Indian economy bouncing back, but still not high enough
If Narendra Modi finishes five years with growth pretty much at the same level as he inherited, a clear opportunity will have been wasted
The Indian economy has been short of good news recently. So the latest GDP growth figures, released on Wednesday, come as a bit of a relief: The economy grew at 7.2% in the last three months of 2017, slightly faster than expected. For the entire financial year—due to end on 31 March—the government’s statisticians now estimate growth of around 6.6%. This is lower than the 7.5% growth registered in 2016-17 but, given that in previous quarters of the current financial year growth was 5.7% and then 6.5%, it’s safe to conclude that the growth slowdown plaguing India has bottomed out.
Still, few will be celebrating. For one, the slowdown India has endured has been largely self-inflicted. A bad-debt crisis, an inexplicable decision to ban cash holdings overnight and then a poorly planned rollout of the new goods and services tax (GST) combined to push Indian growth well below 6%. It’s hard to cheer a recovery when you shouldn’t have had anything to recover from in the first place.
Three additional concerns cast a shadow over this apparent revival. First, there’s the question of where the growth is coming from. The data suggest something of a revival in investment—which strikes me as odd, given that new investment proposals hit a 13-year low during the quarter in question.
In fact, the biggest engine of growth continues to be government spending, which is supposed to grow by almost 11% in real terms this year. Put that together with India’s troubling fiscal deficit—which is pushing 7% of GDP when both the federal and state governments are included, one of the worst figures in the G-20—and this revival starts to look a bit unsustainable.
Second, as the government’s pre-budget survey of the Indian economy pointed out, the return to growth is accompanied by concerns about macroeconomic variables—not just the fiscal deficit, but also inflation. There’s some reason to suppose that the Reserve Bank of India (RBI), freed from worries about a slowing economy, will tighten monetary policy sooner than expected. Whether that will choke off a revival in private investment before it begins is anyone’s guess.
And third, but most important, there’s this simple question: Is 7% growth enough? Remember, back when the current Indian government was sworn in—inheriting a recovering economy growing at, coincidentally, 6.6%—many officials insisted that double-digit growth was around the corner. “India growing at five percent, six percent or even seven percent is not an India that is going to face up to [the challenge of youth unemployment],” finance minister Arun Jaitley warned back then. And he was right. In India, a country where a million young people join the job market every month, seven percent growth simply isn’t enough.
This isn’t to say that there hasn’t been important forward movement on the reform agenda. The GST may have had a rocky introduction but it still got done; once all the glitches are ironed out months or years from now, it should help knit India’s disparate state markets into a more perfect union. The government has also acted energetically on the banking system’s bad-debt problem, with auctions of the most problematic stressed assets now making headlines. And a big recapitalization program will not just help banks clean up their balance sheets, but also hopefully boost lending to a timid private sector.
Yet, just as the GDP numbers fall short of potential, India’s government, too, is performing short of its potential. There’s still no appetite for privatizing India’s chronically under-performing state-run lenders—which, as a recent scandal shows, are too often used by the rich and well-connected as their personal piggy banks. And an otherwise ambitious government has been paradoxically cautious when it comes to structural reform of things like India’s stifling labour laws. Currently, companies that have more than 100 workers aren’t permitted to fire any of them unless government officials consent. A proposal that this consent no longer be required for enterprises that employ fewer than 300 people was withdrawn in less than a week.
Perhaps it’s too late in Prime Minister Narendra Modi’s term for him to take a risk on economic reform. But if he finishes five years with growth pretty much at the same level as he inherited, a clear opportunity will have been wasted. Bloomberg View