[The economic data continue to flash warning signs. The corporate and income tax collected by the government — an indicator of overall economic vitality — is set to fall during the current fiscal year for the first time in two decades, Reuters reported. The latest available nationwide figures show that unemployment spiked to a 45-year high in 2018. And leaked data from a flagship survey conducted once every five years indicated that consumer spending fell in 2018 for the first time in four decades.]
By Joanna
Slater
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Indian
Prime Minister Narendra Modi speaks on opening day of the budget
session
in New Delhi. (T. Narayan/Bloomberg News)
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NEW
DELHI — Faced with faltering
economic growth, India's government unveiled measures on Saturday aimed at
getting millions of Indians to spend and spurring companies to invest.
The task at hand is urgent: India was the
world’s fastest-growing major economy as recently as last year but has since
ceded that spot to China. The news has only worsened in recent months, with
economic output in the current fiscal year expanding at the slowest pace in
more than a decade.
The government on Saturday presented its
annual budget, a much-anticipated exercise that serves as a manifesto for
economy policy. It announced moves to cut certain taxes, encourage investment
and reduce its stakes in major publicly owned companies.
But investors looking for bold steps to power
India back to faster growth were left disappointed: the country’s benchmark
stock index slid more than 2 percent on Saturday.
Here’s what you need to know about the
predicament facing India’s economy.
How
bad is the economy?
Very. While economies around the world have
decelerated recently, India has slammed into a wall: In just over a year,
economic growth tumbled by nearly half from a rate of 8 percent to 4.5 percent
in the latest quarter. For a developed country, that would still be a healthy
rate of expansion. But in a developing economy like India that hopes to pull
tens of millions out of poverty and employ a young and burgeoning workforce, it
feels almost like a recession.
The economic data continue to flash warning
signs. The corporate and income tax collected by the government — an indicator
of overall economic vitality — is set to fall during the current fiscal year for
the first time in two decades, Reuters reported. The latest available
nationwide figures show that unemployment spiked to a 45-year high in 2018. And
leaked data from a flagship survey conducted once every five years indicated
that consumer spending fell in 2018 for the first time in four decades.
India’s economy is in the “intensive care
unit,” said Arvind Subramanian, who served as the government’s chief economic
adviser for four years until 2018. “The evidence is just too large and too
mutually supportive to not raise alarm bells.”
How
did it get to this point?
That depends on who you ask. The government,
together with some economists, contends that India is in a temporary downturn,
with economic growth suppressed by an unfavorable environment worldwide. By
this reckoning, the slump will end later this year and the economy will pick up
speed.
Other economists worry that there is
something deeper than a cyclical slowdown at work. They say several factors —
some of them years in the making — are together acting as a lead weight on the
economy. India’s financial sector is dealing with a bad-debt hangover in sectors
like real estate and infrastructure. Such bad loans have poisoned the climate
for investment, making banks unwilling to lend and companies averse to fresh
borrowing.
The government of Prime Minister Narendra
Modi made a challenging situation worse, these economists say, with its abrupt
decision in 2016 to invalidate most of India’s currency. The move paralyzed the
country’s vast informal economy, which is based on cash transactions. The
introduction of a nationwide value-added tax soon after — a step economists
praised in principle but criticized for its botched rollout — didn’t help.
The picture is “sharp and scary,” wrote R.
Nagaraj, an economist at the Indira Gandhi Institute for Development Research
in Mumbai, earlier this month. Slower economic growth has translated into job
losses and stagnant wages in rural India, he said, leading to falling consumer
spending. It is the “unmistakable story of [an] economy in distress.”
Economists at Goldman Sachs wrote in a note
last year that the slowdown is the longest India has experienced since at least
2006 and represents a “considerable source of anxiety” for investors.
How
has Modi’s government reacted to the slowdown?
Until recently, the government barely
acknowledged that a slowdown was underway. In September, Nirmala Sitharaman,
India’s finance minister, announced corporate tax cuts that buoyed stocks and
aimed to spur investment but nothing further.
Several economists said that the government’s
primary focus has been elsewhere in recent months. In August, Modi undid seven
decades of Indian policy in Kashmir. In December, his government passed a
divisive citizenship law that sparked nationwide protests.
“A disproportionate amount of attention is
going into politics,” said Kaushik Basu, a former chief economist at the World
Bank and a professor at Cornell University. “The economy is feeling the neglect
and that worries investors.”
What
happens next?
Basu said Sitharaman faces a dilemma. The
economy needs a jolt of stimulus in the form of higher government spending, but
any significant move in that direction risks enlarging the gap between public
spending and tax revenue.
“It’s a very dangerous game, but I don’t
think she has a choice,” he said. Sitharaman needs to put “more buying power in
people’s hands, which could mean that the fiscal deficit that was going to be
reined in will not be reined in.”
Amit Basole, an economist at Azim Premji
University in Bangalore, said the situation was serious enough that “now is
really the time to be concerned about the real economy, not the fiscal
deficit.” He urged an expansion of a government program to guarantee jobs in
rural areas to get those consumers to spend.
Subramanian, the former chief economic
adviser, said the government could start with a more limited set of goals:
fixing the jam in the financial system and ensuring the reliability of
government statistics so policymakers can properly assess the scope of the
problem. On spending, “the government just doesn’t have the space to do
anything dramatic or drastic,” he said.
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