India’s slowdown and a simmering shadow banking crisis is putting Prime Minister Narendra Modi’s goal of crafting a $5 trillion economy by 2025 at risk.
The nation entered 2019 as the world’s sixth-biggest economy poised to become the fifth. Instead, it has slipped a notch to seventh place as a collapse in consumption slowed gross domestic product growth to the weakest in six years. External shocks from trade wars to surging oil prices are exacerbating that pain.
Troubled by the grim prospects, the central bank has lowered interest rates to a nine-year low and Governor Shaktikanta Das wants other stakeholders — from the government to banks to the private sector — to step up. But with Finance Minister Nirmala Sitharaman facing lower revenue prospects that threaten her budget gap goal, the heavy lifting on stimulus appears to lie with the Reserve Bank of India.
Das may be able to ease a financing squeeze, but it’ll take delivery on big bang reforms to unlock the productivity gains needed to power the economy toward Modi’s goals. While his return to office this year with a bigger mandate stoked expectations among investors for bolder reforms, that hope is fading 100 days into his second term as global investors head for the exit.
Unemployment at a 45-year high has hurt demand for everything from soaps to 7-cent cookies, while car sales have slumped the most on record and new investments have been sluggish as a lingering shadow banking crisis curbs lending. That’s caused growth to decelerate for five straight quarters to 5% in the three months to June – the weakest since March 2013 – and well below the 8% plus annual expansion needed to meet the goal.
“Investors should await clarity in the coming months on what steps the government will take to ease labor laws, reform the banking system and privatize state-owned enterprises,” said Amitabh Dubey, an analyst at TS Lombard.
“But at the same time they should be ready for a continuation of past policies: namely, a mix of reform, state control and populism.”