INDIA’S ECONOMIC WOES ARE PIERCING MODI’S AURA OF INVULNERABILITY

[With 1.3 billion people, India is the world’s most populous democracy. In 10 years, economic forecasters predict that India’s economy will climb to third-largest in the world, behind only the United States and China. What happens here matters, and domestically, confidence is strained.]

By Jeffrey Gettleman and Hari Kumar

The Kavad family — from left, Krishna, Vasantben and Bharat Bhai —

rely on lace piecework in their home in Surat. But India’s recent

tax changes make it difficult for businesses to hire them, and

 their income has been cut by half, they say.

Credit Atul Loke for The New York Times

SURAT, India — The immense popularity of Narendra Modi, India’s most dynamic prime minister in decades, has always rested on two legs: Hindu nationalism and his tantalizing promises to build on the country’s go-go economy.

That second leg is now looking a little shaky.

In the last two years, India’s consumer confidence has plummeted, construction has slowed, the fixed investment rate has fallen, many factories have shut down and unemployment has gone up.

Fingers are pointing at Mr. Modi. Just about all economists agree that two of the prime minister’s biggest policy gambles — abruptly voiding most of the nation’s currency and then, less than a year later, imposing a sweeping new sales tax — have slowed India’s meteoric growth.

“Things have been worsening, worsening, worsening,” said Himanshu, an economics professor at Jawaharlal Nehru University in New Delhi, who uses only one name.

Still, the economy here is far from failing. The stock market continues to soar, major rail, road and port projects are unfolding across the country, and foreign investors poured $25.4 billion into India from April to September, up 17 percent from the period in 2016.

The government on Friday predicted that the country’s gross domestic product would grow by 6.5 percent in the 2017-18 financial year. While that is the lowest number the country has seen in four years, India’s economy is one that most countries would love to have.

But it does not feel that way to the huge number of Indians negatively affected by Mr. Modi’s policies, and the grumbles are growing. So are social tensions, especially those that divide Hindus from Muslims, and upper caste from lower caste. The fear is that Mr. Modi is already beginning to lean more heavily on that first leg of his, Hindu nationalism, now that his economic strategy is losing some of its sheen.

With 1.3 billion people, India is the world’s most populous democracy. In 10 years, economic forecasters predict that India’s economy will climb to third-largest in the world, behind only the United States and China. What happens here matters, and domestically, confidence is strained.

Even in Gujarat, the state considered the strongest of Mr. Modi’s strongholds, where people have been cheering his rise for the past 20 years and line up in dusty fields by the thousands just to catch a glimpse of his saffron scarf and groomed white beard, many feel betrayed.

The output from the textile industry, a huge employer here and once a healthy exporter, has been cut nearly in half, prompting layoffs and despair.

In many of the industrial areas, the happiest merchants are the merchants of scrap, who make their rounds in lurching trucks, scooping up looms, steel spools and other underused machinery for pennies on the dollar.

In December, in an election that the entire country was watching because it was seen as a referendum on Mr. Modi’s governance, Gujarati voters elected a new State Assembly. Mr. Modi’s party maintained its majority but lost 16 seats.

The message was clear: Mr. Modi’s party was still No. 1, but the man himself was no longer bulletproof.

“Modi hurt our business, and we want to show him that we can hurt him, too,” said Manish Patel, whose once clackety cloth factory is now completely empty, another Gujarati business that has gone under.

Mr. Patel complained that under Mr. Modi, “It was like we were in first class and now we’ve been put in 10th class.”

So for the first time in his life, Mr. Patel voted for the Indian National Congress, the leading opposition party, not for the Bharatiya Janata Party of Mr. Modi.

Here in Surat, a Gujarati metropolis with hundreds of years of storied mercantile history, Mr. Modi’s currency policy hit like a sledgehammer. It was November 2016, and when Mr. Modi abruptly announced that large denomination rupee notes were invalid and being replaced with new currency, panic erupted.

Manish Patel and his older brother, Dilip, who run the family’s cloth business, found themselves scurrying into line at the bank and waiting hours each day, trying to get money.

It was never enough, and when the brothers could not pay their loom operators, many walked off. Hundreds of factories had the same problem. The Surat textile traders association said production in this area dropped to 25 million meters a day now from 40 million meters two years ago.

It’s hard to overstate how central cash is to Gujarat, and India in general. Most laborers, whether they operate looms, drive trucks, wash clothes or haul bricks, are paid in stacks of soft rupee notes, Mahatma Gandhi’s face on each one.

Even large real estate deals, say for a home that costs the equivalent of $500,000 or $600,000, will be done partly in blocks of rupees, to keep profits off the books.

This was what motivated Mr. Modi, who has made fighting corruption a big plank in his platform. He said that by making people turn in old bank notes, he would capture billions of rupees of so-called black money.

It has never been made clear how much black money he actually captured, and perhaps he thought he could get away with the enormous disruption because India’s economy had been doing so well. It expanded at more than 8 percent annually between 2005 and 2009 and more than 7 percent between 2010 and 2014.

But his timing seems to have been bad.

Unlike many of the other big economies that turn on exports — such as China’s, Japan’s or Germany’s — India is not nearly as industrialized.

Mr. Modi has vowed to change this, launching a Make in India campaign to attract foreign investors. But analysts say that India’s labor laws are still too restrictive, imposing all kinds of red tape on factories of more than 100 workers, which discourages businesses from thinking big. “A manufacturing revolution is nowhere in sight,” one commentator recently said.

India’s economy remains substantially influenced by domestic rural demand. And back-to-back droughts in 2014 and 2015 ruined millions of farmers, slowing down overall growth.

Then in July 2017, before people had a chance to recover from the currency chaos — which had also hampered consumption, because many Indians simply didn’t have any spare cash in their pockets — Mr. Modi moved ahead on another front: the new goods and services tax, or G.S.T.

It was the most sweeping tax overhaul India had ever tried, and probably overdue. But many economists and business people questioned Mr. Modi’s timing on this as well.

Suddenly, with the economy softening, all but the smallest businesses had to file dozens of returns each year, online, paying taxes on everything from yarn to mixed nuts, often at confusing rates

Business owners like the Patels, who had run their factory off a calculator and a paper pad, said they had no idea how to file.

“You need a computer; you need to buy online time; you need to hire someone who knows how to do it,” Manish Patel lamented. “All this costs money.”

Many small businesses began to suffer from something they did not understand.

“G.S.T., G.S.T., what is this G.S.T.?” said Bharat Bhai Kavad, who works out of his house in Surat with his wife and daughter sewing lace on garments for a big textile company. “I didn’t know at first what this G.S.T. was, and now it’s come from Delhi to Gujarat to Surat to my house.”

Because the Kavad family’s lace work is unregistered and informal — they get paid a few rupees for each lace they attach — they cannot produce the proper receipts bigger companies need to comply with new tax rules. The Kavads’ earnings have been cut in half.

This is one point that many people here make: The informal economy feeds the formal; the two are inextricably linked.

“The informal sector is a very important part of the economy, a bridge, a foundation of the economy,” said Mr. Himanshu, the economics professor. “And then you attack them?”

Politics are shaped by expectation, and many Indians said they expected more from Mr. Modi. About one million Indians enter the work force every month, and job creation is one of the country’s most urgent political priorities. Mr. Modi has come nowhere near his promise of creating 10 million jobs a year.

The unemployment rate was 5 percent, the worst in five years, in 2015-16. Some studies show that at best, a few hundred thousand jobs have been created each year under Mr. Modi in major industries such as textiles, transportation and information technology, though this excludes the informal sector, where millions of Indians traditionally work.

India’s economy still has a lot going for it: It is already huge, and still growing relatively fast. It has an educated work force; a young, working-age population; and a public that craves new technology. Facebook has 217 million monthly active users in India, second only to the United States.

Economic growth is projected to be higher next year, and Mr. Modi’s supporters say that as India’s economy matures, some sort of slowdown was inevitable. And it is not as if his base has fragmented.

For every Gujarati business owner who wants to send Mr. Modi an angry message, many others are still with him. This was the area where Mr. Modi built his commanding brand as the state’s top politician for 13 years before becoming prime minister in 2014, and where he attracted heavy manufacturing and investment.

But for many people here, politics and economics are not connected at the hip. Kailash Dhoot, a textile exporter, said that Mr. Modi’s recent policies had wounded his business but that Mr. Modi’s party was still his first choice.

When asked why, Mr. Dhoot was quick, and curt, with an answer. “Hindutva,” he said. And he closed his mouth firmly, signaling the discussion was over.

Hindutva is a philosophy adopted by Mr. Modi’s party that emphasizes Hindu supremacy.

Since Mr. Modi came to power, so-called cow vigilantes have brutalized or killed dozens of people, many Muslim, for slaughtering or trading cows, a venerated animal in the Hindu religion. The hate crimes seem to never end.

Analysts fear that if the economy continues to come up short of expectations, Mr. Modi might turn more to what are termed “communal issues,” subjects that divide communities based on religion or caste.

“If economic maneuverability is limited,” said Ashutosh Varshney, a political-science professor and India specialist at Brown University, “then the communal card, the Hindu-Muslim card, is a massive political temptation.”

“That’s what Mr. Modi did in Gujarat,’’ Professor Varshney said. “He twisted every available political possibility into a Hindu-Muslim question.”

One example was Mr. Modi’s accusations that opposition leaders were in cahoots with Pakistan, India’s rival and a nation with a strong Islamic identity, after some opposition leaders met some Pakistani officials at a recent social event.

Many people saw those claims as a low blow to stir up Gujarati Hindus, who make up the state’s vast majority.

“It didn’t used to be like this,” said Hanif Belim, a taxi driver in Gujarat. But nowadays, he added, “politicians divide the public and sit on the side and watch them fight.”

Follow Jeffrey Gettleman and Hari Kumar on Twitter: @gettleman and @HariNYT.

Vindu Goel and Ayesha Venkataraman contributed reporting from Mumbai, and Suhasini Raj from Morbi, India.

@ The New York Times