India’s economy has slowed just as it was expected to accelerate

A year ago, India bounced back from the Covid-19-induced recession with spring. The country has overtaken China as the most populous nation, and its leaders have declared India the world’s fastest growing major economy.

It was music to the ears of foreign investors, and to India’s prime minister, Narendra Modi, who boasted all the time about his country’s inevitable rise. Home to 1.4 billion people, a vibrant India could become an economic workhorse for the rest of the world, which has stumbled through the fog of trade wars, China’s troubles and Russia’s invasion of Ukraine. .

India will overtake Britain in 2022 as the world’s fifth largest economy, and next year is expected to overtake Germany in fourth place. But India has lost a step, revealing its weakness even as it climbs the world rankings.

The stock market, which has been rising for years, has just erased the gains of the past six months. The currency, the rupee, is rapidly depreciating against the dollar, making the country’s income smaller on a global scale. India’s new middle class, whose wealth has grown at an unprecedented rate since the pandemic, is wondering where it went wrong. Mr. Modi will have to make good on his promises.

November brought the first negative shock, when national statistics revealed that annual economic growth slowed to 5.4 percent over the summer. The last business year, which ran from April to March, grew by 8.2 percent, enough to increase the size of the economy in a decade. The revised forecast for the current fiscal year is 6.4 percent.

“It’s a reversal of the trend,” said Rathin Roy, a professor at the Kautilya School of Public Policy in Hyderabad. There was a brief period, 20 years ago, when India seemed poised for double-digit growth. But, Mr. Roy said, that growth depends on banks lending to businesses at unsustainable rates.

Since the government withdrew large amounts of money from circulation in 2016 to curb the underground trade, Mr. Roy said, the economy has not recovered even by 8 percent. It seems better, he said, because “Covid did the dip, as it happened in many economies. India’s economy did not return to full size until last year,” behind most other countries.

The reasons behind the decline are debated. One consequence is undeniable: Foreign investors are headed for the exits.

“Foreign investors have taken the call that the Indian stock market is overvalued,” Mr. Roy said. “It would be logical for them to get out of emerging economies and put their money where they can earn more,” such as on Wall Street, he added.

Investors who bought a mix of Indian stocks in early 2020 watched their value triple last September, as major market indices hit record highs.

The number of Indians buying stocks grew faster, which helped push prices higher. Ahead of parliamentary elections in June, Mr Modi’s right-hand man, Amit Shah, predicted that India’s new investor class would help catapult his party to victory. During Mr. Modi’s first two terms in office, the number of Indians holding investment accounts rose from 22 million to 150 million, according to a survey by brokerage Motilal Oswal.

“Those 130,000,000 people are going to get something, right?” Mr. Shah argued to The Indian Express, a newspaper. The new investors clearly spent. In particular, luxury and other high-end sectors fared well: cars over motorcycles, high-end electronics over household basics.

But this prosperity, concentrated in the top 10 percent, left the other 90 percent wanting more. Mr. Modi’s party lost its majority in Parliament, although it retained control of the government. Welfare payments helped, such as free wheat and rice distributed by the government to 800 million people.

Despite such programs, the Modi government is fiscally conservative and keeps a close eye on inflation. It has focused on spending on big-ticket infrastructure, such as bridges and highways, which is believed to attract private companies to invest in their own businesses.

Indian companies still have to contend with excessive exploitation, political interference and other common problems. The Modi government has tried to reduce these burdens, but in recent years has focused on increasing economic output.

The government of India is betting big on building new airports, for example. But the airlines that are meant to serve them are pulling out. Vacationers who would have flown to beach destinations like Sindhudurg, between Mumbai and Goa, are not buying enough tickets to keep a terminal open.

Arvind Subramanian, an economist at the Peterson Institute for International Economics in Washington, attributes the lack of demand to the broader labor market.

“There is no job creation, so people have no income and wages are depressed,” he said. There are not enough shareholders to make up the difference. The country’s minimum wage, which is not paid to many workers in the informal economy, is just $2 a day.

Mr. Subramanian, who was the country’s chief economic adviser during Mr. Modi’s first term, said the government was “absurd, and at a loss” to deal with such problems. “An idea for sustainable growth and job creation — that’s what we’re missing today,” he said.

He believes that the rupee’s fall is only natural, and should come sooner. Until recently, the central bank spent billions of dollars to support the value of the national currency.

The psychological impact of the depreciation of the rupee can be painful, but the cost of keeping it at an exchange rate against the dollar is “very damaging to the national economy,” he said.

No one is happy to see slow growth. The government’s current chief economic adviser, V. Ananta Nageswaran, told a news release in November that the bad news could be understated. “The global environment remains challenging,” he said, with the dollar strong and the possibility of sudden political moves in the United States and China on hold.

A year ago, it was hoped that India’s own economic engine could propel it through the global storm. The missing ingredient, then, like this, starts with too many people having too little money.

“There’s just not enough demand,” said Mr. Roy, a teacher in Hyderabad. “The idea that we can expect supply to create its own needs has its limits,” he said.

“Regular people,” said Mr. Roy, those between the top 10 percent who see great gains in the stock market and the bottom 50 percent who struggle to make ends meet, still “don’t have enough money to buy.” the foundation”. About 100 million of these regular people qualify for free grain.

Mr Nageswaran, the current economic adviser, is expected to release a budget for the new fiscal year on February 1, but it could include tax cuts, putting more money in the hands of consumers. .

“This idea that India needs a tax cut, it’s misguided and perverse,” said Mr. Subramanian, a former economic adviser. “Consumption is weak because incomes are weak.”

Last month, Mr Nageswaran told Assocham, a business leadership group, that employers needed to pay their workers more, noting that wages were rising. “A lack of workers’ compensation will result in self-destruction or damage to the business sector,” he warned.