Modi faces limited options to reverse India’s slowdown

NEW DELHI: Prime Minister Narendra Modi is stuck between a rock and a hard place. Growth in Asia’s third-largest economy has been slowing for the past five quarters, thanks largely to the chaotic roll out of the goods and services tax and a surprise ban on currency notes to pin down tax evaders. That’s sparked talk of stimulus measures to boost expansion from the slowest pace in three years. But his options are limited. Sluggish output means revenue collections haven’t kept pace and any spending boost would only widen one of Asia’s largest budget deficits, stoke inflation and, possibly, prompt a review of India’s investment grade rating. Standard and Poor’s cut China’s rating last week citing risks from soaring debt. “The revenue uncertainty this year because of GST implementation and likely slippage in non-tax revenue should limit the government’s ability to increase direct spending significantly,” said Credit Suisse economist Deepali Bhargava. Modi’s administration, which took power in 2014 promising to create jobs, is battling a public perception of economic mismanagement after growth fell below 6% in the June quarter. On top of it, foreigners are dumping stocks at the fastest pace this year as weak earnings fail to justify the boom in share prices. The government’s regular cash cows aren’t in the pink of health either. The central bank has halved its annual payout, asset sale proceeds are far from the target, and telecom spectrum auctions may not find many takers as carriers struggle amid a brutal price war. Refund claims under the goods and services tax have further put receipts goal at risk. “A policy stimulus, using some combination of monetary and fiscal policies, could provide a short-term boost to growth but is unlikely to be fully effective unless accompanied by a broader range of reforms that are essential to rebuild confidence and stimulate investment,” said Eswar Prasad, a professor at Cornell University. He cautioned that a deviation from a path of fiscal consolidation could backfire without broader reforms. Modi has tried, albeit unsuccessfully, to change archaic labour and land laws in the country to enable faster growth. Meanwhile efforts to clean bank balance sheets with a new bankruptcy framework has yet to yield results. Private investment has been sluggish with banks battling bad assets and credit growth for years now. GDP growth is the weakest since 2014 – the GST roll out in July dealt a fresh blow to businesses even before they could recover from the cash clampdown of November. The move to void 86% of currency in circulation hurt consumption and investment in what was once the world’s fastest-growing major economy. Measures to support growth might come at the cost of fiscal slippage. The budget deficit is pegged at 3.2% of the gross domestic product in the year through March.