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Tuesday, 12 December 2017

The two Indias

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  • India’s Prime Minister Narendra Modi performs yoga with others during a yoga camp to mark the International Day of Yoga, in New Delhi, India.

One and a half years since taking power, Narendra Modi’s superstar status on the international stage contrasts with mounting frustration closer to home.

India’s prime minister has been busy of late. Narendra Modi spent much of his first year in charge of the world’s largest democracy globetrotting, visiting industrial powerhouses like South Korea and Japan, while courting Sri Lanka and Myanmar, neighbouring states that have, in recent years, been sucked into China’s widening commercial orbit. The former teaboy who turned his home province of Gujarat into a manufacturing and technology hub has become something of an international political rock star. Manhattan ground to a halt when he visited New York last year, while nearly 20,000 showed up to hear him wax lyrical about India’s digital future at the S&P arena in Silicon Valley in September. In November, the leader of the Bharatiya Janata Party will speak to a 75,000-strong audience at London’s Wembley Stadium.

Yet, political leaders are judged on their performances at home rather than overseas and here, at least so far , India’s premier has been found wanting. Elected last year after Indians ran out of patience with the dithering of the Congress Party and the chronic corruption that had pervaded a slowing economy, Modi promised the sort of real change consumers, jobseekers and entrepreneurs craved for – more jobs, greater growth, and plenty of reforms.

All three were, and are, vital to the country’s future. On Modi’s arrival, major infrastructure projects had been bogged down for years due to arcane and restrictive land laws. Growth dipped below 7% for the third straight year in 2014, according to data from the World Bank. The working-age population will hit 1.15 billion mid-century, creating a demographic dividend that will either – depending on whether policymaking is soggy or sensible – cement India’s place at the top economic table, or lay the foundations for future social unrest.

For now, top-line data suggests India is in a good place. In its latest World Economic Outlook published in October, the IMF tips economic growth to hit 7.3% this year, down from its previous forecast of 7.5%, but enough to warrant a thumbs-up from IMF managing director Christine Lagarde, who described India as a “bright spot” in the global economy. Barclays expects gross domestic product to hit 7.8%, the fastest pace since 2010, when it topped 10%. A year and a half ago, India was bracketed as one of the so-called “fragile five” countries deemed vulnerable to higher US interest rates. Yet, it escaped this group, as lower oil prices helped cut inflation and bring the fiscal deficit under control. India’s current account deficit fell to US$6.2bn in the second quarter of 2015, from US$31.8bn at its peak in the final three months of 2012.

Still, none of this has been enough to dispel a sense of gloom that continues to shroud the world’s ninth-largest economy. Indeed, there is a lingering feeling that Modi is failing to deliver on his own pre-election promise of injecting more enterprise and efficiency into the economy, while slashing red tape and reducing the throttling power of the state. Some have even begun asking if he is indeed the “Great Reformer” of legend, or merely a high-functioning bureaucrat with a penchant for self promotion. Modi promised to change India for good and for better, yet many are starting to wonder what he has really accomplished.

“Reforms are stalling in parliament and chances are that comprehensive reform packages will not be passed in the medium term.”

Let us start with GDP. In most developing economies, a growth rate of 7%-plus will be cause for celebration. (The IMF in October also tipped 2016 GDP to come in at 7.5%). Yet, many had expected it to accelerate even faster this year, as India’s private-sector industrialists put their considerable cash reserves to use in new industrial and commercial projects. In an ideal world, notes London-based Capital Economics, India’s economy “could sustain GDP growth of 10% a year if it were to get everything right”. However, it adds that, with growth “still falling well short of this, India is doing far worse than it could do at this stage in its development”.

Even the seemingly rosy current growth data has been cast into doubt, due to the uncertainty surrounding a new data reporting mechanism that incorporates a metric called gross value added. The original thinking here was solid: GVA, which Modi predecessor Manmohan Singh put in place, was designed to offset the distorting effects of taxes and subsidies, ensuing that growth data was based on market prices rather than factor costs.

Yet, the vagaries of the new system have even baffled even seasoned economists. For instance, while manufacturing output officially grew 7.2% year on year in the second quarter of 2015, industrial data points to a real rate of growth of about half that level. The same is true for retail sales and construction, where raw data paints a far more despondent economic picture. Reserve Bank of India governor Raghuram Rajan has publicly expressed his misgivings over the accuracy of the data, while BNP Paribas warns the new system has “suspiciously permanently elevated the rate of economic growth”.

Gautam Chhaochharia, head of India research at UBS, said growth in the financial year to end-March 2016 would “disappoint”. He fretted that the “few green shoots” that existed were limited to a few high-performing sectors (notably auto production) and did not point to a broad-based economic recovery. “High frequency data – business activity, consumption, surveys – continue to indicate a slow gradual growth recovery,” said Chhaochharia.

A Kolkata-based businessman lamented the emergence of “two Indias”. He said: “There’s the one portrayed in the official data, and the one everyone else – consumers, businessmen, those without a super-stable government job – sees each day.”

This reflects concerns of a schism between the state and the private sector: while public spending jumped 19% in the six months to end-September 2015 (against a 1.4% fall in the corresponding period a year ago), capital expenditure in the private sector is set to “nosedive” this year to its lowest level since 2010, curtailing wage growth, rating agency Fitch warns. This leads many outside New Delhi (and more than a few inside India’s capital) to believe that the true current rate of economic growth is closer to 5% than 7%.

What, then, can be done? The answer, in a nutshell, is reform – the word Modi and his campaign team uttered more than almost any other last year. Reform in India tends to focus on two interconnected factors: slashing red tape, and unleashing the private sector. So far, though, the prime minister’s report card has been distinctly mixed. Modi has sent the right messages, pushing ministers and regional governors to get serious about tackling a mountain of toxic loans in the banking sector, and sorting out a power grid that tends to seize up in the summer months.

A pledge to more than double renewable-energy capacity to 175 gigawatts come 2022 underscores plans to industrialise the economy (while limiting carbon emissions) and deliver power to all Indians. Energy and banking reforms, says Firat Unlu, chief India economist at the Economist Intelligence Unit, indicate that the premier “understands what needs to be done to put the Indian economy on a firmer footing. While this is a far cry from his campaign promise of ‘good days’ ahead, he has taken the right steps.”

The Modi government has also pushed through measures to deregulate the coal sector, open the defence and railways sectors to private investment and – in an unpopular, but necessary and brave move – axe diesel subsidies, long a drain on state budgets.

Still, too many of the government’s grand, overarching reforms have either been mishandled, become wedged in legislative limbo, or dropped entirely in the face of public opposition. Much-heralded efforts to sell stakes in state firms to private investors have underwhelmed: a 10% sale in Indian Oil Corporation succeeded only when Life Insurance Corporation of India (LIC), the country’s biggest investor and another sprawling state firm, bought 86% of the shares on offer.

Meanwhile, with India’s parliamentary upper house, the Rajya Sabha, still under the control of the opposition, “prospects for a comprehensive overhaul of India’s land or labour legislation are remote at the moment,” said the EIU’s Unlu. “Reforms are stalling in parliament and chances are that comprehensive reform packages will not be passed in the medium term.” Opposition leaders have also systematically blocked a much-hyped sales tax, the GST, which should give states far more control over their budgets and boost GDP up to 2 percentage points a year.

This makes ongoing elections in Bihar, one of India’s poorest and most-crowded states – yet also one of its fastest growing – more important than ever. If Modi can win in the northeastern province, with polling due to end on November 29, it will offer much-needed impetus to his reform drive. A dozen state elections will follow next year: win all or most of them, and Modi and the BJP will be in position in 2018 to push through all the reforms they like.

That may be the only way India can ever get to unleash its full potential, given that the current opposition, which loathes Modi as much as, say, House Republicans in the US despise president Barack Obama, are “highly recalcitrant, and show little sign of cooperation with the government on key reform issues”, according to the EIU’s Unlu. Failure to gain control of the upper house may halt Modi’s already stuttering reform drive in its tracks. Also gone will be India’s best, and maybe last, chance to inject genuine change into an economy that so often fails to deliver on its promises.

To see the digital version of this report, please click here

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com

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