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Indian Economy in “Transition”

There is no doubt that much of the progress that was made in the Indian economy during Prime Minister Narendra Modi's first term

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Indian, Economy, Transition
For example, the Reserve Bank of India and the International Monetary Fund, among other domestic and international groups, have cut the country's growth projections -- in part due to the decline. Pixabay

Before returning to New Delhi recently after attending the annual IMF-World fall meeting, Finance Minister Nirmala Sitharaman provided an upbeat perspective on the Indian economy. She asserted that its fundamentals are strong and attributed the majority of the problems ailing the Indian economy to a global slowdown. In the same time period, the World Bank announced that India had jumped 14 spots from 77th to 63rd on its Ease of Doing Business ranking. Together, these indicators might suggest that it should be plain sailing for strong growth of the Indian economy going forward.

That’s not exactly the case. Growth will be more difficult than these pronouncements make it appear. Economists, both Indian and international, have pointed out that the nearly $3 trillion economy faces a number of problems. For example, the Reserve Bank of India and the International Monetary Fund, among other domestic and international groups, have cut the country’s growth projections — in part due to the decline in global growth but also because of other internal factors.

There is no doubt that much of the progress that was made in the Indian economy during Prime Minister Narendra Modi’s first term is due to reforms and new initiatives. It is also unquestionable that additional reforms and corrective actions will be required to move the economy forward.

The results-producing economic reforms during the first term focused primarily on business and domestic welfare. On the welfare front, cooking gas connections for millions, assistance to farmers, and government-funded health care made a difference for citizens and at the ballot box for Modi. On the business side of the ledger, changes to the Insolvency and Bankruptcy Code, the Make in India campaign, and special incentives bolstered investor confidence and attracted a large amount of direct foreign investment.

Indian, Economy, Transition
That’s not exactly the case. Growth will be more difficult than these pronouncements make it appear. Pixabay

Not all of the economic reforms produced the desired results. There is a general consensus among economists today that two of the biggest economic initiatives, the demonetization and the introduction of the nationwide Goods and Services Tax (GST), have not had the desired effects.

Demonetization, which removed nearly 86 per cent of the existing banknotes worth $210 billion from circulation, was initially seen as an audacious move to curtail the country’s shadow economy. But the cash shortage badly impacted several sectors, including manufacturing and agriculture.

The job market was also affected, with an estimated loss of 1.5 million jobs, according to the Centre for Monitoring Indian Economy. This contributed, to India’s GDP growth rate at the macro level falling under 7 per cent for the first time since 2011.

The GST, which was introduced in the summer of 2017, replacing the existing taxes collected by the central and state governments, was seen as a necessary move to reform India’s tax regime. However, after an uneven rollout that resulted in a lot of confusion, GST has still not been fully embraced by small businesses and industries.

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In addition to the unintended consequences of these initiatives, a third internal factor that has contributed to the less than satisfactory growth of the Indian economy over the past five quarters was a slowdown in reforms. It was widely reported that in the run-up to the general election, the government more or less stopped the reform process altogether.

As a result of all these factors and others, the Indian economy today is definitely sluggish. Consumption has slowed down three quarters in a row. The automotive industry, one of the fastest growing sectors for several years, has shrunk significantly in the past year. There have been poor performances in several other important sectors such as banking, manufacturing and real estate as well.

The IMF projects India to grow at 6.1 per cent this fiscal year. The Center for Monitoring Indian Economy makes an even lower prediction. It expects the economy to grow at 5.9 per cent, “the slowest growth in the last seven years.”

What is required to get the India economy to turn the corner and change the current narrative that it is stuttering? First and foremost, the Modi administration should recommit itself to and accelerate the economic reforms process. In this regard, Simeon Djankov, Director of Development Economics at the World Bank, said that to continue to improve on its ease of doing business ratings, India will need a “�fresh set of reforms.”

Indian, Economy, Transition
Economists, both Indian and international, have pointed out that the nearly $3 trillion economy faces a number of problems. Pixabay

It appears that India has begun to relaunch the reforms process. In September, Finance Minister Sitharaman cut the corporate tax on profit from 30 per cent to 22 per cent, which was universally welcomed by businesses and investors in the country. Now, similar bold reforms are required in multiple areas in a sustained manner, including deregulation of sectors such as energy and increasing foreign investment caps in areas such as insurance, retail and defence.

Another key requirement for growing the economy is modernizing the country’s infrastructure. Roads and railroads in India, except in some pockets, require major upgrades. Recently, Union Steel Minister Dharmendra Pradhan announced that the country will spend about $1.4 trillion on infrastructure development over the next five years. Taken together, both the corporate tax cut and the announcement of $1.4 trillion spending on infrastructure signal, that the government is serious about reforms. The government has also announced several stimulus measures. Additionally, the Reserve Bank of India has slashed the repurchase rate nearly half a dozen times this year.

There is much underway. But India is a huge economy and there is much that will need to be done in order to continue to move the needle dramatically over time.

The current quarter, which began in October, is pivotal. If the corporate tax cut and the stimulus measures have an impact, it will be reflected in the quarterly numbers, which will be available early next year. One hopes those numbers will be headed in the right direction. If they are, then progress will have to be sustained. If they are not, adjustments will have to be made.

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State Bank of India Chairman Rajnish Kumar, who accompanied Finance Minister Sitharaman as part of the Indian delegation to the World Bank and IMF meeting, stated that Indian economy is in “transition” and opined that he thought India was “�at the bottom as far as growth is concerned.” By staying the course and updating the reform playbook that it had in its first term the Modi administration can prove his assessment to be correct. (IANS)

Next Story

Here’s Why Coronavirus May Have Severe Impact on Asia’s Economy

This time around Chinese tourism matters even more to Southeast Asia

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Coronavirus
The Coronavirus outbreak, which has so far caused 41 deaths in China, and caused the country to quarantine 16 cities, is causing comparisons to the 2003 spread of severe acute respiratory syndrome, or SARS, which decreased the value of the global economy by $40 billion. VOA

Southeast Asia’s proximity to China and dependence on that nation for a major share of its economy is raising concerns that the coronavirus outbreak  that started there will not only have health impacts but harm the region’s economies.

The outbreak, which has so far caused 41 deaths in China, and caused the country to quarantine 16 cities, is causing comparisons to the 2003 spread of severe acute respiratory syndrome, or SARS, which decreased the value of the global economy by $40 billion.

“Now that the Wuhan coronavirus has been found to be able to be transmitted from human to human, the economic consequences could be extremely concerning for the Asia-Pacific region,” Rajiv Biswas, IHS Markit Asia Pacific chief economist, said.

Sectors of the economy that are particularly vulnerable to a SARS-like virus epidemic that can be spread by human-to-human transmission are retail stores, restaurants, conferences, sporting events, tourism and commercial aviation,” he said.

Observers agree that tourism could be one of the hardest-hit industries, in part because of the millions of Chinese who usually travel now, during the Lunar New Year, and in part because China has grown so much in the last two decades that many neighboring nations depend on it for tourism.

That is only one of the economic differences between China today and the China of the SARS virus in 2003.

Coronavirus
The recent coronavirus outbreak originating from China to other countries including Singapore may impart some uncertainty to near-term business and consumer sentiments. VOA

China has since then become a member of the World Trade Organization and the second-biggest economy in the world. Its supply chain has become more integrated with the rest of the world than it has ever been, and it has become the biggest trading partner for many countries in the region.

The 2003 virus decreased China’s economic growth rate, but its effect was the same for Malaysia, Singapore, and Vietnam, Biswas said.

This time around Chinese tourism matters even more to Southeast Asia.

After Hong Kong, nations for which Chinese visitors’ spending accounts for the biggest share of gross domestic product are, from most to least, Cambodia, Thailand, Singapore, Vietnam, and Malaysia, according to statistics released by Capital Economics, a London-based research company, Friday. In many of these nations, businesses catering to tourists display signs in Chinese, accept China’s yuan currency, and use that country’s WeChat for mobile payments.

Major tourism events in the region add to the threat that the virus and its economic impact will spread, such as the Tokyo Summer Olympics, Biswas said. Vietnam will also host the Vietnam Grand Prix Formula One race this year, while Malaysia will host the Asia-Pacific Economic Cooperation forum.

Singapore is an island nation that depends heavily on foreign trade, including to facilitate trade and investment in China. Selena Ling, head of treasury research and strategy at Singapore’s OCBC Bank, said Friday she was expecting Singapore’s economy to stage a modest recovery from 2019, but that may change.

Coronavirus
Southeast Asia’s proximity to China and dependence on that nation for a major share of its economy is raising concerns that the coronavirus outbreak  that started there will not only have health impacts but harm the region’s economies. VOA

She said “the recent coronavirus outbreak originating from China to other countries including Singapore may impart some uncertainty to near-term business and consumer sentiments.”

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That could mean slower growth in the first quarter of 2020, she said. (VOA)