Before returning to New Delhi recently after attending the annual IMF-World fall meeting, Finance Minister Nirmala Sitharaman provided an upbeat perspective on the Indian economy. She asserted that its fundamentals are strong and attributed the majority of the problems ailing the Indian economy to a global slowdown. In the same time period, the World Bank announced that India had jumped 14 spots from 77th to 63rd on its Ease of Doing Business ranking. Together, these indicators might suggest that it should be plain sailing for strong growth of the Indian economy going forward.
That”s not exactly the case. Growth will be more difficult than these pronouncements make it appear. Economists, both Indian and international, have pointed out that the nearly $3 trillion economy faces a number of problems. For example, the Reserve Bank of India and the International Monetary Fund, among other domestic and international groups, have cut the country”s growth projections — in part due to the decline in global growth but also because of other internal factors.
There is no doubt that much of the progress that was made in the Indian economy during Prime Minister Narendra Modi”s first term is due to reforms and new initiatives. It is also unquestionable that additional reforms and corrective actions will be required to move the economy forward.
The results-producing economic reforms during the first term focused primarily on business and domestic welfare. On the welfare front, cooking gas connections for millions, assistance to farmers, and government-funded health care made a difference for citizens and at the ballot box for Modi. On the business side of the ledger, changes to the Insolvency and Bankruptcy Code, the Make in India campaign, and special incentives bolstered investor confidence and attracted a large amount of direct foreign investment.
Not all of the economic reforms produced the desired results. There is a general consensus among economists today that two of the biggest economic initiatives, the demonetization and the introduction of the nationwide Goods and Services Tax (GST), have not had the desired effects.
Demonetization, which removed nearly 86 per cent of the existing banknotes worth $210 billion from circulation, was initially seen as an audacious move to curtail the country”s shadow economy. But the cash shortage badly impacted several sectors, including manufacturing and agriculture.
The job market was also affected, with an estimated loss of 1.5 million jobs, according to the Centre for Monitoring Indian Economy. This contributed, to India”s GDP growth rate at the macro level falling under 7 per cent for the first time since 2011.
The GST, which was introduced in the summer of 2017, replacing the existing taxes collected by the central and state governments, was seen as a necessary move to reform India”s tax regime. However, after an uneven rollout that resulted in a lot of confusion, GST has still not been fully embraced by small businesses and industries.
In addition to the unintended consequences of these initiatives, a third internal factor that has contributed to the less than satisfactory growth of the Indian economy over the past five quarters was a slowdown in reforms. It was widely reported that in the run-up to the general election, the government more or less stopped the reform process altogether.
As a result of all these factors and others, the Indian economy today is definitely sluggish. Consumption has slowed down three quarters in a row. The automotive industry, one of the fastest growing sectors for several years, has shrunk significantly in the past year. There have been poor performances in several other important sectors such as banking, manufacturing and real estate as well.
The IMF projects India to grow at 6.1 per cent this fiscal year. The Center for Monitoring Indian Economy makes an even lower prediction. It expects the economy to grow at 5.9 per cent, “the slowest growth in the last seven years.”
What is required to get the India economy to turn the corner and change the current narrative that it is stuttering? First and foremost, the Modi administration should recommit itself to and accelerate the economic reforms process. In this regard, Simeon Djankov, Director of Development Economics at the World Bank, said that to continue to improve on its ease of doing business ratings, India will need a “ fresh set of reforms.”
It appears that India has begun to relaunch the reforms process. In September, Finance Minister Sitharaman cut the corporate tax on profit from 30 per cent to 22 per cent, which was universally welcomed by businesses and investors in the country. Now, similar bold reforms are required in multiple areas in a sustained manner, including deregulation of sectors such as energy and increasing foreign investment caps in areas such as insurance, retail and defence.
Another key requirement for growing the economy is modernizing the country”s infrastructure. Roads and railroads in India, except in some pockets, require major upgrades. Recently, Union Steel Minister Dharmendra Pradhan announced that the country will spend about $1.4 trillion on infrastructure development over the next five years. Taken together, both the corporate tax cut and the announcement of $1.4 trillion spending on infrastructure signal, that the government is serious about reforms. The government has also announced several stimulus measures. Additionally, the Reserve Bank of India has slashed the repurchase rate nearly half a dozen times this year.
There is much underway. But India is a huge economy and there is much that will need to be done in order to continue to move the needle dramatically over time.
The current quarter, which began in October, is pivotal. If the corporate tax cut and the stimulus measures have an impact, it will be reflected in the quarterly numbers, which will be available early next year. One hopes those numbers will be headed in the right direction. If they are, then progress will have to be sustained. If they are not, adjustments will have to be made.
State Bank of India Chairman Rajnish Kumar, who accompanied Finance Minister Sitharaman as part of the Indian delegation to the World Bank and IMF meeting, stated that Indian economy is in “transition” and opined that he thought India was “ at the bottom as far as growth is concerned.” By staying the course and updating the reform playbook that it had in its first term the Modi administration can prove his assessment to be correct.