The EconomistOctober 26th 2019 Special reportIndia 92 75% of employment. If the critics are right, growth since 2011 may
have been overstated by 2-2.5% a year. As Mr Subramanian notes,
the trouble with bungling the numbers is that it is like driving with
a faulty speedometer. Indeed, the strongest proof that growth was
overstated may be that India appears to have driven off course. The
current slump can largely be ascribed to policies followed in the
mistaken belief that India was hurtling along at 7-8% annual
growth, when the reality was more like 5-6%.
Since the slowdown has taken hold, Ms Sitharaman has
scrapped the most onerous of new taxes and compliance rules. She
also announced the government would support nbfcs, and top up
a range of schemes meant to ease access to export credits and
housing loans. Amid a series of rate cuts by
the rbi, the government also imposed a
slew of mergers between state-owned
banks that will, in theory, improve their
books and make them keener to lend. The
sudden move to slash company taxes came
with a further sweetener, a two-year win-
dow for new industrial investments to at-
tract a rate of just 17%.
Businesses have broadly welcomed all
these moves, as well as having their tax cut
by a third, but concerns persist. Though the
supply-side tinkering helps, it does not in-
dicate personal attention from Mr Modi, let
alone the kind of policy shift many feel is
needed to kick-start growth. “The lack of
economic vision baffles me,” says a conser-
vative think-tank scholar who now regrets
voting for Mr Modi. “They get this monster
electoral verdict, and then do nothing?”
Turning ten stodgy state banks into four bigger ones, for in-
stance, may indeed strengthen the financial sector in the long
term. More immediately, though, it ties up the institutions just
when the economy needs them. The government promises to buy
itself more cars, and to lower interest rates on housing for public
servants, but neglects stronger demand-side prods such as rural
public works. Ms Sitharaman talks of tweaking export credits and
speeding tax reimbursements for exporters, when letting the over-
valued rupee drop would boost exports even more. She has chas-
tised tax officers for being overly aggressive, but aside from the cut
in corporate rates that simply brings India closer to world aver-
ages, has proposed no other bold tax relief.
This is badly needed. India has some of the world’s most convo-
luted taxes, and enforces them with gusto. gstpaperwork is tricky.
Rates for some goods are ruinously high. Cement and cars are
taxed at 28% (plus hefty further taxes for cars), which is odd if you
wish to save manufacturing jobs or spur housing investment.
Some personal stories are hair-raising. One luxury-goods execu-
tive complains that inspectors invaded his home at gunpoint in
the middle of the night and held him and his wife hostage for two
days, threatening jail for not co-operating as they poked through
his cupboards. They found nothing, but left the businessman
shaken. He has decided to leave the country.Can’t rely on unicorns
Despite the gouging, the government is faced with a chronic defi-
cit. It pretends this is a mere 3.4%, but after allowing for hidden
off-budget liabilities and state debts, overall government borrow-
ing is closer to 9%. August brought a reprieve, with a hefty and con-
troversial dividend payment from the central bank to shore up rev-
enue. But those off-budget fudges, demands from states and
shrinking tax receipts will soon start to squeeze the exchequer.
The gloom is not universal. The $180bn itsector, centred on
boomtowns like Bengaluru (formerly Bangalore) and Hyderabad,
continues to prosper. nasscom, an industry body, counted 7,200
start-ups in 2018, of which eight became “unicorns”, valued at over
$1bn. Tata Consulting Services passed another milestone for Indi-
an itfirms, reaching a market capital of $100bn. The sector cannot
pull the rest of India along, however, and has its own limits. nass-
compredicts that automation is likely to shrink the number of it
jobs—currently more than 4m—by some 14% in the next five years.
Population growth, rising productivity and growing aspira-
tions can probably propel a big, diversified economy at a steady
5%. Barring a global crisis, even without ambitious new policies,
India may be able to climb out of the current doldrums. Returning
to the trajectory of 7-8% growth would take
a little longer.
With luck, in a few years’ time, the pre-
sent slump may be regarded as a useful ca-
talysing moment, like the economic crisis
of 1991 that sparked India’s initial market
reforms. But bringing back the brash, risk-
taking ebullience of the mid-2000s will not
be easy. Many believed Mr Modi when he
promised achhe din—good times—in 2014.
Starting his second term with a deep
slump, he has no one to blame but himself.
Worse, say critics, he has no one to turn to.
Ms Sitharaman is tough and straight, but
her team does not inspire confidence. “We
always had bad institutions, but a few real-
ly talented people—ninjas who could go in
and make things work,” says a former fi-
nance-ministry mandarin. “Now it’s a
Trumpian wasteland.” 7Decline and fallSources: RBI; Central Statistics OfficeIndia, % of GDP262830323436382011-12 12-13 13-14 14-15 15-16 16-17 17-18Savings
(gross domestic)Investment
(gross capital formation)