The Economist USA - 26.10.2019

8 Special reportIndia The EconomistOctober 26th 2019

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business as usual. The emphasis was on new taxes, more hand-

outs, more regulations, a further bail-out of public-sector banks

and the airy goal of doubling India’s gdpto $5trn within five years.

As the summer wore on, however, it became clearer that the econ-

omy had turned against Mr Modi, even if the electorate had not.

The big question now is whether the downturn will be bad enough

to force the prime minister into some of the much-needed reforms

that he avoided in his first term. Some changes have started to be

made in the past few months.

Initial tweaks in August had little effect, but on September 20th

the government abruptly decreed a sharp cut in corporate tax,

from an effective rate of 35% to a far more competitive 25%. The

move prompted Mumbai’s biggest stockmarket leap in a decade.

The market’s instant, oversized joy suggests two things. One is that

there is a great deal of pent-up energy in the Indian economy, wait-

ing to be released by wiser government policies. The other is that if

Mr Modi’s government puts in some effort, it is capable of coming

up with those wiser policies. Businesses are watching to see what

will follow. There are rumours of a sweeping privatisation drive.

But it is unclear whether Mr Modi’s reforming side can override his

conservatism, which reflexively favours an interventionist state,

protectionist trade policies and the opinions of Hindutva trade un-

ions, small business lobbies and ideologues.

Some progress

These tensions played out during Mr Modi’s first term, which saw

the introduction of some welcome reforms. A long-overdue bank-

ruptcy law theoretically reduced the time to settle a business fail-

ure from around four years to nine months. The gstdid, for all its

paperwork, abolish absurd interstate duties and so sped up inter-

nal commerce. Fiscal discipline kept inflation modest. Infrastruc-

ture—and in particular power supplies—improved substantially.

Over the past decade 30m more Indians every year have been con-

nected to the electric grid, which now reaches 90% of all homes.

India climbed a stunning 65 places up the World Bank’s Ease of Do-

ing Business Index and pulled in record hauls of foreign invest-

ment, totalling more than $35bn in each of the past three years.

Yet the government shied away repeatedly from risking its po-

litical capital on deeper structural reforms. Labour laws that make

hiring and firing too expensive remained a block to growth, as did

laws making it hard for companies to acquire land. Such blockages

continue to hamstring efforts to expand India’s manufacturing

base, Chinese-style, to create plentiful low-paid factory jobs for ru-

ral migrants. Instead of supporting small business, the govern-

ment experimented with shock demonetisation, fancy new taxes

and heavier enforcement. Rather than pro-

moting trade, it scrapped existing bilateral

deals, raised tariffs and sparred with the

wto. Disappointing his own business con-

stituency, Mr Modi dodged calls to priva-

tise some banks, industries and utilities,

instead forcing healthy state-owned firms

to swallow sick ones.

At the same time, regulators moved too

slowly to deal with an urgent problem. Dri-

ven by starry forecasts and cronyism under

the previous government, state-owned

banks had let non-performing loans inflate

to a $200bn balloon. Then, caught in the

glare of increased scrutiny, they reined in

lending, further crimping investment and

pushing credit-seekers towards non-bank-

ing financial corporations (nbfcs). In Oc-

tober 2018 a default by one of those caused

hiccups across the financial sector. Despite

$30bn in government bail-outs for state banks, and a slow decline

in non-performing assets, lenders and borrowers remain wary.

Though foreign direct investment stayed strong in Mr Modi’s

first term, all but a trickle of the new money poured into services

and a few big acquisitions, rather than job- or export-generating

industry. The largest single deal saw Walmart, an American retail

giant, splash out $16bn for control of Flipkart, an online retailer.

The ink had scarcely dried on Walmart’s cheque before the govern-

ment radically changed the e-commerce rules that had under-

pinned Walmart’s decision to invest. Small traders, who are an im-

portant part of the influential Hindutva business lobby, had

pressed the government for changes, revealing the kind of obsta-

cles that reforms have to overcome.

All the while, talk of Indian growth ob-

scured such facts as declining farmgate

prices, stagnant urban wages, flat exports,

rising household debt, a long-term decline

in savings and investment rates, and flat or

falling consumer spending.

Some of India’s top economists did no-

tice the gloomy numbers and realised that

since the country’s statistics agency

changed its methodology in 2011, there had

been growing divergences between calcu-

lations of gdpand a range of other indica-

tors. The doubters, who include Arvind

Subramanian, the government’s chief eco-

nomic adviser from 2014 to 2018, do not

suggest foul play but rather poor method-

ology, compounded by the difficulty of

measuring an “informal” sector that makes

up 45% of the economy and accounts for

A long way behind

Source: Credit Suisse Global Wealth Databook

Wealth per adult, 2018, %

0 20 40 60 80 100

Less than

$10,000

$10,000-

$100,000

$100,000-

$1m

More than

$1m

China

India

World

Rural slowdown