Global slowing has raised concern about its impact on individual countries. India is not usually on these lists, given its multi-year growth record, its vast potential, current political certainty, and its greater insulation from external factors. Yet recent economic stats have raised eyebrows about the subcontinent’s near-term growth path. Is India in trouble?
The second quarter of this year was not good for a host of economies, and a disturbing number of them came within a hair of recession. India’s second-quarter GDP number was a shocker, logging its weakest growth in more than six years, at just 5%. High frequency indicators have also reflected this weakness—year-to-year auto sales were down 41% as of August. Has the global chill given India a cold…or worse?
The weakening external environment likely plays a role, but it’s at best a “bit part.” Export growth will be muted given weaker global demand and persistent global trade uncertainties and India’s relatively low trade exposure will limit its impact on the broader economy. After all, India’s exports and imports are just 21% and 24% of GDP, respectively, well below the exposure of China and other emerging economies. At the same time, foreign direct investment accounts for less than 2% of GDP.
Nascent weakening seems to have been largely self-inflicted. This downturn has been in the works for some time, at long last reflecting the demonetization scheme of November 2016 and the rollout of the new goods and services tax in July 2017. Add to that the recent bank amalgamation and policy uncertainty following Modi’s re-election, and there’s cause for the pause.
Is India in for more than a pause? Not likely; economic fundamentals remain strong. Improvements both in domestic labour productivity and population growth, including in middle- and high-income households, continue to be solid pillars of India’s medium- to long-term potential growth rate of 7.5% to 7.8%. Further, the re-elected majority Modi government appears to be committed to growth-stimulating measures and reforms.
Short-term relief is already in the works. Last month, the government mandated federal agencies and departments to replace old vehicles, received a $25-billion dividend of “surplus capital” from the central bank supporting stimulus measures, announced a public-private partnership infrastructure plan totalling $1.3 trillion, and ordered the public bank consolidation to support credit flow. Moreover, monetary easing has delivered four rate cuts, and another is expected in October.
There’s more: low world prices of crude oil have helped to narrow India’s current account deficit to just 0.6% of GDP, well inside the 3% level deemed unsustainable by the International Monetary Fund when oil was at $100 per barrel. A further reason for optimism is the monsoon season. Over 60% of India’s population dwells in monsoon-dependent rural areas. To date, rainfalls have risen by 34% in the previous two months, a positive development for production.
Future sustained growth will depend on policy progress. Prime Minister Modi is well known for business-enabling reforms that catapulted India’s World Bank’s Ease of Doing Business scores to 77th place in 2019 from 130th spot in 2014 in the 190-country sample. There is great hope that his second successive majority will lead to further ambitious reforms, although in the early going, more politically oriented measures have muddied the outlook.
On balance, India’s near-term future seems bright. The aggressive growth path of recent years has ignited aspirations on a broad base, and policy progress has fuelled international interest in India’s long-term potential.
