October 17, 2017 / 2:47 AM / a month ago

BREAKINGVIEWS-Breakdown: Narendra Modi’s not-so-bright spot

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Una Galani

MUMBAI, Oct 17 (Reuters Breakingviews) - India’s star status in the global economy is fading amid an overdose of initiatives rolled out quickly to root out tax dodging and corruption. GDP growth has slowed for five consecutive quarters, to 5.7 percent, and is the lowest in three years. Breakingviews explains what went wrong and what is at stake.

WHY SUCH A SHARP SLOWDOWN?

India has tried to do too much at once. In November Prime Minister Narendra Modi’s ban on high-value banknotes led to a massive money squeeze. Then came new real-estate laws that gave the industry its first regulator but left firms struggling to comply. Finally, a new nationwide goods and services tax (GST) has led to massive disruptions in supply chains.

That was too much on top of subdued investment. Indian factories run at barely 70 percent capacity, below the long-term average. Investment demand has fallen to barely 29.5 percent of GDP, from 34.3 percent five years ago. Companies are reluctant to spend.

The result is that consumer confidence is at its lowest in more than three years. A central bank index surveying six urban areas is at 95.5. A reading above 100 shows optimism. Data shows people are most worried about jobs, followed by prices. That is bad news given consumption has been a key driver of growth.

HOW ARE INVESTORS RESPONDING?

Depends who you ask. The rupee has gone from being one of Asia’s best-performing currencies in this year to one of the worst. And foreigners have been net sellers of stocks for most of this year.

But Indians have continued to buy shares, snapping up new listings at punchy valuations. The Nifty 50 index is near a record high. Reforms have made Indians wary about hoarding money in hard assets like real estate, and many families are starting to invest in the stock market for the first time.

Foreigners are not uniformly gloomy, either. They are still net buyers in the nascent corporate debt market. And top sovereign wealth and pension funds from overseas continue to eye big investments, encouraged by the broader reform story.

HOW MUCH DOES A SLOWDOWN MATTER FOR MODI?

Quite a lot. The prime minister calls this a blip but must be worried this could turn into a prolonged slump. Although moves to root out corruption should set up India for stronger growth in the long term, a soft patch means fewer jobs for the estimated 12 million Indians that join the workforce each year.

Modi has assembled an economic advisory committee and given a combative speech defending his economic record since coming to power in 2014. New Delhi has also tweaked reforms, for example cutting taxes on 27 items including popular Gujarati snacks, and scrapping a requirement for jewellers to tell the taxman about any individual sales above 50,000 rupees ($770).

Such concessions might buttress support ahead of polls in one of Modi’s key power bases, Gujarat, a state that is a hub for gem and jewellery exports. But they are dangerous because they undermine the prime minister’s brand as a leader determined to crack down on corruption no matter the political cost. Still, the abysmal state of the opposition means slower growth is only likely to cost Modi some votes, rather than lose him elections.

HOW COULD AUTHORITIES TURN THINGS AROUND?

Industry is clamouring for a stimulus package, but that looks tough amid an expected shortfall in tax revenues, waivers of farm loans, and the need to recapitalise banks. JPMorgan warns India has never had such a spending splurge that has not ended in tears. Both the Reserve Bank of India, which has resisted pressure to cut interest rates, and Modi’s new economic committee have warned the government against abandoning its fiscal deficit target, set at 3.2 percent this year.

Devaluing the rupee would help to boost exports but would be especially risky since if oil prices spiked, so would the current account deficit. Giving stressed lenders longer to meet international capital standards might delay the need for a bank bailout until after the general election, which is due in 2019, but lending is unlikely to pick up while financial institutions are strapped for funding.

The best option might be to hold tight. The International Monetary Fund cut its forecasts but still reckons India will rebound, growing at 6.7 percent this fiscal year and 7.4 percent the following year. Modi already has the upper hand with voters. So he could double down on reforms that make it easier to do business and also speed up the sale of government assets, like Air India, that are already on the block. That would take time but is the only sure way to set India up for a great economic run.

On Twitter twitter.com/ugalani

CONTEXT NEWS

- India must not move away from the path of fiscal consolidation, the prime minister’s economic advisory council said on Oct. 11.

- The government is considering ways to revive the economy after growth fell to its slowest pace in three years in the three months to June.

- For previous columns by the author, Reuters customers can click on

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Editing by Quentin Webb and Katrina Hamlin

Our Standards:The Thomson Reuters Trust Principles.
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