INDIA: INCREMENTAL
FIRE FIGHTING While financial markets’ concerns about the global economic outlook centre above all on China, the Eurozone and the UK, it is India which has arguably proved to be the biggest disappointment in 2019.
As is well documented Q2 GDP slowed to just 5.0% y/y, the worst outturn since Q1 2013, and a far cry from the 8.0% seen in Q2 2018, while GVA has slowed from 7.9% to 4.9% y/y in the same period. The high hopes which accompanied PM Modi’s first election victory in 2014 have largely evaporated despite a more emphatic election victory this year, and in place of ‘creative incrementalism’, his re-elected government appears to be lurching from one episode of economic fire-fighting to another. For many observers, the fact that India has not been, and is unlikely any time soon to capitalize on opportunities emerging from US/ China trade tensions is perhaps the greatest disappointment.
One can attribute much of this poor performance to a combination of factors, some of which are home grown, above all due to persistent failures to grapple with structural reforms, in part hampered by a very complex political and economic system that is hobbled by a bureaucracy, which as elsewhere is riddled with corruption. While it would be an over-simplification, it can be said that the two major initiatives of the first Modi government – the long awaited introduction of GST (Goods & Services Tax) and the 2016 ‘Demonetization’ exercise – did not achieve what was intended, primarily because such ‘big bang’ reforms generally do not work, if they are not part of a broader pallet of ‘root and branch’ structural reforms. As is the case in most countries, such reforms are generational projects which require a unity of purpose across the political spectrum and the support of a large swathe of businesses, if they are not to fall foul of the electoral cycle, which fosters short- term thinking for immediate political gain, and is antithetical to the ‘big picture’ thinking which is required to embed them into the culture of an economy.
So much for these top level considerations and challenges, how has this played out in practice, and how effective will the four part set of post-budget economic stimulus measures be, and what are the key risks? By way of a recap, it is worth recalling that while the services sector is the largest part of India’s economy, it was ‘only’ 56.4% of GVA in Q2 2019, while manufacturing contributed 30.7% and Agriculture 12.9%. Breaking this out into a comparison of actual growth rates, Services has been relatively steady, slowing from something of an upside outlier in Q2 2017 at 9.4% to 6.9% in Q2 2019, which is around the trend rate for the past 2 years. The Manufacturing sector has been volatile, but posted growth of between 6.0% and 12.0% from Q3 2017 through Q4 2018, but slowed to just 0.6% y/y in Q2, and as elsewhere sliding auto production, exports and domestic sales have been a key feature, with some industry estimates suggesting that some 350,000 have been lost at auto makers, parts manufacturers and dealerships. Agriculture has also fared poorly, slowing to 2.0% in Q2 (though improving from zero in Q1), having averaged around 5.0% y/y in the Q2 2017 to Q3 2018 period. While reliably measuring Unemployment is very difficult in such a populous economy, particularly with such a high proportion of informal employment, official
8 | ADMISI - The Ghost In The Machine | September/October 2019
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