Can Modi reinvent himself a third time and deliver structural reforms?

Mismanagement at home and increasing protectionism abroad have ensured that India has dropped out of that group of fast-growing emerging economies.

Business Standard : It’s now official: The Indian economy is suffering through a major slowdown, and one that shows no immediate sign of easing.

The only surprise is that the estimate for growth in gross domestic product last quarter isn’t even lower than the announced 4.5 per cent. When the Narendra Modi-led government presented its first budget after being re-elected, it expected growth in 2019-20 to be around 7 per cent. A few months later, the Reserve Bank of India slashed that to 6.1 per cent. It is hard, now, to see how even that rate — relatively slow by India’s past standards — will be achieved.

Hidden in the disaggregated numbers is the story of what has gone wrong. Investment has collapsed. It contracted 3 per cent in real terms last quarter, after growing almost 12 per cent in the same quarter last year. What has grown faster is government spending. It may have been responsible for as much as 40 per cent of whatever growth India did have.

Since early in his first term, Modi has largely abandoned his campaign promise to get government out of business. Instead, he’s relied on the public sector to build a welfare state and prop up growth. In the heady years, as falling oil prices flattered Indian growth and fattened the treasury, it looked like his strategy was working.

But the money is rapidly running out. Including spending by provincial administrations, the deficit is approaching 8% of GDP. Claims that public spending would make investment more attractive for the private sector have not been borne out. There simply isn’t enough money to go around — with the government taking the lion’s share of financial savings, private investment has to be content with the meager leavings.

India’s government has nobody else to blame. The economy has slowed in the past — most recently, during the commodity boom and the “taper tantrum” — but on each such occasion there was some sort of exogenous calamity it had to deal with. There hasn’t been a bad monsoon, or sudden commodity price inflation, or a balance-of-payments crisis. The world economy isn’t exactly booming, yet export-oriented economies like Vietnam and Bangladesh seem to be doing fine. Vietnam grew at 7.3 per cent in the last quarter, and Bangladesh may see two successive years of 8 per cent growth.

Mismanagement at home and increasing protectionism abroad have ensured that India has dropped out of that group of fast-growing emerging economies. It’s fashionable in India to worry about slumping consumer demand and blame it for the slowdown.