India’s economy faces severe challenges | Financial Times 18/10/20, 6:04 pm

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Opinion Indian economy

India’s economy faces severe

challenges
Unreliable growth statistics have disguised the depth of the problem

ARVIND SUBRAMANIAN Add to myFT

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A bazaar in Assam, India. For the economy to recover, investment must revive © Dhiraj
Singh/Bloomberg

Arvind Subramanian 6 HOURS AGO 23

The writer is former chief economic adviser to the government of

India

India’s economy is experiencing a sharp slowdown — to the

consternation of many observers. For several years, analysts and
organisations such as the IMF and World Bank have touted India as
the fastest-growing major economy, with the world’s brightest

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India’s economy faces severe challenges | Financial Times 18/10/20, 6:04 pm

the fastest-growing major economy, with the world’s brightest

medium-term outlook. But in December the Reserve Bank of India,
the central bank, cut its forecast for 2019 growth in gross domestic
product to 5 per cent.

That headline figure actually understates the slowdown. High-

frequency indicators show that in the first eight months of the
current fiscal year, non-oil exports and imports have fallen, as has
production of investment goods. Production of consumer goods and
real government tax receipts have both grown by only 1 per cent.
And a savage credit crunch has reduced commercial lending to less
than Rs1tn in the first six months of this fiscal year, one-seventh its
level the previous year.

Why have analysts failed to see the severity of the problem? A key
factor has been faulty measurement. Ever since a new data system
was adopted several years ago, methodological problems have
bedevilled GDP estimates. As a result, the official growth rates of 7-
7.5 per cent since 2011/12 have overstated actual growth by a
considerable margin.

At the same time, analysts have misdiagnosed the problem because

this time really has been different. India has experienced standard
business cycles and even macroeconomic crises. But until recently it
had never suffered from a serious balance-sheet crisis.

After the global financial crisis, corporate profitability collapsed,

causing the share of debt owed by companies that do not generate
enough cash to service interest payments to skyrocket to 40 per
cent, according to Credit Suisse. Unlike in macro crises, the impact
on the economy from the balance-sheet crisis has not been
dramatic. Instead, momentum has slowly ebbed from investment,
export and credit growth, while India’s entrepreneurial spirit has
been drained.

Consider next the outlook. The stock market seems optimistic.

Similarly, the IMF and World Bank are expecting growth to
rebound in the next fiscal year. To be sure, India’s future is
fundamentally bright. It has cheap labour and some decent
institutions, with considerable scope for growth. Even so, the
outlook for the next few years is sombre.

To begin with, India does not have the macro​economic tools to get Follow the topics in this article
the economy out of the slump. Monetary policy is ineffective
because central bank rate cuts are not being passed on to customers Arvind Subramanian Add to myFT

by financially stressed and risk-averse banks. Fiscal policy is

Indian politics & policy Add to myFT
constrained because public-sector deficits have risen to nearly
double-digit levels, while debt dynamics are adverse because Indian economy Add to myFT

primary deficits are high as are interest rates compared with Global Economy Add to myFT
growth.

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India’s economy faces severe challenges | Financial Times 18/10/20, 6:04 pm

growth.
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More importantly, India’s main challenges are not just cyclical, but
structural. Fixing the balance-sheet problem has proved difficult.
Despite determined efforts by Narendra Modi’s government,
including launching a new bankruptcy code and repeatedly
injecting capital into banks, stress in the corporate sector and banks
remains high.

A related challenge is the fraught

FT Opinion
relationship between the state and
the private sector. For the economy
to recover, investment must revive,
which is why the government
recently announced a major
infrastructure initiative.
Translating these intentions into
reality, however, will be difficult,
Catch up with the latest because in India neither the state
opinion articles from the nor the private sector commands
Financial Times by great legitimacy.
subscribing to our FT
Opinion email newsletter.
Sign up here for your daily This problem has a long history,
guide to today’s debates. but intensified after the
government corruption scandals of
the 2000s and the lending
practices of the past decade. Given this experience, bureaucrats will
be reluctant to sign off on public sector projects, while the anxious
private sector will continue to lack appetite for ambitious projects
that demand long-term commitment.

None of this should be taken as a counsel of despair. The

government can pull the economy out of the slowdown. But two
ingredients are essential: recognising the true extent and nature of
the problem, and instituting reliable data systems for good policy
navigation. Otherwise, not just Indian policymakers, but their
Washington advisers too, risk remaining in the dark.

Josh Felman, head of JH Consulting, also contributed

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India’s economy faces severe challenges | Financial Times 18/10/20, 6:04 pm

Analysis Indian economy Indian economy Shruti Kapila

The Himalayan tunnel India cuts growth Nehru’s idea of India is
thwarted by India’s forecast to slowest pace under attack
slowdown in 11 years

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All Comments 23
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AFD 33 MINUTES AGO

India is a basket case and all the macroeconomic data is cooked. As an investor,
I would stay the hell away from there.

% Recommend & Reply ' Share ( Report

MeanM 39 MINUTES AGO

At present there is deep pessimism in India about the economy.
The recent round of lay-offs in OYO, Walmart, has shaken the educated
youngsters who are now wondering if they will have a job next month or next
year.
Adding to that is the social turmoil created by the mischievous CAA that has
created a climate of fear among a large section of the population, not just
Muslims.
BJP has to decide whether it wants to stoke the communal cauldron to win state
elections or put its muscle in enacting economic reforms that will help all,
including the Muslims that it despises.
The trouble is that India's political system is such that one state or another is
always going to the polls, even though the general election for the Central govt
is every 5 years.
Until the state elections all over India are coordinated so that they occur
together every 3 years or so, we will continue to have this mayhem where
political parties are at each other's throats locally while at the same time

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India’s economy faces severe challenges | Financial Times 18/10/20, 6:04 pm

political parties are at each other's throats locally while at the same time
buddies centrally.

% Recommend & Reply ' Share ( Report

AGigittyA 2 HOURS AGO

only 2-3% Indians invest in their stock market, compared to the US at 55%; there
is a reason marco economic tools don't work! we all love blaming governments
but the reality is that the private sector in India is nowhere near as competent as
its western counterparts. Social issues have plagued India since its founding,
nothing new with Modi just more of the same. Indians need to realize
government can only do so much especially when only 14% of them actually pay
tax compared to 56% Americans. It's almost laughable that they dream of a
utopia where everyone is equal when they don't even participate in the system
they are winging about.

% Recommend 2 & Reply ' Share ( Report

Fiction 2 HOURS AGO (Edited)

& In reply to AGigittyA
I absolutely concur. Talk of a "superpower" is far-fetched. India is a very
immature democracy, and requires something akin to an enlightenment to
avert a grisly future.

Your comment is especially relevant when discussing tax revenue. As I

understand it, the entire United States has a 5% sales tax which is federally
mandated. India, by comparision, has a 15% tax and the same amount is
claimed by the individual states, meaning the culture of avoiding taxes via
clever invoicing or accounting is rampant since the govt. asks for 30% of
transactions. Stupidly greedy.

% Recommend 1 & Reply ' Share ( Report

Atomic Banjo 49 MINUTES AGO

& In reply to Fiction
There is no national sales tax in the US. Sales taxes are set by state and local
governments.

% Recommend 1 & Reply ' Share ( Report

Cynic in London 2 HOURS AGO

Fix the banks and the restart credit growth. Without credit and a healthy
banking system economies are doomed. Ask Japan and ask Europe.

% Recommend & Reply ' Share ( Report

SunnyK 35 MINUTES AGO

& In reply to Cynic in London
Fix the banks? Quite a laughable comment. You're not dealing with banks that
work under thought out legislation and mostly* free from corruption.

It always amuses me how people want to pass a comment like that, thinking
that if it's called a bank, then it will work the same as what you know to be a
bank. Indian banks are not European or Us banks that operate under your
enforced and familiar rules and regulations.

Good luck to anyone who thinks they can fix an Indian Bank.

% Recommend & Reply ' Share ( Report

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Rcm1 2 HOURS AGO

"To be sure, India’s future is fundamentally bright. It has cheap labour and some
decent institutions, with considerable scope for growth."

Cheap labour is an advantage in the age of Industry 4.0??? Subbu, what man???
just improving measurements is not enough - you saw how the govt went all out
to try to create jobs with Make in India, Startup India, and all that stuff. A
fundamental overhaul is needed to turn a socialist system inside out... have the
courage to say it.

% Recommend 1 & Reply ' Share ( Report

SunnyK 33 MINUTES AGO

& In reply to Rcm1
Modi created more independent onion-wallas than anything else. And then
called these jobs skilled employment for the youth....

% Recommend & Reply ' Share ( Report

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