India’s economy is slowing, ramping up pressure on Modi

Slowing economic growth and high employment underscore challenges faced by Modi as he starts his second term.

Narendra Modi
Prime Minister Narendra Modi begins his second term facing a slowing economy and high unemployment [file: Adnan Abidi/ Reuters]

Indian Prime Minister Narendra Modi is kicking off off his second term in office with unwelcome news on the state of the country’s economy and the jobs market.

Government figures released Friday showed India‘s economy grew at a much-lower-than-expected 5.8 percent in the first three months of the year. That marks a sharp fall from the previous quarter, when growth clocked in at 6.6 percent. 

Meanwhile, the unemployment rate rose to a multi-year high of 6.1 percent in the 2017-18 fiscal year.

The disappointing growth figures mean India is no longer the world’s fastest-growing economy.  For the first time in nearly two years, it has ceded that title to China, where the economy grow 6.4 percent in the first quarter. 

The economic slowdown and high unemployment put pressure on Modi’s re-elected government and the central bank to stimulate the economy to boost growth and create more jobs. 

Nirmala Sitharaman, who assumed charge as India’s finance minister on Friday, is expected to deliver some tax cuts in her first full-year budget in early July while keeping the budget deficit close to its target.

The Reserve Bank of India is expected to reduce interest rates at its June meeting. Lower borrowing costs encourage consumers to buy more and businesses to produce more, which boosts growth. 

Weaker consumer demand and slower growth in investments were blamed for the slowdown in India’s economy. Private investment grew 7.2 percent in the March quarter, down from 8.4 percent in the previous quarter, while investment growth slowed to 3.6 percent from 10.6 percent, the data showed.

Economists said growth could slow further in the current quarter, the first of the fiscal year, citing weakening global growth as a factor leading to this decline.

The slowdown would “lead to pressures” for fiscal stimulus, including tax cuts on fuel products to boost consumption, said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a Delhi-based think-tank.

The Ministry of Statistics and Programme Implementation also revised its estimate for growth in the fiscal year ending March 31, forecasting it to be 6.8 percent from a previously projected seven percent.

The government is already considering rolling out a slew of “big-bang” economic reforms in the first 100 days of Modi’s second term, with a focus on privatisation of state assets and relaxation of labour and land rules for businesses, a top official at the government’s main think-tank told Reuters.

Several indicators – automobile sales, rail freight, petroleum product consumption, domestic air traffic and imports – indicate a slowdown in domestic consumption.

The farm sector contracted 0.1 percent in the March quarter compared with 2.7 percent growth in the previous quarter, while manufacturing grew 3.1 percent, slower than 6.7 percent in the previous quarter.

Corporate earnings hit a six-quarter low growth rate of 10.7 percent during January-March on weakening consumer sentiment and softening commodity prices, ICRA, the Indian arm of the ratings agency Moody’s, said on Tuesday, citing a sample of more than 300 companies.

Source: Reuters