Inevitably, there will be a rebound. Economists have begun suggesting the possibility of
a slight contraction in GDP during the first half of 2021, tempered by a sharp increase in
the latter half of the year, assuming a catch-up for lost sales. Privately, many speculate
about a multi-year decline.
Years of bad financial management mean the government’s accounts were stretched
pre-covid, but disguised by fanciful expectations for tax receipts and windfalls from the
divestment of government-controlled entities. Even previously plausible expectations
are unfeasible now. Tax collections have tanked; nothing has been divested. Deficits,
already huge, will swell even without further demands, which could arise from large-
scale vaccinations and recapitalisation of the banking system.
The repeated delay of a necessary clean-up of government-controlled banks meant the
financial system entered the crisis in bad shape. Things have got worse as emergency
rules have allowed companies to defer repayments and banks to pretend they were
being made whole. At the same time, inflation, fed in part by the cash-starved
government’s levies on petrol, has been rising, adding to borrowing costs. The challenge
for 2021 will be to manage a national bail-out with money that (unlike richer countries)
India cannot print cheaply.
Mr Modi has been on a global tour to attract needed foreign investment. The reaction
has been public enthusiasm but private reluctance. There have been exceptions. Some
overseas funds have taken minority stakes in banks and existing assets with strong
franchises, such as Delhi’s airport. Money has been flooding into Reliance Industries,
India’s biggest company, and (in far smaller amounts) into Adani Group, another
conglomerate. Each has the great talent of being able to navigate the country’s mercurial
regulators and courts. The billions of dollars poured into these investments by
Facebook, Google, and a host of private-equity giants, sovereign-wealth funds and
multinational companies were hailed by the local press as expressions of confidence in
India Inc. But they may be just the opposite. After years of trying to make it on their own,
with decidedly mixed results, many foreign firms have concluded that the only way to
get ahead in India is to team up with a well-connected local conglomerate.
For India to rebound, broad investment must recover and for that, foreign businesses
must be persuaded that the deck is not stacked against them. There will be some
exceptions: Apple, for example, is scaling up smartphone production in India, both to
diversify away from China and to avoid import tariffs that push up its prices. Much of
the investment Mr Modi is hoping for, however, will head to Bangladesh, Vietnam and
other developing countries with more tolerable business environments.
Given these difficulties, a genuine economic crisis in India would hardly be a surprise.
Credit-rating agencies debated downgrading India’s sovereign debt to junk in 2020, but
decided to wait and see if its prior high rates of growth will return. Though a
downgrade would not mean much in itself—India has little foreign debt—it would
shake already fragile confidence. Multiple financial institutions have failed over the past
two years.
All is not lost. In August a returnee to the largely closed building in Mumbai that houses
The Economist’s local office was delighted to be greeted outside by the familiar