01 June, 2019 / Business cases of internationalization

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

India continues to grow

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

During the five years of the first Modi administration, the Indian economy grew by an average of 7.51% per year and repeatedly edged out China—which was slowing down—to claim the title of the world’s fastest-growing major economy. This acceleration was, on the one hand, marred by controversy over the reliability of official statistics and, on the other, insufficient to fulfill one of the many commitments made to the electorate: guaranteeing a job—perhaps even a well-paid one—to the 10–12 million young Indians who enter the labor market each year. Unemployment, on the other hand, has risen: India has not released data for two years, but a report from the statistics office leaked to the media (and denied by the government) puts the unemployment rate at 6.11%, the highest in 45 years. Independent research centers put it at over 7.1%. According to the Confederation of Indian Industry, India’s GDP must grow by at least 10% to absorb the demand for labor.

However, the economy has entered a cooling phase. In the last quarter, GDP grew by 5.81% quarter-on-quarter (slower than China’s this time), down from 6.61% quarter-on-quarter in the final quarter of 2018, marking the slowest pace in 17 months. Growth has now slowed for five consecutive quarters, and in the 2018–19 fiscal year, GDP stood at 6.81% year-on-year, down from 7.21% in 2017–18—the lowest figure in five years. In the last quarter, investment growth stood at 3.61% year-on-year, down from 11.71% in the previous three months. Public consumption, however, more than doubled, ’thanks to election spending,« notes Prakash Sakpal of ING Economics.

The goal of industrializing India and turning it into a global manufacturing hub also remains a distant prospect. The “Make in India” initiative—which offers investment incentives and seeks to attract foreign capital (in an attempt to replicate a Chinese development model just as Beijing is moving away from it)—has not yielded the desired results: foreign direct investment has arrived (44.4 billion dollars in 2018, according to the latest official data), but manufacturing remains at around 18.1% of GDP, up from 15.1% in 2014.

India continues to grow

There is another side to the demonetization story. It is also thanks to that initiative that over 200 million people have opened bank accounts: another significant step forward for the country. The same can be said for 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 government has shown no lack of energy or initiative and has launched numerous programs to improve the daily lives of the population. Starting with sanitation and hygiene: during Modi’s first term, the percentage of homes with a bathroom rose from 40% to 95%. Fewer than 40% of villages had access to electricity; now, nearly all do.

In the fight against the high cost of living, the government has been able to count on the decisive action of the Central Bank (RBI), which, under the leadership of Raghuram Rajan first and Urjit Patel later, reined in double-digit inflation, with peaks in the food sector. A tax on poverty, as Rajan called it: a spike in the price of onions could easily have sparked serious social unrest. Now (core) inflation is running below 3.1% year-over-year. But Rajan and Patel were forced to step down from the RBI due to disagreements with the government over interest rates (the government wanted them low) and the restructuring of the banking system to address non-performing loans (amounting to 10.1% of total loans, rising to 15.1% for public sector banks).

India is vying with the United Kingdom for the position of the world's fifth-largest economy and with China for the most populous country (1.3 billion inhabitants). But while Beijing has aging problems, in India half the population is under 25 years old. A demographic dividend that risks being squandered. With another five years in office, Modi can carry forward his ambitious project to transform the country. And if in October he capitalizes on the election momentum and wins in three key states, he can also secure a majority in the upper house of Parliament. This would be the missing piece: during his first term, it was precisely the upper house (where he was in the minority) that blocked many of his projects.

The stock market believes in it and is traveling around the highs. “A very important sign”, 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 Goods and Services Tax (GST) is now in effect and should begin to support economic activity. The new bankruptcy law makes timelines and procedures more certain. “What's more, there is now a strong political stability, which allows us to overcome the uncertainties of the eve of the vote, when it was thought that Modi could win, but without a clear victory.”.

To read the full article from Il Sole 24 Ore, click here