrial growth, the stock market and
the rupee are sinking, and most consumers earn too little to buoy them, stymieing
India’s drive to become a developed economy.
India displaced Britain in 2022 as the
world’s fifth-biggest economy,
and by next year it is expected to push aside Germany in the fourth spot.
[ABS
News Service/22.01.2025]
A year ago, India was bouncing back from
a recession caused by Covid-19 with a spring in its step. The country had overtaken
China as the most populous country,
and its leaders were declaring India the world’s fastest-growing major economy.
This was music to the ears of foreign investors,
and to India’s prime minister, Narendra Modi, who at every opportunity boasted about
his country’s inevitable rise. Home to 1.4 billion people, an invigorated India
could become an economic workhorse to power the rest of the world, which is stumbling
through the fog of trade wars, China’s troubles and Russia’s invasion of Ukraine.
India displaced Britain in 2022 as the
world’s fifth-biggest economy,
and by next year it is expected to push aside Germany in the fourth spot. But India
has lost a step, revealing its vulnerabilities even as it moves up the global rankings.
The stock market, which soared for years,
has just erased the past six months of gains. The currency, the rupee, is falling
fast against the dollar, making homegrown earnings look smaller on the global stage.
India’s new middle class, whose wealth surged like never before after the pandemic,
is wondering where it went wrong. Mr. Modi will have to adjust his promises.
November brought the first nasty shock,
when national statistics revealed that the economy’s annual growth had slowed to
5.4 percent over the summer. Last fiscal year, which ran from April through March,
was clocked at 8.2 percent growth, enough to double the economy’s size in a decade.
The revised outlook for the current fiscal year is 6.4 percent.
“It’s a reversion to trend,” according
to Rathin Roy, a professor at the Kautilya
School of Public Policy in Hyderabad. There was a brief period, 20 years ago, when
India seemed poised to break into double-digit growth. But, Mr. Roy argued, that
growth depended on banks pumping out loans to businesses at an unsustainable rate.
Ever since the government withdrew vast
amounts of cash from circulation in 2016 in a vain effort to rein in underground
commerce, Mr. Roy said, the economy has never recovered even its 8 percent pace.
It only looked better, he said, because “you had the Covid dip, as happened in many
economies. India’s economy didn’t get back in absolute size until last year,” later
than most other countries.
The reasons behind the slowdown are up
for debate. One effect is undeniable: Overseas investors have been heading for the
exits.
“Foreign investment has taken the call
that the Indian stock market is overvalued,” Mr. Roy said. “It’s quite logical that
they would get out of pesky emerging economies and put their money where they can
make more,” like on Wall Street, he added.
Investors who bought a broad mix of Indian
stocks early in 2020 watched their worth triple by last September, as major market
indexes hit record highs.
The number of Indians buying stocks grew
even more rapidly, which helped drive up prices. Ahead of the Parliamentary election
in June, Mr. Modi’s right-hand man, Amit Shah, predicted that India’s new investor
class would help sweep their party to victory. During Mr. Modi’s first two terms,
the number of Indians holding investment accounts went from 22 million to 150 million,
according to a study by Motilal Oswal,
a brokerage house.
“These 130,000,000 people will be earning
something, no?” Mr. Shah reasoned to The Indian Express, a newspaper. The new investors were clearly
spending. In particular, the luxury and other high-end sectors were doing well:
cars more than motorcycles, high-end electronics more than household basics.
But that prosperity, concentrated among
the top 10 percent, left the other 90 percent wanting more. Mr. Modi’s party lost
its majority in Parliament, though it retained control of the government. Expanded
welfare payments,
like the free wheat and rice the government distributed to 800 million people, helped.
Despite such programs, the Modi government
has been fiscally conservative and keeps a watchful eye on inflation. It has focused
spending on big-ticket infrastructure items, such as bridges and highways, that
are supposed to entice private enterprise into making investments of their own.
Indian businesses still have to contend
with excessive red tape, political interference and other familiar difficulties.
The Modi government has tried to reduce those burdens, but in recent years it has
focused on increasing economic supply.
India’s government bet big on building new airports,
for example. But the airlines that were set to serve them are pulling out. Vacationers
who would have flown to beachy places like Sindhudurg, between Mumbai and Goa, are
not buying enough tickets to keep a terminal there open.
Arvind Subramanian, an economist at the
Peterson Institute for International Economics in Washington, traces the lack of
demand back to the broader state of employment.
“Jobs are not being created, so people
don’t have incomes and wages are depressed,” he said. There aren’t enough stockholders
to make up the difference. The national minimum wage, which many workers in the
informal economy are never paid, is just $2 a day.
Mr. Subramanian, who was the country’s
chief economic adviser during Mr. Modi’s first term, said the government has gone
“stale, and bereft” of ideas for tackling such problems. “Ideas for long-term growth
and boosting employment — that is what we’re missing now,” he said.
He thinks the rupee’s fall is only natural,
and should have happened sooner. Until recently, the central bank was spending billions
of dollars to prop up the value of the national currency.
The psychological effect of a weakening
rupee can be painful, but the cost of keeping it at a fixed rate of exchange to
the dollar was “extremely damaging for the national economy,” he said.
No one is happy to see growth slowing.
The government’s current chief economic adviser, V. Anantha
Nageswaran, told a news briefing in November that the
bad news could be a blip. “The global environment remains challenging,” he said,
with a strong dollar and suspense over the possibility of sudden policy moves in
the United States and China.
A year ago, the hope was that India’s own
economic engine could push it through the global headwinds. The missing ingredients,
then as now, start with too many people having too little money in hand.
“There simply isn’t enough demand,” said
Mr. Roy, the professor in Hyderabad. “The idea that you can expect supply to create
its own demand has its limits,” he said.
“Regular people,” Mr. Roy said, those between
the top 10 percent seeing big stock market gains and the bottom 50 percent struggling
to get by, still “don’t earn enough to buy the basics.” About 100 million of these
regular people qualify for free grain.
The government is expected to release a
budget for the new fiscal year on Feb. 1. Mr. Nageswaran,
the current economic adviser, has stirred hope that it may include tax cuts, putting
more money in the hands of consumers.
“This idea that India needs tax cuts, it
has the causation exactly wrong and reversed,” said the former economic adviser,
Mr. Subramanian. “Consumption is weak because incomes are weak.”
Last month, Mr. Nageswaran
told Assocham, a group of business leaders, that employers
need to pay their workers more, noting that wages were stagnant. “Not paying workers
enough will end up being self-destructive or harmful for the corporate sector itself,”
he warned.