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India’s faltering economy poses questions for Modi

NEW DELHI — Mr Amit Shah, president of India’s ruling Bharatiya Janata Party (BJP) and the engineer of the party’s election victories, recently made a rare public address on a problem that threatens Prime Minister Narendra Modi’s 2019 re-election prospects: the faltering economy.

A roadside currency exchange vendor sorts Indian currency notes at his stall in Agartala, India, December 6, 2016. Source: Reuters

A roadside currency exchange vendor sorts Indian currency notes at his stall in Agartala, India, December 6, 2016. Source: Reuters

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NEW DELHI — Mr Amit Shah, president of India’s ruling Bharatiya Janata Party (BJP) and the engineer of the party’s election victories, recently made a rare public address on a problem that threatens Prime Minister Narendra Modi’s 2019 re-election prospects: the faltering economy.

“The BJP government that took office three years ago has completely transformed the thought processes of the people and has been successful in creating brand India,” Mr Shah told the Federation of Indian Chambers of Commerce and Industry, adding that business leaders should stop “grumbling”.

“It is now for the Indian industry to cash in on the high pedestal that the economy has been placed.”

Two years ago, India was indeed touted as a rare bright spot in a dim global economy. Its growth had outpaced that of a slowing China, and Mr Modi’s government briefly revelled in India’s status as the world’s fastest-growing large economy.

Many expected India to enjoy a sustained economic boom. That hope was not realised. Since early 2016, Indian growth has slowed consistently.

In the quarter ending June 30, gross domestic product growth fell to 5.7 per cent — its slowest since early 2014, the doldrums of the previous Congress government. July’s index of industrial production has also surprised economists, up just 1.2 per cent, with 15 of 23 industries contracting.

New Delhi insists that the downturn is temporary — a wobble due to reforms such as the July 1 introduction of a national value added tax.

But many economists suggest India is facing serious structural problems from which it is unlikely to recover rapidly.

Companies and banks remained weighed down in high levels of stressed debt. Exports — which helped drive growth after Mr Modi took over — have faltered. Private investment has fallen steadily since early 2016 with little sign of imminent pick-up.

“The reasons why corporates are not investing is because there is no demand,” says Mr Jahangir Aziz, head of emerging markets analysis at JPMorgan.

“India, like every other emerging market, is dependent on foreign demand to drive its growth. Foreign demand went down, and India did not replace it with an alternative.”

Since taking power, Mr Modi’s economic vision has centred on boosting India’s appeal and competitiveness as a manufacturing base — to encourage more companies to “Make in India”.

He vowed to revive long-stalled infrastructure projects, including those mired in unsustainable debt. He has talked of slashing red tape to improve the ease of doing business.

His government has pushed through the new goods and services tax, which is turning the country into a genuine single market.

But in a world of excess global manufacturing capacity, some suggest that New Delhi’s focus on promoting India as an export-oriented manufacturing base may not deliver the expected results.

“When global trade is languishing, it’s very difficult for India to stand up and say we are going to take market share away from China,” says Mr Aziz. “Everybody is fighting for a smaller and smaller pie.”

It does not help that the rupee has also appreciated strongly, rising 6 per cent against the dollar this year, as relatively high interest rates compared with other markets attract capital inflows.

Many economists argue the currency is overvalued — an argument so far dismissed by New Delhi. “Countries often make a mistake and take pride in the stronger currency, and that is a very risky thing,” says Mr Kaushik Basu, who served as chief economic adviser to India’s previous Congress government.

“The rupee in real terms has become strong and that is showing up in exports not doing well and imports picking up a bit too rapidly.”

The introduction of India’s goods and services tax has undoubtedly damped short-term economic impact, as many manufacturers ran down their stocks amid uncertainty about how the government would give tax credits for goods made before July 1.

“Everybody started reducing inventory levels,” says Mr Gaurav Daga, whose business imports plastic polymers used to make goods ranging from shoes to cables to auto components.

“Nobody had any clarity about the transition credits.”

But many say India’s economy is also reeling from the aftershocks of last year’s radical demonetisation, when Mr Modi banned the use of nearly 86 per cent of the country’s cash, severely disrupting daily life and commerce.

Many small enterprises, which account for the vast majority of India’s jobs and traditionally have operated almost entirely in cash, were hard hit and have yet to recover, as they now wrestle with the complexities of the new tax regime.

“What we are seeing over the past six months is largely driven by demonetisation,” says Mr Basu, who was also chief economist of the World Bank. “It has affected the bottom end most heavily. People’s buying power was damaged hugely. Notes are in the banks, not in people’s hands or their pockets.” THE FINANCIAL TIMES

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