Mumbai, India – India‘s economy continues to decelerate, presenting challenges to policymakers tasked with reviving growth as the coronavirus outbreak disrupts global supply chains and saps business and investor confidence around the world.
Figures released on Friday by the National Statistics Office (NSO) showed India’s economy grew an anaemic 4.7 percent on an annualised basis in the final three months of 2019 – marking a slowdown from the same period a year earlier, as well as from the previous quarter’s revised growth rate of 5.1 percent.
Hopes for a stronger pick up in activity had been fed by the emergence of potential green shoots late last year including increased optimism among auto-dealers, a bellwether of economic health, and a bumper winter crop.
But that was before the spread of coronavirus starting in January. As global recession risks mount with the widening outbreak, and the fallout of COVID-19 becomes clearer, forecasters are revising growth estimates downwards.
“Global growth and trade are weakening and there are certain manufacturing supply chains through which disruptions in Chinese production impact India,” Priyanka Kishore, head of India and South-East Asia at Oxford Economics, told Al Jazeera. “We could see slower recovery going forward than people are expecting”.
The NSO has pegged 2019-20 growth at 5 percent, representing no change from last month’s estimates. Growth in India peaked in 2016 at 8.2 percent, the rate at which India’s own finance ministry said it must grow to achieve its goal of becoming a five-trillion-dollar economy in five years.
Now, there are fears that “stagflation” – a term coined to reflect the twin pressures of a stagnant economy and rising consumer prices – is squeezing household incomes in a traditionally consumption-led economy.
India’s government has tried to stem the slowdown with a host of measures, including tax cuts and cash injections for the banking and automobile sectors. However, February’s budget session left many wanting, as Finance Minister Nirmala Sitharaman failed to announce the spending increases, which analysts said would help spur growth.
“I saw nothing in the budget to indicate support for a demand-led slowdown,” Rayaprolu Nagaraj, economist at the Indira Gandhi Institute of Development Research, told Al Jazeera. “It was a missed opportunity to take decisive action.”
Are recent stimulus measures working?
Last year, New Delhi enacted an unprecedented $10bn recapitalisation plan for the country’s ailing banking sector. This has brought some relief to a sector struggling with a backlog of non-performing loans and the surprise collapse in October of the major non-bank lender IL&FS.
Combined with lending rate cuts at the central bank this has appeared to “improve financial conditions if not heal the sector altogether,” said Kishore. “Liquidity is now in a relatively more comfortable position.”
Analysts said a bigger problem though is creating a demand for credit among Indian corporates who are working through piles of bad debt and have no appetite for new investment.
Credit growth shrunk to 7 percent in December 2019, from 12.8 percent a year earlier, according to latest estimates from the Reserve Bank of India. Add to this a “fear factor” among businessmen who worry about speaking up against government decisions and it is not clear we will not be seeing any change soon, said Nagaraj.
“Right now, you have corporates sitting and waiting amongst a lot of policy uncertainty,” he added.
A $20bn corporate tax cut in late 2019, followed by changes to the personal income tax regime in February’s budget may have also missed the mark.
Given the current low-risk and low-appetite environment, few are confident the cuts will translate into capital formation. Companies are “likely to bank the savings or simply announce higher profits,” said Nagaraj, adding that, similarly, individuals are unlikely to translate any tax savings into buying more goods.
At 22 percent, India’s corporate tax rate is now one of the lowest in Asia. Policymakers hope this will make Indian businesses more competitive and revive animal spirits. But while such reforms are welcome said analysts, they will take time to bite.
“Tax realisation is a good policy overall but it does not address the cyclical slowdown,” said Kishore, adding that the policy tool would be more impactful from a structural perspective.
New Delhi increasing tariffs on certain goods like auto-parts, chemicals and electric vehicles, has also raised fears of a return to protectionism and the effect this could have on trade channels.
Though the aim is to “protect Indian industries from the onslaught of dumping by China,” the move will end up hurting export-orientated companies in the long run, cancelling out gains said Sengupta.
Tackle the ‘low hanging fruit’
With unemployment flagging at 7.2 percent and the RBI’s consumer confidence survey showing sentiment at a six-year low, analysts said the government ultimately needs to put money back in people’s pockets to boost consumption.
“Fear of job losses among the low- and middle-income groups mean they are reluctant to spend,” said Jayshree Sengupta, senior fellow at the Observer Research Foundation’s economy and growth programme, adding that distress in the agricultural sector which employs close to half the country, is further stifling rural demand.
Many analysts, therefore, baulked at the finance ministry’s $1.3bn (94.1 billion rupees) cut to a key rural employment scheme that guaranteed at least 100 days of work in a year.
“Perhaps the government doesn’t think much of the programme or has its own political reasons,” suggested Nagaraj, “but the net effect is that an opportunity to put money in the hands of people who will spend it immediately, the rural poor, has been removed”.
While New Delhi’s hands are somewhat tied by an increasing revenue shortfall, raising expenditure on “low-hanging fruit”, such as improving infrastructure, is the need of the hour said Kishore. Investments in roads, internet connectivity and a reliable power supply would have a multiplier effect of drawing in private enterprise, as well as creating jobs.
Helping private business to spur export-led growth is where other emerging economies, like Bangladesh, are faring better. According to World Bank data, per capita income in India’s neighbour is at $1,698 – close to overtaking India’s ($2,009) after successive decades of low value-added manufacturing growth and higher than average annual growth for the region.
“Many developing economies made long-term finance available to business, which is key,” said Nagaraj, “whereas we did away with development banks in the early nineties in the name of reforms.” Analysts said this has helped other economies adapt quicker and capitalise on the recent US-China trade tensions, while India largely missed out.
Picking up the pace on structural reforms would also help attract more private investment.
Analysts have said India’s business environment is still largely “undesirable” in the face of complex labour laws and lengthy land acquisition procedures. Kishore also pointed to the way e-commerce platforms now have to navigate a controversial data protection bill, as well as the frosty reception given to Amazon head, Jeff Bezos upon his India visit last month. “We’re telling the world we want investment but we’re not sending consistent signals,” she said.
An industrial policy to boost manufacturing is also sorely lacking. Manufacturing is the typical route to industrialisation for developing economies, but so far, India has struggled to convert its mostly farming workforce into a blue-collar one. At one point, it was believed India could leapfrog manufacturing into a service-based economy “but that’s proven to be untrue,” said Nagaraj who believes this is still the optimal route to growth.
“There’s a bank of low-skilled labour in our small towns – we need to grab this opportunity with both hands.”