Indian economy needs revolution, not tinkering
Last week, Indian Prime Minister Narendra Modi jubilantly launched Fit India, a programme to improve the public health of the world’s second most populous country. The fitness of India’s economy is looking increasingly questionable, however. Figures released this week showed that manufacturing growth had fallen to its lowest level in 15 months. Some of the country’s largest automobile manufacturers warned of steep falls in sales. The problem is not sector-specific: over the past quarter, the Indian economy grew only 5 per cent year on year: the slowest growth in six years, 3 percentage points lower than the same quarter in 2018.
Despite hopes for reforms under Mr Modi, he has been a tinkerer when it comes to the economy. The main exceptions to this — the Goods and Sales Tax and a reform of bankruptcy law — had their roots with the rival Congress party. But Mr Modi’s government must now commit to a thorough programme of changes. The alternative is facing down an increasingly bleak economic outlook.
India’s economy has been battered by a confluence of factors, including a trade spat with the US. In recent years, state banks, faced with bad debts and non-performing loans, have been risk averse. Many would-be borrowers had to turn to unstable non-bank lenders instead. The government’s practice of using public companies to buy other public-sector assets has often raised less cash than planned. In 2015, Indian Oil’s sale of shares was marred by poor market sentiment. Failure to attract big investors meant the state-owned Life Insurance Corporation had to salvage the deal.
The $25bn profit transfer from the Reserve Bank of India to the government has further heightened concerns about the central bank’s independence among political opponents, after the departure of the governor last year and the deputy governor this June. If this money is put to long-term use there might be a case for more optimism. It is more probable however, faced with lower than expected tax revenues, the government will use it to meet its fiscal deficit target of 3.3 per cent of GDP.
In the short term, Mr Modi should live up to his election promise of overhauling India’s infrastructure and cutting its infamous bureaucracy. He should also work on fixing the financial sector, including state banks. The plans to merge many of them are poorly timed. When lending is at its most crucial, these institutions should not be distracted by major structural changes. The decision is nevertheless an important if long overdue one, which should strengthen the sector in the future. The government must also show a willingness to change its relationship with the banks. Whether through privatisation or other means, these institutions must be sealed away from the danger of government interference or they risk lapsing back to their current state.
India’s long-term agenda must include greater investment in education and an overhaul of corporate governance. India also requires significant land reforms. The arcane market is hampered by complicated rules over who has the rights to buy land, as well as rules around different uses of it. The labour market has a dire need of change too. The decision to stop publishing official employment statistics last year speaks to the lack of the good-quality jobs which Mr Modi promised.
The prime minister has increasingly relied on jingoistic and populist rhetoric to bolster his popularity. These are no substitute for the sort of economic flair which India is in desperate need of. If Mr Modi wants to bring India up in the world, he will have to be prepared to push for bold changes.