India loses its bang as growth fizzles
Gloomy Diwali reflects economy
New Delhi’s Gandhi Nagar market is one of India’s largest garment wholesale hubs, offering inexpensive readymade garments for the aspirational but price-sensitive lower middle class.
Typically, the run-up to the annual Diwali festival is the market’s peak season, when the narrow lanes are so jammed with buyers hauling clothes it is difficult to move. But in 2019, traders complain, the festive shopping season has been gloomy, with sales falling precipitously as a deepening economic slowdown hurts ordinary Indians.
Hit by lay-offs, pay cuts and reduced earnings, anxious consumers are tightening their belts. “For common people, these are luxury items,” says Sahil Nangru, 26, whose small business makes children’s outfits, selling them wholesale for about Rs500 ($7.07) a set. “People do not have money in their hands these days. Businessmen do not have money to invest.”
The gloom at the market reflects the malaise in India’s economy, now under the spotlight after the hoopla of Prime Minister Narendra Modi’s security-focused re-election campaign — and his triumphant victory just six months ago.
Not that long ago India was revelling in its status as the world’s fastest-growing large economy. It seemed on the cusp of its aspiration of growth rates of 9%-10%, the pace economists say is necessary to create enough jobs for the estimated 12-million Indians entering the workforce yearly.
But since the second quarter of 2018, when GDP grew at a brisk 8% year on year, India’s economy has steadily lost steam. GDP growth sank to just 5% in the three months to June 2019, its slowest pace in six years. And as the economy skids, India’s millions of selfemployed contract workers and farmers have all taken a hit.
“People’s businesses have collapsed,” says Nidhi Varma, who runs a shop in a Delhi mall, and has watched as other shops shut down around her in recent months. “People don’t have enough profit to pay rent.”
New Delhi insists the difficulties are a cyclical blip, brought on by tumultuous international conditions. But many economists believe the slowdown is of India’s own making — the result of policy missteps, sluggish marketoriented reforms and Modi’s failure to resolve problems in the financial system left by overexuberant lending during the previous Indian National Congress administration.
According to the most recent RBI consumer confidence survey, Indians’ optimism about their future prospects is ebbing away.
Families have been living beyond their means, drawing down savings and taking loans, government statistics show.
India’s automotive industry, which accounts for about 40% of manufacturing GDP, suffered a contraction in passenger and commercial vehicle sales of 23% year on year from April to September. Sales of motorcycles and other twowheelers contracted 16%. Other industries are slowing.
India is forecast to grow 6% this financial year, but some see that as over-optimistic. Arvind Subramanian, the government’s former chief economic adviser, dropped a bombshell in June, when he argued that India’s official GDP statistics probably overstated growth by 2.5 percentage points a year from 2011/2012 to 2016/2017.
Though the government has rejected his claim, many economists in India and abroad have questioned the credibility of India’s headline GDP growth in recent years, which has often appeared at odds with weaker underlying data.
Subramanian, who says he raised his concerns about the data when in government, believes India has been struggling since the global financial crisis.
“The malaise is not recent,” he said. “Essentially, India never recovered from the global financial crisis. Investment and exports — the main engines of growth for developing countries — have never recovered.” Others believe Modi’s policies — to clean up and formalise a notoriously corrupt business culture — have also taken a toll, inflicting severe disruption on two of the country’s most employmentintensive sectors.
His draconian 2016 cash ban and the chaotic roll-out of a new tax system were knockout blows for millions of small, informal enterprises that had operated beyond the tax net. Many could not cope with either the goods and services tax’s technical or financial demands. Real estate was also hard hit, leaving developers with a vast inventory of unsold and unfinished buildings.
The anticorruption drive also unnerved corporate India, stalling investment. Businesspeople say officials seem to see all entrepreneurs as suspect, and treat corporate distress as evidence of deliberate malfeasance.
“Many parts of business in India were like a dirty white shirt,” says Uday Kotak, CEO of Kotak Mahindra Bank. “India needed to clean it with soap and a wash, but we must take care that in the wash process, we avoid tearing the shirt.”
It is a far cry from the kind of job-generating economic boom Modi was expected to deliver in 2014, when he promised to bring “good days” to a young, restless population. “It’s a crisis,” economist Abhijit Banerjee said before he won the Nobel Prize earlier in October.
“People are poorer now than they were in 2014/2015.”
Modi and his cabinet still talk grandly of India growing into a $5-trillion economy by 2024. But independent economists warn serious vulnerabilities — including overstretched public finances and the fragile financial system, will to weigh on India’s prospects. /