India’s economic woes

India’s economy expanded by 6.6 percent during October-December, the lowest in five quarters, on weak consumer demand and investments, dealing a  blow to Prime Minister Narendra Modi as he seeks a second term in office at a general election that kicks off next month.

Background

India is a country in South Asia. It is the seventh largest country by area and with more than 1.3 billion people, it is the second most populous country as well as the most populous democracy in the world.

According to the International Monetary Fund (IMF), the Indian economy in 2017 was nominally worth US$2.611 trillion; it is the sixth-largest economy by market exchange rates, and is, at US$9.459 trillion, the third-largest by purchasing power parity, or PPP.  With its average annual GDP growth rate of 5.8% over the past two decades, and reaching 6.1% during 2011–12, India is one of the world's fastest-growing economies. However, the country ranks 140th in the world in nominal GDP per capita and 129th in GDP per capita at PPP.

The long-term growth prospect of the Indian economy is positive due to its young population, English proficiency, corresponding low dependency ratio, healthy savings and investment rates, and increasing integration into the global economy. India topped the World Bank's growth outlook for the first time in the fiscal year 2015–16, during which the economy grew 7.6%. Despite previous reforms, economic growth is still significantly slowed by bureaucracy, poor infrastructure, and inflexible labour laws (especially the inability to lay off workers in a business slowdown).

Analysis

RBI Governor Shaktikanta Das met more than a dozen economists to get their views on the economy ahead of the Monetary Policy Committee (MPC) decision due on April 4.

Most economists expect the six-member MPC to cut the repo rate by 25 basis points for the second time in a row next month to 6.00 percent, a level last seen in August 2017. While the economists did not specify the extent of the rate cut that the RBI could consider, one of them called for a 50-basis- point reduction.

Slowing growth has hit the government’s tax collections, reducing its ability to substantially boost spending ahead of elections. However, neither Das nor any RBI official from the monetary policy department gave any indication of their thoughts or views, as is typical in such big-group meetings.

Economists and strategists spoke of several issues including drought, liquidity management, exchange rate, inflation, growth, bank credit growth, real interest rates and monetary policy transmission.

Indian women, especially those working in precarious informal sectors, are at the sharp end of what economists and opposition politicians describe as a jobs crisis in India. According to the private Centre for Monitoring Indian Economy (CMIE), 90 percent of around 10 million jobs lost last year were held by women.

Several unemployed women interviewed by Reuters said they had soured on Prime Minister Narendra Modi, a Hindu nationalist who swept to power in 2014 vowing to turn India into an economic powerhouse but has struggled to create jobs. While Modi remains the favourite in general elections that kick off next month, insufficient employment - despite India’s roughly 7 percent economic growth rate - is a major voter worry. The dwindling female labour participation rate could have far-reaching implications for India’s economic development and the progress of women’s rights in the often deeply conservative country.

Measuring the problem is tricky, and Modi’s government has delayed the release of controversial jobs data. According to the official report, the female labour participation rate was merely 23.3 percent in 2017-2018, down about 8 percentage points from 2011-2012.

Some economists pointed out that food inflation could begin inching up after September if monsoon rains were not sufficient, but was unlikely to push retail inflation past the RBI’s 4 percent target. Consumer inflation was at 2.57 percent on-year in February as food prices continued to fall for a fifth straight month.

The economists also raised concerns over a slowdown in global growth that has hurt India’s exports. India’s outbound shipments grew 2.4 percent annually in February, slower than 3.7 percent in January.

Assessment

Our assessment is that with the recent accusation by prominent economists in India about the government falsifying data, this should not be taken lightly by the opposition and the government. We believe that the government should be careful with policy-making decisions, especially when there is turbulence in the global economy due to the trade war and the oil price volatilities. 

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