Industry, development, work: Modi's India no longer has an alibi

Alessandro Fichera's opinion on the current situation in India, following the recent victory of Narendra Modi, in an analysis by Il Sole 24 Ore.

During the five years of the first Modi government, India's economy grew by an average of 7.5% a year and repeatedly snatched the pink jersey of fastest growing large economy in the world from a slowing China. An acceleration on the one hand tainted by controversy over the reliability of official statistics and on the other not sufficient to maintain one of the many commitments undertaken with the electorate: to guarantee the 10-12 million young Indians who knock on the job market every year a job, perhaps even a well-paid one. Unemployment, on the contrary, has risen: India hasn't released data for two years, but a report by the statistics office filtered to the media (and denied by the Government) puts the jobless at 6.1%, the highest for 45 years. Independent study centers register it over 7%. According to the Confederation of Indian Industry, India's GDP must grow by at least 10% to absorb the demand for labour.

However, the economy has entered a cooling phase. In the last quarter, GDP grew by 5.8% (less than China this time), from 6.6% in the last quarter of 2018, at the slowest pace in 17 months. There have now been five quarters of slowdown and in the 2018-19 budget year, GDP stopped at 6.8%, up from 7.2% in 2017-18. The lowest figure for 5 years. In the last quarter, investment growth stalled at 3.6% year-on-year, up from 11.7% in the previous three months. Instead, public consumption has more than doubled, "thanks to electoral spending," notes Prakash Sakpal of ING Economics.

Even the goal of industrialising India as a global manufacturing hub remains a long way off. The Make in India plan, investment incentives and the attraction of foreign capital (trying to replicate a Chinese development model just as Beijing is abandoning it), has not given the desired results: foreign direct investments have arrived (44.4 billion dollars in 2018, according to the latest official data), but manufacturing remains around 18% of GDP, up from 15% in 2014.

India continues to grow

The coin of demonetization has another face. It is also thanks to that operation that over 200 million people have obtained a bank account: another significant step forward for the country. As well as the opening of many sectors of the economy to foreign investments, the adoption of a new bankruptcy code and the digitization of the country. The Executive has not lacked energy and initiative and has launched numerous programs to improve the daily life of the population. Starting with hygienic and sanitary conditions: during Modi's first mandate, the houses equipped with a bathroom went from 40 to 95%. The villages reached by electricity used to be less than 40%, now almost all of them are.

In the fight against the cost of living, the Government was able to count on the incisive action of the Central Bank (RBI), which, first under the leadership of Raghuram Rajan and then Urjit Patel, put the reins on inflation that was traveling in the double digits, with peaks in the food segment. A tax on poverty, as Rajan called it: a hike in the price of onions could easily set off serious social unrest. Now (core) inflation travels below 3%. But Rajan and Patel were put in a position to leave the leadership of the Rbi, due to disagreements with the Executive on rates (the Government wanted them low) and the recovery of the banking system from non-performing loans (equal to 10%, which rises to 15% for public institutions).

India competes with the United Kingdom as the fifth largest economy in the world and with China as the most populous country (1.3 billion inhabitants). But if Beijing has aging problems, in India half of the inhabitants are under 25 years old. A demographic dividend that risks being wasted. With another five years in office, Modi can carry forward the ambitious project of transforming the country. And if in October he takes advantage of the long wave of voting and wins the elections in three key states, he will also be able to secure a majority in the upper house of Parliament. It would be the missing piece: during the first term, it was the upper house (where he was in the minority) that blocked many of his projects.

The Stock Exchange believes it and travels around the highs. “A very important signal”, underlines Alessandro Fichera, managing director of Octagona, who invites us not to be too frightened by the slowdown in GDP. "Stock market trends in India - he explains - are very indicative of what will happen in the economy". The tax on the purchase of goods and services (GST), he continues, is now fully operational and should begin to support economic activity. The new bankruptcy law makes certain times and procedures more certain. "Moreover, there is now a political framework of strong stability, which makes it possible to overcome the uncertainties of the eve of the vote, when it was thought that Modi could win, but without a clear affirmation".

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