A year ago, India was bouncing back from the coronavirus recession. The country had overtaken China as the most populous country, and leaders had declared India the world's fastest-growing major economy.
This was music to the ears of foreign investors, and it was also music to Indian Prime Minister Narendra Modi, who boasted about his country's inevitable rise at every opportunity. India, with a population of 1.4 billion, could become an economic workhorse to power the rest of the world, which is stumbling in the fog of trade wars, China issues and Russia's invasion of Ukraine.
India will kick out Britain in 2022 It is the world's fifth-largest economy and is expected to displace Germany into fourth place by next year. However, India fell a step behind, exposing its vulnerabilities even as it moved up in the world rankings.
The stock market, which has soared for years, just wiped out gains from the past six months. The rupee is rapidly depreciating against the dollar, making the country's income dwarfed on the world stage. India's new middle class, whose wealth has soared like never before after the pandemic, is wondering where they went wrong. Mr. Modi will have to adjust his promises.
The first severe shock came in November. National statistics revealed that the economy's annual growth rate slowed to 5.4% over the summer. Last year's growth rate, which ran from April to March, was 8.2%, enough to double the size of the economy in 10 years. The revised forecast for the current fiscal year is 6.4%.
“This is a return to trend,” said Rashin Roy, a professor at the Kautilya School of Public Policy in Hyderabad. Twenty years ago, there was a time when India was on the verge of entering double-digit growth. But Roy argued that growth depends on banks providing loans to businesses at unsustainable interest rates.
The economy has not recovered even an 8% pace since 2016, when the government withdrew huge amounts of cash from circulation in a futile effort to curb underground commerce, Roy said. “Because we had the coronavirus downturn, as has happened in many economies,” he said. “India's economy failed to regain its absolute size until last year,” he said, lagging behind most other countries.
The reasons behind the slowdown are debatable. One influence is undeniable. That means foreign investors are heading for the exit.
“Foreign investments indicate the view that the Indian stock market is overvalued,” Roy said. “It's very logical for them to pull out of troublesome emerging economies and put their money where they can make more money, like on Wall Street,” he added.
Investors who bought a wide range of Indian stocks in early 2020 saw their values ​​triple by September last year as major market indexes hit record highs.
The number of Indians buying stocks grew even faster, which led to higher prices. Ahead of June's parliamentary elections, Mr. Modi's right-hand man, Amit Shah, predicted that India's new investor base would help his party win a landslide victory. During Mr. Modi's first two terms, the number of Indians with investment accounts rose from 22 million to 150 million, according to a study by brokerage firm Motilal Oswal.
“These 130 million people are going to earn something, right?” Shah argued to The Indian Express. New investors were clearly spending money. Luxury goods and other luxury goods sectors performed particularly well, such as cars over motorcycles and high-end electronics over household goods.
But that prosperity is concentrated among the top 10 percent, and the other 90 percent want more. Mr. Modi's party retained control of the government but lost its parliamentary majority. The expansion of welfare benefits, such as wheat and rice, which the government distributed for free to 800 million people, helped.
Despite these plans, the Modi government remains fiscally conservative and closely monitors inflation. It focuses spending on big-ticket infrastructure items, such as bridges and highways, that are said to encourage private companies to make their own investments.
Indian businesses still have to contend with excessive red tape, political interference and other familiar challenges. The Modi government has sought to ease these burdens, but in recent years has focused on expanding economic supply.
For example, the Indian government made a big bet on building a new airport. But the airlines that were supposed to serve them have pulled out. Holidaymakers who were planning to fly to seaside places like Sindhudurg, between Mumbai and Goa, are not buying enough tickets to keep terminals open.
The lack of demand goes back to the broader employment situation, said Arvind Subramanian, an economist at the Peterson Institute for International Economics in Washington.
“People have no income and wages are stagnant because jobs are not being created,” he said. There are not enough shareholders to make up the difference. The national minimum wage, which many workers in the informal economy are never paid, is just $2 a day.
Subramanian, who served as the country's chief economic adviser during Mr. Modi's first term, said the government is “stuck and running out of ideas” to tackle these issues. “Ideas that drive long-term growth and jobs, that's what we're missing right now,” he said.
He believes the rupee depreciation is natural and should have happened sooner. Until recently, central banks spent billions of dollars trying to maintain the value of their currencies.
While the psychological impact of a weaker rupee could be painful, the cost of maintaining a fixed exchange rate for the rupee against the dollar was “extremely detrimental to the national economy,” he said.
No one is happy when growth slows. The government's current chief economic adviser, V. Ananta Nageswaran, said at a press conference in November that the bad news could be temporary. “The global environment remains challenging,” he said, due to the strong dollar and concerns about the possibility of sudden policy actions by the United States and China.
A year ago, there were hopes that India could weather global headwinds with its own economic engine. Scarce materials, then as now, begin with too many people having too little money.
“There simply isn't enough demand,” says Roy, the Hyderabad professor. “There are limits to the idea that we can expect supply to create its own demand,” he said.
Mr. Roy said “ordinary people” between the top 10% who make big gains in the stock market and the bottom 50% who struggle to get by still “don't earn enough to buy the necessities.” Approximately 100 million of these ordinary people are eligible to receive free grain.
The government is scheduled to announce the new fiscal year budget on February 1st. Nageswaran, the current economic adviser, has fueled hopes that the budget will include tax cuts, putting more money into the hands of consumers.
“The idea that India needs tax cuts is completely wrong and reversed,” said Subramanian, a former economic adviser. “Consumption is sluggish because income is low.”
Last month, Nageswaran told Assocham, a group of business leaders, that wages have stagnated and that employers need to pay workers more. “Not paying workers enough will ultimately be self-defeating or harmful to the business sector itself,” he warned.
