Industry, development, jobs: Modi's India has no more alibis

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

During the five years of the first Modi government, India's economy grew by an average of 7.5% per year and repeatedly snatched the pink jersey of the world's fastest growing large economy from slowing China. An acceleration on the one hand tainted by controversy over the reliability of official statistics and on the other not enough to fulfill one of the many commitments made to the electorate: to guarantee the 10-12 million young Indians who knock on the job market each year a job, perhaps even a well-paid one. Unemployment, on the other hand, has risen: India has not released data in two years, but a Bureau of Statistics report filtered to the media (and denied by the government) puts joblessness at 6.1%, at a 45-year high. Independent study centers record it over 7%. According to the Confederation of Indian Industry, India's GDP needs to grow at least 10% to absorb labor demand.

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, the slowest pace in 17 months. There are now five quarters in slowdown, and in the 2018-19 budget year, GDP stood at 6.8%, from 7.2% in 2017-18. The lowest figure in five years. In the last quarter, investment growth stopped at 3.6% year-on-year, from 11.7% in the previous three months. By contrast, public consumption more than doubled, ’thanks to election spending,« notes Prakash Sakpal of Ing Economics.

The goal of industrializing India, making it a global manufacturing hub, also remains distant. The Make in India plan, investment incentives and attraction of foreign capital (trying to replicate a Chinese development model just as Beijing is abandoning it), has not yielded the desired results: foreign direct investment has come in ($44.4 billion 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 medal of demonetization has another side. It is also thanks to that operation that more than 200 million people have obtained bank accounts-another significant step forward for the country. So is the opening of many sectors of the economy to foreign investment, 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 lives of the population. Starting with sanitation and hygiene: during Modi's first term, houses with a bathroom increased from 40 to 95%. Villages reached by electricity were less than 40%; now almost all of them are.

In combating the high cost of living, the government was able to rely on the incisive action of the Central Bank (RBI), which, under Raghuram Rajan first and Urjit Patel later, put the reins on an inflation that was traveling in double digits, with spikes in the food segment. A poverty tax, as Rajan called it: a spike in the price of onions could easily ignite serious social unrest. Now (core) inflation is traveling below 3%. But Rajan and Patel were put in a position to leave the leadership of the Rbi, over disagreements with the Executive over rates (the government wanted them low) and cleaning up the banking system from bad loans ( amounting to 10%, rising to 15% for public institutions).

India contends with the United Kingdom as the world's fifth largest economy and with China as the most populous country (1.3 billion people). But if Beijing has a problem with aging, in India half the population is under 25 years old. A demographic dividend that is in danger of being wasted. With five more years in office, Modi can pursue his ambitious plan to transform the country. And if he takes advantage of the long wave of voting in October and wins elections in three key states, he can secure a majority in the upper house of parliament as well. That would be the missing piece: during his first term, it was the upper house (where he was in the minority) that blocked many of his plans.

The stock market believes in it and is traveling around the highs. “A very important signal.”, points out Alessandro Fichera, managing director of Octagona, who urges not to be too frightened by the GDP slowdown. “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 in place and should begin to support economic activity. The new bankruptcy law makes times and procedures more certain. “In addition, there is now a political framework of strong stability, making it possible to overcome the uncertainties of the eve of the vote, when it was thought that Modi could win, but without a clear-cut statement.”.

To read the full article in Il Sole 24 Ore click here

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