http://money.cnn.com/2017/10/04/news/economy/india-economy-modi-slowdown/index.html
India’s economy, once hailed as a global bright spot, is down in the dumps.
Growth in the South Asian nation fell during the first six months of 2017 from 7% to 5.7%, its
slowest pace in three years, and analysts say the road to recovery is steep.
“We’re on a downward spiral,” said Mohan Guruswamy, head of the Center for Policy Alternatives
in Delhi, and a former ocial
at India’s finance ministry.
Prime Minister Narendra Modi swept into power in 2014,
promising to take India’s economy to new heights. But
many reforms have yet to materialize and some changes
that have been enacted are hurting growth.
Modi defended his performance in a speech Wednesday,
claiming his government had helped several industries.
“It is true that there has been a reduction in growth, but it
is also true that the government is fully committed to
reversing this trend,” he said. “Our fundamentals are
strong.”
A double whammy
India is still reeling from two shocks within 12 months —
– Modi’s sudden ban last November of 86% of the
country’s cash, and a sweeping overhaul of the tax
system aimed at turning the country’s 29 states into a
single market.
The cash ban “was a massive blow, just when the
economy looked at a point of inflection last year and the
decline had started leveling o,”
Guruswamy said.
Modi’s signature reform — a national goods and services
tax implemented in July — has been widely hailed as a
positive step because it should simplify business in the
long run. But the implementation caused major
disruption.
“My fear was that if people didn’t understand how to do
the tax system, then they would stop doing business with
one another,” said Shailesh Kumar, South Asia analyst at
the Eurasia Group. “You did see some of that…as
companies didn’t really know what to do.”
The government has said it expected a growth
slowdown, but appears to have been blindsided by the
sharp drop.
Top financial institutions are worried that the economy
will struggle to regain its momentum in the near term.
The central bank has just slashed its growth forecast for the current fiscal year to 6.7% from
7.3%.
“The implementation of the [tax reform] appears to have rendered short-term prospects
uncertain,” Reserve Bank of India Governor Urjit Patel told reporters.
The State Bank of India, which is owned by the government, was more blunt. The slowdown, it
said in a report last month, is “not short term in nature or even transient.”
Modi’s not delivering
Analysts, business leaders and even members of Modi’s own party are now questioning his
stewardship of the economy, not just because of the upheaval his changes have caused but also
over reforms that aren’t happening.
“High on the list of priorities is pushing through measures to ease land acquisition laws and
liberalize the labor market,” analysts at Capital Economics wrote in a recent note. “But there is
no clear indication yet that Prime Minister Modi actually has the conviction to push ahead with
necessary but unpopular reforms.”
There have also been calls for an overhaul of the banking system. About 12% of total loans have
gone bad, according to ocial
data.
Yashwant Sinha, a former finance minister and senior member of Modi’s party, wrote an opinion
article slamming the “mess” that the Indian economy is in. “A hard landing appears inevitable,”
Sinha said.
Beef and beer bans
Rising Hindu nationalism, stoked by Modi’s right-wing party, is also hurting some parts of the
economy.
In May, the government banned the sale of cows — an animal considered sacred by the
country’s Hindu majority — for slaughter, sending the meat industry into a frenzy.
While the ban was suspended by India’s Supreme Court in July, the policy confusion has had a
chilling eect.
India exports vast quantities of bualo
meat. Those exports have declined this
year, according to local media.
Cattle that once provided a vital source of additional income for millions of India’s rural poor have
now become liabilities because farmers fear they will be unable to sell them to the meat and
leather industry, Guruswamy said.
Hindu nationalists have “completely unleashed a reign of terror as far as cattle are concerned,”
he added.
India’s Supreme Court dealt the economy another blow in April, banning the sale of alcohol
within 500 meters (546 yards) of national highways. Some estimates put the hospitality
industry’s potential losses at $10 billion.
The court eased the restrictions in August, but many within the industry said they had already
lost millions. Diageo ( ), the company behind brands like Johnnie Walker and Smirno,
said
the India ban would dent sales growth.
Some of India’s top trading partners are taking note.
“The space for civil society in India continues to shrink as Hindu nationalism rises,” Sen. Bob
Corker, chairman of the U.S. Senate Committee on Foreign Relations, said on Tuesday.
Corker, who was speaking during a hearing to nominate a new U.S. ambassador to India, also
expressed disappointment at the state of the economy.
“In particular, I remain frustrated by the slow pace of Indian reforms in the economic sphere,” he
said.
Millions of new jobs needed
Modi faces an uphill struggle to steady the ship. The most pressing challenge, experts say, is to
create the jobs he promised India’s large young population.
Around 12 million Indians enter the workforce every year, but struggle to find employment.
“Poor quality data makes it dicult
to put a number on the job woes, but the available data is
grim and news stories about jobs losses abound,” Ruchir Sharma, chief global strategist at
Morgan Stanley, wrote in the Times of India newspaper on Wednesday.
Over 1.5 million Indians lost their jobs in the first half of 2017, according to a study by the Centre
for Monitoring Indian Economy, and unemployment is on the rise.