Indian economy on life support, structural reforms need of the hour

If the India story isn’t dead, it’s certainly on life support. The economy grew at 5 per cent in the last quarter for which data is available, leading to a rash of downward recalibrations of growth for the full financial year. (India’s financial year begins on April 1) Most recently, the Economist Intelligence Unit suggested that growth in FY20 will be 5.2 per cent -- significantly below potential.

It is hard to overstate the degree of gloom you’ll find in policy and business circles in India right now, at least behind closed doors. There was a time, not long ago, when 7 per cent or even 8 per cent growth was considered India’s birthright, the floor below which GDP growth would not drop unless there was a global crisis. Today, we’re staring instead at a 7 per cent ceiling -- a ceiling that, most of the time, may loom out of reach.

What’s going on? The Indian economy is facing a perfect storm, beset by a combination of cyclical and structural factors that makes recovery doubly difficult. The immediate concern is crashing demand. As freshly minted Nobel laureate Abhijit Banerjee has pointed out, household consumption has fallen since Prime Minister Narendra Modi entered office in 2014, something that hasn’t happened in “many, many, many, many years.” His advice: Get money into the hands of the rural poor and “pray.”

The immediate cause of the demand slowdown may have been the twin blows of demonetization and the new indirect tax regime, as well as the collapse of shadow banking credit last year. But there is a deeper problem as well: Promoting consumer demand should never have been considered a sustainable growth model in the first place. Instead, India should have been focusing on encouraging greater levels of private investment.

This reflects a broader unwillingness to confront the structural problems in the Indian economy. In 2013, as India was buffeted by the taper tantrum, many voters believed that replacing the apparently ineffective Congress-led government in New Delhi would lead to a growth revival. Instead, fundamental problems are being exacerbated.

One of the central issues in India is the size and inefficiency of the public sector. State-owned companies monopolize the lion’s share of household financial savings and then deploy them incredibly inefficiently. Government-owned banks, which comprise over 70 per cent of India’s banking sector, constantly misallocate capital because of priorities foisted on them by politicians.

Some public companies -- such as those in telecom and aviation -- are supported by the federal budget for years while making losses, rendering it difficult for private players in their sector to survive. Others -- in oil and insurance -- are protected by statute and serve essentially as ways to funnel consumers’ cash to the government budget instead of into productive investment.

The first thing that any government that wished to revive investment and growth would do is dismantle the state sector. Instead, the Modi government has backed the companies it owns with renewed fervor.

Similarly, you can’t expect investors to flock to India when they’re worried about regulatory and administrative uncertainty. Yet, earlier this year, those who had invested billions in e-commerce discovered the rules of the game were being changed to protect local players. Last week, two big telecom majors -- already debt-ridden because of exorbitant spectrum fees -- were ordered by the Supreme Court to pay $13 billion in dues to the government. The markets suspect this will drive at least one of them out of business.

Even the shadow banking crisis may partly have been precipitated by the government highway authority building up masses of unpaid bills with a prominent shadow banker. This is why there’s so much gloom in Indian policy circles at the moment. For years, it was argued that political stability at the top would mean essential administrative changes would follow and Indian growth would race into double digits. But even a prime minister with enormous political capital and a parliamentary majority can’t seem to reduce the enormous risks associated with investing in India.

One positive sign is that, after six long years of complacency, the government finally seems to have admitted that there are serious problems with the economy. It recently slashed tax rates on companies, for example, and has promised that further tax reforms will follow. Still, the government shows no sign of having an overarching plan to deal with the country’s fundamental economic weaknesses.

For decades, India had leaders with policies but not enough power. Now we have a leader with all the political clout one could want but not the policies the economy needs. It doesn’t seem a fair exchange.

India still fast-growing economy with much potential: World Bank economist

India has been relatively hit hard by the recent global slowdown resulting in its projected growth dropping to 6.0 per cent in 2019, but it's still a fast-growing economy with a lot of potential, a top World Bank economist said on Sunday.

"It's still a fast-growing economy. So even with the recent slowdown, it has growth numbers that are higher than in most countries of the world. It's still a fast-growing economy with a lot of potential," World Bank's Chief Economist for South Asia Hans Timmer told PTI.

In its latest edition of the South Asia Economic Focus, the World Bank said that India's growth rate is projected to fall to 6 per cent this fiscal. However, it said the country was expected to gradually recover to 6.9 per cent in 2021 and 7.2 per cent in 2022.

"It has been hit relatively hard by the recent global slowdown in their investments in durable consumption. And so that means that they have to deal with severe problems," Timmer said in response to a question on India's economy, whose growth rate in 2016 was 8.2 per cent and in the next two years it dropped by 2.2 percentage points.

"No, it's not the biggest (drop), but it is comparable to what we saw in 2012 where there was also a slowdown. It's somewhat less than what we saw in 2009. But it's a serious slowdown. That is true," Timmer said.

There are many signs of a sharp slowing of the Indian economy, recently, he noted. "We saw that with the last numbers on quarterly GDP, but it's even stronger when you look at the components of GDP. If you look at the investment then the annual growth now is 9 per cent below what it was a year ago. There was a sharp decline in consumption. And so that's mainly durable consumption, he said.

"If you look at the growth of domestic demands that's slowing much faster than the growth of GDP because imports are slowing fast also. It's a typical case where investors both in companies and in households are cautious to invest.

In our view, that is very much in line with what is happening in the world, because everywhere in the world you see that investments very quickly are coming down and debt is driven by a sentiment that spreads across the world driven by uncertainty in global markets," he said.

Timmer said that, the World Bank in its estimates, has found that "80 per cent of the slowdown" in India could be coming from the international causes.

"That is a transmission mechanism that is not too traditional. In the past we always thought that you have a shock in another part of the world, say a high-income country than import amount is coming down, and that means that export opportunities for developing countries are coming down. They see their export slowing and then the whole domestic economy is slowing also, he noted.

But since the great recession, the global financial crisis and other transmission mechanism has become much more important that it directly goes to domestic demand in the developing countries that...everywhere in the world investors are becoming very cautious, he said.

It's either through the sentiments or through the financial markets and that in a case like that the imports are slowing much faster than the exports.

"That's what we are seeing in India now. We are seeing it in Sri Lanka. We are seeing it in Pakistan and to some extent we are seeing it in Bangladesh also, though the pictures there are little bit mixed because Bangladesh actually benefited from the trade tensions through the exports of garments...," Timmer said.

According to Timmer, the slowdown is mainly due to investor sentiment. Because of the uncertainty in the world, everywhere one sees that investors are just hesitating. "Once they start delaying, that has a knock-on effect. And you see that on the company side and you see it in households' sides, he said.

"It reinforces some of the problems that were already there in the Indian economy, which started more than two years ago when the slowdown started, it was especially the problem in the financial markets -- first in the banking sector and later in the non-banking...that actually was slowly being resolved perhaps too slow but slowly being resolved.

"And now you have the additional slowdown where you could expect that that translates again into increased problems in the financial sector," Timmer added.

India and China to work on reducing trade deficit, improving investment

India and China are setting up a new mechanism under the Finance Minister of India and Chinese Vice-Premier, to works towards reducing trade deficit and improving investment and services. The development, confirmed by Foreign Secretary, follows the two-day informal summit between Prime Minister Narendra Modi and Chinese President Xi Jinping.

Bilateral trade between the two countries currently stands at $87 billion. Xi told Modi that he would work towards reducing India's huge trade deficit with China.

Gokhale said the Kashmir issue was neither raised nor discussed. "Our position is anyways very clear that this is an internal matter of India," he said, adding that radicalisation was a matter of concern for both.

Meanwhile, Modi has accepted an invitation from Xi to visit China for the next summit. Dates will be worked out later.

Xi also spoke of greater facilitation for pilgrims doing the Mansarovar Yatra, and Modi put forth a number of ideas on the connection between the state of Tamil Nadu and the Fujian province of China.

There was renewed focus on people-to-people interaction and it was decided that citizens of both countries must be brought into its fold.

India hits out at Imran Khan, says threat of nuclear war 'brinkmanship'

Strongly hitting back at Pakistan Prime Minister Imran Khan's rant at the UN General Assembly, India has said its citizens do not need anyone else to speak on their behalf and "least of all those who have built an industry of terrorism from the ideology of hate."

Khan delivered his maiden speech at the 74th UN General Debate on Friday and in his almost 50-minute address, devoted half of his time to India and Kashmir, drumming up hysteria over nuclear war.

India exercised its right of reply to the statement made by Khan later on Friday and fielded its newest diplomat at its mission at the UN to fend off the allegations made by former Pakistan cricket captain.

"Every word spoken from the podium of this august Assembly, it is believed, carries the weight of history. Unfortunately, what we heard today from Prime Minister Imran Khan of Pakistan was a callous portrayal of the world in binary terms. Us vs Them; Rich vs Poor; North vs South; Developed Vs Developing; Muslims vs Others. A script that fosters divisiveness at the United Nations. Attempts to sharpen differences and stir up hatred, are simply put - 'hate speech'," First Secretary in India's Permanent Mission to the UN Vidisha Maitra said.

Maitra said that rarely has the General Assembly witnessed such "misuse, rather abuse", of an opportunity to reflect.

"Words matter in diplomacy. Invocation of phrases such as "pogrom", "bloodbath", "racial superiority", "pick up the gun" and "fight to the end" reflect a medieval mindset and not a 21st century vision."

"Pogroms, Prime Minister Imran Khan Niazi, are not a phenomenon of today's vibrant democracies," she said.

"We would request you to refresh your rather sketchy understanding of history. Do not forget the gruesome genocide perpetrated by Pakistan against its own people in 1971 and the role played by Lt. Gen A A K Niazi. A sordid fact that the Hon'ble Prime Minister of Bangladesh reminded this Assembly about earlier this afternoon."

Maitra said Khan's "threat of unleashing nuclear devastation qualifies as brinksmanship, not statesmanship."

"Even coming from the leader of a country that has monopolised the entire value chain of the industry of terrorism, Prime Minister Khan's justification of terrorism was brazen and incendiary," she said.

"Citizens of India do not need anyone else to speak on their behalf, least of all those who have built an industry of terrorism from the ideology of hate," she said.

Maitra added that after having "mainstreamed terrorism and hate speech," Pakistan is trying to play its wild card as the new found champion of human rights.

In his address, Khan had invited UN Observers to Pakistan to verify that there are no militant organisations in Pakistan.

Maitra said the world will hold him to that promise. She said a few questions that Pakistan can respond to as a precursor to the proposed verification, is that would Khan deny to the city of New York that he was an open defender of Osama bin Laden?

"Can Pakistan confirm the fact that it is home to 130 UN designated terrorists and 25 terrorist entities listed by the UN, as of today?

"Will Pakistan acknowledge that it is the only Government in the world that provides pension to an individual listed by the UN in the Al Qaeda and Da'esh Sanctions list!

"Can Pakistan explain why here in New York, its premier bank, the Habib Bank had to shut shop after it was fined millions of dollars over terror financing?

"Will Pakistan deny that the Financial Action Task Force has put the country on notice for its violations of more than 20 of the 27 key parameters?

Khan, who was one a cricket player, and "believed in the gentleman's game, today gave a speech that was "bordered on crudeness of the variety that is reminiscent of the guns of Darra Adam Khel.

She said Pakistan is a country that has shrunk the size of its minority community from 23 per cent in 1947 to 3 per cent today and has subjected Christians, Sikhs, Ahmadiyas, Hindus, Shias, Pashtuns, Sindhis and Balochis to draconian blasphemy laws, systemic persecution, blatant abuse and forced conversions.

"Their newfound fascination for preaching human rights is akin to trophy hunting of the endangered mountain goat - markhor," she said.

Pakistan's virulent reaction to the removal of an outdated and temporary provision that was hindering development and integration of the Indian state of Jammu and Kashmir stems from the fact that those who thrive on conflict never welcome the ray of peace, Maitra said.

Asserting that while Pakistan has ventured to upstream terrorism and downstream hate speech there, India is going ahead with mainstreaming development in Jammu and Kashmir.

"The mainstreaming of Jammu & Kashmir, as well as Ladakh, in India's thriving and vibrant democracy with a millennia-old heritage of diversity, pluralism and tolerance is well and truly underway. Irreversibly so," she said.