Mumbai, India – Fears of an economic slowdown in India are mounting after figures published Friday showed that growth slackened to its slowest pace in six years.
India’s economy grew only five percent year over year from April to June, marking the fifth consecutive quarter of deceleration, according to data released Friday by the country’s Central Statistics Office.
Overcoming anemic economic activity is a major hurdle for the government of Prime Minister Narendra Modi as it aims to transform India into a $5 trillion economy by 2024 – a feat that will require average annual growth of at least eight percent and that relies heavily on stimulating private investment.
Multiple indicators suggest trouble is brewing in India’s economy. The auto industry, seen as a bellwether for activity, has reportedly laid off 350,000 workers since April, while iconic biscuits manufacturer Parle has also complained of slowing demand for purchases among low-income consumers.
Indian Finance Minister Nirmala Sitharaman announced a slew of policy measures last week to stimulate the economy. These included a government spending spree on cars to help the ailing automobile sector, a promise to speed up tax refunds to small businesses and a rollback on taxes for the superrich.
Many of the measures were U-turns on Sitharaman’s July budget announcement, which was criticised by some as unnecessarily punitive to business.
“The first step in tackling a downturn is the acknowledgment of it, which we finally received last week from the government,” Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers, told Al Jazeera.
“Credit should be given to New Delhi for bringing fiscal remedies to the table, though these will take time to bite,” Mukherjea added. “It looks unlikely that we will have an economic recovery this year.”
Structural or cyclical?
Amidst a global economic slowdown fuelled by trade tensions between China and the United States, India is among many countries feeling the effects of reduced demand.
But unlike countries such as Vietnam (which, according to media reports, will be the new home of Google’s smartphone production unit), India is “unable to cash in” on the space left by ebbing demand in the US for Chinese goods and services, says Jayshree Sengupta, Senior Fellow at the Observer Research Foundation.
India’s inability to capitalise on China’s disadvantage reveals the structural barriers hampering its competitiveness. “Compared to some of our neighbours, we have “relatively higher productivity costs, poor infrastructure and low workforce productivity,” Sengupta told Al Jazeera.
Accounting for around 15 percent of India’s economic output, the country’s manufacturing sector has not managed to help transition the economy away from one that is dominated by agriculture – a typical route for raising incomes as nations become industrialised.
More than 40 percent of the workforce is languishing in the farming sector, reeling from low prices and blocked exports. That’s had a knock-on effect on wage growth, which is stagnant, and also on demand, which has become stifled in a traditionally consumption-driven economy.
Ishita Mehrotra, an economist at Ambedkar University, Delhi, also points to the disruption of demonetisation (a botched attempt at removing money earned from illegal activities and hidden from tax authorities) for causing a “liquidity crunch [shortage of hard currency] in a rural economy that is mostly cash-based”.
The “contraction of the construction sector, which previously absorbed a lot of rural labourers” is a further influence on an already tight labour market, she added.
Unemployment remains high and a thorn in the side of a government that initially came to power promising massive job creation. When coupled with rising inflation, this means households are putting the brakes on spending.
“In urban areas, people are not saving, but they are not spending either. It’s a strange situation,” said Sengupta. “This tells you that channels like healthcare and education are a big part of their expenditure- these are the areas where the government needs to invest”.
Reviving consumption demand is a top priority for economic recovery, said the Reserve Bank of India’s (RBI) annual report, as the RBI asked banks to further reduce borrowing costs to encourage consumers and businesses to spend.
With its hands on an unprecedented payout of $24bn from the RBI’s surplus reserves, many hope the government can now deliver a much-needed cash injection that will help revive business activity.
The value of new projects announced between 2018 and 2019 hit a 14-year low, according to the Centre for Monitoring Indian Economy. This indicates a lack of business confidence. Financial markets have also not recovered fully from a liquidity crisis induced by last year’s collapse of Infrastructure Leasing & Financial Services, a major non-bank lender.
The government has announced a $10bn recapitalisation plan for public sector banks to boost lending to industry.
However, economists have warned that boosting the supply side does not necessarily solve the problem of low business and investor confidence.
With increased government spending seen as the need of the hour, there are calls to significantly widen the country’s tax base and help replenish government coffers without relying on central bank handouts. India’s tax revenue is currently 16 percent short of budget estimates due, according to the Economic Survey 2018-19.
“Instead of [giving] tax incentives to foreign portfolio investors and finding support for the automobile sector, the real issue is providing a demand stimulus,” said CP Chandrasekhar from the Centre for Economic Studies and Planning at Jawarharlal Nehru University, in New Delhi. “The government needs to raise spending, and to do this sustainably, it must raise taxation”.
The July budget, which came after the ruling Bharatiya Janata Party secured a huge victory in the May 2019 elections, also disappointed those who expected to see greater clarity on the government’s reform agenda.
While a consolidation of India’s myriad labour laws is underway and while there’s been global praise for the bankruptcy law introduced in 2016, barriers – such as land acquisition and the privatisation of state companies that could help to stimulate growth – have yet to be addressed.
“The budget spoke a lot about what the government had achieved in its first term, but not so much about what it will do in the next,” said Chandrasekhar, adding that the government should focus on the economy rather than “diversionary politics” at this time.
Critics have recently suggested the recent revocation of Article 370, which has brought media reports of unrest to Indian-administered Kashmir, is a tool to detract attention away from an ailing economy.
“It’s not usual to see unemployment levels as high as ours, in countries with a similar demographic structure,” Chandrasekhar said. “This should be the priority of the day”.