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.

As news goes from bad to worse, Modi govt scrambles to revive the economy

Finance Minister Nirmala Sitharaman said this week she's not closing the door on additional steps to support the economy.

Business Standard : The bad news is getting worse for India’s economy and Prime Minister Narendra Modi is exhausting all options to stem the fallout. Data on Friday will likely show the economy had its weakest performance last quarter in more than six years, with the growth rate dropping below the symbolically important 5% mark. It’s a culmination of several months of downbeat figures, from plunging car sales to shrinking factory output and an export slump.

Having left much of the stimulus burden to the central bank early this year, Modi is now taking bolder steps to reverse the decline. In recent months, the government has slashed corporate taxes, set up a special real-estate fund, merged banks and announced the biggest privatization drive in more than a decade. While authorities are committed to doing more, the policy room may be narrowing. “Domestic demand is displaying chronic weakness, with an apparent credit crunch afflicting wide swaths of the economy,” said Taimur Baig, chief economist at DBS Group Holdings Ltd. in Singapore. “Production and sales are under pressure, and public spending is running out of room due to poor tax collection.”

Why in India, 6% Economic Growth Is Cause for Alarm: QuickTake

Friday’s eagerly awaited data will probably show gross domestic product grew 4.5% in the July-September period from a year ago, according to the median estimate of 41 economists surveyed by Bloomberg. That would be the slowest pace since the March quarter of 2013. India was the world’s fastest-growing economy until last year, posting quarterly growth rates of as high of 9.4% in 2016. A crisis among shadow banks -- a key source of funding for small businesses and consumers -- weak rural spending and a global slowdown have since conspired to bring down growth steadily.

“The nature of the slowdown is broad-based, with consumption as well as investment oriented sectors feeling the pain,” said Indranil Pan, chief economist at IDFC First Bank Ltd. in Mumbai. “Continuing poor domestic sentiment along with the lack of any demand uptake globally would ensure that any recovery process would only be gradual.”

Aggressive Easing

The Reserve Bank of India has already cut interest rates by 135 basis points this year to the lowest since 2009, with more easing to come. The central bank is expected to look through the recent breach of its 4% medium-term inflation target and deliver another rate cut on Dec. 5. India’s Central Banker Das Faces a Tough Balancing Act (1) “The onus is on the government to do the heavy lifting,” said Devendra Pant, chief economist of India Ratings and Research, a local unit of Fitch Ratings Ltd..

Moody's sees credit crunch to prolong in India, pain for households

Ratings company cuts India's outlook to negative, says fewer jobs will be created.

Moody’s Investors Service said it doesn’t expect the credit squeeze among Indian shadow lenders to be resolved quickly, and warned that the squeeze may actually worsen and add to risks in the already flagging economy.

“Stress among non-bank financial institutions with the possibility of a more severe credit crunch that would affect credit supply, both directly and indirectly through linkages with non-banks and banks, adds to the downside risks to the medium-term growth outlook,” the ratings company said in a statement. It cut India’s outlook to negative, the first step toward a downgrade.

Moody’s comments come days after S&P Global Ratings warned that risks of contagion are rising in the Indian financial sector. The credit quality of Indian companies has plummeted to a record low as Prime Minister Narendra Modi’s government struggles to revive economic growth from a six-year-low.

With state-run banks still grappling with a pile of bad loans, credit supply is likely to remain impaired for “some time,” Moody’s said. Loan-growth in Asia’s No. 3 economy slumped to 8.8% in October, the lowest level in two years, RBI data show. Bank credit to private, non-financial companies accounts for more than half of India’s gross domestic product, according to data from the Bank for International Settlements.

The spread between the RBI’s key policy rate and the weighted average lending rate on outstanding loans from commercial banks is the highest in data going back to February 2012.

Indian households, which already have among the lowest per capita incomes for emerging markets, can’t fully absorb such shocks as fewer jobs will be created, Moody’s said.

Business Standard

Every number in Budget is authentic, says Finance Minister Sitharaman

Data given in the Budget is 100% above board, Sitharaman said.

Finance Minister Nirmala Sitharaman on Wednesday said the government was committed to the path of fiscal consolidation without compromising on public expenditure. Sitharaman also said all the data mentioned in the Budget 2019-20 was authentic, allaying the Opposition’s doubts about the numbers.

Doubts have cropped up because the Budget assumed 12 per cent economic growth at current prices, while the Economic Survey, presented a day earlier, implicitly pegged the growth at 11 per cent. All the key numbers in the Budget — be it revenues or the fiscal deficit — are based on the nominal GDP growth rate assumed for the year.

Replying to the general discussion on the Budget, Sitharaman said the assumed gross domestic product (GDP) growth rate for FY20 was on the basis of the first advance estimates for national accounts released on January 7. However, the Economic Survey projected the growth rate based on the first actual numbers released on May 31, she said.

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“Data given in the Budget is 100 per cent above board. I wish to assure the entire house that there need not be any speculation on the figures which have been given out. Every number is authentic,” Sitharman said.

She added she had given reasons why there were differences between one number in the Economic Survey as opposed to what has appeared in the Budget document. The Survey pegged the FY20 GDP growth at constant prices at 7 per cent. If inflation, as mandated by the Reserve Bank of India at 4 per cent, is taken into account, the growth at current prices comes at about 11 per cent.

The first advance estimates have pegged the GDP at current prices at Rs 190 trillion for FY19. However, it was Rs 188 trillion in the first actual numbers, also called provisional numbers.

“Both the projections are consistent with each other,” said Sitharaman. Earlier, experts also pointed out holes in the Budget numbers based on these two projections. A query has been raised about the “missing” Rs 1.7 trillion fiscal hole in India’s financial accounts. This is so because the Budget uses the revised estimates, a projection of how much the government was expected to earn, while the Economic Survey uses the first actual numbers. The RE used in the Budget show earnings of Rs 17.3 trillion in 2018-19, while the first actual numbers in the Economic Survey show that the government had earned Rs 15.6 trillion.