A year ago, India was bouncing back from a Covid-19-induced recession with a spring in its step. The country had overtaken China as the most populous country and its leaders were declaring India the world’s largest and fastest growing economy.
This was music to the ears of foreign investors and to India’s Prime Minister, Narendra Modi, who in any case boasted about his country’s inevitable rise. Home to 1.4 billion people, a revitalized India could become an economic workhorse to power the rest of the world, which is being hampered by the fog of trade wars, China’s troubles and Russia’s invasion of Ukraine.
India displaced Britain in 2022 as the world’s fifth largest economy, and by next year it is expected to overtake Germany in fourth place. But India has lost a step, exposing its weaknesses even as it moves up the global rankings.
The stock market, which rose for years, has just erased the gains of the past six months. The currency, the rupee, is depreciating rapidly against the dollar, making domestic revenues look smaller on the global stage. India’s young middle class, whose wealth soared like never before after the pandemic, is wondering where it went wrong. Mr. Modi will have to adjust his promises.
November brought the first nasty shock, when national statistics revealed that the economy’s annual growth had slowed to 5.4 percent over the summer. Last fiscal year, which ran from April to March, grew by 8.2 percent, enough to double the size of the economy in a decade. The revised outlook for the current fiscal year is 6.4 percent.
“It’s a reversal of the trend,” according to Rathin Roy, a professor at the Kautilya School of Public Policy in Hyderabad. There was a brief period, 20 years ago, when India looked poised to break into double-digit growth. But, Mr. Roy argued that growth depended on banks pumping out loans to businesses at an unsustainable rate.
Since the government withdrew large amounts of money from circulation in 2016 in a futile attempt to curb underground trade, Mr. Roy said, the economy has never recovered its 8 percent pace. It just looked better, he said, because “you had the Covid downturn, as it did in many economies. India’s economy did not return to absolute size until last year”, later than most other countries.
The reasons behind the slowdown are up for debate. One effect is undeniable: foreign investors have gone for the exit.
“Foreign investment has gotten the call that the Indian stock market is overvalued,” said Mr. Roy. “It’s only logical that they would get out of pesky emerging economies and put their money where they could earn more,” like Wall Street, he added.
Investors who bought a broad mix of Indian stocks in early 2020 saw their value triple by last September as major market indices hit record highs.
The number of Indians buying stocks rose even 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 propel his party to victory. During Mr. Modi’s first two terms, the number of Indians holding investment accounts went from 22 million to 150 million, according to a study by Motilal Oswal, a brokerage house.
“These 130,000,000 people are going to win something, right?” Mr. Shah reasoned to The Indian Express, a newspaper. Young investors were clearly spending. In particular, luxury and other high-end sectors were doing well: cars more than motorcycles, high-end electronics more than basic home appliances.
But this prosperity, concentrated among 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. Expanded welfare payments, such as the free wheat and rice the government distributed to 800 million people, helped.
Despite such programs, the Modi government has been fiscally conservative and keeps a watchful eye on inflation. He has focused spending on big-ticket infrastructure items, such as bridges and highways, that are supposed to entice private enterprises to make their investments.
Indian businesses still have to deal with excessive bureaucracy, political interference and other well-known difficulties. The Modi government has tried to reduce those burdens, but in recent years it has focused on increasing economic supply.
The Indian government has bet big on building new airports, for example. But the airlines that were set up to serve them are pulling out. Vacationers who would have flown to coastal places like Sindhudurg, between Mumbai and Goa, are not buying enough tickets to keep a terminal there open.
Arvind Subramanian, an economist at the Peterson Institute for International Economics in Washington, traces the lack of demand to the broader employment situation.
“Jobs are not being created, so people have no income and wages are depressed,” he said. There aren’t 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.
Mr. Subramanian, who was the country’s chief economic adviser during the first term of Mr. Modi said the government has remained “stagnant and bereft” of ideas to tackle such problems. “Ideas for long-term growth and boosting employment – that’s what we’re missing right now,” he said.
He feels that the fall in the rupee is only natural and should have happened sooner. Until recently, the central bank was spending billions of dollars to support the value of the national currency.
The psychological effect of a weakening rupee can be painful, but the cost of keeping it at a fixed exchange rate against the dollar was “extremely damaging to the national economy,” he said.
No one is happy to see growth slow. The government’s current chief economic adviser, V. Ananta Nageswaran, said at a press conference in November that the bad news could be a mistake. “The global environment remains challenging,” he said, with a strong dollar and suspense over the possibility of unexpected policy moves in the United States and China.
A year ago, the hope was that India’s economic engine could push it through global headwinds. The missing ingredients, then as now, start with many people having very little cash on hand.
“There just isn’t enough demand,” said Mr. Roy, professor at Hyderabad. “The idea that you can wait for supply to create its own demand has its limits,” he said.
“Regular people,” said Mr. Roy, those between the top 10 percent who see big gains in the stock market and the bottom 50 percent who struggle to get by still “don’t earn enough to buy the basics.” About 100 million of these regular people qualify for free wheat.
The government is expected to publish a budget for the new fiscal year on February 1. Mr Nagswaran, the current economic adviser, has raised hopes that he could include tax cuts, putting more money in the hands of consumers.
“This idea that India needs tax cuts has exactly the wrong and opposite cause,” said former economic adviser Mr. Subramanian. “Consumption is weak because incomes are weak.”
Last month, Mr. “Not paying workers enough will end up being self-defeating or damaging to the corporate sector itself,” he warned.
