21 Aug 2019 13:56 IST

India could use a good economic crisis

The country’s malaise is widespread. Worse, it has no clear cause

A crisis focuses the mind. India’s shoppers are cutting back on everything from biscuits to a new car. Businesses are reining in too: the value of proposed new projects is at its lowest since 2004. Unemployment, meanwhile, is rising. All of that suggests the nearly $3 trillion economy is heading for a prolonged, painful slowdown. Luckily, New Delhi has a record of embracing reform in times of stress.

The country’s malaise is widespread. Worse, it has no clear cause. Theories range from the impact of a 2016 ban on high-denomination bank notes, compounded by a complex new value-added tax, to problems in shadow banks and lower government spending. Some problems are cyclical, others structural. Either way, India’s problem is mostly homegrown — and it looks thorny.

Official data for the June quarter, due at the end of the month, will likely show activity has weakened since the March quarter, when growth came in at 5.8 per cent, the slowest in four years. If India’s GDP data has been overestimating growth, as suggested by former Chief Economic Advisor Arvind Subramanian, the situation may be grimmer still.

New Delhi will struggle to counter weakness with hefty stimulus. Revenues are running short, raising expectations India will miss its lower fiscal deficit target of 3.3 per cent for the year to March. The central bank has already cut borrowing costs four times this year, but lenders have been slow to pass on the benefit.

Prime Minister Narendra Modi has another option. A rare outright majority for his Bharatiya Janata Party, combined with real economic pain, gives him a mandate to unleash a bold, 1991-style overhaul. Back then, a balance of payments crisis pushed India towards the market. It dismantled controls and broke state monopolies — all with a push from the International Monetary Fund. More reform followed.

The current government has an almost equally long to-do list, from tackling land and labour laws to providing better training for workers. There are two easy places to start: first, Modi can overhaul the governance of state-owned banks, creating an arms-length vehicle to hold its shares. He can then tackle the credibility of India’s GDP figures, which makes even discussing a downturn challenging. An internationally-respected committee could help end the debate. Such measures will help restore confidence, a pre-requisite for getting back on the right path.

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